VERI - NASDAQ

Good day, and welcome to the Veritone Inc. Second Quarter 2024 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Stefan Norbom, Investor Relations. Please go ahead.

Thank you, and good afternoon. After market close today, Veritone issued a press release announcing results for the second quarter ended June 30, 2024. The press release and other supplemental information are available on the Investors section of Veritone's website. Joining us for today's call are Veritone's Chairman Chief Executive Officer; Ryan Steelberg; and Chief Financial Officer, Mike

Thank you, Stefan, and thank you, everyone, for joining us. We are excited to speak with you today and provide an update on our second quarter 2024 operations, financial performance and strategic progress. Mike

Thank you, Ryan. I'm happy to report we continue to execute on plan through Q2 2024. More importantly, we ended Q2 with our strongest pipeline of SaaS revenue since our inception and on track with costs keeping us on target towards operating cash flow profitability neutrality on a non-GAAP basis as early as Q4 2024. During my prepared remarks, I will discuss our Q2 year-over-year performance and KPIs and Q3 and fiscal 2024 guidance highlighting the scalability of our revenue and business, including the risks heading into the second half of fiscal 2024, focus on near-term profitability and projected full year results. Starting with Q2 2024 performance. Revenue was $31 million, up 10.7% or $3 million from Q2 2023 driven by an increase of $1.5 million from software products and services and $1.5 million for managed services driven largely from year-over-year improvement in advertising. The increase in software products and service revenue was largely driven by Veritone Hire, which improved $1.7 million as compared to Q2 2023, largely driven by the June 2023 acquisition of Broadbean which generated $8.7 million in revenue in Q2 2024, offset by the expected decline in consumption-based revenue from legacy Veritone Hire customers over the same period, including Amazon. By comparison, Amazon represented approximately 14% of consolidated revenue in Q2 2023 as compared to less than 5% in Q2 2024. Excluding the impact of Amazon, Q2 software products and services revenue would have increased over 50% in Q2 2024 versus Q2 2023. As we continue to diversify our customer base throughout fiscal 2024, our partner-driven channel strategy continues to deliver results. In Q2, we delivered strong key performance metrics on a pro forma basis. ARR of $67.9 million, including $49.2 million from subscription versus consumption-based customers, which represents an improvement of over 3% from Q2 2023, and over 72% of our total ARR. While our subscription-based ARR grew year-over-year, our overall ARR decline given the trailing 12-month pullback in consumption-based spending, principally from customers, including Amazon. We expect consumption-based ARR to continue to decline year-over-year in the second half of 2024 as we exit Amazon dependencies over the trailing 12-month period. Total new bookings were $14 million, up 67% year-over-year, driven by increases in subscription-based customer bookings. As I will discuss later, we are seeing a large uplift in our sales pipeline, in particular with public sector and we expect bookings over the next few quarters to improve substantially year-over-year as a result. Gross revenue retention continued to be above the 90th percentile, and software products and services customers of 3,437, which were up quarter-over-quarter, but slightly down year-over-year, principally due to reductions in legacy CareerBuilder accounts, transition off our higher platform post the acquisition of Broadbean and from smaller ACV accounts across Veritone Hire as we prioritize renewals with larger ACV customers in Q2 2024. The overall decline had a minimal impact as overall ARR from subscription-based customers improved year-over-year that was slightly up from Q1 2024. As we discussed in our prior call, we are seeing a rebound in advertising beginning in Q2 2024. Specifically, Q2 managed services advertising gross billings per active client were $727,000, improving 26% from Q2 2023. Given our performance, bookings through today and expected macroeconomic improvements in the second half of 2024 we anticipate advertising to continue improving throughout the second half of 2024 as compared to 2023. Q2 loss from operations of $17.7 million improved $10.5 million or 36.8% from Q2 2023 loss from operations of $28.2 million. The year-over-year improvement was driven in part by an improvement in non-GAAP gross profit, a decline in acquisition-related expenses year-over-year driven by the Q2 2023 Broadbeam acquisition, year-over-year reductions in operating expenses from legacy cost restructuring efforts over the trailing 18 months and the timing of the Broadbeam acquisition which included a full quarter of Broadbeam results in Q2 2024 as opposed to a partial month in June of 2023. Q2 2024 non-GAAP gross profit reached $24.6 million, improving $4.4 million or 22% from Q2 2023, largely due to the increase in revenue. Overall, non-GAAP gross margin in Q2 2024 of 78.8% improved by 660 basis points versus Q2 2023 of 72.2%, largely driven by the outperformance and mix of our revenue. We expect consolidated non-GAAP gross margins to approximate 78% to 80% through the remainder of fiscal 2024. Q2 non-GAAP net loss was $6.9 million, an improvement of $6.1 million or 47% as compared to non-GAAP net loss of $13.0 million in Q2 2023. This was driven largely by the improvements in non-GAAP gross profit, coupled with the reductions in our cost structure over the trailing 12 months, which included significant cost reductions through fiscal 2023 through Q1 2024. On the strategic time as we transition our focus out of cost reductions in Q1 2024, we are now well positioned to return back towards growth. As a reminder, we executed over $37 million of annualized cost savings since the beginning of 2023. During Q1 2020, we completed over $13 million of annualized cost reductions, which is included in our full year and Q3 2024 financial guidance. On top of this phase of reorganization, we expect future synergies both cost and revenue to materialize in the latter part of fiscal 2024, largely from integration of past acquisitions across our software products and services lines. The Q1 restructuring included organizational realignments within sales, engineering and corporate, the result of which was a reduction of approximately 14% of our global workforce. On the growth front, our software products and services revenue pipeline and long-term outlook are at all-time highs. More specifically, we see strong demand across the global digital evidence management market, which represents an approximate $10 billion market opportunity. In the public sector alone, we are currently in contract phases on several large projects with various facets of the U.S. federal government and international customers with a sales pipeline of over $100 million. Additionally, we recently renewed our license agreement with the NCAA, a multiyear deal with up to $40 million in expected revenue over the term and against heavy competition. Turning to our balance sheet. At June 30, 2024, we held cash and restricted cash of $47 million compared to $80.3 million at December 31, 2023. The net $33.3 million decrease reflects net cash outflows from operations of $26.8 million, driven principally by the timing of payments in managed services in Q2 of 2024. Our non-GAAP net loss net interest payments of approximately $4.1 million, principally from our debt and approximately $1.5 million of onetime transition and severance expenses associated with our Q1 2024 restructuring. Note that in Q2, we accelerated the timing of payments to our customers across our advertising platform, partly driven by a shift from traditional media to increased influencer-based campaigns where expectations on media settlements are much shorter versus traditional media. In addition, there was net cash outflows from investing activities of $3.4 million, driven by capital expenditures, $2.8 million of deferred purchase consideration from fiscal 2023 acquisitions and principal debt payments of $1.9 million on our December 2023 term loan offset by $1.8 million in cash from the sale of our energy investment. Total interest paid on our debt was $4.7 million in the first half of Q2 2024, which was offset by interest income earned from cash on hand of approximately $0.6 million. At June 30, 2024, we had consolidated debt of $166.5 million principal of which $75.5 million is term debt and the remaining $91 million is convertible debt due November 2026. Beginning in June 2024, we began amortizing our term debt principal balance at the rate of 2.5% per quarter. As we have mentioned on previous calls, we remain on a near-term pathway to improve our balance sheet and liquidity position. We are currently engaged with outside bankers and have launched a formal process to sell 1 of our non-software assets. We currently have multiple qualified bidders and hope to close this transaction in the second half of 2024. If consummated, this transaction is expected to generate significant cash proceeds, which will be used to repay a portion of our term debt and to fund future operations. There can be no assurance that any transaction resulting from this process will ultimately be completed but this is an active strategic objective for our company. Of the total $47 million in cash, approximately $39.3 million of our reported cash is essentially held for payment to third parties for our managed services, down from $45.3 million at December 31, 2023. In June 2024, we refreshed our $300 million shelf filing, which expired in the same month. We ended June 30, 2024, with $38 million outstanding and approximately $2.5 million five-year warrants outstanding under our debt facility at $2.57strike price. During the first half of 2024, we net settled 499,857 warrant shares in exchange for 298,110 shares of common stock. Looking ahead to Q3 2024, I want to point out certain onetime cash items. Cash payments of $2 million associated with the amortization of our term debt. Cash interest payments is up to $5.2 million associated with our term and convertible debt and cash payments of $1.2 million associated with our January 2024 amended consulting agreement with our former CEO. Turning to financial guidance for Q3 and fiscal 2024. As a backdrop to fiscal 2024, we continue to approach our planning with a very conservative approach on revenue, particularly on any consumption-based revenue and with heightened discipline around costs as we march towards profitability. As previously mentioned, in Q1 2024, we executed over $13 million of annualized cost savings, which is included in our guidance but have intentionally omitted from our 2024 guidance any future cost and revenue synergies expected in the second half of 2024 until they are realized. Given uncertainty and timing of closing some larger deals in the public sector, we are maintaining the top end of our revenue range to reflect a more conservative outlook in the second half of 2024, and our guidance assumes we continue to grow advertising in the second half of 2024 at a similar pace to year-over-year growth in Q2 2024. With that backdrop, we are guiding Q3 revenue to be between $34 million and $35 million, which is relatively flat year-over-year at the midpoint. Driving this will be growth from public sector and for our managed services, including advertising, offset by a decline in consumption and onetime revenues. Our managed services is expected to continue accelerating with more significant growth coming in the second half of 2024 as we begin to exit a more challenging 2023 macro environment and continue to grow our bookings with new and existing customers. We continue to see strong bookings across our advertising services with Q3 pacing in excess of 15% year-over-year. Offsetting these growth drivers will be legacy Veritone Hire applications. More specifically, Q3 2024 assumes Amazon will be less than 5% of our consolidated revenue as compared to 8% of our consolidated revenue in Q3 2023. Risks and upside to our Q3 revenue guidance include execution on new enterprise deliverables, namely across our public sector, which can be unpredictable, and, to a lesser extent, from consumption-based revenue across our Hire and managed services, and Q3 quarterly non-GAAP net loss to be between $2.5 million and $4 million an improvement of 59% at the midpoint versus Q3 2023. Driving this improvement in the bottom line are legacy cost reductions, which we will begin fully realizing in Q1 2024. For full year 2024, we are maintaining our revenue range to be between $136 million and $142 million, representing a year-over-year increase of 9% at the midpoint and relatively flat versus pro forma 2024. As a reminder, and given the current economic outlook, we continue to forecast our revenue conservatively in 2024, driving the second half of 2024 our public sector remains on pace to grow as much as 40% to 50% year-over-year. However, and as previously discussed, this growth is dependent on closing some of the larger near-term deals over the next three to five months. Moreover, we remain in late agreement stages with various federal agencies on large multimillion-dollar enterprise-level arrangements, which if executed in 2024 could accelerate this growth projection even further. We expect our managed services, including our advertising, to continue to improve in the second half by over 15% year-over-year, led by advertising and licensing. Offsetting this is a year-over-year decline in consumption-based revenue and certain one-time software sales in 2023, not recurring in 2024. Amazon is projected to considerably represent less than 5% of our consolidated revenue at the midpoint as compared to 11% in 2024. Risk to our annual revenue guidance include the macro economy and the results of continued inflation, tighter labor markets and higher interest rate on our customers, which we expect to continue at least through the latter part of Q3 2024. Execution on new enterprise deliverables namely across our public sector and continued customer growth and retention metrics from our software products and services. As a result, we now expect full year non-GAAP net loss to be between $13 million and $16 million, with substantial progress towards profitability beginning in the second half of 2024. At the midpoint, this represents over $20 million and a 61% improvement when compared to fiscal 2023 non-GAAP net loss. Assuming we reach the higher end of our guidance, we expect we will be cash flow positive on a non-GAAP basis as early as Q4 2024. Further, and assuming modest revenue growth in fiscal 2025, we should be cash flow positive on a non-GAAP basis in fiscal 2025. Lastly, we will be presenting at the 26th Annual Investment Conference, September 9 to the 11th in New York City. That concludes my prepared remarks. Operator, we would like to now open the call for questions.

[Operator Instructions] The first question comes from Brent [indiscernible] from Pacific Equity. Please go ahead.

Hey, Ryan, Mike. Thanks for taking my question here. You guys have made some material strides in reducing your GAAP operating loss and non-GAAP net loss. I believe you said 47% improvement, but do you foresee any impact on future growth from these cost cuts and organizational changes?

Thanks, Brent. I think -- we've started to put this strategy and execution plan in the practice now well over 1.5 years ago. And I think part of it has been very methodical about looking at where the future growth drivers of this business are, obviously, we talked a lot about one key area of the public sector what that would require in terms of product and engineering focus as well as go-to-market focus. So the short answer is, I think we've done a fantastic job of finding the right mix and reorganizational structure. So we can continue to hit the numbers, right, despite the very material cost cuts that we've done. But I can honestly state and very excited to state that I think our productivity on a product perspective and engineering perspective is at an all-time high. And the testament is really our ability to not just be bidding on contracts in state and local enforcement areas, but we're landing those contracts and looking to provision these solutions at scale this year. So ultimately, I think the proof of that statement is software is being deployed, we're servicing it effectively, and we're still retaining our customers at a very, very high retention rate.

The next question comes from Andrew Michael [indiscernible] Wealth Management. Please go ahead.

Hi, thanks for taking my questions. Your projections for Q -- for 2024 imply that Q4 non-GAAP profit would be mid-single digits, $3 million to $7 million or somewhere around there and then revenue of $41.9 million for Q4. So this would be a pretty good big improvement over the fourth quarter of last year, I think, $7.7 million. So, should we think about this as an increase as a return to the seasonality that you have in revenue, or is the fourth quarter more of a base for revenue going forward? And that's the kind of improvement we can expect on a regular basis from quarterly revenue for Q1, Q2, Q3 of next year.

I'll cover some of the business. You'll speak to seasonality, but obviously that includes, again, the expected contribution of some say, newer revenues that we've talked about on the call today of contracts with public sector customers. Number two, as Mike talked about on the call is we've definitely seen a revitalization of the managed services, particularly on the advertising side, where we stated a 25% quarter-over-quarter improvement in the second quarter. So we expect with, I'd say, kind of record bookings at this time of the year, coupled with net new customers coming on board, we're very bullish about that as well. And then I'll let Mike speak to the seasonality a little bit.

Yes, there's definitely some seasonality, particularly across the consumption side of our business. On the software side, we typically see seasonal increases or our hiring products, which are consumption based. And then on the managed services side, certainly more driven by our customer mix. So for example, DraftKings is going to be advertising more during football and higher sports market times versus not. So I wouldn't kind of queue that in as a run rate heading into Q1, but it's certainly something you can start proxying in, in terms of growth for next year.

So the growth component of that that would imply 20-some-odd percent, right? So is that what you mean? Or...

We're not giving guidance on 2025, but you can use that as sort of a in your model to some sort of exit rate.

[Operator Instructions] Our next question comes from Stephen Banta with Banta Asset Management. Please go ahead.

Hey guys, thanks for taking the call. It’s good to hear that you’re making progress in divesting the legacy service business. Is there anything more you can share about the transaction and its probability to close? The second question would be, it looks like you're getting some traction in the public service space. And I'm just curious to know what you're thinking about material revenue contribution from area over the next several quarters?

I think we're pretty clear of what we're comfortable stating relative to sort of the timing and progress of the potential divestiture of the non-software-based assets. What I can say is this is something that we've talked a little bit about that we had inbound interest into this asset last year we went pretty far down the transactional path. And the market was a little softer last year. I mean, as we've reported, the advertising unit of Veritone was soft last year for the first time in many years. But as we've stated on this call and sort of the guide and sort of discussion about future managed services growth let's just say the asset is strong, it's growing, we're adding new customers. So I think that this time around with the formal banking process that we started back in Q1. And I'd say the number of qualified interested parties around the table, we are optimistic that we'll get this transaction done. But again, we want to be very disciplined. We know it's an important part of this business on a historical legacy basis, and we expect to see a good result and outcome in 2024. As it relates to the public sector, you can sort of tell by, I think, the comprehensiveness of my prepared remarks and how much detail I went into it is, I think we've arrived as it relates to the public sector as a group. Now the Fed space and the Law Enforcement space and timing is lumpy. But Veritone is becoming an established and trusted partner in state and local enforcement and on the Fed side. And one thing I want to point out is a lot of what we're selling to them is not custom-based solutions. These applications and workflows that we are selling to both state local enforcement and the Fed are all built on aiWARE, our core platform and infrastructure, but the applications and the workflows are very repeatable. So where our velocity to be able to sign new customers and provision new customers quickly, we're very bullish about. And that's a true testament of, frankly, how we built aiWARE and how we sort of honed our skills and expertise because of the complexities and volume of data in the and actually in the media and entertainment business. So we're excited. We're glad we'll be able to discuss certain key accounts like the defense logistics agencies and others. And we're also very proud that we're able to apply our AI expertise and technologies for AI for good and specifically servicing the public sector.

This concludes our question-and-answer session. I would like to turn the conference back over to Ryan Steelberg for any closing remarks.

I would like to thank everyone today for joining us. As we head into the remainder of 2024, I have a lot of excitement and optimism for what is to come for Veritone. As the adoption of AI continues to accelerate, Veritone remains well positioned to capitalize on this effort -- I mean, on this momentum and break down barriers to our customers may fully realize the true value and opportunity of AI. Our team has obviously worked incredibly hard to secure and advance a record serviceable pipeline led by our public sector but also strong contributions from our media and entertainment and higher divisions. We look to communicate these advancements and successes in the near future. We will continue to drive the business towards profitable growth. That's been a clear focus and pillar of strategy for ours for a while. And also we're aiming to improve both our liquidity and balance sheet, during the second half of 2024, which we've articulated previously. If you kind of look at this as -- and sort of, again, a testament to and a validation of our strategy and execution is our 47% improvement in non-GAAP net loss and growth in our top line, we did a strong validation and I really want to applaud our employees and partners for helping us realize us through this transition. AI is quickly becoming the foundational new element for data-driven businesses and Veritone is definitively at the forefront of advancing these solutions and AI-based solutions to empower people to do even better. And we look forward to providing an update on our progress during our third quarter 2024 earnings call in November. Thank you for your time today.