VERI - NASDAQ

Good day, and welcome to the Veritone, Inc. Fourth Quarter 2024 Financial Results Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Cate Goldsmith, Investor Relations. Please go ahead.

Thank you, and good evening. After the market closed today, Veritone, Inc. issued a press release announcing results for the fourth quarter 2024 and full year fiscal 2024 ending December 31, 2024. The press release and other supplemental information are available on the Veritone, Inc. website. Joining us for today's call are Veritone, Inc.'s chairman and chief executive officer, Ryan Steelberg, and chief financial officer, Mike

Thank you, Cate. Thank you everyone for joining us. We are excited to speak with you today and provide an update on our fourth quarter and full year 2024 operations, financial performance, and strategic progress. We are pleased to report our Q4 2024 and full year fiscal 2024 financial results, which reflect solid revenue performance and significant strides in our strategic initiatives. Throughout 2024, we have made decisive moves to optimize our operating structure and strengthen our balance sheet, allowing us to focus and prioritize investments to drive growth and differentiation in our core AI software and services offerings. This disciplined approach has laid a strong foundation, and we are already seeing the benefits in the early part of 2025. Building on the strong foundation and fueled by mega trends such as the momentum in enterprise-wide AI adoption, the exponential growth rate of unstructured data, as well as our growing robust sales pipeline, we are very confident in our ability to accelerate the Veritone, Inc. strategy. Today, Veritone, Inc. is positioned to become the leading enterprise AI software applications and services provider across the commercial and public sectors and create long-term value for our shareholders. Mike

Thank you, Ryan. I'm excited to report that we continue to make substantial financial progress, ending the year with revenue in line with expectations and solid customer metrics and contributions made across our software products and services and managed services. As we exit 2024, a year where we streamlined our operations, including divesting our media agency in Q4, and exiting historical revenue concentration dependencies, we made improvements in progress in our operations to refocus back to our near and long-term growth targets heading into fiscal 2025. During my prepared remarks, I will discuss fiscal 2024 and Q4 year-over-year performance and KPIs, which exclude the results of our media agency, which are presented as discontinued operations in the corresponding historical financial periods. Balance sheet and liquidity position pre and post-divestiture, including our November 2024 ATM, January 2025 capital raise, and Q1 and fiscal 2025 guidance, highlighting the scalability of our revenue and business, including risks heading into fiscal 2025, focus on improved profitability and projected full-year results. Starting with the full-year 2024 performance, revenue was $92.6 million, in line with our guidance and down 7% year-over-year from $100 million in 2023. Driving this was software products and services, which decreased $7.4 million or 10.8%, while managed service revenue of $31.6 million was flat year-over-year. The software products and service revenue decline was largely attributed to commercial enterprise, which declined $7 million year-over-year, largely due to the expected declines in consumption-based customers over the same period, including Amazon, and certain one-time software revenue in 2023 of approximately $2.2 million, which did not recur in 2024, offset by the addition of Broadbeam in late Q2 2023. As I will discuss in more detail, we remain bullish on our future, and we are on pace for fiscal 2025 to be a breakout year across our commercial enterprise and public sector, with the public sector on track to grow year-over-year anywhere from 100% to 150%, driven by our IDEMS applications. Full-year GAAP gross profit reached $62.7 million, as compared to $70.3 million in 2023, a decline of $7.6 million largely driven by the decline in revenue, with GAAP gross margin of 67.6% as compared to 70.4% in 2023, a decline of 280 basis points that was principally driven by the increase in noncash depreciation and amortization expense largely associated with the June 2023 Broadbeam acquisition. Excluding noncash depreciation and amortization expense, 2024 non-GAAP gross margin was 71.6% as compared to 72.3% in 2023, a decline of 70 basis points largely due to the decline in higher margin revenue from consumption-based customers. Loss from operations was $86.8 million as compared to $99.6 million, an improvement of $12.8 million or 12.9% from 2023 loss from operations. This was primarily driven by improvements made in our operating expense structure over the past 24 months, coupled with declines in acquisition-related expenses of $5 million, severance and executive transition costs of $1.8 million, purchase consideration of $1.8 million, and noncash stock-based compensation of $2.6 million. Offsetting these were a lower non-GAAP gross profit from the decline in revenue over the same period and higher depreciation and amortization expense of $3.3 million as a result of the June 2023 Broadbeam acquisition. Non-GAAP net loss from continuing operations of $48.8 million improved $5.4 million as compared to 2024, driven by the year-over-year decline in non-GAAP gross margin, offset by cost reductions enacted in the first half of 2024. In 2024, I'm happy to report we did not have a single customer that represented 5% or more of our consolidated revenue during the year, demonstrating our successful efforts to diversify our revenue base. Next, I would like to discuss our Q4 2024 performance. Q4 revenue from continuing operations was $22.4 million, down $4.7 million from Q4 2023, principally due to a decline in software products and services, driven largely by commercial enterprise, which declined $4.2 million year-over-year due to the expected decrease in consumption-based customers over the same period, including Amazon. Included in Q4 2024 was approximately $0.7 million in revenue from the launch of Veritone Data Refinery, or VDR, which today has a near-term sales pipeline of over $5 million. Overall, managed service, which excludes the divestiture of our legacy media agency, was relatively flat year-over-year. Across our software products and services, our key performance metrics for Q4 2024 show ARR of $58.8 million, down year-over-year as we expected declines in consumption-based revenue from customers across our commercial enterprise sector, including Amazon, over the trailing twelve months. Overall, ARR from recurring subscription-based SaaS customers remained relatively flat year-over-year. As of Q4 2024, 81% of our ARR was from subscription-based customers versus consumption-based customers, up from 61.3% at Q4 2023 and 76% sequentially from Q3 2024. Total new bookings of $13.2 million, down $4.3 million year-over-year, primarily due to the timing of a renewal with one of our larger enterprise customers, who renewed on a multiyear deal in Q3 2024 versus a one-year extension in Q4 2023. Gross revenue retention continued to be above the ninetieth percentile, and total software products and service customers of 3,237, which was down 6% year-over-year, predominantly from our commercial sector, which includes lower consumption-based customers across Veritone Hire and the rolling impact of sunsetting legacy CareerBuilder customers post the June 2023 acquisition of Broadbeam, and smaller customers as we focus on larger ARR opportunities, offset by an increase across the public sector largely from growth in public safety customers. Q4 GAAP gross profit was $15.3 million compared to $19.9 million in Q4 2023, a decline of $4.6 million largely driven by the decline in revenue, with GAAP gross margin of 68.1% as compared to 73.5% in Q4 2023, a decline of 540 basis points principally driven by the decline in consumption-based revenue, which generated over 90% gross margins. Excluding noncash depreciation and amortization, 2024 non-GAAP gross margin was 70.2% as compared to 76.5% in Q4 2023, a decline of 630 basis points largely driven due to the decline in higher margin revenue from consumption-based customers coupled with a higher mix of lower margin revenue. Note that in Q1 2024 was the initial launch of VDR, where gross margins were approximately 50%. We expect that as the VDR product matures, margins will initially be similar to Q4, but should improve throughout 2025. In addition, certain larger content licensing renewals in Q4 2024 drove lower margins in the early phases of tiered volume pricing but are expected to improve throughout 2025 as the volume of revenue increases over time. Q4 loss from operations of $19.7 million was flat year-over-year, primarily driven by improvements made in our operating expense structure over the last 24 months and lower purchase consideration expense as a result of a $1.4 million gain recorded on the change in fair value of the Veritone One earn-out, offset by lower non-GAAP gross profit from the decline in revenue over the same period and higher noncash depreciation and amortization expense of $1.2 million. Non-GAAP net loss from continuing operations was $9.7 million, which was relatively flat as compared to Q4 2023. The year-over-year change was driven by the decline in non-GAAP gross margin, offset by cost reductions enacted in the first half of 2024. On the strategic front, as we transition our focus away from the divestiture, we are poised to return to growth with a much more efficient operating structure and laser focus on our AI solutions. Since the beginning of 2023, we have executed over $40 million of annualized cost savings, which includes over $17 million of annualized cost reductions in this 2024. The 2024 restructuring included organizational changes within sales, engineering, and corporate, the results of which was a reduction of our global workforce by 15%. This positions us very well from a cost perspective heading into fiscal 2025. On revenue growth and our outlook, our software products and services revenue pipeline and long-term outlook remain at all-time highs. More specifically, we continue to see strong demand across the global digital evidence management market, which represents an approximate $10 billion market opportunity today. In the public sector alone, we remain in near-term contract phases on several large projects with various facets of the US federal government and international public safety customers with a sales pipeline of over $100 million. These near-term growth opportunities, coupled with a much-improved cost structure heading into fiscal 2025, provide us a pathway to profitability as early as fiscal 2026. As a reminder, we divested our media agency, Veritone One, in October 2024. Total consideration from the sale was up to $104 million in cash, which consisted of $86 million in cash at closing and $18 million in cash subject to an earn-out based upon Veritone One's revenue for calendar year 2025. Of the total $86 million cash at closing, the net cash proceeds were $59.1 million in cash after $6.7 million in cash was held in escrow and $20.3 million in purchase price adjustments. Net cash proceeds from the sale were used to pay down $30.5 million in principal amount of the company's December 2023 term loan, plus an additional $3.3 million in accrued interest and prepayment premiums associated with the debt and $3.9 million of deal-related expenses. Including amounts held in escrow and the earn-out, potential future proceeds include up to $24.7 million in cash, which will largely be payable toward the end of 2025 through April 2026 as certain escrows expire and the 2025 earn-out is known. Given the media agency's growth throughout fiscal 2024 and its forecasted exit of customers and expected bookings for fiscal 2025, we feel confident in achieving at least a large portion of the $18 million earn-out at this point in time. Upon closing in Q4 2024, we recorded a gain on the sale of the divestiture of $69.6 million, which is included in discontinued operations in Q4 and fiscal 2024 results. Turning to our balance sheet, as of December 31, 2024, we held cash and restricted cash of $17.3 million, as compared to $47.5 million at December 31, 2023. Including the January 3, 2025 registered direct offering, December 31, 2024 cash would have been over $37 million. The net change reflects net cash outflows from operations of $31.2 million, principally driven by our non-GAAP net loss of $40.8 million, interest paid on debt of $11.8 million, offset by $18.8 million in net cash inflows largely driven from working capital changes from our media agency divestiture in Q4 2024. Net cash outflows from investing and financing activities were $32.2 million, driven largely by capital expenditures of $6 million and debt and deferred purchase consideration payments of $38.1 million, offset by net cash proceeds of $7.9 million from the cash sale of our energy group and media agency in 2024, and $4.5 million from net proceeds raised through our November 2024 ATM. Turning to liquidity today, in 2024, we executed on our largest strategic initiatives set up at the beginning of the year, including material cost reductions, the divestiture of non-core assets, which included the cash sales of our energy group and media agency, and establishing a $35 million ATM facility, setting us up for optimal growth heading into fiscal 2025. In addition to the ATM, we raised $20.3 million in a registered direct offering in early January 2025. On top of this, we have reduced our debt carry substantially. As of December 31, 2024, consolidated term debt is down from a peak of $201 million in December 2021 to approximately $132.6 million today, comprised of term debt of $41 million due by December 2027, and convertible debt of $91.5 million due November 2026. That said, we are currently in advanced negotiations to further improve our cash position and balance sheet in the near term, which we will discuss in more detail as these initiatives progress. At December 31, 2024, we had 40.2 million shares issued and outstanding, and 2.4 million warrants outstanding to our debt holders. Total shares of 1.7 million were issued in Q4 2024 under our $35 million ATM, raising net proceeds of $4.5 million. On January 2, 2025, we completed a registered direct offering, selling 4.4 million shares of common stock priced at $2.53 per share, and 3.6 million of pre-funded warrants priced at $2.52 a share, for gross proceeds of approximately $20.3 million. Including the January 2025 offering, we had approximately 44.6 million shares outstanding, exclusive of the 3.3 million pre-funded warrants. Now turning to updated fiscal Q1 2025 and full-year 2025 guidance. First, I would like to remind everyone that we have some very large public sector deals that we are expecting to close as early as Q1 2025, but could close in the coming quarters in 2025. Our confidence in these deals is high. While there has been a lot of scrutiny around government spending under the new president administration, these initiatives are not expected to be scrutinized by the current administration and will drastically improve the federal government's investigative and evidence-gathering capabilities in forecasted centralization. These deals range in the seven to mid-eight figure level and last anywhere from one to five years in duration. As the exact timing and rollout of these larger deals are still being actively negotiated today, we have provided a larger range on revenue in our fiscal 2025 outlook. In addition, we are seeing high demand for our VDR initiative, with a pipeline of over $5 million and growing as of today, the most of which we expect to execute in fiscal 2025. These, coupled with an improved outlook on licensing and stability across our Veritone Hire services, we remain highly confident in our near-term revenue growth prospects across both our commercial and public sectors. More specifically, in Q1 2025, revenue is expected to be between $23 and $24 million, as compared to $24.2 million for Q1 2024. In Q1, we expect the public sector to be flat to slightly up year-over-year, which includes the loss of $0.3 million of certain nonrecurring project-related revenue in Q1 2024 that is not recurring in Q1 2025. Commercial revenue is expected to be relatively flat, driven by a $1 million decline in consumption-based revenue across our managed services and Veritone Hire services, offset by $1 million in improvements in commercial SaaS driven in large part from new VDR revenue in Q1 2025. We expect Q1 non-GAAP gross margins to be around 71%, consistent with Q1 2024. Q1 non-GAAP net loss is projected to be between $7 million to $8.5 million, as compared to $10.4 million in Q1 2024, an improvement of 13.5% at the midpoint. Turning to fiscal 2025 outlook, we are slightly updating our prior guidance for fiscal 2025, which we are expecting revenue to be the same at $107 to $122 million, which at the midpoint represents a 24% increase year-over-year, and non-GAAP net loss to slightly change to be between $27 million, representing a 46% improvement year-over-year at the midpoint. The slight change is reflective of the earlier compressions in gross margin, though we expect this to improve throughout fiscal 2025. Key assumptions in our fiscal 2025 guidance include for the public sector, as previously discussed, we are expecting the public sector to grow 100% to 150% year-over-year, led by near-term deals across the Department of Defense, public safety, including international expansion into Europe, and through more recently announced and expanded partnerships with AWS Gtech, and others. We are currently in trials in our early phases of deployments on all of these projects, which when aggregated, are projected to generate substantial revenue over today's baseline. For commercial enterprise, since August 2024, we renewed our partnerships with some of the largest customers, including multiyear deals and expanded services with the NCAA, CBS, and iHeart. Moreover, we recently renewed ESPN for a multiyear deal that included expanded software products and services. We are also in the beginning phases of our VDR product offering with exciting new partnerships with some of the largest AI LLMs and cloud providers, expanding our offerings into generative AI. These existing and newer market opportunities will drive year-over-year growth across our commercial sector. Turning to our recently launched AI Solutions Group, during the second half of 2024, we began to focus efforts on more expanded enterprise opportunities. In Q4 2024, we upsold a multiyear deal to an existing Fortune 500 company to provide AI application services across their hiring platform. In addition, we were recently selected by one of the largest homebuilders in the US to provide deeper AI analytics and tools to accelerate some of their existing manual process and data collection efforts. Lastly, we are at various stages with the US Senate to assist them in managing their existing data. While we are forecasting modest revenue in fiscal 2025 around our expanded AI solutions, we do believe this will be a larger area of growth beyond fiscal 2025. For Veritone Hire, given the recent macro environment, we continue to expect modest to flat growth across our Veritone Hire applications and services in fiscal 2025. With the exit of consumption-based customer dependencies in fiscal 2024, we do expect a more stable year in 2025 with a return back to growth in late 2025 to fiscal 2026 with expected macroeconomic improvements. On non-GAAP gross margins, we are projecting our non-GAAP gross margins to be between 71% to 73% throughout fiscal 2025. To the extent that we approach the higher end of our fiscal 2025 revenue guide, we can see non-GAAP gross margins expanding closer to 75% on a blended basis. As we begin to scale and look towards 2026 and profitability, our non-GAAP gross margin should return to 75% or better. And finally, our cost structure. With a backdrop of significant cost savings enacted over the last two years, we exited 2024 with a much-improved cost structure relative to the past three years. Moreover, we will continue to manage our cost structure throughout fiscal 2025 to ensure we time necessary investments in our cost structure with corresponding growth. Today, our largest cost remains headcount, and to a lesser extent, professional services that have recently been higher and driven by transactional volume and integration. As we exit 2024, we are not expected to focus on M&A and tactical transactions, which will allow us to become much more efficient with our back end of support services and exit dependencies of higher professional fees over the past several years. Before closing the call, I'd like to remind everyone listening that Veritone, Inc. will be attending the 37th annual Roth Conference taking place from March 16th to the 18th in Dana Point, California. That concludes my prepared remarks. Operator, we would like to now open up the call for questions.

We will now begin the question and answer session. The first question comes from Scott Buck with H. C. Wainwright and Co. Please go ahead. Hi, good afternoon guys. Thanks for taking my questions. First off, I'm curious, when do you fully anniversary some of these consumption customer headwinds? Just trying to get a sense of when the year-over-year comps improve there.

Yeah. I can take that one. Q1 2024. So you're year-over-year, we are going to be out of the consumption comparison.

Okay. Perfect. And then I was curious just in the public sector and specifically federal government, I've heard from some other folks during the earning season that typically, when you have an administration turnover, there's just some disruption and delay. It's kind of normal course of business. Are you guys seeing any of that?

We are not seeing that for a lot of the contracts that have been awarded for us previously. A lot of what I alluded to of the recent deployments of aiWARE in our respective applications in DOD areas is primarily 2025 money to date. We obviously are all watching closely, which again, we don't believe is going to be relatively impactful for our 2025 guide in the short-term business. But like others, for longer-term attention to, obviously, the upcoming budget cycle and the potential CR that's currently being negotiated. But to be very clear, what we're talking about now in terms of our current and active deployments and revenue opportunities, we're primarily servicing against approved 2025 dollars.

Perfect, Ryan. That's very helpful. And then last one for me. I think you signed, what, eleven new commercial customers during the quarter. Typically, how big of a bite of the apple do you take with that first contract? I guess I'm trying to what I'm trying to do is figure out what the potential upsell opportunities are from those new customers in the future. Well, let's break them down. So if it's VDR related customers, as Mike alluded to, we're thrilled. I mean, some of the growth in contracting that we've been able to sign for this new service right out of the gates are vastly exceeding our expectations. That being said, some of them initially upfront as Mike alluded to, is some of the margin is a little bit lower than our stated blended overreaching margin, but we do expect that to normalize over the course of the year. So, again, that's speaking to VDR. Upsell opportunities right now, obviously, if you do some comparison, some and some comps to other companies who have been in the AI-ready or asset AI asset preparedness businesses like Shutterstock and others, this is a very big opportunity for us. You know, we're obviously in a very ideal situation considering our magnitude and scale with high-quality, IP-based audio and video. As we kind of touched on, you know, just last year, we processed over fifty-eight million hours of audio and video on behalf of our customers. So we expect that to be, again, a major contributor for production this year. But, again, we are right now, I think, in VDR, in the first phases of a call. The first contracting. But we do expect over the course of the year, consistent with these other companies, that we expect multiple SOWs and potential upsell opportunities with these new customers over the course of the year and into 2026.

Great. I appreciate the added color, guys. Thank you for the time. Thank you. The next question comes from Jesse Silbertson with D. B. O. Capital. Please go ahead.

Hi, everyone. Thanks for taking my questions here. Kind of dovetailing off of the prior question on the timing of consumption headwinds here. You know, you are guiding to some sign growth this year versus the reported declines. So beyond these consumption headwinds, can you point to any specific drivers that underscore your confidence in this inflection point in growth? Is it just the timing of the large government contract awards or maybe an anticipated acceleration in this VDR segment? I'm just trying to point to some specific business-related catalysts to underscore the confidence here.

Yeah. As we stated previously, on some recent calls in public disclosures, VDR and public sector are by far going to be leading the growth and trajectory. In terms of proof points and immediate catalysts, VDR, as we've stated, has kind of come out of the gates significantly farther ahead in terms of where we thought we'd be already. We're under contract and working with and generating revenue from some of the largest hyperscaler and model development companies, while also working with some of the largest IP owners on the content side. So that is a clear one with clear proof points that we're very excited about. And to be very clear, it is exceeding our expectations both in terms of contract velocity and revenue growth. The public sector side, as we've touched on already, is we are actively deploying our solutions into DOD facilities and environments and tenants. And we hopefully will be able to continue to publicize those opportunities and expanded contracts here publicly through press releases and other mechanisms here over the next several weeks and few quarters. But again, remain very bullish on hard concrete proof points for both BDR and public sector growth.

Awesome. Awesome. That's exciting. And then just one follow-up for me, and then I'll jump back in the queue or connect with you guys. Just curious, you know, we're it's looking like we're hitting an inflection point of growth in the business with all the pieces pointing to positive trends. As we look out over the medium to longer term, give us an idea of where you expect to be breakeven on a cash operating standpoint? And what, like, some longer-term profitability targets might be?

Yeah. I'll take that one. I think based on our projections, you know, the earliest is going to be in the back half of 2026.

Alright. Great. Well, thanks for the details, and thanks for taking my questions. Thank you. Thank you. The next question comes from Glenn Matson with Ladenburg Thalmann. Please go ahead.

Yes. Hi, thanks for taking the question. Just curious on the IDEMS opportunity. Could you have just better understand how the new offering differs from the previous public safety revenue that you produced? Just the breadth of the product and why that maybe is creating an inflection point there?

I think first is the number of applications. So IDEMS, collectively, is a suite of different applications. So historically, we primarily have had one application in this suite of solutions. Those historical applications have been primarily Redact and Illuminate. Both very valuable, both still selling at a good clip. But the expansion of IDEMS is really building up the portfolio of those applications. So in effect, we can start moving much larger, diverse datasets and workflows to expand on the investigation process. These newer applications include Track, which is an application that we announced last year, which provides dynamic and, I'll say, cross-device, cross-camera tracking of people of interest, as well as the upcoming, or the in addition to Investigate, which we also announced, which is a much more broader it's more analogous to DMH Digital Media Hub, which we offer, and is one of the dominant products that we sell on the commercial side. This is somewhat analogous on the commercial side but named Investigate. And so because of these application product lines, we do expect more additional revenue on a per licensing basis against the application, but also we expect larger contracts because of, again, the breadth of the opportunity and solutions that we're providing because of the multivariate nature of the diversity of the application.

Oh, that's super helpful. And then I guess, just as a terms of competitive landscape, is it could you just describe what when you're in the field, what you see versus, you know, some of the other offerings that are out there and how you're able to differentiate and win in that scenario?

Yep. This is really exciting. So unlike the commercial business, where there's been different forms of technology and storage and I'll say more archaic analytic tools for, you know, movie content and elements, the public sector space, I mean, it's pretty much greenfield. You're seeing an explosion of new data types being created. And it typically, they're really bound in more or less closed environments with certain hardware providers. So for example, if there is a closed you know, if there's a security camera, right, that's going to a proprietary VMS system. If there is a single body camera company, right, that's really worth with it, you know, that type of dataset is working on the back end with a single vendor. The reality is when you're talking about the diversity of these new datasets, you're talking about multiple different IoT sensor and capture things. Meaning data is being produced at an incredibly higher rate now, the diversity of those datasets is making it incredibly challenging for municipalities, sheriff departments, and police agencies to ingest, index, and organize the breadth of these diverse and disparate datasets. That's what we do. So IDEMS is built on aiWARE, is the leading open platform that's going to be able to ingest all these different datasets in any format, which by the way is critical. You can't really follow and progress an investigation along unless you can ingest all these different datasets and create a common narrative in storyline. For example, I like to say crime unfortunately travels. If you're bouncing from drone footage to a security camera, to a citizen upload camera, all that has to be taken into a common platform, and that's what we're bringing to the market through with IDEMS on aiWARE.

Thanks for all that clarification. Very helpful, Ryan. And congrats on the results.

Thank you.

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

The close of 2024 represented really two years of material change and transition for our business. But I like to say is Veritone, Inc. is back into a very focused and a very strong position for both revenue growth and market expansion for 2025 and beyond. I'm very thankful to our passionate teams and talented Veritonians who have led us through this transformation. I mean, we're all excited about 2025 and beyond. But more specifically, it's taken into account, again, our market-leading AI solutions. The near-term positive impact from BDR and our public sector growth and can we couple that with a very large diverse customer base already of over three thousand global enterprises, this is our year to really flip the switch. I think we've articulated some very clear proof points why both shareholders and potential new investors should be very bullish about the future of Veritone, Inc. Thank you for your time today.