VERI - NASDAQ

Welcome to the Veritone Inc. First Quarter 2025 Financial Results Conference Call. [Operator Instructions] 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 close today, Veritone issued a press release announcing results for the first quarter 2025 ending March 31, 2025. The press release and other supplemental information are available on the Investor Relations section of Veritone's website. Joining us for today's call are Veritone's President and Chief Executive Officer, Ryan Steelberg; and Chief Financial Officer, Mike

Thank you, Kate, and thank you, everyone, for joining us. We are excited to speak with you today and to provide an update on our first quarter 2025 results, financial performance and progress against our strategic growth plan. I will begin by providing a strategic update and sharing my perspective on our current market environment and the opportunity that lies ahead. Mike

Thank you, Ryan. We started the year strong in Q1. Revenue was in line with our preliminary results, but did fall slightly below our guidance, primarily driven by delays in some of our larger public sector deals, offset by outperformance from our VDR business, which resulted in slightly lower gross margins versus expectations. We ended Q1 with solid customer metrics and contributions made across our software products and services and managed services. As we enter the second quarter of 2025, we remain very bullish on the future growth prospects across our public sector and VDR initiatives, which I will explain in more detail. During my prepared remarks, I will discuss Q1 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 and Q2 and fiscal 2025 guidance. Starting with our Q1 2025 performance. Q1 revenue was $22.5 million down $1.7 million from Q1 2024, principally due to a decline in managed services and to a lesser extent from software products and services. Q1 managed services of $8 million declined $9 million principally driven by declines in campaigns across our representation services, coupled with slightly lower licensing. We expect this negative trend in representation services to continue throughout 2025 or until the macro economy shows demonstrated improvements over 2024. For software products and services, Q1 commercial enterprise revenue declined $6 million year-over-year, largely due to a decrease in consumption-based revenue over the same period. Coupled with a decline in foreign exchange rates in Europe in Q1 2025 as compared to the U.S. Dollar. Offsetting this was growth in Veritone Data Refinery, or VDR, in Q1 2025 of approximately $0.9 million in revenue. VDR, which launched in Q4 2024, is one area where we anticipate substantial year-over-year growth throughout fiscal 2025, with a near-term sales pipeline of approximately $10 million or double that from early March of 2025. Overall, our public sector saw a small decline in revenue year-over-year and was slightly better when you exclude the loss of $0.3 million of certain non-recurring project related revenue in Q1 2024 that is not recurring in Q1 2025. As I will explain later in my prepared remarks, we remain incredibly excited about our public sector and the growth it will achieve in fiscal 2025, which we are forecasting to start in Q2 2025. Turning to key performance metrics across our software products and services in Q1 2025. ARR was $58.7 million which was relatively flat sequentially and down year-over-year as we expected declines in consumption-based revenue from the customers across our commercial enterprise sector, including Amazon over the trailing 12 months. Overall, ARR from recurrent subscription-based SaaS customer remained relatively flat year-over-year. As of Q1 2025, 81% of our ARR was from subscription versus consumption-based customers, up from 68% at Q1 2024 and flat sequentially from Q4 2024. Total new bookings of $15.8 million up $2.9 million or 22% year-over-year, primarily due to larger renewals across our software customer base. Gross revenue retention continued to be above the 98 percentile and total software products and services customers of 3,156 was down 7% year-over-year, predominantly from our commercial enterprise 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 Broadbean and smaller customers as we focus on larger ARR opportunities, offset by an increase across public sector largely from growth in public safety customers. Q1 GAAP gross profit was $13.9 million compared to $16.6 million in Q1 2024, down $2.7 million largely as a result of the decline in revenue. Coupled with a higher mix of lower margin revenue in Q1 2025, with GAAP gross margin of 61.9% as compared to 68.8% in Q1 2024. Excluding non-cash depreciation and amortization expense, 2025 non-GAAP gross margin was 65.1% as compared to 71.2% in Q1 2024, a decline of 610 basis points largely due to the reduction in higher margin consumption-based revenue, coupled with a higher mix of lower margin revenue. Note that in Q1 2025, VDR gross margins were approximately 40%. We expect that as VDR product matures, margins will initially be similar to Q1, but should expand throughout 2025 as we grow and diversify our content offerings. In addition, certain larger content licensing renewals in Q1 2025 continue to drive lower margins in their early phases of tiered volume pricing, but are expected to improve throughout 2025 as the volume of revenue increases over time. Q1 operating loss of $21.6 million improved by $2.7 million or 11% year-over-year, primarily driven by lower operating expenses and severance costs year-over-year as a result of our Q1 2024 restructuring, offset by lower non-GAAP gross profit from the decline in revenue over the same period. Net loss from continuing operations was $19.9 million an improvement of $6.3 million or 24% compared to Q1 2024. The year-over-year improvement was principally driven by the previously discussed $2.7 million improvement in loss from operations and a $3.7 million benefit from the change in fair value of our earn out from the divestiture of Veritone One recorded in Q1 2025. Non-GAAP net loss from continuing operations was $11.1 million as compared to $10.3 million in Q4 2024. The decline was principally due to lower non-GAAP gross profit offset by improved operating losses. Turning to our balance sheet. As of March 31, 2025, we held cash and restricted cash of $16.4 million as compared to $17.3 million at December 31, 2024. The net change in cash reflects net cash outflow from operations of $17 million principally driven by our non-GAAP net loss of $11.1 million, deferred purchase consideration of $1.2 million and interest paid on debt of approximately $1.2 million coupled with the timing of working capital in the quarter, offset by net cash inflow from investing in financing activities of $16.5 million driven by net cash inflows of $19.9 million from our January registered direct offering, partially offset by $1.9 million in debt principal payments and $1.4 million in capital expenditures. Turning to liquidity. In Q1 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 per share for gross proceeds of approximately $20.3 million. At March 31, 2025, our consolidated debt is down from a peak of $201 million in December 2021 to approximately $130 million today, comprised of term debt of $39 million maturing in December 2027 and convertible debt of $91.3 million due November 2026. As of March 31, 2025, we have over $30 million available across our $35 million ATM, which was established in November 2024. That said, we are currently in various discussions 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 March 31, 2025, we had 44.9 million shares issued and outstanding and 2.5 million warrants outstanding to our debtholders. Now turning to updated Q2 2025 and full year 2025 guidance. Our software products and services revenue pipeline and long-term outlook continue to be at all-time highs. More specifically, we continue to see strong demand across the approximate $10 billion global digital evidence management market. In the public sector alone, we are beginning to march towards our 100% to 150% revenue growth target for fiscal year 2025. We also remain in near-term contract basis on several large products with various facets of the U.S. Federal Government and international public safety customers with a near term sales pipeline in excess of $100 million. These deals range in the high seven to mid eight figure levels and will last anywhere from one to five years in duration and our confidence on closing these remains high. While there has been a lot of scrutiny around government spending under the new presidential 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. As previously noted, we are seeing strong demand for our VDR product offering. Our near-term sales pipeline on VDR is now over $10 million which is an increase of 100% or $5 million since March of 2025. We are in active discussions with most of the largest hyperscalers on various VDR initiatives and will provide more detailed updates as we continue to progress on these initiatives. More specifically, in Q2 2025, revenue is expected to be between $23 million and $25 million as compared to $24.1 million in Q2 2024. In Q2, we expect public sector revenue to be up year-over-year, led by the launch of larger initiatives across the Department of Defense. Commercial enterprise revenue is expected to be relatively flat, driven by $1 million decline in consumption-based revenue across our managed services and Veritone Hire services offset by $1 million growth in commercial SaaS driven in large part from expanded VDR revenue. Managed services is expected to be down year-over-year, principally due to the representation side of our business, which is experiencing some deceleration as a result of the more challenging macro environment. We expect Q2 non-GAAP gross margins to be around 68% to 70%. Q2 non-GAAP net loss is projected to be between $8 million to $9 million as compared to $9.7 million in Q1 2024. Turning to fiscal 2025 outlook. We are updating our prior guidance for fiscal 2025, which we are expecting revenue to be between $104 million to $115 million which at the midpoint represents an 18% increase year-over-year. The change in our outlook is principally driven by the shift in some of our larger growth initiatives across our public sector and VDR to the second half of 2025, coupled with the forecasted deceleration in managed services reflecting the more challenging macro market today. Non-GAAP net loss to be between $30 million to $20 million representing a 39% improvement year-over-year at the midpoint. The change is reflective of the timing shift in revenue, coupled with the compression in gross margins on half of 2025, which we expect to improve in the latter half of fiscal 2025. Key drivers to our fiscal 2025 guidance remain intact and include in 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, Getac and others. We are currently in early phases of deployments on projects across the U.S. Government and later trials on other opportunities. All these projects, when aggregated, are projected to generate substantial revenue over today's baseline, more prominently in the back half of 2025. Commercial enterprise. Since August 2024, we renewed partnerships with some of our largest customers, including multiyear and expanded services with the NCAA, CVS and iHeart. Moreover, we recently renewed ESPN for a multiyear deal that included expanded software products and services. We are also in the early phases of our VDR product offering with meaningful growth opportunities in fiscal 2025 and beyond. Today, we are expecting anywhere between $5 million to $10 million of deals to execute in 2025 and exciting new partnerships with some of the largest AI LoMs and cloud providers expanding our offerings into generative AI. These existing and newer market opportunities will drive year-over-year growth across our commercial enterprise sector and more importantly drive longer term sustainable growth. We believe the opportunity for VDR could generate $60 million in revenue annually by 2027. Veritone Hire. Given the current 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 2025, we do expect a more stable year in fiscal 2025 and a return back to growth in late fiscal 2025 to fiscal 2026 with expected macroeconomic improvements. Non-GAAP gross margins. We are expecting our non-GAAP gross margins to be between 65% to 70% 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 73% on a blended basis. As we begin to scale and look towards 2026 and profitability, our non-GAAP gross margins should return to 70% or better. And finally, our cost structure. With the 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. We will continue to manage our cost structure throughout 2025 to ensure we time necessary investments with corresponding growth. Today, our largest cost driver remains headcount and to a lesser degree professional services that have recently been higher and driven by transactional volume and integration. That concludes my prepared remarks. Operator, we would now like to open up the call for questions.

Thank you. [Operator Instructions] Our first question comes from Scott Buck with H.C. Wainwright & Co. Scott, you may ask your question.

Hi, good afternoon, guys. Thanks for taking my questions. I guess first, I'm curious on the public pipeline. What if that is new customers versus more customer expansions?

The majority of it is, I'll say, customer expansion. So definitively why we're bullish is we've already executed two revenue-based contracts for some of the larger pipeline customers, meaning we're expecting here over frankly in the next few days or the next few months, our ability to communicate and announce much larger and expanded contracts against, I'll say existing agencies under the DoD. So it's really a combination of expansion or additional expanded task orders and contracts within existing agencies that we've already been working with and recognizing revenue as well as net new agencies under the DoD and the DOJ.

All right. That's helpful, right. And I guess kind of piggybacking off of that, the second quarter guide and the annual revenue guide suggests kind of second half revenue being up mid-30s versus the first half. Can you just speak a little bit more to your visibility and confidence? And it sounds like it's going to be a combination of several factors, public sector, VDR, but any kind of additional granularity you could provide there would be helpful?

Yes, I think it will be dominated by that delta will be again be dominated by VDR and public sector. So I would say public sector, we have, I'd say, great visibility on magnitude of the size of the deals and the revenue contribution. Obviously, the timing of when those contracts get opened and we're able to execute against those contracts, most of which is software, not services. That is going to be one of the variables and hence why we took a slightly more conservative position on the guide. On VDR, we do have great visibility, and we're hopeful that that could be a breakout win even to the upside. So really the combination of active deal flow proposals, and sort of where we are specifically with VDR in conjunction with, frankly all ready to go and just ready for these next phase of these contracts to open up in the public safety side does give us confidence that we will be able to meet or surpass those kind of growth targets and prospects for Q2 and I'm sorry, for Q3 and Q4.

That's great. And it sounds like the difference between the low end and the high end of the range is just again simply timing, right?

I would say timing of one and velocity on growth of VDR as well. I'd say VDR is less of a timing function, public safety is more a timing function.

Yes. And the increase in VDR today versus the end of the quarter, is that one contract, two contracts, several contracts, just trying to gauge how widespread the management.

Multiple contracts with new partners, new clients, respective clients.

With new partners, perfect. I appreciate it. That's it for me guys. Thanks a lot.

Thank you.

Our next question comes from Seth Gilbert with UBS. Seth, you may ask your question.

Yes. Thanks for the questions. I had two. Maybe to start off a follow-up from the previous question. The full year guide still implies a pretty healthy uplift in the second half. I was wondering, maybe more generically speaking, when could some of these public safety deals start generating revenue? Is it once you get the deal signed in the go ahead, they'll immediately begin generating revenue and that's why you're so bullish about the $104 million to $115 million guide or will it sort of trickle you know, bit by bit because there's some integration work or, you know, other work you need to do with, with some of these deals? Thank you.

For some of the, high visibility contracts that we're discussing, we're ready to deploy. So to be clear, we've kind of and obviously, we've been talking a lot about our historical deployments with the DLA, Defense Logistics Agency, which mind you which, just to provide a little bit more insight, was the actual deployment, on Azure, so aiWARE based and application deployments on a secure environment on the on the on the Azure stack. For some of the ones that we've been talking about that are immediately going to be accretive and potentially contribute as early as in Q2, is on AWS, which we've successfully done many times and we're kind of ready to go, which means the software modules, the applications that are being procured and contracted for are ready to be delivered and stood up. So again, I would say, you will start to see, and again, it's not mostly service based revenues, but you will start to be see full satisfaction of obligations starting almost immediately once that contract gets released.

Got it. Very helpful. Maybe in the second one, Veritone Hire, I know the market is tough right now and Mike just walked through some comments at the end of his prepared remarks. Maybe could you talk about some of the steps you're undertaking on that side of the business? Or has there been a change in the competitive landscape like anything else that you've mentioned just on Veritone Hire? Thank you.

Yes. I think number one, we've reached a point of stability. So again, on a relative basis to how it's been over the past previous years, primarily as an impact from Amazon as a major customer, we've absolutely achieved an element of stability. In terms of growth, as I touched on briefly in the prepared remarks, it's really a three-pronged approach. Number one is the expansion of the reseller and partner network. A pretty big chunk of our new leads and new deal flow is now actually coming more consistently through partners such as Bullhorn, such as Workday. Again, so we're leaning into those and another benefit of those deals with those larger HCR, HR companies is some of the average contract value is actually higher. So again, partner engagement and partner activation is one of the three-pronged approach for acceleration of the growth on the hiring side. Number two is the media services. So in effect, where we're helping using our software to manage, let's just say, X percent of a customer's job acquisition budget. There's been a concerted effort starting frankly a couple of years ago, but really picking up velocity, at the second half of last year is to procure and secure a larger portion of the overall spend budget. And we're seeing good success there and we actually have some pretty good, a pretty strong pipeline. It's one of the key areas where we probably have the most visibility of growth for the hire business is the expansion of that share of wallet or taking more of that spend allocation. And then the third prong approach again is just continued optimization, right, of our algorithms and it's been leaning in more to our competitive advantage in terms of ROI yield. So in effect, when we do get a dollar from a customer, what is the yield that we can get from in terms of proving whether that's cost of applicant or cost per hire is continuing to maintain our competitive lead in the performance there. So it's a pretty defined, I think well organized three-pronged approach, but I guess it's going to be dominated with confidence mostly by the expansion of the partner one, again with the big players like Workday and others as well as the expansion of our media services opportunity.

Got it. Thank you for that, Ryan.

And our next question comes from Glenn Mattson with Ladenburg Thalmann. Glenn, you may ask your question.

Thanks for taking the question. Sorry, if you covered this, I'm bounced amongst a couple of calls here. So just one quick one for me. Mike, can you help us understand the margin kind of flow throughout the year as VDR kind of maybe drags earlier and then gets better over time, but then also the public sector, it sounds like it's going to be a big second half for public sector. So the impact that has in the recovery just kind of as we want to think about it quarter to quarter, that would be helpful? Thanks.

Yes. I think I mentioned it in my prepared remarks that we had some slippage and some planned delay on some of the public sector stuff that's going to come in at a higher margin. And then we had some VDR stuff that kind of drove that down a little bit further. As we get into Q2, Q3, Q4, those margins are expected to improve.

Okay. So just kind of think about it stepping up each quarter a little bit, I guess. And you may have covered this as well, but just kind of the stair step of growth from $5 million a little less than a month ago in pipeline to $10 million. Can you just talk about the nature of that difference? Was it broad based or is it a couple of large -- I guess the deal size here is so large that one or two deals can move that or is that

It's a few. It's not dozens, but let's just say a few players who we've been speaking with for now several months have progressed to, I'd say, a level of visibility in terms of data sampling, even at that stage already, that we're pretty bullish and it's against a lot of the same data assets that we've been servicing and mobilizing already. So specifically, it's not a net new of having to find new data assets per se, It's actually just expansion of in effect selling those data assets to net new customers, who are some of the biggest names out there. And again, we're not going to go into the details of those. So specifically, it's expansion for net new customers is why we're bullish.

That's great. And just quick, is it are you starting to see any of the feedback loop yet to bring in new content customers in terms of their.

Yes. I think the halo effect of us so once again just to clarify what you're asking is, if we're talking about customer like the NCAA where they are technology customer, they are footage licensing customer and now a VDR customer, right, where that three-pronged opportunity has created a halo effect. And so now we're in discussions with dozens of net new IP owners to become net new customers. So not only will that we do expect this to be continue to accelerate and drive the VDR line item, but we do expect acceleration in, I'll say, core AI or DMH software SaaS licensing as well. Thank you for asking the question.

Great. Thanks guys.

Thank you. Our next question comes from Jesse Sobelson with D. Boral Capital. Jesse, you may begin.

Hey, guys. I can take my question here. Just a bigger picture one since it's related in the call. With AI adoption accelerating, how are you guys balancing these R&D investments in VDR against the profitability targets? And then when you look at this product for the rest of the year, what milestones are you really looking to define success? Is it converting this doubled backlog by the end of the year? Or are there other milestones we could point to? Thanks.

Sure. I'll hit the first one on the CapEx. So the good news is, I think we have a pretty good runway where at least as it relates to VDR, we're not going to expect or we foresee a lot of capital investment to continue to advance, I'll say, that revenue line at least for the next maybe couple of quarters. Specifically, it's because it's relying on everything we've already built and it's using the exact same aiWARE based platform and software systems, specifically DMH, to manage that product offering. So in effect, we already have made the investments and we're actually generating revenue and profits from those software services with media companies already. So this is almost like a net new, very organic new extension built on the same infrastructure and AI infrastructure that we've already been that has already been subsidized, right, because of other lines of business. Now over time, as we get more sophisticated and the scale and velocity of VDR grows, by all means, we're going to want to make sure that we double down, I'll say, and cement our moat and moats around the opportunity, so we can continue to be more efficient. And that's one of the areas that I think over time where we're going to start to see an improving margin, right? As we can continue to streamline the operations of VDR, we do expect again over time the margins to increase. So that hopefully answers the question on VDR. And do you mind, can you ask the second part of your question again, please?

Yes, sure. I appreciate the detail there on the extension of an existing platform. I am very excited about the business model here, which is one of the things I wanted to highlight. The second piece of this is just with VDR, what other milestones for success can we point to with this? Is it converting that backlog or is there an additional piece of it that we could look to?

Yes. Great question. So I think we've achieved some of them already, which means we're not just limited to facilitating VDR revenues against data assets that are already under contract, right? Meaning, with the our historical DMH and aiWARE based media companies. We've already now facilitated deals against new data sets. So Veritone has established a level of credibility and trust on both sides of the equation, both the sell side, meaning our representation of the content IP owners, such as the news outlets and the broadcasters, etc. But now we're also facilitating deals, I'll call on the buy side, so representing as both the service and technology partner for the hyperscalers and the model developers. And that second part was something that we did not foresee to happen as quickly as it has, but it puts us in a very strategic leverage position that we're really excited about. In terms of the asset classes, I think one of the big milestones was, hey, when can we show the efficacy of our ability to sell frankly the same data asset to multiple buyers. And I would just say we're very, very close to achieving that and hopefully over the next few weeks here a couple of months that we'll be able to sort of communicate that in more detail. But those are the two big KPIs that I wanted to see is could we represent and participate on both sides of the equation in terms of representation and buy side? And could we start to see a viability of selling the same data sets to multiple buyers, which we've done? In terms of like trying to sell every piece of asset that we have under management, I don't think that's necessarily a goal. I think most importantly is, do we feel that we have either direct control and oversight over the right audio and video assets today, right, which proves the supply to go realize those revenues? And if we don't, do we have the intimacy of the relationship with the buyers that if there are data sets that we need to go get, right, and fold or expand our current corpuses of data or get net new types of data sets out there? Do we have the trust and do we have the ability to go procure those? And I will state that we have done that already. So for example, we are already procuring, I'll say, some elements of security and public service data that is becoming an interesting asset class where we're seeing high demand for. So this is no longer just limited to a media and entertainment, news and sports related content, but we're also seeing, again, managed through Veritone VDR, surveillance and other forms of unstructured datasets that's in high demand as well, which is a great crossover to our public safety business as well.

Thank you very much.

Thank you. Okay.

It seems there are no further questions at this time. This concludes our question-and-answer session. I would like to now turn the call back over to your host, Ryan Steelberg, for any closing remarks.

Well, thank you everybody for joining today. I would say, I'm somewhat disappointed that we had some slippage in timing of some of these deals. But I think what you're hearing through our voices in the Q&A, we're very, very bullish on VDR and we're very bullish on public sector. These are going to deliver in a big way for us and we're very, very excited about that. We are going to be participating in a few upcoming in the very near-term financial conferences. Hopefully, many of you can listen in if they're virtual or participate in person. Those conferences are going to be the Needham Conference, the Technology, Media and Consumer Conference, which is actually virtual conference starting tomorrow. And so you can get more information on our investor site or on Needham's website about that conference. Next week, we're going to be participating in person at the JPMorgan, their annual Global Technology Media and Communications Conference in Boston on May 14 and the 15. Again, encourage everybody to participate if they're in the respective area. And then finally, the Ladenburg Thalmann Innovation Expo, 2025, which is on May 21 in New York City, and I'll be there in person presenting. So look forward to speaking to everybody in person and going deeper into different areas. Thank you for your time everybody today.