Good afternoon. Welcome to Veritone's First Quarter 2019 Earnings Conference Call. I'm Brian Alger, Senior Vice President of Corporate Development, Investor Relations. After the market closed today, Veritone issued a press release announcing results for the first quarter ended March 31, 2019.

The press release is available in the Investor section of our website. Joining me for today's call are Veritone's Chairman and CEO; Chad Steelberg and the Company's CFO; Pete Collins. Following their remarks, we'll open up the call for questions.

Please note that certain information discussed on the call today will include forward-looking statements about future events and Veritone's business strategy and future financial and operating performance, including its expected net revenues for the second quarter of 2019.

These forward-looking statements are subject to risks, uncertainties and assumptions that may cause actual results to differ materially from those stated or implied by the statements. Certain of these risks and assumptions are discussed in Veritone's SEC filings, including its annual report on Form 10-K.

These forward-looking statements are based on assumptions, as of today May 8, 2019 and Veritone undertakes no obligation to revise or update them.

In addition to the Company's GAAP financial results, during this call we'll be presenting and discussing the Company's earnings before interest expense, depreciation, amortization, and stock-based compensation, adjusted to exclude certain acquisition, integration, and financing related expenses or adjusted EBITDA, which is a non-GAAP financial measure.

A reconciliation of the Company's adjusted EBITDA to its net loss is included in the Company's press release issued today. Finally, I would like to remind everyone that this call is being recorded and will be made available for replay via a link available in the Investor Relations section of the Company's website at www.veritone.com.

Now I'd like to turn the call over to our Chairman and CEO Chad Steelberg. Chad..

video, audio, images, and documents, both structured and unstructured, while staying agnostic when it comes to source and format. Just as our individual applications are constantly improving, so is our proprietary orchestration technology Conductor.

Our first iteration of Conductor was groundbreaking, but it couldn't yet support real-time applications. Our second-generation technology Conductor 2.0 added real-time capability, which opened new opportunities not only in media and entertainment but also in our government vertical.

Today we are working on Conductor 3.0, which will enable users to tune and customize AI engines to maximize engine performance on their specific datasets, moving us one step closer to autonomous learning. We are also developing ways to get more out of the applications and engines we have today through new tools.

Two good examples of this are Flow, our internally developed low-code, no-code tool that enables customers and partners to quickly and easily develop and deploy custom applications on aiWARE and speaker separation, which improves the efficacy of our transcription capabilities enabling a number of new use cases.

Flow is the core technology that is accelerating the development of many of our new products, including speaker separation, Illuminate, and our Essentials apps suite. Within our targeted verticals, we now have multiple applications addressing the specific needs and workflows of our customers.

In our most mature market, media and entertainment, our new SaaS applications, Attribute, DMH, and Core, are now attracting new customers and generating new capabilities and better margins from existing clients.

With DMH, for example, we are now able to take our customers' content and using aiWARE transform it into new content that can be monetized, creating new value for our customers. Importantly, we can capture this new TAM without adding any new products.

Looking further out, through aiWARE and our suite of applications, we will be able to programmatically create new podcasts and on-demand content to be delivered to our partners and monetized by Veritone One. We continue to see rapid growth and expanding opportunities from our existing products and customers in M&A.

In our government vertical, we serve two different but related constituencies, state and local law enforcement agencies and federal agencies. Our traction with state and local departments and municipalities for our IDentify and Redact applications is rapidly accelerating.

When we hosted our Analyst Day in mid-March, we had a handful of POCs underway for IDentify. As of last Friday, we now have signed agreements for four trials of IDentify and seven trials of Redact. Exiting Q2, we expect a number of signed trial agreements to more than double from the current level for each of these applications.

Augmenting the interest being generated by our direct and channel sales efforts, I am pleased to announce that we are now offering Redact through its self-service portal. In fact, I encourage each of you to go to veritoneredact.com to download and test the Redact software yourselves.

By reducing the friction in this process, we hope to generate stronger awareness and faster revenue growth from this application. Our other group of government customers is federal agencies. As we announced in March, we recently received FedRAMP authorization for our aiWARE Government platform. With the sponsorship of the U.S.

Department of Justice, aiWARE Government is now available in the FedRAMP Marketplace for other federal agencies to use. And we expect this to open a wide range of other new federal agency opportunities to us. In the legal and compliance vertical, we have just launched our Illuminate application for beta testing with select partners.

While this product is very new, we are already seeing very strong interest from a number of our SI partners and customers in the United States and abroad. While other point solutions are being offered in this space, we think that our platform approach and capacity for multi-variant search and hybrid deployments are game-changing differentiators.

We recognize that it's often difficult for those outside of Veritone to quantify the level of interest in artificial intelligence. Perhaps the best tangible evidence we could share with the financially-focused investors is the organic growth in our media and entertainment vertical.

Anchored by our aiWARE's SaaS business, which grew organically by 68% year-on-year, and Veritone One, our advertising business, which grew organically 38% year-on-year. Veritone One is clearly gaining market share and it is a direct result of aiWARE differentiating it from competitors. Media and entertainment was our first vertical.

And based on the current channel and customer engagements, we believe government and legal and compliance are rapidly following similar growth trajectories, with more than 20% of our Q1 SaaS revenue originating in these verticals.

With the forthcoming launches of Flow and Illuminate, we anticipate further acceleration of our growth in these markets, as well as an expansion of our TAM. With that, I'll ask Pete Collins, our CFO, to review our Q1 financial results and update our guidance for Q2 2019.

Pete?.

Wazee Digital, Performance Bridge, and Machine Box. Our net revenues increased by 177% to $12.1 million due to a $6.2 million contribution from the acquisitions I just mentioned as well as to the addition of new customers and growth with existing customers.

This quarter, net revenues from our aiWARE software and services businesses were 53% of our total net revenues, which is the first quarter that they exceeded 50% of our total net revenues. Our aiWARE SaaS net revenues increased 117% to $2.8 million, including approximately $1.1 million from Wazee Digital's Core and Digital Media Hub applications.

On an organic basis, our aiWARE SaaS net revenues increased by $365,000, or 29%, to $1.6 million from $1.3 million in the first quarter of 2018.

While our year-over-year organic growth in this market reflects good traction and is even more impressive when you consider that our net revenues in the first quarter last year included approximately $600,000 from a large project in the legal and compliance vertical compared with only $85,000 from that vertical this quarter.

Our year-over-year organic SaaS revenue growth in our other markets was close to $900,000. That increase was divided roughly equally between our media and entertainment and government verticals.

Our net revenues from the media and entertainment vertical in the first quarter increased by approximately $429,000, or 68%, as we continue to land new customers and expand our business with existing customers. Our net revenues from the government vertical in the first quarter were primarily from three pilot projects in the law enforcement market.

Two of those were in the UK and one was in the U.S.. All three were delivered in collaboration with a global consulting firm. Our aiWARE SaaS monthly recurring revenue, or MRR, under agreements in effect at the end of the first quarter increased by approximately $325,000, or 192%, of which approximately $259,000 came from our acquisitions.

Our aiWARE SaaS bookings in the first quarter were $1.3 million, including $580,000 from the acquisitions. Excluding the impact of acquisitions, our SaaS bookings increased approximately 211% year-over-year. The majority of our first quarter bookings were in the media and entertainment and government verticals.

Our aiWARE content licensing and media services business had net revenues of $3.7 million. The first quarter is generally a strong quarter in this business since a good portion of its annual revenues come from a major sporting event that occurs in the first quarter.

Our advertising net revenues increased $2.6 million, or 83%, to $5.7 million, including a $1.4 million contribution from Performance Bridge. Excluding this acquisition, our advertising net revenues increased by 38% compared with the first quarter of 2018, thanks to a combination of new clients and growth with the existing clients.

Our total GAAP operating expenses increased to $24.8 million from $17.1 million in the same period of 2018 due primarily to the addition of approximately $3.5 million of operating expenses as the businesses acquired in the third quarter of 2018 and $3.0 million of additional stock-based compensation expense primarily related to performance-based awards and acquisition-related stock awards.

The acquisitions and the higher stock-based compensation collectively made up all but $1.2 million of the year-over-year increase in our GAAP OpEx. This demonstrates that we are managing our overhead closely, while continuing to invest in software and product development.

Going forward, we will keep a focus on driving revenue growth while controlling our spending, which will reduce our use of cash. Depreciation and amortization expenses increased by approximately $780,000 year-over-year due to the amortization of intangibles related to the businesses we acquired in the third quarter of 2018.

Our loss from operations was $16.5 million compared with a loss of $13.2 million in the first quarter of 2018. Our net loss totaled $16.3 million, or $0.84 per share, compared with a net loss of $13.0 million, or $0.81 per share for the prior year quarter. Now, turning to our non-GAAP results.

Our first quarter adjusted EBITDAS loss was $9.3 million, or 77% of net revenues, down from $10.2 million, or 233% of net revenues in the first quarter of last year and $8.9 million or 82% of net revenues, in the fourth quarter of 2018.

In 2019, we are continuing to leverage our revenue growth and prudent expense management and expect to reduce our adjusted EBITDAS loss rate in each quarter of 2019 on a year-over-year basis. Our balance sheet remained strong. As of March 31, 2019, we had cash and cash equivalents and marketable securities totaling $50.9 million and no long-term debt.

The cash and marketable securities balance includes cash received from clients for future payments of $9.2 million. During the first quarter, we issued 662,000 shares of common stock via our ATM facility at an average price of $6.55 per share resulting in net proceeds of $4.2 million. Turning to our guidance.

I'd like to mention two key factors that impact the comparison of our first quarter net revenues to the second quarter outlook. First, our aiWARE SaaS revenues from the government vertical in Q1 were generated from three pilot projects.

We are working with our global consulting firm partner and two of their government customers to transition to annual or longer agreements. But as the negotiations are ongoing, we have not yet factored any revenue from these projects into our guidance.

The other factor to consider is that we expect our aiWARE content licensing and media services revenue to decrease in the second quarter by approximately $700,000 compared with Q1 due to normal seasonal patterns in this business.

Based on these factors, we expect that our second quarter net revenues will be between $12.1 million and $12.5 million and our adjusted EBITDAS loss rate will be similar to our first quarter results.

This net revenue range is based upon the signed agreements in place today, the expected net revenues from our aiWARE content licensing and media services based on recent and historical trends, and the planned spending by our advertising clients.

This range of net revenues does not include potential projects, including eDiscovery or Media & Entertainment archive processing that have not yet started and those are difficult to forecast accurately. And with that, I'll turn the call back over to Chad for his additional remarks. Chad..

Thanks, Pete. We are very pleased with our start to 2019. The takeaway from our standpoint is that the operational inflection points of product, channel, and revenue diversification we have discussed since our IPO are happening.

This early momentum is encouraging us to move forward aggressively to pursue the huge opportunities we see for our technology. In the upcoming months, we expect to see further revenue diversification across products, geography, verticals, and channels. Over the next several weeks, we look forward to connecting directly with our investors and analysts.

Next week we will be at the Oppenheimer Emerging Growth Conference in New York City. Then on the week of May 29, we will be attending the Craig-Hallum, one-on-one conference in Minneapolis. Finally, we will be in London the week of June 18 for the 5th Annual ROTH London Conference.

To arrange meetings at any or all of these events, we encourage institutional investors to reach out to their respective brokers or please contact Brian with questions about these events. Operator, I would like to begin the Q&A session..

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

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

Thanks, Chad..

So maybe for Chad. It seems like I mean, M&E is doing great, but it seems like there's something going on under the hood in terms of momentum behind the other verticals and I assume it's mainly government driven but maybe it's legal also.

And specifically for your IDentify and Redact applications kind of what's really driving? I mean, your proof-of-concepts you say are going to double this quarter. Your revenue coming from these new verticals is now becoming real.

What's really driving the government growth and maybe the traction you're seeing, whether it's proof-of-concepts or overall revenue there?.

Yes, it's actually a couple different factors.

On the federal side, the growth that we've seen in Q1 is really related to the penetration into the channel market, specifically with some large global system integrators that have been working both domestically and internationally at both the federal and the local level where they're applying aiWARE to solve some really difficult challenging problems.

And we're now into the contracting phase with some of the partnerships they've brought us.

On the local level, specifically the state and local law enforcement, the two applications IDentify and Redact are really seeing fantastic traction, both in terms of the efficacy, in terms of being able to identify suspects through video-based surveillance data, matched up against known offender's databases.

I think since inception now we're well over a 100 suspects that have been successfully identified with the technology in just a couple initial pilots. And the second is really some of the legal challenges with regards to the redaction application.

So you're now seeing legislation come down in California, Ohio, and many other states which are now from a public information disclosure perspective are forcing law enforcement to – on a far more rapid timeline be forced to disclose a redacted version of their audio and video-based evidence.

And so this new compliance law is really creating a fantastic opportunity that Veritone's new redaction application is fitting perfectly with that market demand..

So is that – so that's new to me.

Is there a timeline or a deadline that they have to be in compliance with that video redaction standard, I guess?.

Actually there is. There's actually two laws that went into effect in the state of California. I don't have the numbers right in front of me at this point in time, but I can probably look them up.

But one is actually coming live in July, goes into effect and rapidly accelerates – I think it's less than 30 days before actually fines start to – actually it's 45 days before fines go into effect if they can't properly redact and disclose that evidence..

What are their options other than redact, Chad?.

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

Right. Yes, okay. Great. That sounds really interesting. And then secondly, I think at least from my standpoint in talking with investors, there's some confusion about the status of your formerly I think very large shareholder, Acacia and kind of where we sit today from an ownership standpoint there.

Are you guys comfortable disclosing kind of where they're at and what form of equity they own these days?.

Chad, I'll take that. This is Pete. So Acacia filed a regulatory filing as of the end of March recently and indicated that their total interest is 1.7 million shares. However, that includes 1.1 million warrants that are priced at $13.61 a share.

So the number of shares that they actually hold is around 600,000 to 650,000, which is basically equal to about one day's trading from an average perspective in our stock. So the amount of shares that they hold, excluding the warrants, has been decreasing since back in August..

Okay. No, that's great color. I think it'll be helpful. One last one for me, maybe for Pete.

Pete, as we kind of annualize I guess on the acquisitions in the September quarter, maybe more so on the December quarter, how should we think about the SaaS aiWARE business growth from an organic basis as we look at it when we lap these transactions? And I'll hop off. Thanks..

Well, last quarter our SaaS growth was up 29% on an organic basis. And as Chad was just describing to you, we did pick up a good amount of revenue in the government sector in the first quarter. It was about 20% of our revenue in the quarter, which was very nice.

But we're seeing traction now with the development from a marketplace perspective on Redact as well as IDentify. The additional pilots and proof-of-concept that we're working on there, the trials that we've got indicate the traction that we've got.

So I'd say that, Chad, from a marketplace perspective, we're seeing very good traction across all three verticals in SaaS. And we don't see any reason why that wouldn't continue going out when we start to anniversary the acquisitions of Wazee and the other two businesses in the second half of the year..

Thanks, guys. Nice job again..

Thank you..

Yes. Thanks, Chad. Chad, hey, I was able to look up those two bills, so for our investors and for your own identification.

In California, for example, the two new laws were Senate Bill 1421 and Assembly Bill 748, and they've repealed prior laws that treated most types of law enforcement records as confidential, expanding the types of records that law enforcement agencies are now required to release in response to public records requests as well as shortening the time deadlines for their releases.

So we're seeing similar laws to that actually being enacted both in Nevada and Ohio, and we expect it to continue..

Perfect. Thanks, Chad..

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

Hi. This is Vijay Devar for Mike Latimore. Thanks for taking my question. I'm interested in knowing more about your combined Wazee and aiWARE offering.

Would you speak a little bit about the number of days you were able to land during the last quarter and impact on the ASPs for this combined offering?.

Yes. I mean, at a high level the integration has gone extremely well. Especially pleased with the way the teams have come together. In fact, two of the executives at Wazee are now core parts of our product and go-to-market sales team.

The Wazee applications themselves now have the capabilities to have real-time cognitive search integrated into their data stores, which expands the capabilities of a customer looking for specific audio and video-based clips at events such as the NCAAs and other major events like golf, et cetera.

So again part of our core initiative there was not only to be able to ingest more content at a quicker rate, which we've accomplished, but also to expand and provide better transparency into identifying the appropriate clips in real-time..

Okay.

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

Yes. The pipeline for the business continues to expand nicely. We're cross-selling both to our existing customers as well as upselling aiWARE products to Wazee's customers. So the interest was very strong. We continue to see growth throughout Q1 and expect that to continue for the balance of the year.

In terms of new customers, again we're not making comments specifically on customers on this call. But when we do and we have the capability through press releases..

Okay, great. Thank you..

Thank you..

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

Hey, guys. Thanks for taking my questions. Nice quarter. I want to dig in a little deeper on Attribute.

Chad, maybe can you just talk a little bit about the traction there and what you're seeing? And then how that kind of transcends the ability to cross-sell both the DMH as well as with Veritone One, just given how that kind of connects? Second question on Illuminate. Just want to get some clarity.

How many customers are either currently are going to be in beta when that gets launched or paid pilot? And then, Pete, you rattled off some numbers in your prepared remarks I think about aiWARE with SaaS. One was government and I think the other was media and entertainment. If you just repeat those numbers that that'd be helpful. Thanks..

Yes, perfect. So talking about the Attribute application, again, winning the NAB Product of the Year in Radio Award was spectacular for us earlier this month. I think that's a testimony to the efficacy and product fit from market perspective. We've signed a number of different large broadcasters.

We have a number of others still in the pipeline in process and contracting. I believe this is a game-changer for broadcast based media, both for radio and for television, not only domestically but abroad.

It really puts broadcast media on an even playing field with its digital counterparts, such as Google, Yahoo!, et cetera, in terms of being able to measure the true impact of the campaigns that are running across their network, both in terms of knowing exactly when the ad runs but also correlating that back to the actual response that's happening on the websites for those advertisers.

In terms of how that application actually impacts the Wazee side, it's not really a tight correlated fit to the DMH product. It's obviously having a tremendous impact in terms of Veritone One. And I think Veritone One doesn't have anything in terms of secret sauce, in terms of better non-exclusive access or better access to Attribute.

It just knows how to leverage that product and the great results based upon the campaigns that Veritone One are placing in the intelligence. The difference now is it can be measured by our clients, and the value truly quantified in terms of the benefit that it's exceeding what other agencies can produce.

That makes sense?.

It does. I guess where I'm going with the DMH is, given you have that kind of unique set with attribution with someone who is advertising and effectively selling inventory.

If they own content, are you seeing any scenarios where they're actually being attracted to become kind of both the content and the advertising side, and hence you're going to look out the whole ecosystem, or maybe it's a little bit too early for that?.

Yes, I think it's still too early for that. I mean Attribute right now is really being used by the broadcasters themselves in terms of being able to help advertisers quantify the value that they're providing to their advertising clients.

In the case of the DMH, it's really about being able to use aiWARE to search and identify the appropriate content in near real-time and deliver that to the appropriate audience. Attribute doesn't necessarily factor into that equation at this point in time. To move on to your second question, though, Illuminate, we've run a number of beta tests in Q1.

The results have been quite positive. We expect to see, call it, half a dozen customers coming onto the platform in some type of paid pilots or unpaid pilots in Q2 as we work out some of the go-to-market issues and really expect from a revenue standpoint that to gain traction in Q3..

And Darren, let me pick up the question you had about the numbers I was rattling off. Let me see if I can go back and go over it a second time. So on our organic SaaS business, a year ago our revenues were $1.3 million, and this year they were $1.6 million.

But a year ago, they included about $600,000 from the legal and compliance vertical and we only had $85,000 in that vertical this year. As you know, we had called out that there was a large project in the first quarter last year.

So what drove the increase of $300,000 was really about $900,000 of increased revenue across both the media and entertainment and the government verticals. So in media and entertainment, it's a combination of new clients as well as the land and expand with existing clients and that delivered about $429,000 year-over-year increase or a 68% increase.

And then on the government side, it was over $400,000 of revenue primarily from three pilot projects with the global system consulting firm – global consulting firm. Two of those were in the UK and one was in the U.S..

Great, thanks..

Yes. Thank you..

Thanks..

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

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

Operator?.

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