Veritone, Inc. — Q1 2018 Form 10-Q
Business context and period. This unaudited quarterly report covers the three months ended March 31, 2018, compared with Q1 2017. Veritone provides its aiWARE artificial-intelligence platform and operates a media advertising agency. Dollar amounts below are in millions unless stated otherwise.
Financial performance and liquidity
- Revenue: $4.388, up 41.2% year over year. Media agency revenue was $3.121, up 7.7%; AI platform revenue was $1.267, up 506.2%.
- Profitability: Gross profit was $3.824, with an 87.1% gross margin versus 93.7% a year earlier. Operating expenses rose 78.7% to $17.054; operating loss widened to $13.230 from $6.631. Net loss was $13.049 versus $5.847; loss per share was $0.81 versus $3.09.
- Cash flow: Operating activities used $13.248, compared with $5.112 used in Q1 2017. Investing activities provided $4.237, including $6.0 from marketable-security sales, partly offset by $1.693 in capital expenditures. Financing activities provided $0.492. Cash and cash equivalents declined $8.519 during the quarter.
- Liquidity and debt: Cash and cash equivalents plus marketable securities totaled $54.518 at March 31, down from $69.143 at December 31, 2017. The company reported no outstanding debt and said it expected available liquidity to fund requirements for the next 12 months and beyond. It had no available credit lines.
- Balance sheet: Total assets were $77.728 and current liabilities were $26.582 at quarter-end. Stockholders’ equity was $51.146.
Material changes and management commentary
- AI platform growth reflected increased legal- and media-market revenue; the company reported 70 platform customers at quarter-end, versus 25 a year earlier. Accounts on the platform increased to 591 from 57, and quarterly data processed rose to 2.805 million hours from 367,000. New bookings were $0.237 million, while monthly recurring revenue under active agreements was $0.169 million.
- Media agency clients with active campaigns increased to 60 from 39. Revenue growth was partly offset by the nonrecurrence of a large initial client campaign from Q1 2017.
- Management attributed lower gross margin to AI platform revenue becoming a larger share of sales; AI platform margins are lower than media agency margins. Higher processing and computing costs also increased cost of revenue.
- Operating expenses increased notably with higher personnel and marketing costs; general and administrative expense also included a $1.9 million increase in share-based compensation. Total share-based compensation expense was $2.474 million.
- Management expects continued investment in AI development, sales and marketing, and operating capacity, and does not expect profitability in the foreseeable future. It stated that these investments may not generate increased revenue or operating profit.
Risks, contingencies, and unusual items
- Customer concentration remains relevant: the ten largest customers represented 58.7% of total revenue, versus 76.6% a year earlier. The ten largest media agency clients represented approximately 61% of media agency revenue.
- Media agency contracts generally may be cancelled on 30 to 90 days’ notice; revenue can vary with client budgets, account wins or losses, and campaign seasonality.
- Q1 2017 results included a $3.118 million warrant-liability fair-value gain and $2.054 million of debt discount and issuance-cost amortization; these items did not recur in Q1 2018. Veritone also stated that the Acacia and Bridge Loan balances converted to equity upon its 2017 IPO.
- Capital expenditures of $1.693 million primarily related to the headquarters build-out, completed in March 2018. Management reported no material change to the risk factors in its 2017 Form 10-K and no legal proceedings expected to have a material adverse effect.
- The filing provides no formal revenue or earnings guidance. It cautions that forward-looking statements are subject to risks and actual results may differ materially.
Important facts for investors to verify
- Whether rapid AI platform revenue and usage growth converts into recurring revenue and bookings; Q1 bookings were $0.237 million and recurring revenue was $0.169 million.
- Whether cash burn moderates as the company scales: operating cash use was $13.248 million for the quarter, and management expects continued losses.
- How the shift toward lower-margin AI platform sales affects consolidated gross margin and the path to profitability.
- Customer retention and concentration, alongside the company’s ability to sustain growth in active media agency clients and platform customers.
- Potential dilution from outstanding equity awards and warrants; the filing reported 4.934 million options outstanding and 1.525 million warrants.