Veritone, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods. Amounts are in U.S. dollars, generally in millions unless stated otherwise.
Business context
Veritone develops aiWARE, an AI platform for analyzing audio, video and other data, and operates a media advertising agency. The agency remained the larger revenue source, while the company described its AI platform business as being at an early stage.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $4.168 | $4.087 | $8.556 | $7.195 |
| Gross profit / margin | $3.348 / 80% | $3.751 / 92% | $7.172 / 84% | $6.663 / 93% |
| Operating expenses | $17.801 | $11.599 | $34.855 | $21.142 |
| Loss from operations | ($14.453) | ($7.848) | ($27.683) | ($14.479) |
| Net loss | ($14.330) | ($21.595) | ($27.379) | ($27.442) |
| Net loss per share, diluted | ($0.88) | ($2.94) | ($1.69) | ($5.82) |
Q2 revenue rose 2.0%; AI platform revenue increased 147.1% to $0.860 million, while media agency revenue fell 11.5% to $3.308 million. For the first half, revenue grew 18.9%: AI platform revenue rose 281.9% to $2.127 million, while agency revenue declined 3.1% to $6.429 million.
Operating costs increased substantially as the company expanded sales, engineering, data science and product teams. Cost of revenue also rose with platform usage and computing costs. Management said AI platform margins are lower than agency margins and expected overall gross margin to decline as the platform becomes a greater share of revenue.
The smaller reported net loss versus Q2 2017 primarily reflects unusual prior-year financing and warrant-related expenses, including debt-cost write-offs. Operating loss widened year over year in both the quarter and first half. First-half 2018 non-GAAP EBITDAS was a loss of $21.192 million versus a loss of $12.373 million a year earlier; the company cautioned that EBITDAS is not a GAAP measure.
Cash, liquidity and capital
- At June 30, 2018, cash and cash equivalents were $52.692 million and marketable securities were $25.526 million, totaling $78.218 million, compared with $69.143 million at year-end 2017.
- First-half operating cash use was $21.341 million, versus $16.477 million in 2017. Investing activities provided $11.031 million, including $14.0 million from securities sales, and financing activities provided $33.457 million, mainly from the June stock offering.
- The June offering sold 1,955,000 shares at $18 per share and generated approximately $32.9 million net proceeds. At June 30, the company had no outstanding debt. It also had an at-the-market equity agreement allowing up to $50 million of additional share sales; no sales under that agreement were reported by quarter-end.
- Management expected available cash and securities to fund the pending acquisitions and ordinary-course operations for at least 12 months, while noting continued losses and the possibility of needing future financing for additional acquisitions or investments.
Outlook, risks and notable items
- No quantified revenue or earnings guidance was provided. Management expected significant AI platform investment to continue and did not expect profitability in the foreseeable future; it also anticipated continued increases in sales and marketing, R&D and G&A expenses.
- AI platform scale indicators grew: quarter-end accounts reached 625, customers 86 and active third-party cognitive engines 214. Second-quarter processed audio and video totaled 2.729 million hours, up from 438,000 a year earlier. Quarterly bookings were uneven, at $0.583 million, and monthly recurring revenue at quarter-end was $0.214 million.
- Customer concentration remains relevant: the ten largest customers represented 49.7% of Q2 revenue and 52.1% for the first half. Media agency revenue can vary with campaign timing, customer budgets, client churn and seasonality.
- After quarter-end, Veritone agreed to acquire Performance Bridge Media for $6 million plus a contingent earn-out of up to $5 million, and Wazee Digital for $15 million. The filing estimated approximately $8.7 million of cash use in Q3 for the acquisitions, subject to adjustments, and up to $1 million of additional cash for the contingent earn-out if achieved. Both transactions were expected to close in August, subject to customary conditions.
- Stockholders approved a performance-based plan authorizing 4.2 million shares. CEO and President awards cover approximately 3.17 million options, with total grant-date fair value of $30.375 million to be expensed over derived service periods. This creates a notable compensation expense and potential dilution consideration.
- The company reported no legal proceedings it believed would have a material adverse effect, no material changes to the previously disclosed risk factors, and effective disclosure controls at period-end.
Important facts for investors to verify
- Whether AI platform growth converts into durable recurring revenue, bookings and improved unit economics, given lower platform gross margins and rising operating costs.
- Cash burn and runway against management’s 12-month liquidity assessment, including acquisition payments, earn-out conditions and any use of the $50 million equity program.
- Customer concentration, agency client retention and the impact of campaign timing on revenue.
- Acquisition closing, integration results, actual cash and stock consideration, and any contingent payments.
- Expected timing and accounting impact of the $30.375 million executive option awards, alongside broader equity dilution and ongoing stock-based compensation.