Veritone, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise. The filing was signed November 14, 2022.
Business context
Veritone provides AI computing solutions through its aiWARE platform, alongside advertising and content-licensing managed services. Commercial Enterprise accounted for nearly all revenue. Recent acquisitions included an influencer-management business, VocaliD, and certain Vision Semantics assets; PandoLogic, acquired in September 2021, is a significant source of software revenue.
Financial highlights
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $37.2 | $22.7 | $105.8 | $60.2 |
| Operating loss | $(3.6) | $(11.1) | $(28.0) | $(54.3) |
| Net loss | $(4.9) | $(11.5) | $(30.3) | $(54.8) |
| Net loss per share, diluted | $(0.13) | $(0.34) | $(0.84) | $(1.67) |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $(24.6) | $(3.5) |
- Revenue rose 64% in Q3 and 76% for the nine-month period year over year. Software Products & Services revenue was $20.8 million in Q3 and $57.4 million year to date; Managed Services revenue was $16.4 million and $48.5 million, respectively.
- Reported non-GAAP gross margin was 80.9% in Q3 and 80.4% year to date, versus 74.4% and 73.6% in the comparable periods. These are company-defined non-GAAP measures.
- Non-GAAP net loss was $5.7 million in Q3 and $18.1 million for the nine months, compared with $2.3 million and $10.1 million, respectively, in 2021.
- At September 30, cash and cash equivalents were $196.1 million, down from $254.7 million at December 31, 2021. Cash, cash equivalents and restricted cash totaled $196.9 million. Cash includes $59.5 million collected from advertising customers for future vendor payments.
- Total assets were $469.8 million and stockholders’ equity was $70.8 million. Current assets were $322.8 million versus current liabilities of $185.8 million.
- Convertible senior notes had a carrying value of $196.0 million; their aggregate principal amount is $201.3 million. The notes bear 1.75% interest and mature in November 2026. The filing estimated their fair value at $121.0 million.
Changes and notable items
- Revenue growth primarily reflects PandoLogic and expansion in software and managed-services activity. Software Products & Services grew 197% year over year for the nine months on the company’s stated basis; Managed Services grew 19%.
- GAAP net loss narrowed, but the comparison includes a $23.1 million year-to-date gain from a reduction in the estimated fair value of contingent consideration. Lower stock-based compensation and the prior-year sublease charge also affected the comparison. Meanwhile, sales and marketing, research and development, and amortization expenses increased substantially.
- Operating cash use increased to $24.6 million. Investing activities used $11.1 million, including acquisitions, capital expenditures and a $2.8 million strategic investment; financing activities used $22.9 million, including the PandoLogic earnout payment and taxes on net share settlement of equity awards.
- In September, Veritone amended the PandoLogic earnout so the 2022 earnout would be at least $10.825 million regardless of actual performance. The amendment also ended certain operational covenants and provided for early release of certain escrow funds.
- Management disclosed an error in the prior accounting for PandoLogic contingent consideration and purchase accounting. It judged the prior-year errors immaterial, corrected the December 2021 balance sheet and comparative 2021 figures, and had previously restated Q1 2022 statements.
Outlook, risks and controls
- No specific revenue or earnings guidance is provided. Management said it believed cash on hand would fund ordinary-course operations for at least 12 months from the filing date, expected operating results to improve in 2022 compared with 2021, and expected profitability in the foreseeable future; these are expectations, not assurances.
- Management expects seasonality, including potentially higher Q4 profitability, and planned continued investment in engineering and sales. It also reported cost-saving measures in response to macroeconomic uncertainty.
- Customer concentration is significant: the largest customer represented 31% of Q3 revenue and 25% of nine-month revenue. Management attributed lower average annual software revenue per customer in part to reduced hiring consumption by Amazon, and cited customer concentration as a source of revenue volatility.
- Other stated risks include inflation, rising interest rates, recession and geopolitical disruption, changes in advertising demand, long sales cycles in government markets, technology and infrastructure risks, and the need for additional capital or successful customer growth and acquisitions.
- Disclosure controls were deemed ineffective because of a material weakness involving oversight and review of third-party specialists’ work on valuations and acquisition accounting. Management described remediation efforts, but said the weakness would not be considered remediated until controls operate effectively for a sufficient period and are tested.
- The company reported no legal proceedings expected by management to have a material adverse effect and no material changes to the risk factors described in its prior filings.
Important facts for investors to verify
- Whether customer concentration, particularly PandoLogic and Amazon-related hiring demand, continues to affect revenue and average revenue per customer.
- How much of reported growth is organic versus attributable to acquisitions, and whether customer and booking growth converts into recurring revenue and cash.
- Whether operating cash burn moderates and whether management’s liquidity and profitability expectations are achieved.
- The final amount and settlement mix of PandoLogic earnout obligations, alongside deferred acquisition payments and potential dilution.
- Progress and testing of remediation for the material weakness, and whether subsequent filings report effective controls.
- The effect of contingent-consideration fair-value changes and other excluded items when assessing GAAP results alongside non-GAAP measures.