Veritone, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. Veritone provides AI solutions through its aiWARE platform and also operates a media advertising agency. During the quarter, it acquired Performance Bridge, Wazee Digital, and Machine Box.
Financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $7.5 million | $3.7 million | $16.1 million | $10.9 million |
| Gross profit / margin | $6.0 million / 79% | $3.4 million / 92% | $13.1 million / 82% | $10.1 million / 92% |
| Operating loss | $16.3 million | $19.5 million | $43.9 million | $33.9 million |
| Net loss | $15.9 million | $19.4 million | $43.3 million | $46.8 million |
| Net loss per share | $0.86 | $1.31 | $2.55 | $5.94 |
Revenue growth reflected higher Media Agency revenue and growth in AI and Digital Content Solutions, as well as revenue from the newly acquired businesses. Gross margin declined as AI and Digital Content Solutions and Digital Media Services, which generally have lower margins than Media Agency, became a larger share of revenue. The nine-month 2017 comparison includes substantial debt- and warrant-related items; these contributed to that period’s net loss.
For the nine months, operating cash use was $25.0 million, versus $20.4 million in 2017. Investing activities provided $7.2 million, including $21.0 million of marketable-security sale proceeds, partly offset by $9.6 million of acquisition payments and $3.5 million of capital expenditures. Financing activities provided $34.3 million, principally from a June stock offering. Cash and cash equivalents were $46.1 million; marketable securities were $18.6 million. Total current assets were $98.3 million and current liabilities $58.8 million. The company reported no debt outstanding at September 30.
Management’s non-GAAP adjusted EBITDAS was a loss of $8.6 million for Q3, compared with $7.6 million a year earlier, and a loss of $29.8 million for the nine months, compared with $20.0 million. This measure is not a GAAP substitute.
Material changes and transactions
- Q3 revenue increased approximately 103% year over year; nine-month revenue increased approximately 48%. Media Agency revenue rose 44% in Q3 and 12% year to date. AI and Digital Content Solutions revenue grew substantially from a smaller base; Digital Media Services revenue was newly added through Wazee Digital.
- Q3 operating expenses were $22.2 million, slightly below the prior-year quarter; nine-month expenses rose to $57.1 million from $44.0 million. The Q3 comparison benefited from a prior-year $8.2 million performance-option vesting charge that did not recur. Acquisition and integration costs were $2.0 million in 2018.
- In June, Veritone raised approximately $32.8 million net from a common-stock offering. Shares outstanding increased to 19.3 million at quarter-end from 16.2 million at year-end 2017.
- Acquisitions expanded podcast agency services (Performance Bridge), digital content management and licensing (Wazee Digital), and machine-learning capabilities (Machine Box). Preliminary goodwill recorded for these acquisitions totaled approximately $27.6 million; purchase-price valuations remained incomplete.
Outlook, risks and unusual items
- Management said it expects continued operating losses for the foreseeable future and continued investment in sales, marketing, AI research and development, and acquisition integration. It believed available cash and marketable securities would fund ordinary-course operations for at least 12 months. No specific revenue or earnings guidance was provided.
- Management expected Digital Media Services revenue to decline sequentially in Q4 2018 because of the absence of major sporting events. Media Agency revenue is subject to campaign timing, customer budget changes, client churn, and seasonality.
- Performance Bridge may earn up to $5.0 million in revenue-based contingent consideration; Machine Box may earn up to $3.0 million tied to development and integration milestones. The filing estimated up to $1.3 million of cash use over the next 12 months for these contingent payments if earned. Machine Box’s estimated $2.9 million contingent amount is treated as compensation expense over specified service and milestone periods.
- Wazee Digital’s content licensing business exposes Veritone to potential copyright, publicity, clearance, and indemnification claims. The company reported no legal proceedings expected by management to have a material adverse effect, while noting litigation could still incur costs and divert management attention.
- Customer concentration remained relevant: the ten largest customers generated 44.3% of Q3 revenue and 44.1% for the nine months, down from 69.5% and 66.0%, respectively, in 2017. Management also cited dependence on large Media Agency clients.
- Acquisition purchase-price allocations were preliminary and could change. The filing states that interim results are not necessarily indicative of full-year results. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile the filing’s revenue figures: the financial statements report Q3 revenue of $7.545 million, while MD&A reports $7.547 million; segment revenue also differs slightly between sections.
- Track operating cash burn, working-capital movements, and the portion of reported cash held for future Media Agency vendor payments ($14.1 million at quarter-end).
- Monitor acquired-business integration, final purchase-price allocations, goodwill and intangible-asset valuations, and whether contingent acquisition payments are earned.
- Assess whether growth in AI and digital-content revenue can improve margins, and whether bookings and recurring revenue sustain the platform’s reported customer and usage growth.
- Consider dilution from equity offerings, acquisition shares, stock awards, and the company’s available $50 million at-the-market equity program; no shares had been sold under that program as of September 30, 2018.