Good afternoon. Welcome to Veritone's First Quarter 2018 Earnings Conference Call. After the market closed, Veritone issued a press release announcing its results for the first quarter ended March 31, 2018, and the press release is available in the Investor Relations section of Veritone's Web site. Joining us for today's call are Veritone's Chairman and CEO, Chad Steelberg; and the company's Chief Financial Officer, Pete Collins. Following their remarks, we will 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 operating performance for the second quarter of 2018. These forward-looking statements are subject to risks, uncertainties and assumptions that may cause the actual results to differ materially from those stated or implied by those 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, 2018, and Veritone undertakes no obligation to revise or update them. In addition to the company's GAAP financial results, during this call, management will be presenting and discussing the company's earnings before interest, expense, depreciation, amortization and stock-based compensation, or EBITDA, which is a non-GAAP financial measure. A reconciliation of the company's EBITDAS 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 Web site at www.veritone.com. Now, I would like to turn the call over to Veritone's Chairman and CEO, Chad Steelberg. Sir, please proceed.

Welcome everyone, and thank you for joining us today. Q1 was a great quarter for Veritone as we experienced an inflection point in our AI platform business. Notably in the quarter, our AI operating system aiWARE saw the following year-over-year growth, and over 50% increase in active customers, and over 75% increase in net new customers, and over 500% increase in SaaS revenues, reaching our first 1 million quarter, and over 250% increase in cognitive engines integrated with our aiWARE operating system, almost a 1000% increase in total accounts, and 180% increase in total customers. Our SaaS revenue growth is particularly noteworthy as it reflects the success we are beginning to achieve with our 'land and expand' strategy of making it easy and cost-effective for customers to deploy AI to enable 1x and 2x solutions to their immediate business needs, and then increasing our business with them as they realize the power of our platform and create additional used cases. We saw significant growth in our second vertical market, legal, and made important stride in laying the groundwork for our third vertical, government. For our new followers, I would like to now provide some background on artificial intelligence and our business offering. AI-based solutions can analyze large and complex bodies of data much more quickly and effectively than human's can, due to their superior processing speed and scalability. Today, this enables these solutions to extend the user's cognitive capabilities, increasing their effectiveness, and in the future, it will allow these solutions to perform some human cognitive functions altogether. This analysis is performed by cognitive engines, which are specialized machine learning algorithms trained to do certain things, such as transcribe spoken language or recognize faces or objects within videos. For these engines to be effective, the tasks need to be defined…

Thank you, Chad, and good afternoon everyone. Our net revenues in the first quarter of 2018 increased 25% to $4.4 million from $3.5 million in the prior quarter, and they increased 41% from $3.1 million in Q1 of last year. The year-over-year increase in net revenues was mainly due to a 506% increase in SaaS net revenues from our AI platform, which increased from $209,000 in Q1 last year to $1.3 million in Q1 this year. The increase in our total net revenues was also due to an 8% increase in our Media Agency net revenues, from $2.9 million in Q1 last year to $3.1 million in Q1 this year. Looking closer on our AI platform business, we generated net revenues primarily in two verticals in Q1 of 2018, those being media and legal. The media vertical delivered the majority of the AI platform's net revenues in the quarter as we continue to build on the business development work we started in 2016. Our land-and-expand approach delivered the media verticals' revenue growth particularly at iHeartMedia and Entercom CBS Radio. The legal vertical delivered the majority of this quarter's revenue increase on both the year-over-year and sequential basis. The legal vertical's net revenue were primarily in the eDiscovery or litigation support aspects of this market, which typically involves non-recurring project engagements. Our largest project this quarter involved transcribing over 1 million recorded phone conversations on behalf of a financial institution. We processed this volume quickly and achieved a level of accuracy that was better than their other providers. Our monthly recurring revenue or MRR under agreements that affected the end of Q1 increased 54% to $169,000 from $110,000 in the first quarter last year. The year-over-year increase of $0.2 million or 8% in net revenues from our Media Agency business was…

Thank you, Pete. At a macro level, AI use cases today carry massively heightened capability of compute with human interaction, resulting in comprehensive insights that solves key problems and has the capabilities to generate new breakthroughs within virtually every market and application. I believe the market at large still needs to establish a greater level of trust of artificial intelligence, before wide-spread adoption occurs. Veritone's AI focus on enabling early and small wins for users to solve immediate business challenges, while leveraging the insights only humans can provide aligns with the market state-of-readiness. We make it easy and cost-effective for customers to deploy AI to enable 1x and 2x solutions to their immediate business needs, and then increase their business with us as they learn the power of our platform and create additional use cases. Note that the trajectory of our business will be both unpredictable and lumpy as a result of the industry dynamics. The industry is new. Some of our business comes from projects such as legal cases that are a varying revenue size and duration. When the case ends, the associated revenue stream from the project also ends. As I had said, we are in the very early innings of a long game. And over time, as we continue to execute our strategy and build our business across all of our verticals, we expect to deliver significant, sustained revenue growth. We are focused on continuing to develop the foundation of our AI platform business, including continuing to advance the proprietary Conductor and data science technology in the build-out of our best-of-breed ecosystem, which with new third-party engines, new third-party developed applications, and new volumes of data ingested will create what we see as an autonomous, virtuous cycle. We are building our offerings in a solid manner and working to deliver meaningful and measureable value to our users and members of our ecosystem. Today, aiWARE is augmenting human technology, extending the users' cognitive capabilities while leveraging the insights only humans can provide. Over time we expect to be able to enable our users and partners to deliver 10X solutions that can perform a greater range of human cognitive functions which will fundamentally transform the way these organizations operate. Again, thank you for your time today. We look forward to updating you on our progress on future calls. We're now ready to open the line for questions. Operator?

Thank you, sir. [Operator Instructions] Our first question comes from the line of Chad Bennett of Craig-Hallum. Your line is open.

Great, guys. Thanks for taking my questions; great quarter, phenomenal to see the AI platform, huge growth sequentially and year-over-year; great to see, congrats.

Thanks, Chad.

Yes, no problem. I guess the first question, it's great to see that the legal vertical, it is -- you're starting to see traction there and it sounds like it was a meaningful contributor in the quarter. I understand that this is potentially a lumpy vertical for you guys based on it being project-based. I guess, maybe for Pete, how significant was it in the quarter? And then, I know you guys have talked about before I think legal being your biggest vertical this year in the AI platform business. Is that still the case and how do you think legal plays out through the rest of the year? Thanks.

Yes, what we said in the remarks was that it was the largest contributor to the increase on a year-over-year basis, and also from Q4 to Q1, but media was the majority of the revenue in the quarter. So legal had very good growth, we still think it's going to be the biggest source of revenue in the AI business for the year, but it's just kind of ramping up from a smaller base at the beginning of the year in comparison to media.

Got it. And then Chad, maybe you could talk about you guys made, I thought, a pretty interesting announcement around effectively real-time capabilities around your new version of our AI technology and aiWARE and your Conductor technology. Can you talk about, I guess, from a competitive standpoint in the market how far ahead this kind of brings you? I mean, you guys are already, in my opinion, kind of leading edge in this area. But just kind of the differentiation the new iteration creates for you?

Absolutely, Chad. I mean, what we were seeing in the market with our 1 and 2x solutions were sort of -- anywhere between a five and 10-minute time lag between the intelligence across all of those different cognitive images that we could process and then deliver to our partners. But both in the media industry as well as we started to work in public safety. The capability and the 3, 4, and 5x solutions to be able to have near instantaneous cognition competitive with the human would really start to open up ways to protect our citizens better in public safety, as well as in media to take real-time actions whether it be in terms of digitally inserting a new advertisement, et cetera. So the potential is really why we chased that technology. It took us nine months to actually go from a three to, again, multi-minute lag to now just a few seconds and trending even lower than that. From a competitive standpoint there isn't really anybody out there that's providing multi-engine cognition at this level of scale, even at the three to five-plus minute range. So we're now down to the seconds, really working with our partners. So this isn't a competitive response. We're doing this because our partners are demanding the need for this level of intelligence at this level of speed and accuracy.

Got it, makes sense. Thanks guys. Nice job again.

Thanks, Chad.

Thank you. Our next question comes from the line of Rob Stone of Cowen & Company. Your line is open.

Hi, guys. Chad, I wanted to talk about legal for a minute as well. You mentioned in the prepared remarks that you had a big project processing some recorded calls, and got that done quickly and with higher accuracy. Can you give us a sense of sort of what kind of performance step-up are your legal customers looking for in order to get them to adopt this? And which is more important, the speed or accuracy, how does that affect their thinking relative to cost, for example?

In the legal category, at least with the current use case for the discovery data processing speed is not necessarily the driver. It really comes down to accuracy and cost. And today, historically firms have been paying a substantial premium to the service that we're offering by routing a lot of this information to humans to provide the transcription services against media files. And that bar, obviously, is extremely high in most cases. So to win the business we needed to produce results that were substantially better than single-point solution engines on our platform, which was achieved using Conductor. So as we continue to expand the number of natural language processing engines from -- in nascent times, I think last year we were in 60 to 80 range. We're now over 115-plus engines just in the category of natural language processing which gives us the breadth of both language as well as dialects to be able to parse and transcribe audio and video based files at a level that obviously the legal firms are finding to be acceptable, and clearly ahead of the competition. From our last benchmark we were somewhere between 15% and 20% better than the single best point solution engine on the platform using Conductor.

So, you mentioned the non-recurring nature of these projects, but having proven that it's a lower cost and acceptable level of accuracy, can you give us a sense -- you have I guess established some channel partner [technical difficulty] in this area, what kind of sales cycle do you foresee to then sign up additional projects? Should that go fairly quickly?

I think it's again going to be lumpy, not necessarily because the results weren't spectacular for the multiple channel partners that are using our platform today to prosecute cases, it really just comes down to, again, working with the law firm and in turn their clients. Do they have the budget and the wherewithal to process this audio and video-based files, does the case match up against the technology we have in terms of how they want to handle the case. And that's something that's out of our control. But as we continue to push and expand the number of system integrators and MSPs in the legal business obviously we will start to flatten out that curve as larger deal flow opportunities come to us.

Great. A couple of questions for Pete, if I may; one, Pete, could you touch on customer concentration in the quarter, number of 10% customers or sort of roughly how the revenues broke down?

Yes, I think in the Q, Rob, we've got disclosure in there. And I don't remember it exactly off the top of my head, but I think the top 10 customers were somewhere in the neighborhood of about 55% of the revenue. So especially on the media agency side with the increase in the number of active customers, active clients they've got, they've done a very good job of kind of mitigating the risk of being too heavily concentrated in a few different customers. So as the business is growing we're seeing that dependence upon any particular customer being mitigated.

Great. And you mentioned the increase in staffing and investment in R&D and data science, sales and marketing. Could you give us the headcount figures for end of '17 versus end of Q1?

Yes, so at the end of '17 we had 206 staff members. And at the end of Q1 we had 225.

Okay. And how should we think about the OpEx trend or headcount additions for Q2 versus Q1?

I don't think we're going to see another 20 people coming onboard, 19 people coming onboard. I think there'll be probably a few targeted hires, but I'd say the run rate would probably be about a third of what we saw in Q1.

Great. I'll jump back in the queue. Thanks, guys.

Bye, Rob.

Thank you. Our next question comes from the line of Darren Aftahi of ROTH Capital Partners. Your question please.

Hey, guys. Thanks for taking my question. Just back to the topic of legal, just given kind of the lumpy nature of it, I'm curious the lead time on how fast you can kind of get these wins versus actually processing. Said another way, can you have intra-quarter wins where you actually may not have it in the pipeline and hence could actually recognize a fair amount of revenue to kind of move the needle quarter-to-quarter. And then second question, around your fed ramp in process status. How can you work with some of the constituencies within the government while you're in the "In Process" status until you get final sign-offs. Thanks.

Sure, with regards to the legal, absolutely. We can have very short sales cycles as the case deems necessary for the technology to be applied. The ramp up time and this is probably the most impressive piece about the business that we did in Q1, we had multiple projects come through in the quarter, but the very large one Pete referenced, there was over a million recorded telephone calls we processed in literally just a few days, the entire batch of files. So the scalability of our platform was put to the test, proved very beneficial to the law firm that was prosecuting the case. So this is not a function of scale, it is a function of really just continuing to educate the marketplace and allow those MSPs a very simple path on-boarding to our platform and using the technology. And I think you'll see this continue to grow. The lumpiness is really going to come down to when we have those million-hour recorded opportunities hit deck we will be able to process them with our current technology and at scale. On the other side, the fed ramp piece for us, we've got authorization to test is a very large milestone. It allows us to work and start to prosecute information with the Department of Justice and other federal agencies. Part of that though with each agency now have to go through a certification process to give us an authorization to operate, which is the next final piece. We anticipate seeing those things start to happen with us in 2018, but they will be on an agency by agency basis. But our current status allows us to do business and generate revenue with agencies in the U.S. government.

And would those, follow-up on that, would those be more on a pilot basis or is it not limited to pilots?

They will be on a pilot basis during the authorization to test phase, which we're in now.

Got it, thank you. Nice quarter.

Thanks.

Thanks, Darren.

Thank you. Our next question comes from Mike Latimore of Northland Capital. Your question please.

Thanks. Again, great quarter, nice to see the legal vertical tick in there. In terms of additional legal opportunities do you see them coming through kind of a couple of resellers that are sort of fully trained or is it more about getting a few more of the service providers, resellers to onboard it as well?

As we've talked about before, we've signed a majority of the large MSPs in the marketplace today. So very keen, down to the activation we saw in Q1, was about coming back through and retraining and pushing deeper into the education of what our technology can do that different than any other system out there. That's what's really starting to break some of these cases loose for us. We anticipate that to continue in Q2. The other opportunity, again, for legal for us is not just the legal vertical, but it's legal and compliance. And the compliance side is really what I talk about as being less of litigation, where we're working with banks and other institutions that require some degree of compliance that involves processing large amounts of unstructured audio and video-based information. So from our perspective, I think we are heavily engaged with a number of banks and other financial institutions on the compliance side, and I would anticipate us in the balance of this year having some of those opportunities generate revenue as well.

And the compliance opportunity that tends to be more of a traditional kind of subscription model, or is it usage based as well?

It will probably be more subscription-based, but definitely you see lumpiness in those industries as various internal events at these banks occurs and that requires them to process more content on an ad hoc basis.

Okay, got it. And then your guidance for kind of hours of media ingested, it looks like you expect it to grow nicely again in the second quarter. Is that largely on the video or audio side, or what kind of visibility do you have into that sort of forecast?

I think it's still primarily more on the audio side, Mike, I mean the video side of the business with TV broadcasters, cable networks is a growing part of the business, but especially with legal, a lot of the work we're doing in legal is more on audio file context today. So you combine that with our existing run rate from a radio broadcaster perspective, and most of what we are doing is for audio work at this point.

Okay. And just last on the R&D Group, of your 225 employees how many are in the kind of R&D Group at this point?

So, at the end of March, we had 69 in the R&D Group.

Okay. Great, thank you. Great quarter.

Thank you.

Thanks Mike.

Thank you. Our next question comes from the line of Tom Diffely of D.A. Davidson. Your question please.

Yes, good afternoon. Just a follow-up on the hours of video processed question, so when you look at the growth into the second quarter, does that require a host of new legal customers, or is it really just expansion of existing customers?

It's really expansion of existing customers. The way the market is set-up is over the last decade, service providers in the legal eDiscovery business have relationships with the law firms, and as those law firms begin to prosecute cases, the MSPs are engaged to in the eDiscovery process historically dealing with text documents, e-mails et cetera. As the body of evidence increases, increasingly has more audio and video associated with those legal cases training the MSPs to now be aware of the technology solution called aiWARE that allows them to analyze the audio and video in a very similar way that they have been doing the text-based documents is really that education process. So while it might be new clients in terms of legal cases to the MSPs, from our perspective, the really bulk of the MSPs are already been on our platform for a number of months, and we are really lenient to them to further the education, so they can be more nimble and effective, and using our tool to prosecute those cases.

Okay, great. And then, when you look at the average engagement, how long is it? And are most of your engagements today discrete projects or the ongoing engagements?

So, again in the legal side, it's really project work, but if you think about legal and compliance, how we think about the industry, once you are in litigation, it falls in the litigation side. That is all projects work, they've got the operating system and they are constantly putting different cases through the various engines on the platform. On the compliance side, it does have a much more subscription feel to it with banks and others being able to have a much more predictable stream of unstructured content for analysis.

Okay. And then, early you mentioned that government is going to follow behind legal here. Are you expecting revenues later this year then from government?

We'll have pilot revenue this year from the government is our expectation with significant ramp in 2019.

Okay, thanks for your time.

Thanks, Tom.

Thanks, Tom.

Thank you. Our next question comes from Sameet Sinha of B. Riley FBR. Your question please.

Hi, guys, thanks for taking my question. This is Lee Krowl filling in for Sameet Sinha. First, just a product question; just a quick product question on the cognitive engines, just a rapid development in your product and the addition of new cognitive engines, just curious if you could talk about maybe, do the older cognitive engines become obsolete at any point, or do these things build on themselves, so any sort of innovation is just purely additive?

That's a great question. It really depends on the engines particularly, but we do see engines that are no longer being innovated upon by partners can become obsolete, but in other cases, we have some engine on the platform that haven't seen a line of code change in probably a year. They're still being orchestrated through conductor, and play a valuable role in the ecosystem.

So the kind of the engines that we are providing is net of those that get kind of decommissioned. So, there is some of that, but they drop-off, and then what we are presenting is just active count at the end of the quarter set of point in time.

Got it. And then, just a financials question; can you maybe just talk about the cadence of cash burn throughout the year, and maybe just put in buckets of the mix of investments between engineering and kind of your go-to-market strategy?

Yes. So I'd say there was a fair amount of ramp up in headcount going back into the second-half of 2017 and continuing into the first quarter of 2018. So that's given us additional capabilities from both a product perspective through engineering data science, as well as from sales and marketing perspective in developing leads and really pursuing opportunities. So we see that run rate is going to transfer -- that investments going to translate into additional revenues over the back half of the year, and we expect to be able to use some of that additional revenue to reduce the burn rate from the $10.2 million we've had over the last two quarters. So I think by the second-half of the year, there'll be slightly moderated level of cash burn.

Got it. And then, my legal vertical question, just curious, it seems like once you are in with these MSPs, there is an opportunity to land and expand significantly, kind of similar analogy to these agencies in the media side. Could you just remind us once you are in with an MSP in with the law firm and generating revenue, at the MSP level, are you an exclusive provider of your services, or do you -- you know, the MSPs customers have the option to choose someone else?

No, we are not an exclusive provider to any of the MSPs that we have reseller agreements with. It's a very -- again competitive marketplace out there both with technology solutions from legacy providers like a Nuance, to again human levels of transcription offshore. Our technology is the best of breed that's out there. So every single week, we are out there winning business in these legal verticals. So, part of the issue why it took is a two-quarter delay to actually start to see revenue through here was, there was some contracts that were in place with various MSPs where they had pre-bought services from third-party vendors and they needed those contracts to burn off before they could actually spend money with Veritone. So, some of those have now happened, and we are watching the budget start to shift from competitors and legacy providers to a modern AI platform.

Got it. And then the last question from me kind of more high level, but you guys have kind of talked about the deal pipeline in the last several quarters, you mentioned the deal to close in December. Maybe an update on just you know, what the pipeline looks like and maybe timing of the potential acquisitions throughout the year?

Absolutely. So, we continue to see M&A as a strong component to our overall growth strategy, but obviously it's extremely difficult to predict the deal timing. So going forward, we will not be providing M&A color primarily not to tip the hand of the marketplace in terms of what our strategy is, or impair our negotiations.

Got it. Good quarter, and thanks for the update.

Thanks, Lee.

Thanks.

Thank you. Our next question comes from the line of Pat Walravens of JMP. Your question please.

Great, thank you for taking my question. Hi, Chad, can I ask you sort of a big picture question which is given the early stages of market on the AI side, how could the sales cycles work? I mean is it always partner-based? Is it direct? What kind of person you want to hire? Who do they call? What would they say?

Absolutely. When you think about the S-curves of the company that's having rapidly expanding marketplace and growth, you know, when you start off in a start-up, you have business development folks. It's primarily an education function, teaching about the product, teaching about the used cases, and then getting some early wins and using that as reference points to expand. The business development effort then translates usually into a sales cycle, where you get away from that biz/dev kind of education process to a much more classic, lead-gen sales and marketing efforts that lets you scale much more cost effectively and shorten your time span from lead to close. But then you have another phase, which is really when you start using channel partners. And you start to educate a marketplace that can start to build on top of your platform and extend the reach of your sales team. And then lastly, you have self-service, which is kind of the ultimate goal to SaaS platform out there. So where we are as a company, I think we are in the sort of the transition phase of going from biz, dev, and education into customers to now a very robust sales process. We've hired some recent leadership both in product marketing as well as sales that can really start moving in that direction. Second, we've taken a very strong move and made a strong move into the channel space in Q3 and Q4 of last year, and we're continuing to extend that, not just within the legal and compliance sector, but also public safety and media. Self-service yet is not on our roadmap, but how our customers today I think what the normal experience would be in a sales cycle is that actually three to four meetings to close. The first meeting is still educational, the second meeting is really us to point a POC, proof-of-concept. In some cases, those are actually paid POCs and others they're free, they last anywhere between 30 and 90 days depending on the opportunity. The third and the fourth meeting are usually negotiations to close. We see about a 70% close rate once we get a customer into a POC. So we're really actively pushing not only our channel partners but also our internal team to move customers as quickly as possible into the POC to build and measure empirically the lift and value and ROI by using Veritone's aiWARE and our personal intelligence in their business processes.

Okay, that's super-helpful. And then, secondly I am just wondering what you -- I've been impressed by Wolf's sort of research and productivity over the years, what do you have him and maybe his team working on?

So, if I told you I'd have to kill you. But Wolf is sort of our secret weapon. He is our Chief Data Scientist. Anybody I think worth in terms of system automation and artificial intelligence knows of Wolf's science. We have a very high powered team based at Seattle that supports him in his core research. He recently took a professorship at Stanford University. So he continue to be a very active member of the academic community, but were Wolf is really headed for is as we move from intra class conductor, which is a difficult problem, but we have had actually tackled, to inter class conductor which allows now the multiple cognitive engine in different classes to be able to use simultaneously to make better optimization and decision support for our users.

Great, thank you. And then, Pete, maybe one for you, and I totally get that this is relatively small businesses and hard to predict, but do you guys consider giving some sort of revenue -- 'guidance' is probably too stronger word, but perspective and did you consider and sort of what factors played into your decision?

Look, Pat, to be clearly honest, we like to give guidance, but it's just difficult to be able to really predict with --- with the market being so dynamic, we just don't have enough data points to be able to lay it out there. So what we've done is shifted to just providing the information about KPIs on a quarter-out basis, which is where we've got a better line of sight. And as the business matures and we get more data points, we can look to extend that horizon out even further. But at this point, just makes more sense for us to be able to give the guidance, give information about things that we've got in our line of sight.

Okay, fair enough. Thank you for answering my questions.

Yep.

Thank you. At this time, I would like to turn the call back over to Chad Steelberg for any closing remarks. Sir?

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

Thank you, sir. And thank you ladies and gentlemen, this does conclude today's conference. Thank you for your participation, and have a wonderful day.