Good afternoon. Welcome to Veritone’s Fourth Quarter 2018 Earnings Conference Call. After the market closed today, Veritone issued a press release announcing its results for the fourth quarter and full year ended December 31, 2018. The press release is available in the Investor Relations section of Veritone’s website. 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 net revenues for the first quarter of 2019. 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 filings, including its Annual Report on Form 10-K. These forward-looking statements are based on assumptions as of today, February 21, 2019, and Veritone undertakes no obligation to revise or update them. In addition to the company’s GAAP financial results, during this call, management – we will be presenting and discussing the company’s earnings before interest, expense, depreciation, amortization and stock-based compensation, adjusted to exclude certain acquisition, integration and financial related expenses or adjusted EBITDA, which is a non-GAAP financial measure, a reconciliation of the company’s adjusted EBITDA 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 website at www.veritone.com. I would now like to turn the call over to Veritone’s Chairman and CEO, Chad Steelberg. Sir, please proceed.

Thank you, operator. Welcome everyone and thank you for joining us today. I’m very pleased with our strong financial and operating performance in the fourth quarter. Our revenue was a record $10.9 million, an increase of more than 200% compared with the fourth quarter of 2017. We delivered on the forecasted revenues and product synergies linked to the three strategic acquisitions that we closed in the prior quarter. We expanded our customer base and revenues by successfully deploying three organically developed aiWARE applications, Redact, Identify and Attribute. And finally, Veritone One closed the year on a high note, continuing leverage aiWARE to differentiate its advertising services. As a whole, Veritone enters 2019 in the strongest strategic and operational position since our inception in 2014. Taking a broader look for a moment, I’d like to reflect on some of the key objectives we outlined during our IPO in May of 2017. The first objective was to reduce the advertising component of our revenue mix, which was 95% in the first quarter of 2017 to 20% or less are growing our aiWARE SaaS business through organic growth and strategic acquisitions. Seven quarters later Veritone’s revenue mix in the fourth quarter of 2018 with 55% advertising and 45% aiWARE software and services. We expect this trend to continue for the foreseeable future and expect our aiWARE revenue to cross the 50% threshold in the first half of this year. The second objective was to reduce our adjusted EBITDAS loss as a percentage of our net revenue from 207% in the first quarter of 2017 to eventually achieving a positive adjusted EBITDAS run rate. Veritone’s adjusted EBITDAS loss rate in the fourth quarter of 2018 was 82%, the lowest rate in our history, compared with 292% in the fourth quarter of 2017. We believe…

Thank you, Chad, and good afternoon everyone. As Chad mentioned, we achieved our fourth quarter 2018 goals and set the stage for a strong 2019. I will first review our fourth quarter 2018 performance compared with the fourth quarter of 2017; remember that we acquired Wazee Digital and Performance Bridge in August of 2018. So, this was the first full quarter reflecting their impact. Our net revenues increased 213% from $3.5 million to $10.9 million, thanks [ph] to this $4.8 million contribution from our recent acquisitions, the addition of new customers and growth with existing customers. Our aiWARE SaaS net revenues were $2.4 million, including approximately $900,000 from Wazee Digital’s core and Digital Media Hub applications. Excluding the acquisitions, our aiWARE SaaS net revenues increased by $1.0 million or a 211% to $1.5 million from $477,000 in the fourth quarter of 2017. This increase reflects the growth we saw both in the number of active clients and the spend from those clients as well as the performance incentive we earned during the quarter. aiWARE Content Licensing and Media Services had net revenue of $2.5 million. The fourth quarter is generally the seasonally slowest quarter in this business since a good portion of an annual revenues come from sporting events that occur in the first, second and third quarters. Within our aiWARE SaaS business, our net revenue growth was anchored by our media and entertainment vertical market. We continued to execute well on our land-and-expand strategy with customers as Chad discussed earlier. Excluding the acquisitions, our aiWARE SaaS monthly recurring revenue or MRR under agreements in effect at the end of the fourth quarter increased 32% to $229,000 from $173,000 in the fourth quarter last year. Remember that MRR excludes some agreements we have with media customers that are variable revenue…

Thanks Pete. We are very pleased that our annual revenue increased by 88% in 2018 and that our adjusted EBITDAS loss margin in the fourth quarter was the lowest level in our history. We are excited about furthering these trends in 2019. We are on track to drive to scale revenue growth and bottom-line improvement with our land-and-expand, self-service sign up and app development strategy. We also look forward to connecting with our investors and analysts. Next week, we will be at the JMP securities Technology Conference in San Francisco. Then in the week of March 18, we will be at the Annual ROTH Conference in Dana Point. As this event is a short distance from our offices, we will be holding our first Investor Day at our headquarters in Costa Mesa on March 20. our team will be in touch with more details or please contact LHA investor relations with questions about these events. Operator, I would like to begin the Q&A session.

[Operator Instructions] Your first question comes from the line of Mike Latimore from Northland Capital. Your line is open.

Great, thank you. Yes, and congratulations on the quarter. Looks Great. Your first quarter guidance, your revenue guidance is sort of well above what I was looking for, I guess. Can you talk a little bit about what you’re seeing in the business? What’s driving that sequential growth in the first quarter?

Hey, Mike. This is Chad. Pete, I want you to take that?

Yes. So, Mike, the business, with the bookings that we had especially in the fourth quarter nearly $900,000 on the SaaS aiWARE side, plus the bookings for aiWARE for Wazee Digital is about $300,000, helps us to be at a place now, where we’re confident with that range of $11.5 million to $11.9 million from a net revenue perspective. So, it’s the sequential growth that we’ve seen and kind of building on the success we’ve had, especially from a kind of a land-and-expand perspective that gives us confidence that we’ll land net revenues in Q1 in that range.

So, most of the sequential growth probably in the AI and Digital content revenue line there?

Yes. Well, also that the aiWARE Content Licensing and Media Services business will have a better quarter in Q1. As we talked about in the prepared remarks, fourth quarter is a seasonally slow quarter for that part of our business. The other thing is that the advertising business, we talked about the strength in the fourth quarter, especially with one customer’s campaign, and we’re not expecting that to recur in the first quarter. So there’s a little bit of puts and takes that I would kind of put into the seasonal category, but the thing that’s more consistent quarter-to-quarter is that aiWARE staff side of the business.

Yes. I think you announced at least one deal with Digital Media Hub and an AI were combined, can you talk a little bit about just the pipeline you’re seeing on that combined platform?

Yes, Mike. Our integrations with those companies have gone very, very well. The aiWARE enabled Wazee applications are proving to be extremely powerful solution in the M&A space. We have sold several integrated solution to date and we have a pipeline to continue to expand nothing, but green lights from my perspective at the end of 2018 on the integration of those products in the aiWARE.

Okay. And just last [Technical Difficulty] and then how would you – I mean, if you do have them in the pipeline, how do you think about that relative to maybe guidance. Do you include or exclude them?

What we exclude from the guidance is really those project based work. Anytime we’re sending customers that are kind of dispose that application clients, that’s really where we’re focused on guidance. Many of our borrower relationships are in the government vertical and our partners are primarily global system integrators. We’ve had modest revenues in these relationships so far, but we now have three active paid pilot projects in the government vertical with one of these partners and the pipeline continues to expand. We believe that these borrowers can help with scale and entry certain verticals such as government more quickly and we’re continuing to evaluate how we can structure these relationships to maximize sales as they leveraged the business and products that we’ve delivered.

Great. Thanks a lot. Good luck this year.

Thanks, Mike.

Thanks.

Your next question comes from the line of Chad Bennett from Craig-Hallum. Your line is open.

Great. Nice job on the quarter guys. Thanks for taking my questions.

Thanks, Chad.

maybe real – a couple of quick ones for Pete, I think. So Pete, in light of the revenue shift, which has been well advertised to your aiWARE SaaS and Content Licensing business, which is a good thing, longer-term, how should we think about gross margins kind of into 2019 or blended for the year. And then from an OpEx standpoint, considering where you were in the December quarter, on a dollar basis is that kind of constant throughout next year or any fluctuations there?

So, Pete, can you start?

Yes. So Chad, let me start with the gross margin. So, we’ve said in the past that our advertising business has a very healthy gross margin just by the nature of it, so north of 90%. And then our aiWARE both on the SaaS and the Content Licensing has margins that are in the range of 45% to 65% depending upon the specific type. So, as the revenue mix shifts more to that aiWARE side of the business, it will naturally bring our blended margin to levels that are lower than what we’ve had in the past. The other thing that I want to point out for this quarter is that we’ve had a bit of a step function increase in the cost of revenues and a reduction in our gross margin associated with the amortization of technologies that we acquired as part of the three acquisitions we did back in the third quarter. So that amortization charge in the fourth quarter was about 720 basis points of gross margin. So, if you do the math, we would have been closer to a 75% margin rate without that amortization from the acquired technology. So, I think to answer your question though, as our revenues increased more on the aiWARE side, we do expect to see the margins come down just because of the mix shift.

Pete, does that amortization charge at 720 basis points, is that a one-time issue or is that consistent going forward at least for – on a straight line basis over a number of years.

It’s the latter. It’ll be there for a while now.

Okay. Got it. Okay. And then maybe, a follow-up for Chad. Chad, the apps that you guys have released in the fourth quarter looked really interesting and I’m just curious as we look into 2019, not that you want to kind of let everything out ahead of time, but how should we think about app development and app releases in 2019 and maybe potential areas or use cases. And then also I’d love to get your kind of thought process on what we should expect out of Machine Box in 2019 and potential opportunities there? Thanks.

Sure, Chad. Yes, so answer is yes, we will continue with our application development in 2019. this will include new applications further and further enhancements in our existing application. Some of the new applications that we’ll be rolling out, we’ll be addressing specific issues and specific verticals such as legal and compliance as we mentioned in the prepared remarks and others will enhance the ability of our customers to leverage aiWARE for additional use cases across all markets. I alluded to some of that in terms of our no code, low code, new sets of applications that we expect to roll out in the first half of this year. And we believe that will dramatically improve the adoption of aiWARE and some of the custom applications that we expect our partners to be building.

Okay. And then on the Machine Box side.

Yes. On the Machine Box piece, really, I mean the strategic nature of that was the fact that it gave us the in-house capabilities to build the spoke and custom models for our industries and our partners. With conductor, it really requires a set of engines and models to be arbitrated between and the marketplace really wasn’t producing neither scale that can be customized in real-time. So, we’ve been very pleased with the Machine Box technology to date. We’ve seen additional models that are rolled out such as Object Box as well as logo and we continue to expect great things from them in 2019.

Great. Thanks guys.

Thank you, Chad.

your next question comes from the line of Dillon Heslin from ROTH Capital Partners. Your line is open.

Hi, thanks for taking my question. First one, could you talk a little bit about the progress that you saw in public and safety, and sort of how the pipeline starts to develop there and what sort of timeframe there is for a little bit more revenue contribution. And then on that, how much is that is inbound or outbound versus some of the products that you might be planning to build?

Yes, Pete, I’ll take the first one, you can take the second part of that question.

Okay.

So, in the governance [ph] it was specifically, we believe that industry is extremely scalable for us and the opportunity is large and based on conversations we’ve had with customers needs verticals. We have developed and are continuing to develop new applications. The pipeline and the tools that we’re rolling out, where we are starting to allow aiWARE to flex its muscle in terms of lowering the cost of application development, targeting the needs for our customers. I expected the combination of these specialized applications that utilize the average stack as well as the self-service signup aspects of our 2019 initiative is truly going to drive, unprecedented scale in the business in 2019. Pete?

So Dillon, you asked, I think there’s the follow-on question was about what the pipeline for government, is that what you were looking for?

Yes. Sort of the pipeline and when do you expect some revenue contribution or what sort of the outlook for what could be a realistic revenue contribution from the vertical?

Yes. So, Chad talked in his prepared remarks about the three paid pilots we’ve got going on in the first quarter in the government sector. Two of them, well, they’re both across the Identify and the Redact applications. So, as far as what we’re seeing is at least in the first quarter is six-figure type revenues coming in for those paid pilot projects. And I think that then beyond that as we progress and deliver those and then move into the next phase, hopefully for those projects as well as working with Global System integrators to then move on to other opportunities, we’ll be able to update you as we progress.

Got it. Thank you. And then just as a follow-up, you mentioned they took over some incentives you received. What was that related to and are you able to quantify what it was?

Yes. We’ve said before that we’ve got some of our SaaS revenue on the media and entertainment space, and has a variable component to it. And one of our customers we do a year long kind of arrangement with them and because we didn’t achieve the goal until the fourth quarter, we’ve recognized that full amount in the fourth quarter and that, that worked out to be right around $400,000 that was recorded in the fourth quarter. So, it recognizes the work we’ve done throughout the year, but from just a pure revenue recognition perspective, it gets booked in the fourth quarter.

Got it. Thank you.

Sure.

Thanks.

Your next question comes from the line of Tom Diffely from D.A. Davidson. Your line is open.

Yes. Good afternoon. First, a question on some of the programs you’re working on. Will you set up kind of a long-term view, Identify and Redact? I know right now they’re project based, but long-term is that going to be more of a subscription model or standardized software sale or is it going to be project based going forward?

Yes. Hey, actually the revenue that we’re receiving in the fourth quarter with these paid pilots is not project based revenue. They are all be subscription based classic fast based models. The exciting news with redact is really we’re moving that part, because it’s not isolated in restricted to adjust the government sector. There are many industries that require an expedited redaction process. And so that’s one of the reasons why we’re focused on rolling out our first self-service sign up process and that initial application that’ll benefit from that is the redaction app.

Okay, great. And Pete, because of the acquisitions for the quarter now, what’s your view on OpEx over that on a go-forward basis from here?

So, we had the acquisitions included in the business for the whole fourth quarter as you said. Our head count, which makes up a big portion of our operating expenses, finished the year at 316. We’re looking to increase that by less than 10% over the course of 2019. So, I think Tom, as far as it’s kind of overhead goes, the run rate we were on in the fourth quarter with relatively modest increase in head count anticipated over the course of the year is kind of what we’re thinking of. So, we’re always balancing revenues with the bottom line and big variable in there is those operating expenses in order – depending upon how the revenue is doing with the goal on achieving our adjusted EBITDAS amount, if we’re fortunate and we’re able to generate incremental revenues above our plan, then we would be in a position, potentially to invest more in building the business for the long-term with the operating expenses. But it’s that balance that we’re looking to achieve between revenues and adjusted EBITDAS loss.

Okay. That makes a lot of sense. And then when you look at, I guess the other side, the cash burn side, is it a kind of a steady state again, or are there still some one-time integration once that have to go through?

No, I’d say the remarks that we made were that we’re going to be looking to reduce the adjusted EBITDAS loss in 2019 in comparison to 2018. So that would not be steady state. And then also the ratio of the EBITDAS loss to the revenues also will be coming down [Technical Difficulty].

Thank you.

There are no further questions at this time. I’ll turn the call back over to the presenters.

So, let me take you to Chad.

Thank you for joining us on today’s call. We want to thank our employees, partners and investors for supporting us as we pursue our mission of building in the operating system of the future. We look forward to updating you on our progress on our next call. I’ll turn the call back over to the operator. Operator?

This concludes today’s conference call. You may now disconnect.