Good day, and welcome to the Veritone Second Quarter 2022 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note today’s event is being recorded. I would now like to turn the conference over to Brian Alger, Senior Vice President, Investor Relations and Capital Markets. Please go ahead.

Thank you, and good afternoon. After the market closed today, Veritone issued a press release announcing results for the second quarter ended June 30, 2022. The press release and other supplemental information is available at the Investors section of Veritone’s website. Joining us for today’s call are both the live and digital twin versions of Veritone’s Chairman and CEO, Chad Steelberg; President, Ryan Steelberg; and CFO, Mike Zemetra, who will provide prepared remarks and then open up the call for a live question-and-answer session. Please note that certain information discussed on the call today, including certain answers to your questions will include forward-looking statements. This includes, without limitation, statements about our business strategy and future financial and operating performance. These forward-looking statements are subject to risks, uncertainties and assumptions that may cause the actual results to differ materially from those stated. 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 the assumptions as of today, August 9, 2022, and Veritone undertakes no obligation to revise or update them. During the call, the actual and forecasted financial measures we will be discussing will be presented on a non-GAAP basis, unless noted otherwise. Reconciliations of these measures to the corresponding GAAP measures are included in the press release we issued today. Finally, I would like to remind everyone that not only has this call been produced with Veritone Voice, our proprietary synthetic voice solution. It is also being recorded and will be made available for replay via a link in the Investors section of the company’s website at www.veritone.com. Now, I’d like to turn the call over to the digital twin of our Chairman and CEO, Chad Steelberg. Chad?

Thank you, Brian. Good afternoon, everyone. [Foreign Language] As Brian noted, I am digital twin Chad. I’m happy to speak with you today and to provide an update on the progress of our business. For the second quarter of 2022, Veritone reported revenue of $34.2 million representing year-over-year growth of 78% on a GAAP basis and 2% on a pro forma basis. Over the same period, bookings in the quarter nearly doubled and our customer count grew 42%, both on a pro forma basis. As Ryan and Mike will detail shortly, the vast majority of our business tracked very well in the second quarter of 2022. However, actions taken by one of our largest customers, Amazon, impacted our financial growth in the quarter. As you can see from the balance sheet in our earnings release, Veritone is well capitalized. We have over $220 million in cash and cash equivalents with many levers of growth. We continue to strategically invest in our growth and the opportunity that aiWARE represents. We are implementing a number of cost-saving initiatives and other tactical changes to better align our business with the opportunities ahead. Artificial intelligence, in good times and bad, will continue to thrive. Our sequential and year-on-year growth in new customers and bookings in the quarter is a testament to that fact. Additionally, gross revenue retention was well in excess of 90% in Q2 2022. Consumption activity negatively impacted our results in the second quarter, primarily driven by Amazon, even while the fundamental strength of the overall business, our market penetration and our technology improved meaningfully with Ample resources, strong management and a firm commitment to the end goal, we remain confident in our business, our technology and our strategy. Now, I’ll turn the call over to Ryan, our President, to provide further details on our operational progress. Over to you, Ryan.

Thank you, Chad. In the second quarter of 2022, GAAP revenue grew 78% year-on-year with strong growth in both Software Products & Services as well as our Managed Services. Quarterly new software bookings of $14.7 million was our second consecutive software bookings record. And as Chad mentioned, our software customer count grew to 594, up 42% year-on-year on a pro forma basis. Within our Managed Services business, we saw strong year-on-year revenue growth as average gross billings per active customer grew 16% to a record $736,000. Let’s start the business review with commercial enterprise. Q2 2022 commercial enterprise revenues increased 78% over the prior year period. Within commercial enterprise on a GAAP basis, our Managed Services grew 16% year-over-year, and our software and services revenue grew by nearly 229%. On a pro forma basis, our commercial Software Products & Services revenues declined 8% year-over-year. While PandoLogic’s contribution was significant to the first quarter’s growth, actions taken by our customer, Amazon resulted in a significantly softer second quarter despite strong revenues and bookings from our other commercial Software Products & Services. Importantly, on a year-to-date basis, our commercial Software Products & Services are up 21% year-over-year. Commercial enterprise customer growth in general was strong with PandoLogic’s seeing over 60% year-over-year growth in its customer base, while Veritone as a whole grew its customer base 42%. Our final customer count at quarter end was 594. Within commercial enterprise, we are rapidly signing up new customers and partners to leverage Veritone Voice and our broader Veriverse offerings. Though revenue contribution to date has not been material, the contracting and engagement with numerous creators across multiple media genres confirms our expectations for this rapidly evolving market. We expect Veritone Voice and our other Veriverse offerings in aggregate to strengthen top and bottom line expansion.…

Thank you, Ryan. Q2 was a mixed quarter. On one side, we continue to execute across our business with software customer growth of 42% year-over-year, record bookings up 199% year-over-year, customer gross retention in the high-90 percentiles and excluding Amazon, net customer retention well in excess of 120% year-over-year. Atop this, we ended Q2 with over $220 million in cash, $157 million of which is unencumbered and instituted cost-saving measures in Q3 2022, most notably curtailing hiring that when aggregated, gives us 10-plus years of cash at this year’s projected burn rate. As mentioned, we did face some headwinds in Q2 with our largest customer, Amazon, which ran initiatives to reduce its hiring across its fulfillment business beyond the levels we had previously forecasted. Our updated second half 2022 guidance reflects the current estimated run rate of the Amazon hiring consumption. Also, we closed a small, but strategic acquisition at the end of the quarter that we believe will accelerate our synthetic voice strategy. During my remaining prepared remarks, I will discuss our Q2 year-over-year performance in KPIs on a pro forma basis as if we own PandoLogic’s since the beginning of 2021, our Q2 cash position and working capital and Q3 and full year 2022 guidance. Now, turning to Q2 2022 financial performance. Q2 revenue of $34.2 million was a record second quarter, up $15 million or 78% from Q2 2021. Software Products & Services revenue increased $12.8 million or 229%, a Q2 record of $18.4 million, driven by the addition of PandoLogic coupled with year-over-year increases in our legacy solutions. Managed Services revenue grew $2.2 million or 16%, driven largely by growth in content licensing, which rose 42% year-over-year, driven by the overall increase in digital content usage and in live events coverage as we return to pre-COVID…

Thank you. [Operator Instructions] Today’s first question comes from Koji Ikeda with BofA. Please go ahead.

Hey guys. Thanks for taking my questions. Just thinking about PandoLogic and how much it’s kind of driving the guide down here. I know it comes out in the Q, but I was wondering if you could just kind of give us on an absolute basis, what the revenue contribution from PandoLogic was in the quarter. Kind of the back of the envelope math looks like about $3.7 million. Is that about right? And then just kind of getting more granular, what was the Amazon contribution, so we could start parsing that out and looking at the other side of the business that was growing faster for Pando.

Yes, I’ll take the – maybe the second part of that question. We said Amazon represented about 11% of our consolidated revenue for Q2. And we don’t specifically break out PandoLogic from the legacy business. But historically, we said that Amazon represented anywhere from, call it, 70% to 80% of that business. However, with the growth of the non-Amazon revenue, it’s substantially lower now.

Got it. Thanks, Mike. So the Amazon part was 11% of total revenue. Got it. Okay. So thinking about the profitability profile of the business and the net income guide down, it looks like that’s pretty much attributable to Amazon. Is that the right way of thinking about the net income guide down? But more so kind of thinking going forward, when can we potentially expect you guys to get profitable again? What needs to happen either from a Veritone business, aiWARE or PandoLogic business for you guys to get profitable net income? Thanks guys.

One I want to jump on that. Mike, why don’t I take a little bit more on the strategic side and then Ryan can jump in operationally from – when you think about our business and how we’re investing, I mean, this year at the tail end of last year, we had just over 500 employees. And today, we’re sitting at just over 700. So we continue to significantly invest in both sales, marketing and technology investment in the company because our strategy is working. If you look at our net retention and our growth metrics on the business, net of Amazon, one customer, they’re as good as we’ve seen in our past and record-breaking in some cases. 199% growth in total bookings, 42% customer growth, 60% CAGR over the past five years. And so we know what we’re doing is working. We’re continuing to be diligent. But at the same time, right, we’re also being conscious of macroeconomic environments. We are conscious of what’s happening in Amazon, and we’re being smart about how we’re managing the business and realigning it for growth. And so again, I don’t want the Street or you, Koji, to think in any way that this in any way reflects that our strategy hasn’t been on point. I think that we just got caught a little bit blindsided by how strong the negative impact was on Amazon hiring. And to a testimony to the PandoLogic team, we’ve recovered and done a phenomenal job in growing other sectors of that business very quickly. So Mike?

Yes. And then if you take a step back, I mean our commercial enterprise business is incredibly profitable, including PandoLogic. And we’re continuing to invest in long term across the regulated industry and the enterprise part of our business. And we’re not going to give any guide in terms of 2023, but we’re going to continue along the same strategy, and it should turn the ship here shortly, if that makes sense.

And I would just add that, I think the investments that we’ve made in the human capital side and on the product side, I feel very confident that we have the right product mix and both in production today and frankly, that’s emerging right now into full production, that I don’t think any potential curtailing of our internal hiring pace is in any way going to disrupt our revenue potential growth as it relates to our products and services. So I think our – again, a testament to our increased customer counts are very high net retention rates coupled with what frankly has already been built or is being here shortly, very, very bullish on the future growth prospects for every other area of the business and also including Pando, their continued excellence in growing their non-high volume sellers and really say, non-Amazon business is incredible.

Got it. Thanks guys. Thanks for taking the questions.

Sure. Thank you.

And our next question today comes from Darren Aftahi with ROTH Capital Partners. Please go ahead.

Hey guys. Thanks for taking my questions. Two, if I may. Just on the record bookings. Can you guys kind of dive in a little bit deeper into kind of where you’re seeing strength there. And maybe when that revenue is actually get recognized and manifest in the business? And then, Ryan, I think you said advertising was flat. I’m just curious; every other kind of ad tech company has kind of talked about this disastrous cadence. So I’m curious to understand the cadence between April and June and maybe into July, if you’re actually seeing your business soften further if that’s taken into come in the guidance going forward? Thanks.

Yes. Our ad business has been very strong and resilient. Our actual gross billing per customer are up. And we’ll – I think that some of the details we provided in the tables. More importantly, I could tell you that as of two days ago, our ad business has booked already more total revenue of billings than all of last year. And a couple of primary reasons why our ad business is more resilient is, a, we have a very differentiated solution. Again, because of aiWARE, we have a very unique offering where only a few companies like us can really do contextual-based insight targeting to influence through the creative economy. I don’t want to get too technical there, but it’s a clear product differentiation. Number two is our business is performance marketing. So unlike a lot of other brands, CPM-based or impression-based buyers, almost all of our spends – or super majority of our spend is performance-based. And it just shows the testament that we – as long as we’re delivering performance, we’re able to maintain those bookings. The only negative side was – the only downside at all if I’m trying to find anything in the ad business was just some of the start-up businesses that we always like to try to nurture considering the pullback in venture spending had it. But we had increased growth in all of our large – increased spend from the majority of our larger customers in the ad business. So very, very pleased, and I expect continued strong performance.

Maybe I’ll take the bookings one. I mean, Darren, it was across the board. It wasn’t one specific area, just really representing the strength of our business. And you could probably expect about 60% of that or so to be realized over the next 12 months.

In Veritone Voice, Darren, and some of our new technologies are part of that booking.

Thanks, Ryan.

[Operator Instructions] Our next question comes from Chad Bennett at Craig-Hallum. Please go ahead.

Great. Thanks for taking my question. So it looks like relative to the prior bookings question, you actually did see a pretty decent uptick just backing into numbers. I know you don’t like to disclose kind of what Pando was. But backing into numbers on aiWARE sequentially. So was that – from a revenue standpoint, I should say. So was that a function of – again, kind of what drove the aiWARE growth sequentially from a revenue standpoint?

Well, from a bookings, as we stated earlier, it was primarily through increased selling and the mobilization of commercial enterprise products and services and software and also an uptick in bookings on GRI between primarily those two elements.

Okay. So but the GRI business, again I’m talking sequentially was up modestly sequentially. So it seems like it was a lot of other commercial-related sectors that drove aiWARE revenue growth sequentially. Is that what you’re saying?

Commercial enterprise, yes, was the majority or the lion’s share of the bookings.

Okay. And then second question, just on – when we’re thinking about the Pando business model and margin profile when you acquired it, is that still at the current run rate – is that still a 50% EBITDA margin business?

Yes. I could take that one. So we have made investments into PandoLogic, namely on sales and marketing and R&D. So we’re running slightly below that 50%, but it’s still incredibly profitable.

All right. Thanks for taking my questions.

Yes. Thank you, Chad.

And our next question comes from Pat Walravens of JMP Securities. Please go ahead.

Great. Thank you. Maybe two, maybe I’ll start with one for Mike. So Mike, when does – how much debt is there? When does it come due? And should we be worried about you repaying it?

Yes. Good question – yes, $200 million, it’s convertible debt. We issued the notes in November of last year. They’re five year notes, interest-only, and they’re convertible about $36 a share. So no covenants, nothing crazy, so it’s all sitting in long term, but nothing to worry about in the near term.

Okay. And right now, you have $150 million in unencumbered cash, right? So I think we...

$157 million, yes.

I just want to hear you guys are going to start generating cash, right, so that we don’t have to worry about this.

Of course.

And then secondly, Chad benefit of 2020 hindsight, and obviously, that’s a big caveat. But what would you have done differently around Pando.

I think we all went into Pando transaction with our eyes wide open. We knew that they had a significant customer concentration in Amazon. We knew that they were investing heavily, and we were helping them invest in expanding their business line into differentiated new customers that were smaller and obviously, you’re going to have less revenue per customer, but you’re going to get a lot more tonnage in the TAM through that. And so we knew exactly what was expected. And to be honest, I think at some point, we knew that Amazon was going to slow. I think the surprise for us is just how quickly they hit the brakes on that. But that business is still massively profitable. It’s a phenomenal acquisition for us even in today’s economics, and we’re extremely bullish about what that looks like going forward. So I don’t think, Pat, there was any real surprises. I think we structured the transaction really well on the earn-out side and incentivize the management team and protected the Veritone shareholders with making sure that we are all aligned and there was some protection in terms of what the net-net cost would be in the event an Amazon or another catastrophe might have hit the business. So at the end of the day, again, profitable business going well. I think we still purchased it nicely. They’re integrating aiWARE technology and continuing to innovate. So I’m very excited about it and do it again in [indiscernible].

And remember, and I’m not sure this came out on the call. I mean it’s certainly in the earnings release. The software side of the business was up 21% first half sequentially – or first half over first half. And PandoLogic was up still 18%, 20% as well. And remember, in the first half, we got a benefit from Amazon over-hiring, which they corrected in Q2. It was just a larger correction than what we anticipated. So the fundamentals of the PandoLogic business are still performing over the first half of the year. We do expect there to be some incremental lower consumption in the back half. But this thing is still rocking and rolling.

Let me add one comment real quick about that also is in terms of market share, right, on the programmatic side, we believe that the programmatic has already – has really only touched about 5% of the market opportunity. So it’s a very high ceiling of growth for that opportunity. And then obviously, that’s a testament or reinforced by our ability to grow unique customers over 50%.

Okay. And then my last one on this topic is so on – in the press release, the purchase price was $150 million, but that was cash stock and an earn out, right? So Mike, can you remind us how that was initially structured? And what did it really work out to? At the end of the day, did you guys really pay $150 million?

Yes. So I mean we’ll find out by the end of this year, but it was $85 million upfront, and then the remaining $65 million was based upon earn-outs in 2021 and 2022. They fully hit their earn-out in 2021. So we’ve got about $43 million of the $65 million to be paid out based upon their performance this year. And it’s literally – it’s a waterfall schedule from 0 to $21 million to $43 million depending on their end of year results. So intuitively, if they end up missing, which is why we put in this protection around Amazon, that purchase price would be significantly lower.

Okay, thank you.

Yes. Thanks Pat.

And ladies and gentlemen, this concludes your question-and-answer session. I’d like to turn the conference back over to Chad Steelberg, for any final remarks.

Thank you, Operator. We are pleased with the overall execution of our business. Our customer growth, retention and new bookings, all speak to the fundamental strength of the business. We have ample resources in terms of capital and talent to pursue and execute against our growth strategies. Our confidence in aiWARE is backed by our strong customer metrics, and we remain steadfast in our strategy. Despite the ongoing geopolitical and macroeconomic volatility that surrounds all of us today, without question, the future of enterprise is going to be powered by artificial intelligence, and we believe Veritone will play a vital role in unlocking that potential. Thank you for joining us on today’s call. Good day.

Thank you. This concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines, and have a wonderful day.