Q4 2021 Veritone Inc Earnings Call

Good evening.

Thank you for attending today's at bed time of fourth quarter and year end 2021 financial results Conference call. My name is about the knee and I will be your moderator for today's call.

All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question. Please press star one on your telephone keypad I would now like to pass the conference over to our host. Please go ahead, good afternoon, and welcome to Verathon fourth quarter and full year.

2021 conference call I am the digital twin a vin Scully the legendary voice at the Los Angeles Dodgers from 1963 to 2010, even though I have retired from calling Dodger games several years ago, My voice and passion for sports and great achievements in human history have me here.

Year to date by a baritone voice the most advanced AI powered synthetic voice platform in the world I'm excited to introduce baritones fourth quarter and year end 2021 conference call. It's now my pleasure to hand, the call off to Brian Alger, SVP Investor Relations and capital markets over to you Brad.

Thank you Mr Sculley.

After the market close today <unk> issued a press release announcing results for the fourth quarter ended December 31, 2021, the press release and other supplemental information is available at the investors section Baritones website.

Joining us for today's call are both the live and digital twin versions of <unk>, Chairman and CEO , Chad Silbert, President Ryan Gilbert and CFO , Mike <unk>, who will provide prepared remarks, and then open up the call for a live Q&A session. We believe having an AI led earnings call available in multiple languages is an industry first.

Shortly after it completely today's call remarks will be made available in six languages and baritones synthetic voices. Please note that certain information discussed on the call. Today will include forward looking statements about future events, and <unk> business strategy and future financial and operating performance, including its expected net revenues and non-GAAP net income and loss for the first quarter and full year of 2010.

One respectively. 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 <unk> SEC filings, including its annual report on Form 10-K . These forward looking statements are based on the assumptions as of today March 3rd 2022.

And baritone undertakes no obligation to revise or update them. During this call the actual and forecasted financial measures that we will be discussing other than revenue 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. These non-GAAP measures include a breakout of <unk> results between.

Core operations and corporate.

Core operations consist of very tons consolidated software products and services, including <unk> acquired in late September 2021, and managed services that include baritones content licensing and advertising services and their supporting operations, including direct costs and sales as well as operating expenses for sales marketing and product development and certain general and administrative costs.

Dedicated to these operations.

Corporate consists of general and administrative functions such as executives finance legal people operations fixed overhead expenses, including facilities and information technology expenses, other income or expenses and taxes and other expenses that support the entire company, including public company driven costs.

Paragon has aligned its organization to focus on two distinct customer groups commercial enterprise and government and regulated industries commercial enterprise today consists of customers in the commercial sector, including our media and entertainment customers advertising customers content licensing customers and customers through <unk> that are not from the government or regulated industries government regulated.

<unk> also known as G. Cry today consists of customers in the government and regulators and industry sectors, including state local and federal government legal <unk> compliance and energy customers across the commercial enterprise and government and regulated industries businesses, we separate revenue into two categories software products and services and managed services.

For products and services consists of revenues generated from our AI wear platform and through panel logic software product solutions any related support our maintenance services and any related professional services associated with the deployment and implementation of such solutions managed service solutions consist of revenues generated from our advertising agency and related services.

And our content licensing services.

Finally, I would like to remind everyone. This call is being recorded and will be made available for replay via a link on the investors section of the company's website at www Dot baritone dot com now I would like to turn the call over to the digital twin of our chairman and CEO Chad Gilbert Chan.

Ken.

Thank you Brian good afternoon witnessed out of this we'll swap.

And thought Shah.

Before we begin I want to take a moment to say that baritone stands with Ukraine in its opposition to Russia and hope that one day, our AI is sufficient to help mitigate and if necessary actively resolve conflicts of this nature.

As Brian noted I am digital twin Chad, our customers, including the sports icon Mr. Vince Scully are already using our synthetic voice for commercial purposes, and we are using it on this call today to give you a quick demonstration of one of our many AI. We're powered applications. We suspect synthetic voice earnings calls will become the standard of the future without <unk>.

Further Ado I'll review, our pivotal quarter and year end performance, which without question validates our AI operating system vision are focused application strategy and our team's exceptional performance.

Baritone delivered fourth quarter 2021 revenue of $55 million and bottom line non-GAAP net income of $17 million, resulting in several firsts for the company Q4 was our first profitable quarter 'twenty 'twenty. One was our first profitable year in our first year of positive cash flow, our focus on profitability operating efficiency and our customer.

Success have paid off these results are the culmination of years of hard work and determination and a continuation of a trend that we started nearly two years ago. As Q4 is our seventh consecutive quarter of record revenue, while 2021 was a great year financially with revenue growth of 100% and operating leverage improving the future looks even brighter as.

The network effect of our land and expand strategy and nearly perfect customer retention metrics lay the foundation for continued growth and profitability. We are guiding for full year 2022 revenue to be more than 60% higher than 2021 with positive EBITDA.

More than two decades ago, Marc Benioff declared software is dead today I am proud to state that AI is alive.

It is alive and its direct impact on so many services that hundreds of millions of people benefit from on a daily basis Baritones AI, where is now powering critical applications that underpin and make possible the world of tomorrow today.

He's alive. It is alive in the podcast that we listened to everyday synthetically, producing the content and advertising that inform and entertain us and the delivery of our Amazon packages and Domino's Pizza is through AI powered recruiting diligence and hiring in saving the planet through optimizing the energy flow in southern California, increasing efficiency.

And improving energy forecasting by more than 30%.

And protecting our communities by helping police investigate crimes and providing transparency and communication with the public it serves.

And in defending America, and its allies by helping the department of defense manage and understand an ever growing data set of information being created and collected on the ground on the sea in the air and even in space.

Where's impact is much bigger than my local community or personal life. It is impacting massive industries in profound ways touching every corner of the world and we are only getting started.

Hey, eyewear is poised to expand into every facet of our lives both the real world and the meta versus yet to come.

It's important to note not all AI companies are equal some companies are delivering machine learning models and tools, others are providing consulting and integration services and a few are delivering point solution applications and specific industries. However, only baritone has developed an AI operating system with all of its supporting applications and services that can be.

Our vast array of AI applications across any industry.

In fact, since our IPO Roadshow I had been saying that the future of AI will have a common operating system just like how traditional computational software runs on a handful of common Oss like windows, Mac OS X or Linux, we remain laser focused on our AI operating system, a eyewear and its ability to support an ever expanding number of applications.

AI, whereas mission is to improve enterprise AI capabilities by 100 fold by reducing application development time, boosting performance and dramatically reducing compute cost are unique and differentiated business model paves the way for significant potential upside for our investors our employees and our loyal customers. We do one thing and one thing very.

Well artificial intelligence and based on our financial performance and customer metrics I would say, we do it better than anyone else.

It's been a long process evolving from a startup to a profitable AI leader from building AI, where as the first day I O S to developing award winning AI applications.

At the end of 2019 as we developed version three of AI, where we set the target of expanding our gross margin from 40% to 80 plus percent and we did it checks. The box also in 2019, we predicted law enforcement and public safety would be improved through the ethical use of AI check that box as well before we even went public.

Both Ryan and I publicly predicted the use of synthetic human voices in numerous industries check again.

I wear is more diverse more powerful more stable and more profitable than anyone outside baritone seems to realize similarly in 2001, nobody thought Amazon and online bookseller and now our largest customer could become the online marketplace for everything in the future, but its focus on its core technology, what we now call AWS is the engine that.

Made that possible and is now the leading engine that powers. The cloud AI is 1000 times more important more powerful and more diverse than any marketplace or cloud computing infrastructure. It is the future of humanity and it's our only focus.

We have reached another tipping point and the continued translation of our vision into reality is accelerating.

I'll elaborate just six years ago baritone had one AI model with one application used by less than five customers in one industry running on version one of the eyewear. We ended 2021 with hundreds of models with dozens of applications used by over 500 customers and four industries. Our Q4 results broke many records including customer growth.

Your bill attrition and SAS revenue contribution and this is just the beginning.

We have been aggressively and systematically going after the market. We have formed numerous strategic relationships with global entities like Deloitte, Microsoft in the U S. Federal government in 'twenty 'twenty. One these enterprise partners tested the power of AI, where they were able to build new applications from scratch with 10% of the typical cost and 110th of the average time.

Now they are believers and repeatedly our partners have returned to a eyewear and our managed services teams to develop novel AI solution for their customers. Thus, we have entered a new stage in our land and expand strategy. As we are now, helping our partners land and expand their own AI solutions powered by a eyewear.

In 2022 we expect increased adoption and believe it will further accelerate in 'twenty twenty-three. This is the tipping point, we have been striving for this is the point, where it really gets interesting the point, where our customers use a eyewear to develop applications for their customers and in turn drive the geometric progression of our business the point, where AI application development and Vera.

Don't diverge in the point, where AI, where creates enormous leverage to grow customers and users revenue and so on.

The baritone of the future will have billions of end users millions of customers with less than 1% of the applications running on AI, we're being developed and owned by Verathon. We are building the O S of the future and we've reached the tipping point.

How do I know, we have reached this point or rather an equally important for this call how do I convince investors. We have reached this point because our hard work is translating to metrics that investors can appreciate value compare and understand.

Our record Q4, and full year 2021 kpis, both operational and financial are proof of our progression. In addition, we successfully integrated our acquisition of Panda logic, proving our ability to grow inorganically at scale, while our technology is complex our metrics and results are not we are maniacal and our purpose to declare.

<unk> improved the AI is alive and available for everyone. We're leading the world into a new era, a new epic a new beginning where our biological limitations are augmented and enhanced through our symbiotic relationship with artificial intelligence.

Steve jobs once famously declared that the computer was a bicycle for the mind. This is one case, where Steve may have been short sighted the computer is a mine that will one day surpass its creator.

As Ryan and Mike will detail in a moment baritone is executing and delivering on the strategy that we envision nearly seven years ago as AI gains trust and continues to deliver accelerating efficiency and unprecedented positive outcomes. We are convinced that a eyewear with its standardized adapter layer common intelligent data Lake and standard Apis will drive broad based enterprise adoption.

<unk> of cognitive solutions.

Further enhancing this inherent strength, we find ourselves in an unprecedented period of employment choice. While many businesses are challenged by the current labor environment baritone is benefiting from our recent acquisition of Panda logic and through the exceptional talent. We are now able to attract and leverage for Burtone. The current labor environment is a great opportunity with.

Over $250 million in cash and a cash flow positive business, we are investing in our people and leaning into these advantages to further accelerate our growth and outpace our peers.

I'll summarize 2021 was our best year ever and we expect accelerating growth in 2022 with our revenue guidance projected to be at least 60% higher than 2021 even when it is only forecasting a clear line of sight and omitting our customers geometric adoption of AI, where most importantly, this is the year that prove the AI is alive you.

Might not see it yet but trust me. It's there in the shows you watch and the police that protect and serve you better in the electricity that powers your electric vehicle and so much more and its all running on the eyewear and getting smarter every day.

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 and good afternoon, when a Saturday good novels, and Sasha ha.

We closed 2021 with yet another record performance the outstanding results reflect our first full quarter. After acquiring panel logic. Our integration is on track and cross selling efforts are already beginning to bear fruit starting with commercial enterprise.

On the whole Q4, 'twenty, one commercial enterprise revenues increased 248% over the prior year period within commercial are managed services grew 20% year over year, and our software and services revenue grew by nearly 1200 per cent.

<unk> contribution was obviously significant the business with Amazon our largest customer remains quite robust however, customer growth for panel object was over 100% in the quarter, perhaps more importantly, our commercial business, excluding panda logic grew 61% year over year in the December quarter and outstanding quarter.

By every measure.

Verathon is going from strength to strength, our bookings retention and new market offerings are delivering strong compounding growth or.

Our bookings hit a record high eclipsing $8 million and our organic bookings were up more than 130% versus the year ago quarter.

As we enter 2022 we are excited to have renewed and expanded virtually every single one of our commercial enterprise contracts as Mike will detail shortly our retention metrics remain in the top tier in.

In February we exemplified our land and expand strategy when our long standing client I heart media, the largest audio and podcast company announced it is licensing baritones synthetic voice technology for its podcast network the.

Actions are wide, reaching as baryton is already the leader in podcast advertising and we are rapidly building a deep list of synthetic content prospects to follow I heart media as lead when both large and small commercial businesses seek to leverage synthetic content. They are rapidly turning to verifone.

In November we unveiled how <unk> synthetic voice in conversational AI can help companies Prequalify applicants. This is just another example of how Burtone is bringing the met averse to global enterprises in the coming weeks and months, we will be talking more about our met averse offerings. However, our already announced engagements should leave no doubt a baritones relevance in this.

Emerging market of which we are calling the strategy and focus the very versus.

In addition to <unk>, we are inking deals in a number of voice markets beyond podcasts like audiobooks production studios audio advertising and digital Influencers.

While announced in the prior quarter, our expanded licensing in F. T agreements with the Pac 12, and recur deserve attention as they represent just another piece of the very versus puzzle enabled by the AI where platform and our unique market position.

In 2022 we expect to see strong growth from all of our commercial enterprise offerings with growth acceleration being driven by new panel IQ customers expanded D. M. H functionality, a eyewear driven analytics and workflows and synthetic voice all of which are expanding our Tam.

Shifting to our government and regulated industries or G. R. I.

G R. I finish 2021 with strong momentum that has carried over into 2022 resulting in early booking strength activity is accelerating across local state federal and regulated markets.

<unk>, we announced that baritone contact has been licensed by nearly 100, California law enforcement agencies, while that rapid adoption is impressive on its own. It is the enterprise sale of our other products that holds greater revenue potential although not as material in revenue contribution today, the product market fit and value that we are delivering into the public safety sector is incredibly high.

Hi, and our rapid penetration of the California law enforcement agencies reflects that strength. We are also excited to report significant expansion outside of California, with some notable new customers, including the Indiana State Police Sarasota County, Sheriff Henderson Police Department, Dekalb County, Sheriff and the Chambly Police Department in.

In February we also announced that their tone was named to a $249 million bulk purchase agreement or B P. A with the joint AI center or Jake for the Teeny portion of the broader AI data acceleration initiatives.

Baritones penetration and brand within the federal government has never been stronger not just with the D O D, but across the Doj and numerous other agencies ultimately the results of the past several years of investment will shine in the financial results if not in the press, we expect to see material growth from our government customers represented in our financials. This year.

On the regulated side, we continued to make good progress in February we announced the statistical results of our forecasting technology up against the California Independent system, operator standard known as Queso Queso manages the flow of electricity on high voltage power lines operates a wholesale energy market and overseas infrastructure planning in California.

With 31% better forecasting Burtone has demonstrated the potential to save millions of dollars for energy participants while at the same time, delivering better grid resiliency and reliability already we have signed a contract with C. P V in southern California and are in advanced contract discussions with another energy provider on the East coast. This week's formal announcements.

For our <unk> suite of energy applications is directly targeting this important market opportunity with our lead customer in the southeast U S. Our software continues to run 24 seven in production on their equipment delivering outstanding results. We are an extended conversations regarding a much broader and extended deployment crossed that utilities' entire clean energy portfolio.

Needless to say as soon as commercial terms are finalized we look forward to providing more details on.

On the whole <unk> is operating at its highest performance and efficiency and with more momentum than in any other time in our company's history, our customer engagement is rapidly expanding and the operational leverage enabled by a eyewear is just beginning to be realized.

Now I would like to hand, the call off to Mike The Metro our CFO to go through the financial results and guidance in more detail over to you Mike. Thank.

Thank you Ryan first I want to thank our international investors and analysts around the world in China.

Latin America Gracias.

In Germany Danke <unk>.

Turning to Q4 I am excited to report we are performing at the highest levels with our seventh consecutive record quarter, our first quarter and you're reporting positive non-GAAP results and ending 2021 with cash in excess of $250 million more importantly, we have executed on everything we outlined to you at the beginning of 2021 including.

Waiting over 50% year over year organic revenue growth from our software products and services and closing and integrating our largest acquisition to date Panda logic, which contributed $38 million of revenue with over 50% operating margin and generated pro forma revenue growth over 50% year over year and ending the year in quarter profitable for the first.

Time heading into 2022 with over 60% consolidated revenue growth a rock solid balance sheet and profitability. We now have the business momentum and financial leverage to accelerate our growth story even further.

During my prepared remarks, I will discuss our 2021 in Q4 year over year performance in Kpis on a non-GAAP and pro forma basis as if we owned Panda logic since the beginning of 'twenty 'twenty. Our November 2021 200 million dollar convertible debt financing and working capital and Q1 and full year 2022 guide.

Since starting with full year 2021 performance 2021 revenue reached a record $115.3 million up 100% year over year software products and services revenue increased 329% to a record $59.5 million driven by the 38.0.

Dollars Panda logic contribution and a 53% year over year increase in organic software products and services managed services grew $11.9 million or 27% well above industry averages.

On a pro forma basis 2021 revenue increased 41% to $148.1 million driven primarily by software products and services Panda logic increased $23.8 million or 50% and organic software products and services grew $7.3 million or 50.

3% managed services increased by $11.9 million or 27% as a percentage of total revenue pro forma software products and services represented approximately 62% of total revenue in 2021 versus 58% in 'twenty 'twenty 2021 gross profit reached 93 point too.

Dollars, improving $51.1 million or 122% from 'twenty 'twenty gross margins expanded to 80.1% in 2021 compared with 72.7% in 'twenty 'twenty on a pro forma basis gross profit was $124.0 million of 35.

$5.0 million or 39% from the prior year and gross margins remained relatively constant at 84% in 2021 compared to 83.9% in 'twenty 'twenty.

I am very pleased to report that for the first time since inception baritone generated full year positive non-GAAP net income of $6.8 million as compared to a $20.6 million non-GAAP net loss in 'twenty 'twenty. The remarkable 27.4 million dollar improvement was driven by core operations, most notably from Panda logics.

<unk>, 50% operating margin contribution for the last four months of 2021 combined with increases in organic revenue.

On a pro forma basis non-GAAP net income was $18 $5 million, a 56% or 6.7 million dollar improvement representing an approximate 13% operating margin in each year now.

Now turning to Q4 2021 financial performance Q4 revenue was a record $55.1 million up $38.3 million or 228% from Q4 of 'twenty 'twenty software products and services increased $35.8 million or 714% to a record 40 point too.

$2 million in revenue, reflecting $34.0 million pandal logic contribution and 41% year over year increase from organic software products and services led by growth in commercial media and entertainment and government managed services grew $2.5 million or 20%.

On a pro forma basis Q4 revenue increased 27% from Q4, 'twenty 'twenty software products and services increased 30% driven by 47% growth in new software customers to 529 at Q4, 2021 coupled with Q4 net customer retention of over 120% on a pro forma basis.

[noise] Panda logic grew 28% year over year, driven by over 200% growth in non Amazon customer revenue a a R was relatively flat year over year, which is driven by the timing of new customers offset by the year over year pro forma growth in Amazon overall, our revenue pipeline has never been stronger our partner driven channels strata.

<unk> continues to deliver results new bookings were $8 $2 million in Q4, 2021 an increase of over 450% organic bookings growth was 238% in the quarter. Our future pipeline is at an all time high particularly in G. R. I, where we expect to immediately begin realizing significant growth and.

The near and long term, we have increased opportunities around enterprise offerings within G. R. I, new product applications like synthetic voice technology international expansion and licensing and other services cross selling of Panda logic. The recent 249 million dollar B P. A announcement with the joint AI Commission and significant progress on our energy any.

<unk> and.

In Q4, we reported solid K P. I results, new bookings were $8 $2 million up over 450% from pro forma Q4, 'twenty 'twenty gross retention continued to exceed 90% pro forma customers were up 47% year over year and pro forma software a a R remained consistent year over year at two <unk>.

Wondered and $9000 in.

In managed services advertising gross billings per active client increased to $625000 or 15% over Q4, 'twenty 'twenty Q4, 2021 advertising revenue continued to outpace prior year approximating industry growth versus the robust strength shown in the first half of 2021 largely driven by the timing of new.

New and larger event driven campaigns by key customers in the first half of 2021 .

Q4, 2021 gross profit reached $48.9 million, improving $36.2 million or 284% from Q4 of 'twenty 'twenty gross margins expanded to 88.6% up compared with 75.6% in Q4, 'twenty 'twenty and 74.4% in Q3 2021 .

Benefiting from the entire quarter inclusion of Panda logic, which generated gross margins in excess of 90% as we continue to scale over the next 12 to 24 months, including the full impact of Panda logic, we expect total gross margins to exceed 80% throughout 2022 improving sequentially each quarter, reflecting panda logic seasonality.

On a pro forma basis, our Q4 gross profit of $48.9 million increased $10.1 million or 26% versus Q4, 'twenty 'twenty pro forma gross margins were relatively flat year over year at 88.6% to 89.6% Q4 net income was a record 17.0.

$1 million, improving $20.9 million year over year core operations posted record net income of $21.2 million compared with $1.1 million in Q4, 'twenty 'twenty, reflecting panda logic and the aforementioned gross margin expansion the corporate net loss improved to $4.3 million compared to five.

0.0 million dollars in Q4, 'twenty, 'twenty, driven principally by lower personnel related and rent expenses year over year.

On a pro forma basis Q4, non-GAAP net income increased $1.4 million or 9% versus Q4, 'twenty 'twenty, reflecting improved revenue and gross profit offset by increased investments in opex, namely sales and engineering organically and at Panda logic to fund growth.

Turning to our balance sheet at December 31st 2021, we held cash and restricted cash of $254.7 million, including $66 million received from managed services clients for future payments to vendors. This compares to $114.8 million at December 31, 2020, the increase for.

Flex net cash inflows of $176.6 million from our November 'twenty, 'twenty, one convertible debt offering and $7.2 million from operations offset by $53.7 million and net cash used for the acquisition of Panda logic.

Working capital will continue to fluctuate depending on the timing and due dates of payments in any given period, our unencumbered cash at the end of Q4, 2021 was over $188 million, which is sufficient to operate the existing business and support growth for the foreseeable future. As a reminder, the result of the convertible debt financing was two.

$101.3 million in gross proceeds after the green shoe generating net proceeds of $176.6 million to bear tone total cost of capital, including the cap call and 1.75% coupon is approximately 3.8% with annual interest cash cost of approximately $3 5 million.

We plan to use the proceeds for general corporate purposes and strategic acquisitions.

We ended December 31, 2021 with 35 million shares outstanding.