Veritone, Inc. (NASDAQ:VERI) Q3 2019 Earnings Conference Call November 6, 2019 4:30 PM ET
Brian Alger - Senior Vice President-Corporate Development, Investor Relations
Chad Steelberg - Chairman and Chief Executive Officer
Pete Collins - Chief Financial Officer
Ryan Steelberg - President
Conference Call Participants
Patrick Walravens - JMP Securities
Darren Aftahi - ROTH Capital Partners
Mike Latimore - Northland Capital Markets
Nick Mattiacci - Craig-Hallum
Tom Diffely - D.A. Davidson
Stephen Banta - Banta Asset Management
Ladies and gentlemen, thank you for standing by and welcome to the Veritone Q3 2019 Financial Results. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question and answer session. [Operator Instructions]
I would now like to hand the conference over to Brian. Thank you. Please go ahead.
Good afternoon. Welcome to the Veritone's third quarter 2019 earnings conference call. I am Brian Alger, Senior Vice President of Corporate Development and Investor Relations. After the market closed today, Veritone issued a press release announcing results for the third quarter ended September 30, 2019. The press release is available at the Investors section of our website.
Joining me for today's call are Veritone's Chairman and CEO; Chad Steelberg, President, Ryan Steelberg and CFO; Pete Collins. Following their remarks, we'll 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 and adjusted EBITDAS loss for the fourth quarter of 2019 and the first quarter of 2020.
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 November 6, 2019 and Veritone undertakes no obligation to revise or update them. In addition to the Company's GAAP financial results, during this call, we will be presenting and discussing the Company's actual and forecasted earnings before interest expense, depreciation, amortization, and stock-based compensation, adjusted to exclude certain acquisition, integration, and financing-related expenses or adjusted EBITDAS, as well as our non-GAAP net loss excluding those same items, both of which are non-GAAP financial measures.
Reconciliations of these measures to the Company's GAAP net loss are 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 Investors section on the Company's website at www.veritone.com.
Now, I would like to turn the call over to our Chairman and CEO, Chad Steelberg. Chad.
Thank you, Brian. Welcome everyone, and thank you for joining us today. I am pleased to report our third quarter results and our outlook moving forward. We have never been more excited about the prospects of our business. Our bookings are at record levels, our pipeline of new SaaS business entering 2020 is at our strongest point in our history and we have optimized our operations and team structure to capitalize on these new opportunities.
Veritone has historically been focused on investing in technology development and on growing our revenues while holding our expenses flat to reduce our adjusted EBITDAS loss rate. With the heavy lifting towards these technical investments now complete, we are well positioned to take advantage of the amazing growth opportunities we will be discussing on today’s call while materially reducing our adjusted EBITDAS loss.
This will minimize our dependence on future dilutive financing. Our ability to continue our strong revenue growth while reducing our losses rather than our loss rate is a critical company milestone. In line with our guidance, our net revenues for the third quarter were a record of $12.8 million, an increase of 70% compared with the third quarter of 2018 reflecting both the contributions of our recent acquisitions and organic growth.
Also consistent with our guidance, our EBITDA loss rate in Q3 was similar to the prior quarter at 75% or $9.6 million. In Q3, our advertising business had its best quarter ever, even before the addition of MicroMentions revenue. Their third quarter revenue increased over 33% year-over-year to $6.3 million led by the continued strength of our podcasting business.
Our SaaS revenues were up 67% year-over-year, but down 12% quarter-over-quarter, while our SaaS bookings have continued to be strong and we have had near zero customer attrition our SaaS revenue in Q3 were less than expected due to lower project-based revenues and longer than expected sales cycles with government customers which delayed some revenues we had expected from that market.
While the government sales cycle has been longer than expected, our sales pipeline and number of active trials is larger than it had ever been and we see multiple indications that our government business is on the cusp of dramatic growth. Ryan will talk more about it in greater detail, but our relationships with Microsoft and PRI have dramatically extended our reach and broadened our sales funnel.
Our Content Licensing and Media Services Group posted an outstanding quarter with revenues up $4.2 million. This business is normally seasonally strong in the third quarter, but this past quarter’s performance was even better than expected.
As we have continued to refine our aiWARE platform, and pursue our growth strategy in our targeted vertical market, we have identified opportunities to optimize our organization to maximize our speed, efficiency and customer focus. As a result of this effort, we have realigned our business and functional teams, completed the integration of the companies we acquired last year, and eliminated certain positions that are no longer critical to meeting our strategic goals.
In parallel with these actions, we have recently completed a significant upgrade to our aiWARE software without getting into the technical weeds, we expect these enhancements to deliver orders of magnitude improvements and scalability and compute utilization driving improved margins and more importantly, enabling larger and more dynamic use cases of our existing product portfolio.
These enhancements will be fully deployed this quarter and we expect them to start producing savings next year. We believe these actions will propel Veritone to the next level, accelerating our revenue growth and reducing our adjusted EBITDAS loss.
Finally, before I hand the call over to Ryan, I want to touch on one of our most strategic announcements today. Many investors have asked us about the importance of our recent announcement regarding the launch of aiWARE on Microsoft Azure Government. Unquestionably, it is a very big deal for Veritone as Microsoft is the market leader in cloud and enterprise software for government agencies with nearly 100% market penetration, Microsoft’s field and technical sales people are selling aiWARE products and solutions side-by-side with our team to Microsoft Public Safety and Justice customers.
As we stand today, Veritone has a deeper pipeline and greater visibility of bookings and revenue growth than any time in our history. Our software improvements and organizational realignment will expand our TAM, increase the speed and customer focus of our business teams and drive more profitable revenue growth. By every metric, we will be entering 2020 on our strongest footing ever.
We have nearly $50 million in cash. Our cost base had been reduced significantly and our bookings and revenue pipeline are all-time highs.
Now, I would like to hand the call over to Ryan, our President and Co-Founder to discuss our operational progress in greater detail. Ryan.
Thank you, Chad. As Chad indicated, we have made tremendous progress since our last call. Our Advertising and Content Licensing businesses, each posted record revenues in the third quarter. In our SaaS business, while our revenues continue to be somewhat variable quarter-to-quarter due to the usage component of our revenues and project-based revenue, we have had strong bookings activity and neared zero customer attrition.
Already in Q4, we have signed agreements with total revenue potential of more than $10 million and have more than half of Q4 remaining. Today, our opportunity pipeline is deeper and broader than in any other time in our history.
Before I talk about results, I would like to take a minute to discuss our vertical markets. Historically, we have discussed our SaaS business in terms of three vertical markets, media and entertainment, government, and legal and compliance. However, as our product and customer engagements have evolved, the line between our government vertical and our legal and compliance vertical have blurred considerably.
As such, going forward, we have combined our government and legal and compliance verticals into a single market. In our media and entertainment SaaS vertical, we are in the midst of our biggest bookings quarter ever between new customers and renewals and expansion with existing customers, we have signed over 25 agreements since the last quarter’s call.
We continue to see increasing traction in the government, legal and compliance market, GLC for short. Though as Chad noted, the sales cycle in this market have been longer than we had expected. We have executed 19 new SaaS license agreements for our Redact applications since the beginning of Q3 and our pipeline of new customer opportunities in this market is literally exploding.
We have conducted almost 100 customer demos and initiated ten trials in this market since last quarter’s call. Our engagements with Microsoft, TRI and technology and channel partners have accelerated providing added lift to our 2020 outlook.
In October alone, TRI arranged 38 Redact demos. Since the Microsoft announcement, we have had multiple co-sell days with their field reps and joint sales calls with end-user accounts. We are incredibly excited about this acceleration of activity and expansion of these channels, because based upon numerous trials and feedbacks from customers, we know that we have differentiated products that are meeting the rapidly growing needs in this market.
We are very confident that our investments in this vertical will pay significant dividends in 2020 and beyond. In our Advertising business, we saw our strongest quarter-to-date. A major driver of our advertising strength is our leadership in the podcast market where our organic growth and our acquisition of Performance Bridge have made us the largest U.S. podcast advertising agency.
Our podcast gross billings were up 39% year-over-year and now nearly equal our broadcast based business adding strength to strength, we announced the launch of VeriAds and two of its advertising networks in Influencer Bridge and MicroMentions. We launched MicroMentions with only a handful of advertisers and broadcasters in September with virtually zero additional cost.
We began generating incremental profit in its first month of operation. As the VeriAds business scales up over the course of 2020, we expect it to become a significant revenue and EBITDAS contributor for us. Our content and licensing business posted particularly strong results in the third quarter with some large licensing deals adding to the normal seasonal strength in this business.
While we expect this business to experience its normal seasonally lower Q4, we are very excited about its prospects for 2020.
I would now like to talk about our realignment in more detail. The realignment creates business teams focused on the needs of our customers in the media and entertainment market and government legal and compliance markets to maximize each team’s effectiveness as they execute the next phase of our growth strategy.
Under this new structure, each team will control the products, engineering, sales and product marketing resources dedicated to its customer groups, which we believe will accelerate their time to market and maximize their customer responsiveness. We are really excited about these actions and we believe will maximize our speed, efficiency and customer focus helping us to accelerate our revenue growth.
As our press release indicates, we anticipate realizing cost savings from these realignment actions, as well as the computing cost reductions Chad spoke to previously, totaling $7 to $9 million in annualized savings with the full impact being realized from the start of Q1.
To summarize, we have never been more excited about the prospects for our business going forward. Our bookings are at record levels. Our pipeline of new SaaS business entering 2020 is at its strongest point in our history and we have optimized our team to win that business.
Pete Collins will now review the third quarter financials and provide detail around our financial guidance. Pete?
Thanks you, Ryan and good afternoon everyone. I’d like to review our financial highlights for the third quarter of 2019 as compared with the third quarter of 2018. As a reminder, in the third quarter of 2018 we acquired three companies; Wazee Digital, Performance Bridge and Machine Box.
Our net revenues in Q3 increased 70% year-over-year to $12.8 million. Net revenues in Q3 included $6.9 million from the acquisitions we completed in Q3 of 2018 reflecting a full quarter of results of those businesses compared with $2.1 million in the prior year period, which only included approximately one month of those businesses’ results.
On an organic basis, our aiWARE SaaS net revenues grew by 32% in the third quarter and 50% in the first nine months of 2019 compared with the prior year periods.
The organic growth in both periods was driven primarily by our media and entertainment verticals, which increased by $0.3 million or 30% in the third quarter and by $1.4 million or 55% in the first nine months of 2019 compared with the prior year periods as we continued to land new customers and expand our business with existing customers.
Our aiWARE SaaS monthly recurring revenue or MRR under agreements that effect at the end of the third quarter increased slightly over the second quarter to $547,000. Our aiWARE SaaS bookings in the third quarter were $1.3 million. The majority of our third quarter bookings were in the media and entertainment verticals. As Ryan discussed, our bookings in October were fantastic.
Our aiWARE content licensing and media services business had net revenues of $4.2 million. In total, our aiWARE software and services businesses contributed 51% of our total revenues in Q3, continuing the trend we have discussed in prior quarters.
Our advertising net revenues increased $1.6 million or 33% to $6.3 million reflecting both organic growth and the contribution from our acquisition of Performance Bridge.
In the third quarter of 2019, our total operating expenses increased to $24.2 million from $22.2 million in the same period of 2018, due primarily to addition of approximately $2.3 million of operating expenses of the businesses acquired in the third quarter 2018 and approximately $0.5 million of intangible amortization, plus additional cost directed to R&D
These increases were offset in part by higher advisory and professional fees incurred in the third quarter of 2018.
Our loss from operations in the third quarter 2019 was $16.2 million, essentially flat when compared with the loss of $16.3 million in the third quarter of 2018. Our net loss totaled $14.2 million or $0.64 per share compared with a net loss of $15.9 million or $0.86 per share for the prior year quarter.
In the third quarter 2019, we’ve finalized the purchase price allocated for the three businesses that we acquired in 2018.
As part of this, we recorded an income tax benefit of $1.8 million to true up our deferred income taxes as some of the intangible assets recorded for book purposes will not be deductible in the future for tax purposes. This income tax benefit in the third quarter of 2019 drove much of the decrease in this quarter’s net loss.
Now, turning to our non-GAAP results. Our total non-GAAP operating expenses in Q2 were $18.4 million or 143% of net revenues, compared with $14.9 million or 197% of net revenues in Q3, 2018 reflecting the addition of operating expenses of our acquired businesses, offset in part by the benefits of our cost management efforts.
Our non-GAAP net losses totaled $9.6 million or $0.43 per share, compared with $8.6 million or $0.46 per share for the prior year quarter. Our third quarter adjusted EBITDAS loss was $9.6 million or 75% of net revenues, compared with a loss of $8.6 million or 114% of net revenues in the third quarter of 2018.
As of September 30, 2019, we had no long-term debt and cash and cash equivalents and marketable securities totaling $49.2 million including cash received from clients for future payments of $17.4 million.
During the third quarter, we raised net proceeds of $5.3 million through the issuance of $1.1 million shares of our common stock under the ATM facility that we set up in the second quarter of 2018.
We have $27.7 million available under the ATM as of today.
Please note that we are adopting the new revenue recognition standard ASC 606 starting in the fourth quarter. We will use the modified retrospective method with an adjustment to accumulated deficit for the cumulative effect of adoption. We have performed an assessment to determine the impact of the new revenue standard on our accounting policies and consolidated financial statements.
Generally, for our advertising arrangements, we do not expect any changes as the performance obligations are completed by the end of each reporting period. In connection with our aiWARE SaaS revenue arrangements, we expect changes in the timing of revenue recognition only for some variable consideration arrangements.
In relation to our content licensing revenues, we do not expect changes for the majority of our arrangements as the performance obligation of SaaS, but as soon as the content is downloaded. With regards to content licensing arrangements that have minimum commitment, we are continuing to evaluate the impact of these arrangements.
We are working through our implementation plan and continuing to evaluate the impacts of the standard on our consolidated financial statements. The net revenue guidance that we are providing assumes that the impact of the new revenue standard is immaterial.
Turning to our guidance. As Chad mentioned earlier, we are completing the final step of integration of our acquisitions and realigning our teams to be more tightly aligned with their respective end-markets. We are expecting that these actions and compute cost reductions will deliver $7 million to $9 million of annualized savings. For the fourth quarter ending December 31, 2019, we expect our net revenues to be in the range of $12.0 million to $12.4 million, due primarily to seasonal slowness in our content licensing business, offset in part by higher SaaS revenues and we expect our adjusted EBITDAS loss excluding one-time charges associated with the realignment to be in the range of $8.7 million to $8.3 million.
For the first quarter of 2020, we expect our net revenues to be in the range of $12.6 million to $13.4 million driven by increases in our SaaS and content licensing businesses and we expect our adjusted EBITDAS loss to be in a range of $7.8 million to $7.2 million.
We look forward to connecting directly with our investors and analysts at the following events; On November 12, we will be at the 10th Annual Craig-Hallum Alpha Select Conference in New York; on November 13, we will be at the Roth Technology and New Industrials Day in New York; on November 19, we will be participating in the JMP Securities Software Bus Tour in San Francisco; On December 10, we will be at the 12th Annual LD Micro Main Event in Bel-Air, California; and on December 12 and 13, we will be at the 8th Annual Roth Deer Valley Corporate Access Event in Park City, Utah.
To arrange meetings at any of these events or in person, we encourage institutional investors to reach out to their respective brokers or please contact Brian Alger.
At this time, we would like to begin the Q&A session. Operator?
[Operator Instructions] And our first question will come from Pat Walravens with JMP Securities. Your line is now open.
Great. Thank you and let me apologize for the background noise. Big picture, could you guys just – and I know, you tried to do this on the call, but can you just sort of get us keep wait on reconciling your bullishness on the business with the sequential decline in revenue that you are guiding to in Q4?
Pat it’s Pete. The decline in revenue going into Q4 is really just attributable to the seasonality of our content licensing business. That business is linked to a lot of different sporting events that occur in Q1, 2, and 3 what’s not in Q4. So, if you remember back in the fourth quarter of last year, the amount of content licensing revenue was relatively low, it was at $2.5 million. We’ve easily exceeded that each quarter this year.
And, but as we go from Q3 to Q4, that’s causing the revenue to decline. The other parts of the business, specifically our SaaS business, we are expecting that to grow sequentially and then the advertising business as we talked about on the call has the best quarter ever and we think we can at least achieve that same level and possibly beat it by a little bit. But the headline is basically, seasonality in content licensing up than SaaS and meet or possibly slightly sequentially in advertising.
Yes, Pat, one more thing, this is Chad that I’d add to that which is, we, for the first time provided guidance for the first quarter of 2020 and that shows again, that we get back online with the trend of continued top-line growth and reducing our EBITDAS loss pursuant to the conversation and comments in the call.
Yes, Chad, you anticipated my next question. So, what are your assumptions behind that growth for Q1? I guess, how assured are they that’s the right way to ask it and how confident are you that we can get there, what did go wrong?
I’ll say, as we look at Q4 – this is Ryan, and we look to exit 2019 based upon the type of clients that we have, the pacing of the spends that we have seen historically are in line with as it relates to historical years. Therefore, we sort of take those models, coupled with the SaaS contracts that we’ve already signed as we’ve mentioned earlier over 25 new signings this year which gives us near a 100%’s renewal rate.
It affords us the ability to kind of lock in a baseline with good confidence. Now, obviously that’s tied to the realignment savings and the compute savings to achieve the forecast or the goal to achieve the forecast out in the bottom-line as well.
Yes, Pat, this is Chad. What I’d probably add to that is, we – as we are probably half way through now, the fourth quarter have had our greatest bookings on the SaaS side to-date in the history of the company with over 10 million in that bookings through the quarter.
Again, and we still have, I think some significant contracts in the pipeline to go this year. So our visibility entering in 2020 is the best as ever been in terms of our ability to deliver top-line targets and again achieve those loss rates that we’ve and losses that we’ve predicted.
Okay. Thank you and last one from me. So it sounds like something flipped. You are not the only one who had that happen this quarter, by the way. But is there anything you learned in terms of your sale process?
Yes, reclarify the slip for me so, I can…
Yes, slip, I am assuming some of those you imposed in Q3?
Yes, exactly. I mean, I think, dealing with customers just from one quarter boundary to the next is a fairly arbitrary goalpost and we definitely had a significant number of bookings kind of move into the first part of Q4. But I would qualify that that is limited to primarily the Fed and gov verticals. But that continue with the question, sorry to interrupt. I just want to clarify.
Yes, yes. No, that’s it. Thank you very much.
Your next question comes from Darren Aftahi with ROTH Capital Partners. Your line is open.
Hey guys. Good afternoon. Thanks for taking my question. Just to follow-up on Pat’s question on last one, on the sales cycle, kind of lengthening in the Fed and the government vertical, I am just trying to make heads and tails to your comment. It sounds like the pipeline in that segment continues to build, but the sales cycles are longer than what you kind of initially anticipated. Is that a fair comment?
Yes, I think that’s a very fair comment. I think the other thing that’s driving the size of the pipeline is sort of our go to market strategy through channel partners, primarily Microsoft on the domestic slide as well as PRI. We are seeing tremendous activity from joint sales calls to webinars that are having extremely strong attendance given any of the products we’ve had in our company history and this one is literally orders of magnitude larger.
Great. So, I guess, at least the next question, in terms of, one conversions of entities that are in trial with Redact identified any other products in that sector. What’s the conversion rate? I think that was around 20% as early on last quarter.
Has that continued? And then, you recently announced the Microsoft partnership, obviously, there is some time to integrate. Does that have a delayed impact on 4Q and that kind of gives a little bit more of your bullishness into 1Q 2020?
Well, let’s talk about the Microsoft one first. Now, there is really no ramp up time. So, we are live on as Azure, the applications that they are actively selling are live on Azure and so that’s ongoing and that’s in full production right now. The time to then go through the approval process, whether it’s depending on the municipality, appropriations committee, it’s all across the map.
We are through as we’ve sort of learned through this process working in multiple states, that time horizon is all over the map. So, again, we are really pegging on that it’s great to have the sales force sides of a Microsoft aggressively selling our products and hence we are very bullish that hopefully the majority of these opportunities will convert at some point in the future.
To give a little bit more color on that, this is Chad, we’ve had a number of the trials that we are in last quarter convert to paid contracts and even more importantly, we’ve actually had a number of new customers actually skip the trial phase and go directly to paid contracts under the slide agreements.
That’s helpful. And just lastly on the $7 million to $9 million you mentioned computing and then kind of realignment, maybe sort of Pete, when you speak about computing, I mean, is that going to be a cost of goods benefit? And then on the, kind of OpEx side, where are the biggest kind of cost savings across operating lines? Thanks.
So, yes, the compute savings will be in cost of revenues with some also in R&D category, because we’ve got – it has to be with the platform from interval perspective. So you are going to see savings in both of those categories. And then, as far as, where the realignment was impacted it’s really across almost all areas of the company.
As we evolve significantly over the last couple of years, we looked at all the areas of the company to ensure that we really optimized the next phase of the growth. And so, we have identified different parts of the business where we could streamline and realign our resources and bring down some of the costs we are incurring.
That’s helpful. Thank you.
Your next question comes from Mike Latimore with Northland Capital Markets. Your line is open.
Great. Thanks. Yes, on the strong bookings so far in the fourth quarter, how much of that is sort of renewal versus new customers? I guess, the giants maybe that would be one of the new customers. But how much of the new kind of versus renewal?
The bulk of that would be, I’ll call it new in a form of expansion. So, the majority of those bookings are not resigning legacy companies, but actually expanding upon a lot of legacy customers in addition to new signings. So, a few of our customers had that – I would say, had a percentage of their properties or assets running and being processed through aiWARE have moved and opted to go 100% in some areas in terms of their media allocation.
Great. And then on the Redact application, how many customers do you have for that? I think I heard 19. How many customers you have for Redact versus say, the last quarter?
Yes, we signed 19 in the quarter and so we are probably up into the mid-20s now as far customers, Mike.
Great. Okay. And then, on the - just the integration of the Wazee Digital core in the AI platform, I guess, you talked a little bit about just sales process around that integrated platform kind of in that area?
I am sorry. Can you repeat the question?
Yes. Just the integration of the AI platform with the Wazee kind of digital asset management platform. How is kind of – maybe like new logo activity around that?
Yes, so, a couple things there. First the technical integration is fully completed. So, aiWARE’s search functionality and content adjustment is now fully baked into DMH and Core, which are the Wazee products, which are the Wazee products that we acquired. From a sales and go to market strategy, the related thing there is one unified sales team now as well as unified channel partners in the media entertainment space that are selling all of our products.
And we are starting to see some cross-pollination actually of DMH into other areas. For example, we signed the Giant, which is primarily using DMH to process all of their historical archives. So, we think that DMH is going to make its way actually in the public safety and other sectors as well, given the large amounts of media content that those government agencies continue to house and need access to.
But specifically on the Giant, it was the combination of certain capabilities with the aiWARE with the DMH capabilities that’s what they were looking for.
Correct. We don’t even make a distinction anymore from a product – I mean, DMH now is fully integrated and a native platform application on aiWARE.
But that was the differentiator. So, that was the deal that have been in the pipeline over a year ago.
Correct, correct. So, they have passed on it.
So we are starting to see this tremendous traction with customers that historically had seen effectively a media asset management tool as being something that’s not very differentiated in the market today. But when you couple that with aiWARE in cognition, if we can the Unicorn space.
Got it. And then just, with regard to a little bit longer sales cycle on government, does that includes legal or is that more like government type?
That includes legal. I mean, on the legal side, you could break it into a couple different categories. From a Federal perspective which from the Department of Justice and other large agencies, those are longer sales cycles on the more project-based aspects of our revenue in the legal side from companies like Epic and others, again, they are also customers of us.
But as they bring cases on board, you end up having revenue in that quarter and some quarters you don’t. So, again, it’s not so much lumpy revenue in the classic sense. It’s more usage based SaaS revenue that we experienced on our platform.
Yes, great. Yes. Thank you.
Your next question comes from Nick Mattiacci with Craig-Hallum. Your line is open
This is Nick Mattiacci on for Chad Bennett. Could you give us some color on your outlook for the aiWARE business going into quarter four and then into 2020? And what kind of growth rates you will be looking for?
Yes, I mean, we just gave the overall revenue guidance for Q4 and Q1, but kind of at a lower level, specifically for aiWARE we are expecting to see an increase in Q4 and then another increase on top of that in Q1. I had mentioned that there – when you look back on what we reported for Q4 and Q1 of the prior year, there was – we called out that there was about $400,000 of revenue in each of those quarters that was in the SaaS category that was kind of tied to specific performance in those periods.
One related to a bonus and another one related to some paid pilots. So, we are talking about building on top of those revenues even without those kind of $400,000 sort of one-time items in Q4 last year and Q1 this year. So, from the overall rate, those amounts are somewhere in the neighborhood of 350 to 400 basis points of hurdle we’ve got to clear as we move forward into those periods when we do the year-over-year revenue increases.
Got it. And then, with there be any cash costs involved with your cost saving and realignment efforts like any one-time severance costs?
Yes, relatively modest, but yes, we are at least offered severance to the people that have left and it’s excluded from the guidance that we’ve got from an adjusted EBITDAS perspective. But it’s in the under $400,000 range.
Got it. Thank you. That’s all for me.
Your next question is from Tom Diffely with D.A. Davidson. Your line is open.
Yes, good afternoon. I guess, more questions on the Redact side. You have a 100 demos going on or done in the quarter. How labor-intensive are those demos? And how fast could you ramp your demo capabilities?
The good news is the human capital limitation, which is meaning that software now with the improvements they can scale, we could do hundreds and hundreds of simultaneous demos if we needed to. But those hundreds, they are fast and efficient. It’s a relatively clean product to present and educate around.
And so, usually, it’s anywhere from 30 to a minute to a hour long demo and then you are pretty much done. So, in terms of being – be able to scale it and ramp it, we obviously want to tap into our partners, as well.
And hopefully, empower and train them, so they can actually do the demos. But as up to this point, it’s primarily Veritone employees working in conjunction with PRI, Microsoft’s field reps and it’s actually our employees doing the live demos.
To give you a little bit more color on that, I mean, the demand has been so high that being able to do one-on-one demos for a lot of the vacancies has been almost impossible, just getting calendaring. So we’ve been grouping them together into group webinars on a state-by-state basis and regional-based deployments. So, that’s exciting for us as well.
Okay. Yes, and I think you’ve talked in the past of how it’s potentially 10,000 customers for this going forward.
Okay. And then, along the same lines, what is the kind of the relative size of the initial paid contracts? And as you go through the expansion inside those customers sort of how big could it get?
Yes, it really varies based upon the size of the agency on like a per capita basis and the number of officers. It also ends up being an usage-based agreement. There is a lot of our applications such as Redaction is really predicated more about how much content they are moving through the platform in terms of Redacting.
So, it varies from a couple thousand dollars a month to more than – a lot more than that. So, the spread is significant and really relative to the size of the agency. Historically, we’ve been dealing with I think fairly small agencies just other initial go to market. But with Microsoft, they’ve really sort of up that game with introducing at the state level agencies and potential contracts at that level.
Okay. That was helpful. And then, Pete, when you talked about the fourth quarter guidance, you talked about how the content licensing sort of the seasonality there was the big difference. Versus last year, I think you said it was $2.5 million. Do you expect the content license to be up or down year-over-year?
In Q4 we expect it to be up, but down sequentially.
Great. Okay. Really seasonal. All right. And then, finally, when you look at the annualized savings of $2 million per quarter, just to clarify, that’s mainly people, it’s not facilities at this point.
It’s mainly people. Roughly, two-thirds of the three quarters people – and then compute cost savings that makes up that rest of that. And that’s obviously cash savings.
Yes. Thank you.
And your next question is from Stephen Banta with Banta Asset Management. Your line is open.
Hey guys. It’s Steve here. Thanks for…
To ask a couple questions, yes. Hi Chad. Thanks for letting me ask a couple of questions. I guess, really kind of bigger picture two questions. Can you explain your thought process around why you guys have really decided to go down the path of building aiWARE as an operating system, being the first question and then second one is, as we are looking at the market movement of the stock price, what do you think that the investment community potentially is getting wrong when evaluating your business.
Well I think, maybe the first one, I mean, it’s an interesting question why build aiWARE, I mean, it’s been a key part of our fundamental strategy from the inception of the company. I think to reframe that question, I think you are probably asking why build aiWARE versus building a point solution for a specific vertical. We got the better verification.
Yes, so, when we look about artificial intelligence, it’s essentially the greatest invention in my opinion that man have ever stumbled across. And the reason for that is it’s essentially the only invention that has an opportunity and a potential to change the rate of human innovation. So the thing is that, humans would invent in a 100 years with artificial intelligence they are going to be completed in five to ten.
And that’s going to drastically improve all of our lives and our children’s lives. And so, when you think about how you deploy and build AI, most companies today, from a point solution standpoint think about sprinkling AI from an algorithmic standpoint into their applications similar to how they built a database in the past where AI is just another component to that application.
Fundamentally, we have a different approach to that. Artificial intelligence requires large amounts of data. There is a learning that can happen between applications within a single organization. So point solutions fail to capture any of that cross-pollination of data.
They have failed to enable artificial intelligence to blend from a used case and deployment standpoint across different, what I call humans in the loop. And so, to put this in practical context when we sign an ad agency or we sign an advertiser, or we sign a broadcaster, and they start using one of our applications, let’s say it’s – just pick one, Ryan.
They pick Essentials. So they are injecting thousands of streams of audio and video content. They are using it to search and identify where ads are playing et cetera. The ability for them to now certainly download a second application with simplicity such as attribute to be able to start to quantify the value of that advertising literally as easy as clicking a button and turning on another application as you would on Microsoft Windows.
So, we are moving from a world in our opinion from having a single application in artificial intelligence like Microsoft Word to now let an Omni use tool of Excel, PowerPoint, Word all interoperate and work together, touching every part of enterprise organizations and the processes which they function.
That is a very different market potential and ease of use in deployment and cost function for those potential customers versus having a collection of independent point solutions that they are trying to use and integrate. And this has been proven over and over again in history.
If you look at the point solutions that occurred back in the pre-Microsoft days, to what Microsoft was able to achieve in the mid-80s and 90s, we believe that same transition from computational science to cognitive science puts us in a sweet spot that is aligned with history success and it’s clearly resonating with our customers at scale across the two verticals that we are executing in.
So, switching to the stock price question, god knows. We’ve been buying the stock personally, I think if you think about us as a company, as a management team, we have a unbelievable management team and they all have phenomenal historical track records working for public companies.
They’ve all taken significant pay cuts to come work here from the day they started and they are passion about what we are building in artificial intelligence and more importantly, most of us continue to invest in the public markets from our company.
None of us have sold our stock since inception. We continue to buy an average down. So we are huge believers in our future and I just only speak for myself, but for the management team and the members of our Board of Directors. So, we triplex as you are as to why our stock is trending the way it is. Putting an investor head on which I am.
There is three outcomes for our company. We are either going to go out of business. We are either going to get sold to a large company or we are going to become a successful titan in artificial intelligence.
Clearly there are a number of investors that believe or I should say, short sellers that believe that we are going to take door number one, which is go out of business. I can assure you with absolute clarity that that is not going to happen.
We have divisions in our company that are wildly profitable. We can absolutely scale this business to a point where it is a profitable entity as a public company. Number one. Number two, this isn’t our first really. Ryan and I have had many, many successful companies in the past and have a large personal balance sheet and we are not going to let this company fail.
From the second door, in terms of getting acquired, we have no intention of selling this company. As a shareholder, as the CEO, we may some values with the Board and that stuff, but as a personal shareholder and why we started this company, we built this company because we believe the next company that will own and be the dominant player in artificial intelligence is not one of the existing type, it is not a Microsoft, it is not a Google, it will be a new company and one that takes a new approach to this market. We have done that and we continue to invest in that future which is aiWARE and our applications.
So, we are voting on door number three as a company. We continue to invest in the stock and we look forward to seeing how this shakes out in Q4 and Q1 with the realignment that we have did which is some of the hardest decisions you’ve ever done, as well as the technological enhancements we’ve done that improve our operating efficiency and capabilities going forward.
Thanks for taking the call.
At this time, this concludes our question and answer session. If your question was not taken, you may contact Veritone’s Investor Relations team at firstname.lastname@example.org. I’d now like to turn the call back over to Chad Steelberg for his closing remarks.
Thank you operator and thank you all for joining us on the call today. We're very pleased with the progress we have made thus far in the second half. The takeaway from our standpoint is that, we are – as we approach 2020, we have never been more excited about the huge opportunities we see in our business and the teams we have in place to go after them.
In the coming months, we expect to see significant revenue growth and diversification across our products, verticals and channels and we look forward to reporting to you on our progress. Good bye. Have a good day.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. And you may now disconnect.