2023-05-08 18:01:07 ET
Summary
- Veritone, Inc. recently reported its Q1 2023 financial results, beating revenue but missing earnings estimates.
- The firm is divesting its energy business and reducing headcount modestly as it seeks to focus on the AI-enabled opportunities.
- While the intense interest in AI technologies may be a "tide that lifts all boats," I'm Neutral [Hold] on Veritone, Inc. until we see its growth and operating results trajectories.
A Quick Take On Veritone
Veritone, Inc. ( VERI ) reported its Q1 2023 financial results on May 2, 2023, beating revenue but missing EPS consensus estimates.
The firm sells AI-based tools for enterprises to maximize their insights from data sources.
My outlook on Veritone, Inc. in the near term is Neutral [Hold] until we see the firm’s response to the strong growth in interest in AI technologies.
Veritone Overview
Denver, Colorado-based Veritone, Inc. was founded in 2014 to provide a range of AI / Machine Learning software for enterprises to increase their knowledge from their various data stores and information sources.
The firm is headed by co-founder, president and CEO Ryan Steelberg, who was previously CEO of Brand Affinity Technologies and Head of Broadcast at Google.
The company’s primary offerings include the following:
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aiWARE
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AI engines
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Media management and monetization.
Veritone acquires customers through its direct sales and marketing efforts and through its extensive partner ecosystem of managed service providers, resellers, system integrators, technology partners and cloud infrastructure providers.
Veritone’s Market & Competition
According to a 2022 market research report by Grand View Research, the global market for enterprise artificial intelligence was estimated at $11.4 billion in 2021 and is forecast to reach $165 billion by 2030.
This represents a very high forecast CAGR of 34.6% from 2022 to 2030.
The main drivers for this expected growth are an exploding demand for "virtual assistants, chatbots, and robots…and the increasing need to analyze exponentially growing demand for data sets."
Also, the chart below shows the historical and projected future growth trajectory of the U.S. enterprise AI market, from 2020 to 2030, by deployment:
Major competitive or other industry participants include:
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Amazon Web Services
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IBM
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Microsoft
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Oracle
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Intel
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Alphabet
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SAP SE
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C3.ai
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DataRobot
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Hewlett Packard Enterprise
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Wipro Limited
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Nvidia Corporation.
Veritone’s Recent Financial Trends
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Total revenue by quarter has trended lower in recent quarters:
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Gross profit margin by quarter has dropped recently:
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Selling, G&A expenses as a percentage of total revenue by quarter have produced the following history:
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Operating income by quarter has worsened sequentially in recent quarters:
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Earnings per share (Diluted) have only produced one positive result in the last nine quarters:
(All data in the above charts is GAAP.)
In the past 12 months, VERI’s stock price has fallen 50.89% vs. that of the iShares Expanded Tech-Software Sector ETF ( IGV ) rise of 6.94%, as the chart indicates below:
For the balance sheet , the firm ended the quarter with $139.7 million in cash and equivalents and $138.0 million in total debt, none of which was categorized as the current portion due within 12 months.
Over the trailing twelve months, free cash used was $45.7 million, of which capital expenditures accounted for $5.5 million. The company paid $18.2 million in stock-based compensation, or SBC, in the last four quarters.
Valuation And Other Metrics For Veritone
Below is a table of relevant capitalization and valuation figures for the company:
Measure [TTM] | Amount |
Enterprise Value / Sales | 1.0 |
Enterprise Value / EBITDA | NM |
Price / Sales | 1.0 |
Revenue Growth Rate | 10.8% |
Net Income Margin | -18.0% |
EBITDA % | -27.8% |
Market Capitalization | $139,990,000 |
Enterprise Value | $138,260,000 |
Operating Cash Flow | -$40,180,000 |
Earnings Per Share (Fully Diluted) | -$0.73 |
(Source - Seeking Alpha.)
The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.
VERI’s most recent Rule of 40 calculation was negative (17.0%) as of Q1 2023’s results, so the firm has performed poorly in this regard, per the table below:
Rule of 40 Performance | Calculation |
Recent Rev. Growth % | 10.8% |
EBITDA % | -27.8% |
Total | -17.0% |
(Source - Seeking Alpha.)
Commentary On Veritone
In its last earnings call ( Source - Seeking Alpha ), covering Q1 2023’s results, management highlighted the firm’s recent actions to divest its energy group, which it believes will close by the end of Q2 2023 and, as a result, the company will no longer incur related energy group expenses.
Further, management separately announced a "measured reduction" in company headcount that it expects will result in up to $15 million in annualized operational savings.
Leadership is also focusing the firm’s efforts on the fast-growing AI industry, noting $15 million in new bookings for the quarter, an increase of 57% year-over-year.
However, the sharp drop in revenue from Amazon hurt revenue materially during the quarter.
The company’s gross revenue retention rate was "well above the 90th percentile," indicating less than ideal product/market fit and sales & marketing efficiency which is in need of improvement.
Also, total Veritone, Inc. revenue for Q1 2023 dropped 11.9% year-over-year and gross profit margin dropped approximately two percentage points.
SG&A as a percentage of revenue fell by nearly 4 percentage points, a positive development, while operating losses worsened sequentially and year-over-year.
Looking ahead, 2023 revenue growth was guided to 8% at the midpoint of the range, while full-year non-GAAP net loss is forecasted to be $4.5 million at the midpoint, a 72% improvement over 2022 if achieved.
Veritone, Inc.'s financial position is moderate, with enough liquid resources for three years of current free cash burn.
Regarding valuation, the market is valuing VERI at an EV/Sales multiple of around 1.0x.
The Meritech Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of around 5.5x on April 27, 2023, as the chart shows here:
So, by comparison, VERI is currently valued by the market at a substantial discount to the broader Meritech Capital SaaS Index, at least as of April 27, 2023.
The primary risk to the company’s outlook is a macroeconomic slowdown that appears to be already underway, tightening credit conditions which may affect customer spending plans and lengthening slower sales cycles which may reduce its revenue growth trajectory.
From Veritone management’s most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below:
I’m most interested in the frequency of potentially negative terms, so management cited "Uncertain" one time, "Challeng[es][ing]" three times, and "Macro" five times in various contexts, usually negative.
In the past twelve months, the firm's EV/Sales valuation multiple has dropped from about 2.3x to around 1x, so the stock has been subject to material valuation compression, as the chart from Seeking Alpha shows below:
While I’m encouraged at management’s actions regarding divesting non-core activity and reducing headcount, the firm’s customer concentration - Amazon.com, Inc. (AMZN) - remains a concern, as does its generally lackluster retention rate performance while operating losses are worsening.
Veritone, Inc. could very well benefit from a "rising tide lifts all boats" environment for AI technology uptake.
As a result, my outlook on Veritone, Inc. in the near term is Neutral [Hold] until we see the firm’s response to the strong growth in interest in AI technologies.
For further details see:
Veritone Sheds Non-Core Activity And Reduces Headcount To Focus On AI