Veritone Inc. - VERI
Will VERI eventually buy the right partner for long-term stability?
When the whole “AI” hype train started earlier this year, I was half expecting shares of VERI to go along for the ride. VERI has long been touting their AI credentials and trying to get investors to focus on their high-margin software revenues and partnerships with companies like Amazon. Despite briefly doubling from around $5 to a bit over $10 inside of a one-month period at the start of the bubble, the shares never really caught on the way some other stocks did and shareholders may have hoped they would, and soon they continued their decent back down to pre-COVID levels. I first pointed out the stock’s post-COVID bounce when the shares were breaking through $20, and then again above $30, and most recently as they were once again breaking below $20. Timing these things can be tough, but COVID never fundamentally changed anything about their business, so every move higher was an opportunity. Today they sit comfortably under $3.
Ordinarily I would just let this idea fade back into the sunset and watch the shares sink back to their sub-$1 level, but something caught my eye in the earnings release that sort of made me look twice. It wasn’t the company’s bullet point of “highlights” during the quarter. I can’t understand how or why they would choose to highlight this information, but so they did. Their top 6 highlights of the quarter included:
GAAP and Pro forma revenues of $28.0 and $34.7 million, a decrease of 18% and 19%, respectively, compared to GAAP and Pro forma revenues, respectively, for Q2 2022 driven primarily by decline in one-time nonrecurring Software Products & Services revenue.
Pro forma Software Products & Services revenues of $20.9 million, a decrease of $5.8 million or 22% compared to Pro forma Software Products & Services revenue for Q2 2022.
Managed Services revenue of $13.9 million, as compared to $15.9 million in Q2 2022.
Total Software Products & Services Customers(1)of 3,705, flat compared to Total Software Products & Services Customers for Q2 2022(1) and a 1.8% decrease compared to Q1 2023.
Total New Bookings(1) of $8.4 million, down 62% compared to Q2 2022, driven by reduced HR consumption from Amazon, a major customer.
Annual Recurring Revenue (ARR) (1) of $107.9 million, down 17% compared to ARR for Q2 2022, driven by drop in consumption ARR.
New bookings down 62%? ARR down 17%? Customers down a couple percent? Those all-important software revenues down 22%? Ouch. Now, all of that is typically the stuff companies hide somewhere in the 10Q or make you figure out for yourself, but they rarely just come right out and tell you up front. I must say, kudos to the management for being at least somewhat honest and transparent.
Wait, why do I say “somewhat?” Well, the company used a term and included some charts in the earnings release that is usually reserved for footnotes that people rarely see in their 10Q or 10K, and they moved pretty liberally comparing one set of numbers to a different set entirely. That term is “pro forma” and in my experience rarely surfaces during the discussions around an earnings release. Why? Typically a company likes to take credit for all of the supposed top-line growth that happens during a quarter without attributing how much of it came from their acquisitions. But in the case of VERI, it’s being used for a completely different reason. It’s being used to partly distract or hide the true degree of decline the company is facing in revenues and they are hoping that people will concentrate on the “pro forma” revenues that include recently acquired “Broadbean” and choose not to focus on the revenues when compared to what the company had in the prior year. You see, Broadbean didn’t close until June 14th, or about a couple of weeks before the end of the quarter, and the company wants the public to know that things will be different once they see an entire quarter of Broadbean’s contribution.
So yes, the company does provide revenues both with and without Broadbean, and they add the pro-forma element so people will focus on the fact that, with Broadbean, revenues would have been about flat vs. 2022. Rather than a decline from $34.2M to $28.0M, there would have been a slight uptick to $34.7M. So all is good. Whatever we lost, we spent some idle shareholder cash, and we got it right back. That’s evident when they discuss “guidance” for the coming quarter, and revenues are expected to be around $37M vs. last year’s $37.2M; the first number includes Broadbean of course while the second does not. That trick transfers to their annual guidance as well, naturally. Another dishonest fact they omitted? Their $28.0M number did include a couple weeks’ worth of revenues from Broadbean without disclosing the actual number (that I was able to see at least), and given pro-forma revenues would have been almost $7M higher on the quarter, we can assume that those 2 weeks were worth somewhere around $1M, which would have made the quarterly decline that much worse.
Quick question. Can a company claim to have Gross Revenue Retention (GRR) in excess in 90% while their top line is dropping greater than 20%? Once again, they can if they use a “pro-forma” basis for their calculations.
Another question. Is anything going to necessarily change now that they have acquired Broadbean? In the very first bullet point they say revenues would have decline 19% on a pro forma basis vs. the 18% on a normal basis, which is slightly worse than the disaster they are reporting. True, their disaster of 18% was probably closer to 21% or so if you take out the Broadbean calculation, but let’s not quibble. What does that tell us? It tells us that Broadbean is likely not exactly a growing enterprise, and is likely suffering some of their own issues, which is likely why VERI was able to pick them up for $52M for something that supposedly is going to generate $35M in revenues with attractive margins.
With cash balances down from $185M at the start of the year to $67M at the end of Q2, the company needs to stop bleeding, and fast. They have around $70M in receivables out there, which is well over 180 days, so some of those may be suspect. With $140M in convertible notes outstanding and $180M in goodwill and intangibles, there are not a lot of tangible assets left to shareholders should something go amiss with their acquisition strategy.
One thing, though, is for certain. They can’t continue to burn through $60M in cash every 6 months, or they will be out of business by the end of the year, or next year at the latest. Lots of companies, CVNA a recent hot example, have been declared deceased prior to the actual chapter filing, so it’s possible VERI has another run left in them, but with the AI train coming to an apparent standstill, I would not be willing to count on it.