VERI announced fourth quarter results, which also happened to include the first full quarter of recent acquisition PandoLogic Ltd. How did that turn out?
PandoLogic was to be purchased at the end of September for $150M, or about 3x their expected 2021 revenues. The agreement called for $50M of cash and $35M in stock to be paid up front, with the other $65M due upon satisfying various earnout conditions. The final amount was $116M with a bit more cash paid up front and a bit less stock and the value of the earnout provision amount basically cut in half. So was PandoLogic not performing? Quite the opposite.
From the closing date of September 14th to the end of the 3rd quarter, PandoLogic contributed $4.3M in revenues to the VERI top line, which turned out to be around 20% of their total revenues of $22.6M. Pro Forma results would have seen revenues in the $35.5M range, meaning PandoLogic would have done $17.2M in the quarter on a standalone basis, about equal to VERI’s $18.3M. At the time of the announcement, VERI had a market cap of around $750M, and yet they were able to purchase a similarly sized (and much faster growing) company for a fraction of their own valuation. Were they just getting a great deal on a hot Israeli startup or were they buying a load of trouble?
Audited results for PandoLogic show 2019 revenues of $10.2M with a slight profit and 2020 revenues of $47.4M with $32.5M in net profits! (They provided some confusing past financials, sadly, where this one shows the $10M revenue number for 2019 and this one show a rather higher $18M number, and each has wildly different COGS, though the balance sheets both look the same) Revenues rose more than 4x and yet cost of revenues were only up around 50%. Receivables, on the other hand, jumped from $6.2M to $44.2M, so their year over year $37M revenue increase was followed by a similar $38M accounts receivable increase, and much of that increase made its way onto VERI’s balance sheet. VERI’s receivables balance increased by over $39M between Q2 and Q3, even though in their 10Q they only allocated $21.3M of the purchase price to accounts receivables. The PandoLogic financials make you think that perhaps there was a reason VERI was able to pick them up for such a seemingly cheap price.
The Q4 report shines some more light on the combination. Software revenues were given as $40.22M, up 814% year over year, while organic growth was given as 40%. Last year their aiWARE SaaS Solutions revenues (their Advertising and aiWARE Content Licensing and Media Services are not in the software bucket) were $4.4M, meaning their organic revenues would have been around $6.2M without the acquisition, which makes PandoLogic responsible for an amazing $34M in Q4 VERI revenues. Those revenues didn’t come without the obligatory rise in receivables, as those continued their meteoric rise by increasing over $27M. Curious how collections are going or how that can impact cash needs in the coming months? Well, so did the company.
After the acquisition, they announced in their 10Q that ““Beginning in the fourth quarter of 2021 and including the acquisition of PandoLogic in September 2021, the Company expects to generate positive consolidated cash flows from its operations. As a result, management believes that the Company’s existing balances of cash and cash equivalents, which totaled $72,645 as of September 30, 2021, will be sufficient to meet its anticipated cash requirements for the foreseeable future.”
Turns out that “the foreseeable future” isn’t as long as it perhaps once was. Their 10Q was filed on November 15th, and then on November 16th they announced their intention to raise $150M through a convertible notes offering.
So to review, PandoLogic supposedly did $20.5M in total revenues in Q1 and Q2, prior to the acquisition. We think that they did around $17.2M in Q3 and $34M in Q4. Add it all together, and PandoLogic would have done around $72M in 2021 revenues on a standalone basis. That is up from the $47.4M they supposedly did in 2020.
Excluding PandoLogic, VERI would have done $115.3M - $34M - $4.2M = $77.1M.
So combined, VERI and PandoLogic, just assuming they can both match what they did in 2021, should be able to do at least $150M in 2022.
What is their guidance for 2022? Revenues of $180-$190M, with no word on what they expect receivables to do. Q1 revenues are slated to be around $33M, which would be a rather steep decline from Q4, a rather new occurrence, so PandoLogic must be a highly seasonal business.
One final note. In Q3, for the first time, VERI had a couple of customers accounting for 27% of overall revenues. Prior to the PandoLogic acquisition, if there were any significant customers, there would be only 1 and it would typically be at the minimum 10% or 11% threshold. Now we have 2 and it jumps to 27%. Is it mere coincidence that PandoLogic was responsible for 19% of overall revenues and could much of that be coming from a single large customer? Without PandoLogic’s $4.3M contribution in Q3, revenues for VERI would have been $18.35M, up around $2.63M year over year. So if their usual customer was once again around 10%, that would mean they would have had to get an additional 17% customer just to make that number, but it turns out that a single 17% customer would have been greater than their entire year over year revenue increase, making it unlikely to have come from an existing client.
So did it come from PandoLogic? Very likely. Are we likely to see some more significant customer surprises out of that revenue rise in Q4? I wouldn’t bet against it.