Good afternoon. Welcome to Veritone's Second Quarter 2017 Earnings Conference Call. Joining us for today's call are Veritone's Chairman and CEO, Chad Steelberg; and the company's Chief Financial Officer, Pete Collins. [Operator Instructions] 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. These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict and 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 periodic SEC filings. These forward-looking statements reflect management's beliefs, estimates and predictions as of the date of this live broadcast, August 7, 2017, and Veritone undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call. During this call, we will discuss certain of our financial results on a non-GAAP basis, including items we believe to be outside of our core operating results. We believe that the supplemental presentation of non-GAAP financial information provides insight into our core business results as well as a useful comparison of our financial results between periods. Finally, I would like to remind everyone that this call will be recorded and made available for replay via a link available in the Investor Relations section of the company's website at www.veritone.com. Now I'd like to turn the call over to Veritone's Chairman and CEO, Chad Steelberg. Sir, please proceed.

Welcome, everyone, and thank you for joining us today. After the market closed, we issued a press release announcing our results for the second quarter ended June 30, 2017, a copy of which is available in the Investors Relations section of our website. Q2 marked yet another strong quarter for Veritone, building on the operational momentum we established in Q1. We experienced year-over-year growth across all of our key performance indicators, continued to build and strengthen our AI platform and launched an exciting new business team, Veritone Government. I will discuss these highlights more fully a bit later on today's call. As you may remember, I spent a significant portion of our last call giving an overview of our business as well as sharing some of the details under the hood that make Veritone unique. With a company like ours, we think it's incredibly important to understand the fundamentals behind our strategy, execution and results. But before I do any of that, I'm going to pass the call over to our CFO, Pete Collins, who will walk us through our financial results for the second quarter and first half of 2017. Pete?

Thank you, Chad, and good afternoon, everyone. Tuning to our financial results for the second quarter and 6 months ended June 30, 2017. Our second quarter net revenues increased 103% to $4.1 million from $2.0 million in the same period last year. The improvement in net revenues was due primarily to the increase in our Media Agency net revenues by $1.8 million or 93% compared with the prior year period. Also contributing to the increase this quarter was a 380% increase in net revenues from our AI platform, which totaled $348,000 for the period. For the first 6 months of the year, net revenues increased 76% to $7.2 million, up from $4.1 million in the same period in 2016. The increase in net revenues was due primarily to an increase in Media Agency net revenues of $2,664,000 or 67% as well as an increase of $444,000 or 393% in net revenues from our AI platform. Looking at our AI platform business. The total contract value of new bookings received during the quarter increased to $151,000 compared with $126,000 in the same period last year. In addition, our monthly recurring revenue under agreements in effect at the end of Q2 2017 increased to $132,000 from $24,000 at the end of Q2 of last year. Consistent with our historical pattern, our revenue mix this quarter was again derived predominantly from our Media Agency business, whose revenue nearly doubled year-over-year. We believe that the growth in this business is a direct result of the unmatched intelligence that the Veritone AI Platform delivers to its customers. In our other vertical markets, we continue to rapidly grow our AI platform revenue, and we expect it to become the dominant driver of our net revenues in the future. Our gross profit for the second quarter 2017…

Thanks, Pete. As I mentioned earlier, I'd now like to provide some operational updates related to what we discussed on the last call as well as highlight some new developments that occurred during the second quarter. I'll also provide an update on our AI product development and our expanded engagement with CBS Radio. Let's begin with our business highlights for the second quarter, starting with the progress we've made on our KPIs, both for our Media Agency business as well as for our AI platform. As I mentioned on our last call, in order to track the progress of our Media Agency business, we evaluate 3 key performance metrics: the number of new customers added under master services agreements, the total number of active customers and the average media spend per customer. Our first 2 KPIs, which track the number of new and active customers, provide us with insight regarding our ability to grow the market share of our Media Agency business by winning new customers as well as keeping tabs on customer churn. During Q2, we added 16 net new customers compared with 12 net new customers in the same period last year, a 33% increase. In terms of active customers, we had a total of 45 as of the end of the quarter compared with 35 at the prior year quarter end, a 29% increase. Our third KPI, average media spend per customer, allows us to analyze not only spending trends but our ability to grow media spend with existing customers. During Q2, average media spend per customer was $695,000 compared with $499,000 in the same period last year, a 39% increase. It's important to keep in mind that while this business is mature and provides a solid foundation for Veritone, it can also experience volatility in net…

[Operator Instructions] And our first question will come from the line of Mike Latimore with Northland Capital Markets.

I guess a couple of things. The second generation of aiWARE, is that applicable kind of across the board? Or are there some specific verticals like legal or government where they might have the most applicability?

It's applicable across the board, Mike. I think with the media companies, it will possibly provide some efficiency in terms of where that content actually gets processed. But it's a universal deployment both in our primary data centers as well as the on-prem solution to our customers.

Okay. And then you talked about a government app. Is it -- should we think of this as the new application that will sort of sit on top of your kind of platform and then that you can sell directly to customer? Or can you provide a little more clarity on it?

Yes. On the call, we discussed sort of a need that we've identified with our partner, both on the dashcam side as well as different government agencies that we're in discussions with. With regards to processing heterogeneously collected audio and video-based data, whether that's coming, again, from body cams, dashcams or even historical video repositories, what they're looking to do basically is to have a central repository that can process all that content with the search and discovery capabilities at Veritone. At the same time, they are looking to not only use our existing 70 cognitive engines but also to be able to deploy custom ones that are proprietary to the government agencies. The application would be in addition to the existing 6 applications we have on the platform today and be a dedicated build for the government vertical.

Got it. And then just on the legal vertical. You talked about adding a redaction feature last quarter. I guess, is that the main kind of technology update you needed and now it's a matter of just sort of selling through the resellers?

Correct. I think as we mentioned before, we had a bit of a delay due to the fact that not only redaction but we've also added a feature of translation in addition to, obviously, transcription. So all 3 are fully in production, have passed through QA and are being resold by 22 resellers in the market today. As I think I also mentioned in the call, we are generating positive revenue in both domestic contracts as well as international.

Got it. Okay. And then just a data question. What was stock-based comp in this quarter? And then what would be a good number for next quarter on stock-based comp?

So those figures will be in the Q, Mike, which will be coming out the next couple of days. But off top of my head, it was $1.9 million for the 6 months, and I think it was about $1.8 million in just the second quarter. That was for a portion of the whole quarter. So it will be ramping up in the third and fourth quarter, but you'll get -- that will be in the Q itself.

And our next question comes from the line of Chad Bennett with Craig-Hallum.

So I guess on the AI platform side of the business, just looking at your monthly recurring revenue there, I think you said you exited at $132,000 this quarter. And I believe last quarter, it was about $111,000. And I know we talked about just doing just under $1.9 million in bookings last quarter and I think $150,000 this quarter. I guess I just would have thought that there'd be more of a sequential increase in that dollar amount considering the bookings.

Well, that $111,000 that you're referring to had already -- the way that, that metric was captured was it included all of the contracts that were in effect at the end of the quarter. So that had picked up the revenue from the CBS Radio contract, which was the big booking back in the first quarter. So that's why on a sequential basis, going Q1 to Q2, that it may look differently than what you were -- I think where you were heading. But that's the explanation, was that the Q1 number was for all contracts that were in effect. That contract was signed in March, but then the implementation was completed in, I think, 24 out of 26 markets by the end of Q2.

So if we look at the total account figure, I think 169 total accounts over the $132,000 in recurring revenue, is that a fair way of looking at it? And how much growth should we see and kind of from a same-store sales standpoint on that recurring revenue?

Well, there's -- there'll be some growth on that $169,000 and the $132,000 because the CBS Radio came on throughout the quarter, and so the revenue was building. There'll be more revenue coming from that particular customer in Q3 than there was in Q2, in particular. The other thing that -- I think some of those metrics can be a little bit challenging in those -- -- maybe those relationships because, for instance, when we do work with TV or video customers, the amount of engines that we can utilize and the cost of those engines -- the number of engines is higher and the cost of the engines is higher as well. So we generate more revenue per an account or even per hour of media process when it's focused on video instead of just audio. But the growth that we saw in the quarter, both from an account perspective, from a revenue perspective as well as from an MRR perspective, was significant from Q2 and there's more coming in Q3.

Okay. And then last one for me. How should we think about -- and you just alluded to this, but how should we think about the bookings in the second half of the year here in the ramp? And what verticals will really drive that?

Well, the main verticals that are driving the business today are media, first and foremost. And we called that out as being the primary driver of the revenue in the -- on the SaaS platform. Legal is -- as we kind of talked about, as Chad mentioned on the response to Mike's questions, legal was delayed from what we had originally anticipated. However, the opportunity funnel there is even bigger than what we had originally expected. It's just taking us longer to close the deals. And part of that is the delay in implementing the technology that we had anticipated. But we're very confident we can achieve our expectations for the year because we know that the funnel is large and we've got a more accurate service offering that's also more cost effective in that vertical. So media is the one that's a big driver today, and we're expecting, as we said earlier in the year, that legal would be the big differentiator from a revenue growth year-over-year. And we're especially counting on that in the second half of the year.

And our final question comes from the line of Sameet Sinha with B. Riley.

Couple of questions here. So the government initiative, you obviously mentioned the use cases. Can you talk about the education process that you had to undertake there and if there are -- if you're working with resellers, are you trying to go after some opportunity directly? And a second question was on the Media Agency business. Can you talk about the churn there, customer churn? And what are the reasons for -- if it were to happen, what could be the reasons and things that we could watch out for?

Sure. So on the government opportunity, a lot of that is going to be through resellers. Although we are in the process of going through the FedRAMP process. Chad mentioned that in his prepared remarks that we're expecting to be completed by the first quarter of 2018. That will allow us to provide services directly to government agencies as well as be involved with resellers in the government agencies. So it will be a combination of both direct and through resellers. As far as the churn in media, we haven't really had a lot of churn once we've gotten people past kind of an initial 30-day test on the application, and I think even a lot of that was more -- when I look back in the history, from our tracking tool and sales force, a lot of that was in the past. So as we've matured and as we've gotten more experience in selling into organizations, we have not experienced a great deal of churn. The one thing that is unique about media, though, is that we're really creating a new solution. We're not so much replacing an existing service, we're bringing something new to the market. And sometimes, the customers, while they're initially interested and maybe they've got particular users who are interested, the organization just isn't ready for making the investment. But we've also been very successful with organizations like CBS Radio. We've got other large media broadcasters that are in test or market trials with us, and we're pleased overall with the progress we're making in that vertical.

And we do have a follow-up question from the line of Mike Latimore with Northland Capital Markets.

Just on the Media Agency business. Can you talk a little bit about the influence of kind of having your platform available to these Media Agency customers? Has that become sort of increasingly a factor in the customer's decision there versus sort of a couple of years ago? It seems like from some of your press releases, the commentary was a little bit more focused on the technology that you're offering to media agency customers. But maybe just sort of qualitatively you can talk about the importance of the technology in those deals and how that has changed over the last couple of years.

Yes, absolutely. Thanks, Mike. The AI platform is the huge differentiator for us in the Veritone One business. I can say emphatically that without it, we would be just another agency with some great and very talented people. But what's making the needle move for both our customers and for our business there is really a couple of things. One, we uniquely give our advertisers literally an omniscient view of what's happening in the marketplace, not only with regards to the ads that they're buying and the responses from them but also on the landscape of their competitors. Being able to understand when the competitors are making buys, what type of messaging they're sending on a global basis and being able to respond to that in nearly realtime is a game-changer for companies like Uber and a [ Casper sleep ] et cetera. At the same time, we've really upgraded the AI platform's capabilities to hook into third-party data sets. So not only are we processing and understanding what's happening on the Nielsen ratings and other rating agencies, but we can now correlate that back what's happening on the actual advertiser's website, call centers, Google analytics, et cetera, to give them effectively a realtime dashboard of what their ROI is on a per-buy basis. No other agency on earth can even compare to this type of level of service that we're aware of, and it's why we continue to win clients and expand budgets. We continue to see that moving forward as being our big differentiator. And we continue to see rapid expansion, near triple-digit growth in that business.

Got it. Okay. And then on the -- just on the operating expenses, is the kind of run rate we've seen in this quarter -- or generally, how should we think about operating expenses sort of relative to the run rate you had in this quarter?

So on a quarter-over-quarter basis, Mike, the stock compensation was $1.4 million higher in Q2 than it was in Q1. So -- and I think as I mentioned in responding to Chad Bennett's question, that was for basically half of the quarter because a lot of the stock-based compensation that we have now was awarded at the time of the IPO, which was the middle of May. The other thing is that we have more just regular compensation in part due to headcount and in part due to some other factors related to the IPO and kind of getting ourselves all set up as a public company. So I think the run rate that you saw in Q2 is a better one, although you're going to need to pick up some additional stock-based compensation, which you'll see in the Q. And then the other factor that you'll need to take into consideration is we do plan to continue to improve or expand our engineering teams, both from a software development perspective as well as in the sales support area. So as we grow the business, we'll be utilizing some of that additional net revenue to invest in those 2 categories of resources in the company.

And 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 veir@liolios.com (sic) [ VERI@liolios.com ]. I'd now like to turn the call back over to Mr. Steelberg for his closing remarks.

Thank you for joining us on the call today. We want to thank our employees, partners and investors for supporting us through this transition and allowing us to scale our company even further. We look forward to updating you on our progress on our next call. Operator?

Thank you for joining us today for Veritone's Second Quarter 2017 Earnings Call. You may now disconnect.