Q1 2022 SoundHound AI Inc Earnings Call

August 11, 2022

Good afternoon and welcome to SoundHounds second quarter two. This is the second quarter of the 2022 earnings conference.

Kavon Mohajer, and our CFO , Nitesh Charan. We will begin with some short remarks before moving to Q&A.

We'd also like to remind everyone

that we'll be making forward-looking statements on this call. Actual results could differ materially from those suggested by our forward-looking statements.

Reported results should not be considered as an indication of future performance. Please refer to our filings with the SEC for discussion of the factors that could cause our results to differ, including those described in our prospectus filed April 8, 2022, in connection with our business combination.

In addition, we may discuss certain non-GAAP measures.

Please refer to today's press release for further details on the definitions, limitations, and uses of those measures and reconciliations from GAP to non-GAAP .

Also note that the forward-looking statements on this call are based on information available to us as of today's date.

We disclaim any obligation to update any forward-looking statements except as required by law.

Finally, this call in its entirety is being audio webcast on our investor relations website. An audio replay will be available shortly following today's call. And with that, I would like to turn the call over to Kaylon.

Thank you, Scott.

Before we get started, I wanted to welcome Scott Smith to the Townhand team, our new head of investor relations. Welcome Scott!

And thank you to everyone for joining the call today. We are pleased to welcome you to our first AirN

We celebrated our listing on NASDAQ under the TCR SOUN on April 28 of this year.

Today we are excited to share with you our strong second quarter results. We grew our cumulative booking backlog by three times compared to the prior year and our monthly queries have more than tripled since early last year, showing that our technology is being adopted at an accelerated rate.

SoundHound has spent many years building our foundation for this moment. We began this journey 17 years ago in a small dorm room at Stanford University where my co-founders and I decided that within our lifetime, we should be able to talk to the computers the way we talk to each other, and we embarked on the journey to make that happen.

We know that now is the time to scale and that's exactly what we're doing. Earlier this year, we welcomed Zubin Irani as Chief Revenue Officer to our leadership team.

Zooming brings tremendous experience to help us achieve our growth ambitions.

We are ramping up our sales and service organizations and continue to invest in R&D organizations to rapidly expand adoption of soundhand voice AI technology.

We have already expanded to almost 450 employees globally, and I wanted to take a moment to thank those that have been with us from the early days right up to our public listing. At the same time, I also want to welcome the many new and talented employees that share our passion and excitement about this new opportunity.

While we are aware of the macroeconomic environment and the high levels of uncertainty surrounding it, we believe it is the perfect time for our value of proposition.

Innovation around legacy voice AI technology is long overdue. At the same time, AI and business process automation resonates even more than ever in times like these.

We also know that customers are rapidly pushing for the next evolution in how humans interact with technology and consumers' expectations for convenience arising.

The role is in the process of becoming voice enabled and so it is unavoidable that the current status quo and the familiar shortlist of incumbent players needs to be re-examined.

For too long, innovation around voice AI has been static. We believe we have taken it to the next level with the technology that is at the forefront of the next major disruption of computing, conversational AI.

When we unveiled our disruptive technology in 2016 after more than a decade of stealth innovation, it caught the world by surprise. Some players even denied that it was real, and others have been trying to catch up to us for years and have not succeeded.

Let me play a short clip from one of the earlier demos that highlights some of the unique strengths of our conversational AI technology.

Okay hound.

Show me restaurants within 5 miles of San Francisco airport that have 4 stars or more based on at least 10 reviews sorted by rating then by distance then by highest price. Here are several restaurants with more than 4 stars based on more than 10 reviews within 5 miles of San Francisco International Airport sorted by rating then sorted by distance then sorted by highest price.

Only show the ones that have more than 100 reviews are open after 3 p.m. tomorrow and have Wi-Fi and outdoor seating and are good for kids excluding Chinese, Japanese, Italian, French and fast food. Okay showing two restaurants based on more than 100 reviews that are open after 3 p.m. on Saturdays that provide free Wi-Fi have outdoor seating and are kid-friendly excluding Chinese restaurants, Japanese restaurants, sushi bars, Italian restaurants, French restaurants or fast food.

Give me the Starbucks hours and phone number in San Francisco that's open today and has Wi-Fi and is within walking distance of the Ferry Building and tell me if it has a patio and is it expensive? The first result is Starbucks, the coffee shop located at Pier 1, the Embaccadero in San Francisco. Today it's open from 5.30am to 9pm. It's open right now. Its phone number is area code 415-956-3953. It has outdoor seating and it has $1 sign on Yelp. Quite affordable if you ask me. Thank you. You're most welcome.

Conversational AI is undoubtedly the future and we believe Sanhan offers the only global, independent, cross-industry conversational AI platform.

As you can see in our demonstrations, our technology is unmatched by the incumbent players including the big tech. Our ambition and opportunity is to make conversational AI that is even better than humans in understanding, but as human and natural as possible in the way it responds and interacts, making people more productive and the world a better place.

We are in a unique position to maintain our leadership due to our core technology DNA and our track record to solve extremely difficult problems with our breakthrough inventions and content innovation.

Furthermore, while other players that are pure technology vendors are under constant customer pressure to lower their licensing fees and face the real risk of declining revenues, our unique three-pillar monetization ecosystem that Nitesh will soon highlight puts us on a trajectory of increasing revenue per user and increasing adoption due to the revenue shared with the product creators.

Let's summarize our unique positioning and opportunity.

Natural language understanding is an especially challenging form of artificial intelligence. It is complex. It takes a long time to perfect and requires a full technology stack to deliver value.

This creates a very high barrier to entry which is why there are not many companies representing conversational voice AI.

With our proprietary speech-to-meaning, deep meaning understanding and collective AI breakthroughs, along with our industry-leading cloud and edge offerings, we believe we have the best in-class technology.

Our technology bridges two major industry gaps, legacy, inflexible, expensive competitors whose technology is outdated, and big tech players whose voice assistance overrides other brands' connections with the consumers and replaces them with hidden agendas and constant interest.

The competitive and technological differentiation is why we win.

We aim to power billions of devices and services, and rather than being a simple technology vendor, we help product creators innovate and monetize while delighting their users, which increases our adoption and revenue potential.

Sanhass Technology is already voice enabling millions of cars, TVs, mobile apps and IoT devices on a global scale thanks to our expansive set of languages and international presence.

We are doubling down on all these services as we ramp our go-to-market organization, thus enabling us to address the strong demand from our existing customers, where we see tremendous opportunity to expand further.

We are seeing robust demand from new and existing customers and it is clear our technology is resonating and delivering on expectations.

For example, in Q2 we announced a new 7-year agreement with Hyundai and we entered into a new relationship with Square. Our momentum has continued with more recent announcements, delivering voice AI to the most popular Stellantis vehicle brands in Europe and entering in an agreement with LG Electronics.

Our business gained momentum in Q2 with cumulative booking backlog increasing to $283 million, more than three times year over year and making the third consecutive quarter of triple digit growth. We are clearly taking market share and driving exceptional growth at the same time.

Our revenue grew by 43% from the previous quarter and Nitesh will discuss our financial results in more detail shortly.

Our user queries, one of the key measures of customer adoption into our conversational AI platform was also a triple digit year over year. And in just one and a half years, our monthly queries have increased more than three times.

We are also seeing more penetration in new devices while we continue to expand with existing users. This expansive growth gives us confidence that we are continuing to deliver meaningful value to end consumers.

We further continued our momentum with new products, enhanced new customer agreements, and added key relationships in Q2. For example, we launched SoundHand for Restaurants, an AI assistant that allows restaurants to automate the phone ordering process, addressing the twin challenges of staffing shortages and increased demand for take-out, so that restaurants can take more orders and maximize sales. Not to mention that the current environment, these businesses are seeing increasing waste pressure.

The initial customer feedback has been extremely positive and additional customer interest is building rapidly. We have already seen some well-known brands sign up with interest with hundreds more.

Together with this product launch, we announced our first POS integration with Square, which will allow restaurants to use sound hand automated conversational AI phone ordering with Square's thousands of point of sale systems.

This is the start of a new, tremendous market opportunity that we believe we are perfectly positioned to address.

Voice enabled food ordering is particularly challenging. It requires specialized speech recognition and complex natural language understanding, which match our key differentiators very well. This is clearly an amazing product market state, and the demand from restaurants is significant.

We have shown amazing success with the types of partners we have announced so far. And while we are strong, and while they are strong, they take years to build that strong foundation.

What excites me the most about SoundHand for restaurants is that the time to customer adoption is extremely fast. We have already seen customers up and running in a matter of days and this should only improve as we scale into thousands of customers.

This new offering has great potential to make an impact in a much shorter timeframe due to the shorter sales cycles and faster deployment rates.

One of those existing relationships where we are now seeing the strong foundation play out is Hyundai. This quarter, we announced an expanded agreement with multiple brands and multiple languages around the world. The new agreement brings SanHans Edge and Cloud Voice AI technology, music recognition software, voice commerce solutions, and multiple languages to Hyundai, Genesis, and Chia brands. The size and scope of this agreement will allow them to bring the power of voice AI to drivers in every class of vehicles in markets around the world. For more information, visit www.fhwa.com

Before turning the call to Nitesh, I would like to make a few closing remarks. In the first decade of our company's history, we worked tirelessly to create what we believe is the best voice AI technology and platform.

Since launching Sanhan's initial voice AI platform in 2016, we have radically evolved it, globalized it from one language to 25, and now have scaled it into major enterprises across several industries.

Large brands such as Mercedes Benz, Hyundai, Kia, Stellantis, Visio, Snap, and Pandora have helped build our foundation. We first extended this momentum with major announcements over the past several months, such as with Qualcomm, Netflix, Square, and LG Electronics, among others.

We launched Timehound for restaurants, the first of many steps to enter the enormous voice commerce industry, creating a huge global addressable market for us.

While the macroeconomic environment has proved challenging for many companies, we are pleased that SoundHound is performing right on plan and delivering against our own expectations for the first half of the year. Therefore, we confidently reaffirm our 2022 revenue target and the potential opportunity in front of us is only expanding and we are aggressively moving forward.

With that, I will now turn the call over to Nitesh to talk about our financial performance for the quarter.

Thank you, Kayvon.

I share Kayvon's excitement about our first earnings conference call as a public company and the opportunity for ongoing dialogue with all of you.

With Q2's triple-digit bookings growth and strong customer engagement, we are building and executing on the foundation that will fuel our continued expansion.

Before going into the results for the quarter, I wanted to discuss our business model and how we generate revenue, as my remarks will often reference this framework.

For some of you, this may be repetitive, but it is very important, so I wanted to start here.

We break out our revenue into three distinct pillars.

product royalties, service subscriptions, and monetization.

First, we get royalty revenue when we voice-enable products such as cars, TVs, and the rapidly growing billions of IoT devices around the world.

Second.

We generate recurring subscription revenue when we voice enable services like food ordering, appointments, voice commerce, and customer service.

And third, we create monetization revenue when we connect those voice-enabled products with the voice-enabled services.

Such as if you were to order a coffee from a voice-enabled coffee shop by speaking to your voice-enabled car on your commute to work. This natural, seamless interaction unlocks value to all parties involved.

The sale generates revenue for the coffee shop, and we share the revenue that we receive from the transaction with the product creator, or car manufacturer in this example.

Most importantly, you get your morning coffee exactly when and how you want it.

These three revenue pillars create a network platform effect that compounds

expanding our addressable market, and increasing customer adoption.

The monetization pillar extends Voice AI from a valuable cost component to a new incremental revenue generating pathway for customers, meaning the unit economics become increasingly more attractive as the ecosystem scales and expands.

This is the business we have been building.

Today, our revenue is more heavily weighted to Pillar 1, and that will continue to expand. We already see contributions from Pillars 2 and 3, and we see tremendous upside potential.

Now, let me move into the Q2 quarterly financial performance.

We closed the quarter with a strong cumulative bookings backlog of $283 million, representing a year-over-year growth of 207%.

The contracts underlying our backlog range from one year to more than seven years with the 4.5 year weighted average contract length.

Our long-term relationships highlight the confidence and commitment our customers have working with us in partnership to build a future together.

In Q2, we generate $6.2 million in revenue, up 43% sequentially from Q1 2022.

Prior year Q2 results were impacted by one-time revenue derived from a customer upon the early conclusion of professional services contract which added $4.3 million to last year's results.

Adjusted for that impact, Q2 this year had a 56% year-over-year growth.

Revenues were predominantly driven by product royalties, where we continued to scale units and also saw expanding average price per unit.

Our growth margin improved to 60% or up 100 basis points sequentially.

Adjusting for that one timer in last year's results that I just mentioned, our growth margin was consistent with the prior year Q2.

Cost of revenues for the quarter was $2.5 million of 40% sequentially and up 53% from the prior year. The total median Area of

The majority of our cost of revenue is associated with data center costs supporting our customers.

Those were impacted in the quarter by our migration across cloud vendors.

We are expecting to complete the migration this year, after which we expect margins to expand both over the short and long term from this, and as we further realize economies of scale.

Our operating expenses have historically been heavily weighted towards R&D as we have built our voice AI platform and deep patent portfolio.

We are now also ramping up our sales and marketing investments to accelerate growth.

At the same time, we continue to solidify our general and administrative functions as a newly public company.

Across our operating expenses, non-cash employee stock compensation was $7.9 million in Q2, up sequentially and versus the same prior year period due to increased headcount and other adjustments associated with becoming public.

In Q2, R&D was $18.9 million, up 35% year over year.

We continue to expand our headcount and discretionary spend. We will continue to invest in R&D as we move forward to ensure we remain at the forefront of innovation while also helping to develop and scale new products and services.

Sales and marketing expenses were $4.4 million, up 334% year-over-year off a small base.

This is a primary area of investment as we grow the team to drive improvements in lead generation, new customer acquisition, expansions into new verticals, and ultimately market share capture.

General and administrative expenses were $9.4 million, up 127 percent year over year. This includes headcount growth and non-headcount spend across our global functions to support the operational activities needed as we scale as a public company.

We expect this to expand over the next 12 to 18 months and then start to become a source of leverage on the P&L.

Our operating loss was $28.9 million in Q2, an increase from the prior quarter.

A justity bit ta, which excludes the non-cash charges of stock compensation, depreciation and amortization and other non-operating activities with a loss of $20.4 million.

Net loss per share in Q2 was $0.19.

Please note that the 162 million weighted average shares outstanding used in the quarterly EPS calculation are impacted by our transition going from private to public. And as of June 30, our ending share count was approximately 197 million shares.

Our cash on hand at quarter end was $65 million. Our business model is capital light, so the P&L results largely flowed through to free cash flow.

That said, we are a newly public company and investing for growth.

To do that, we are leveraging the proceeds we received from going public in April while continuing to infuse new capital.

Moving to guidance now.

As we messaged last quarter, we believe offering annual revenue guidance is most appropriate given our rapidly evolving industry and significant growth potential.

We are delivering on near-term commitments while focusing on the long-term potential in front of us. As such, for full year revenue 2022, we reaffirm guidance and continue to expect revenue in the range of $27 million to $33 million.

This expectation has not changed since we first communicated it well before the market dislocations of this year, and we continue to feel confident in this outlook.

In closing, given where we are as a business, progress will not always be linear, but our current momentum is unquestionable.

We are excited to be at this juncture and extremely excited about our path forward.

Thank you, and we will now move to Q&A.

As a reminder, if you would like to ask a question, please press star followed by the number 1 on your telephone keypad. To withdraw your question, please press star 1 again.

Our first question comes from Michael Attimore from Northland Capital Markets. Please go ahead, your line is open.

Hi everybody, nice results there and congrats on getting public here.

Thanks. Bye.

So the bookings were very, very strong and it seems like you've almost hit your goal for the year there.

I'm thinking the momentum would.

continue to carry through second half of the year here. So I guess, how are you thinking about, you know, looking trajectory throughout the rest of the year?

I'll start with that. So first I'll say that you know we I'll kind of make a comment on guidance and I'll give you a little more color commentary on the bookings if that's alright. So we as I noted we've kind of sort of established that we think giving revenue guidance on an annual basis is probably the best way to kind of kind of translate how the bookings will flow through and so so again we continue to feel confident of that outlook that we just provided of 27 million to 33 million.

As you noted also, we're very pleased with the bookings result through Q2, $283 million up 3X from prior year just indicates strong momentum and strong conversations that we're having with customers. So while we're not kind of articulating exactly where we expect to end the year, we're having a lot of great conversations with existing customers on how we expect to potentially expand across regions, products, brands.

Where, as we noted in the prepared remarks, the second pillar services offerings, particularly with respect to food ordering and the Soundhound for restaurants offering, we're seeing tremendous traction. We've been, our sales team now that's scaling significantly has been on the ground talking to a lot of customers, a lot of restaurants, and there's just almost insatiable demand for what we're providing to them, particularly in this backdrop of.

labor pressures, wage pressures. It's a solution just very well suited for what they are looking for. So really, we have a backlog of people trying to get on board, and we have worked to kind of get them through the funnel and on. So we are feeling great about the momentum. I will lastly say that bookings is one indicator. Mike, you know this, but just more broadly I will say that bookings represent sort of pillars one and two when we voice enable product and we voice enable services.

They capture that. We're bringing these ecosystems, having a lot of great conversations on it, and bringing those together through monetization. These are not reflected in revenue. Sorry, monetization is not reflected in bookings. That will actually just kind of naturally flow through without hitting the bookings number. I didn't mean to dance entirely off your question, but hopefully that gives some context and color commentary on that.

I think you said also that the price per unit was going up a little bit. I guess one, did you say that? And two, is that specific to royalties or does that include all three pillars here?

So I did say that. I said average price per unit we saw go up in Q2. We've actually seen it continue to sort of go up. My comment was generic, but I could tell you that most of our revenue is in product royalties, so it was applicable to product royalties. And the composition of that is multi-fold. Number one is we're again expanding across customers, across product sets. We've had a long.

steady track record on cloud solutions. We are bringing cloud hybrid, as Kavon mentioned, sort of edge products. They all have different compositions of pricing per unit, but as we are just scaling and we're seeing both units grow and price per unit growth. So that's a good constructive signal and sort of indicative of what we see in the model and what we expect going forward.

Sorry, Mike, can I add one more? I just thought, but I think it's also important in this case, I didn't want this to be hidden in the prepared remarks either, but we also are cognizant that we think it's one of the strengths of our business model because I think there are other ways that webinars can help.

I'll just say peers out there who you know the solution is a is just a cost component to their customers And they feel pressure because they're constantly having conversations about how do I bring the my cost the you know cost the goods down With their customer. We're having a very different set of conversations It's about obviously providing a better solution ultimately to their customers, but as well It's about bringing solutions that can actually help realize greater value and ultimately for us That's increasing revenue per user and and that's why we believe it's not just

distinctive tech here. It's also positioning and business model differentiation that gives us confidence where we're going.

Yeah, yeah. Okay, great. And then I know you've hired a CRO and he's been hiring salespeople, I guess.

You know, how many salespeople are you up to now or how many do you you know want to get to by urine?

So, I'll touch on maybe the numbers briefly, and then I'll let Kayvon add more on the excitement we have with Zuben on board and what he's been doing to his team. So, I mentioned year over year at least the numbers are up three X in sales and marketing. So, we're investing not just on the sales side, but also in marketing. I think you've illuminated in your research how sort of even with the limited business development team previously, we were still able to get pretty sizable deals. But now with Zuben on board really scaling that significantly.

So, we aren't breaking out the per sales, but overall our company is growing. We're at about 450 people. The sales team that used to be sort of single digits is growing well into the double digits and he's in the tens, you know, moving towards the tens of sales folks, but it's beyond that. It's also lead generation and marketing investments that he's doing. So, we're starting to get traction early, but the other point I'll raise is just, you

The things we're going after too, large enterprise deals concurrent with small, medium sized restaurants that we're addressing a lot of different areas and what he's attacking which gets us excitement. With that, I'll let Kayvon add.

I would highlight that a lot of our historical booking success came from

these long cycle deals which

Are amazing when you close them, but they do take a long time

to achieve them and we will continue to invest in that as pillar one. But in pillar two,

The cycles are a lot faster, so you could go from the meeting to being live with the customer. It could be on the same day and that's super exciting because And you're seeing that I mean, that's what we predicted when we

designed that strategy, but now we're actually seeing it live in the market.

Yeah, okay, excellent. Great news. Best of luck rest of the year.

Thank you. Thank you, Mike.

Our next question comes from Brett Noblau from Cantor Fitzgerald. Please go ahead, your line is open.

Hi guys, thanks for taking my question and congrats on getting the first quarter on the books. I was just wondering if you could maybe walk through how we should think about bookings and that backlog flowing through to revenue. What needs to be met is the entirety of bookings consisting of non-cancellable, I guess, contracts that have been signed. I guess any insights on how we should think about that flow through.

call over the next year or two years, three years. Yeah, thanks for the question, Brett.

Maybe let me try to characterize it this way and then

Maybe I'll get some other color commentary if that's okay. So first, I'll just make the statement, our strong bookings backlog sets us up well for future revenue. In our view, bookings is a conservative measure of our success and doesn't include all the revenue components such as monetization. Bookings, they represent committed contracts with large enterprise customers, basically pillar one product royalties and pillar two subscription services.

And they're based on minimum guarantees where applicable and customer volumes where we have confidence in such forecasts. We might get them from the customers directly and we may hedge them down if we don't believe they're conservative.

Any overages that we see, which we do see in our contracts, by the way, those just flow straight into revenue and therefore it's further upside. But to give you a composition of the 283 million of bookings that we have, their average length is about four and a half years. And there's a skewed latter half of that, but they range from one to seven years, but that's kind of the average is four and a half years. So in other words, we expect to realize those bookings.

into revenue over the next several years, it just won't happen radically.

several years, it just won't happen radically.

And then I think I just maybe I'll add a

Because of these dynamics, and I appreciate where your question is going, we decided that given revenue guidance was the best way to kind of provide the best visibility of what we're seeing and how that's rolling into the P&L over the near term. And we expect, frankly, to continue to share annual revenue guidance as we go forward. Maybe last comment, I'll just say, you know, we are scaling – I hope this isn't too duplicative – but we're scaling into new verticals across new product offerings, expanding across geographies.

Most important for us is to focus our efforts on building each opportunity thoughtfully in a structured manner. New revenue streams that we build may have different financial profiles. For example, annual subscription revenue is very different than the nature of royalties that we get in these long-term enterprise contracts that are committed, as you noted. It's different from, like I said, when we sign up a restaurant on a recurring basis. We'll keep evaluating which measures make the most sense, and as we scale in different components we'll happily kind of...

in the compare period, early termination of professional services, I guess, what happened there? Why was there a termination? Any additional color on that?

I'll start. Okay, I'm going to add more color. There was a – it was a contract modification actually with an existing customer. The customer kind of effectively sort of had a pathway they were going towards and then ultimately sort of shifted gears. And we continued to work on expansion with them, but the existing contract was basically that we concluded the professional services. The cash was collected. The termination clause said we sort of recognized the revenue at that point in time versus over

spreading over a longer period of time and we are on kind of working on other stuff with them. So that was kind of the context. It was sort of a lumpy impact to the prior year quarter in Q2.

Perfect, that's very helpful. Thank you

Okay, thanks Brett.

Our next question comes from John Ketsingris from Wedbush Securities. Please go ahead, your line is open.

Hi, how are you? This is John Kitzinger, song for Dan Ives.

So we see you on the present. How are you?

Each of these enterprises start being a bit more selective with capital due to increasing costs with inflation. Have you witnessed any potential slowdowns in the pipeline? Do you expect anything along those lines or any rapid acceleration of bookings? Thank you.

I'll start and Nitesh, you can chime in. We've seen the opposite in general, mostly because

We've seen the opposite in general, mostly because...

We are in AI and automation business.

that really resonates in markets like this when people are either trying to

save costs or increase the revenue or become more efficient.

that's challenging with staffing. For example, the San Joaquin restaurant product.

restaurants aren't able to pick up their phone and

when they do pick up the phone, the customer explanation is not very good. So that solution is resonating with them. We have actually a waiting list for restaurants that I want to sign up on for that service. And then for, if you look at what's happening in the automotive industry or other devices like TVs and so on, the team is increasing revenue from those products. As opposed to, they used to sell the device and your relationship kind of ends with the end user and you have low margins. But if you can,

monetize the user interaction, that's kind of a new paradigm that a lot of device companies are signing up to. And we are a big part of that solution because...

We are the voice AI interface to these devices. We bring services with our three player models and we provide a path to generate revenues while delighting the users. So try and have some fun, don't you think?

The market conditions that actually helped our business, but Nitesh if you want to… Yeah, I mean I might just add a couple of brief things.

I think that the pathway we've been on certainly for the past year leading kind of to this conference call as a public company.

You know the fact that I highlighted that we were kind of maintaining our expectations. We're able to deliver against that in a sort of macro environment where a lot of things have happened over the last nine months to say the least from inflationary pressures to geopolitical dynamics and so forth. And I kind of chalk it up to one, you know, laser focus from the team and kind of commitment to delivering on our customer commitments.

I also believe it has to do with we're delivering solutions to amplify what Kevon said. We're delivering solutions that customers really need and want. And I'd say in a lot of ways they're kind of fed up with the status quo and incumbent.

opportunities that they have and when they see our technology and they understand how it can help amplify their solutions, they're continuously sort of attracted to continue to engage with us and work with us and buy from us. And so, you know, we're helping scale and innovate and in a recessionary environment and a difficult environment, we can, you know, we have a strong value proposition, but we

even longer through whatever business cycle. It's about creating a much more seamless interaction of how humans interact with technology. We believe it's the next modality that will really step, function, change how we interact with technology that is becoming more and more pervasive in our world. And so we just think we're really well suited to deliver on these decade plus of great innovation that Kayvon and co-founders in the team here have built. So we're excited.

Thank you.

We have no further questions. I would like to turn the call back over to Kayvonne Mohajer for his closing remarks.

Thank you. When we founded SoundHand, we had a vision to see conversational AI in our lifetime, and we are now a leader in this space. We have made a series of significant technological innovations, and we are now focused on rapidly scaling our business.

With our speech to meaning, deep meaning understanding, and collective AI breakthroughs, we believe we have a competitive and technological differentiation.

Conversational AI is undoubtedly the future, and we have the only global independent cross-industry conversational AI platform. That is why we win. With that, I thank you for participating in our call today.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Thank you for your participation.

And that and, and and.

The.

Good afternoon and welcome to SoundHounds second quarter 2022 earnings conference call.

After the speaker's presentation, there will be a question and answer session. To ask a question, you'll need to press star 1 on your telephone.

To reach an operator at any time, please press star zero. I would now like to turn the call over to Scott Smith, head of investor relations. Please go ahead.

Thanks, Juliane. Hi, everyone. Good afternoon, and thanks for joining our second quarter 2022 earnings call.

With me here today is our CEO , Keban Moajer, and our CFO , Nitesh Charan. We will begin with some short remarks before moving to Q&A.

We'd also like to remind everyone

that we'll be making forward-looking statements on this call. Actual results could differ materially from those suggested by our forward-looking statements.

Reported results should not be considered as an indication of future performance. Please refer to our filings with the SEC for discussion of the factors that could cause our results to differ.

including those described in our prospectus filed April 8, 2022, in connection with our business combination.

In addition, we may discuss certain non-GAAP measures.

Please refer to today's press release for further details on the definitions, limitations, and uses of those measures and reconciliations from GAP to non-GAAP .

Also note that the forward-looking statements on this call are based on information available to us as of today's date.

We disclaim any obligation to update any forward-looking statements except as required by law. Finally, this call in its entirety is being audio webcast on our Investor Relations website.

An audio replay will be available shortly following today's call. And with that, I would like to turn the call over to Kaylon.

Thank you, Scott.

Before we get started, I wanted to welcome Scott Smith to the Townhand team, our new Head of Investor Relations. Welcome Scott!

And thank you to everyone for joining the call today. We are pleased to welcome you to our first earnings call at The Public Company.

We celebrated our listing on NASDAQ under the TCR SOUN on April 28 of this year.

Today we are excited to share with you our strong second quarter results. We grew our cumulative booking backlog by three times compared to the prior year, and our monthly queries have more than tripled since early last year, showing that our technology is being adopted at an accelerated rate. SoundHound has spent many years building our foundation for this moment. We began this journey 17 years ago in a small dorm room at Stanford University, where my co-founders and I decided that within our lifetime, our

We should be able to talk to the computers the way we talk to each other, and we embark on the journey to make that happen.

We know that now is the time to scale and that's exactly what we're doing. Earlier this year, we welcomed Zubin Irani as Chief Revenue Officer to our leadership team.

Zooming brings tremendous experience to help us achieve our growth ambitions.

We are ramping up our sales and service organizations and continue to invest in R&D organizations to rapidly expand adoption of sound hand voice AI technology.

While we are aware of the macroeconomic environment and the high levels of uncertainty surrounding it, we believe it is the perfect time for our value of proposition.

Innovation around legacy voice AI technology is long overdue. At the same time, AI and business process automation resonates even more than ever in times like these.

We also know that customers are rapidly pushing for the next evolution in how humans interact with technology, and consumers' expectation for convenience arising.

The world is in the process of becoming voice-enabled and so it is unavoidable that the current status quo and the familiar shortlist of incumbent players needs to be re-examined.

Let me play a short clip from one of the earlier demos that highlights some of the unique strengths of our conversational AI technology.

Okay, hounds, show me restaurants within five miles of San Francisco airport that have four stars or more based on at least ten reviews sorted by rating, then by distance, then by highest price. Here are several restaurants with more than four stars based on more than ten reviews within five miles of San Francisco International Airport sorted by rating, then sorted by distance, then sorted by highest price.

Only show the ones that have more than 100 reviews, are open after 3 p.m. tomorrow, and have Wi-Fi and outdoor seating, and are good for kids, excluding Chinese, Japanese, Italian, French, and fast food. Okay, showing two restaurants based on more than 100 reviews that are open after 3 p.m. on Saturdays that provide free Wi-Fi, have outdoor seating, and are kid-friendly, excluding Chinese restaurants, Japanese restaurants, sushi bars, Italian restaurants, French restaurants, or fast food.

Give me the Starbucks hours and phone number in San Francisco that's open today and has Wi-Fi and is within walk-in distance of the Ferry Building and tell me if it has a patio and is it expensive? The first result is Starbucks, the coffee shop located at Pier 1, the Embaccadero in San Francisco. Today, it's open from 5.30am to 9pm. It's open right now. Its phone number is area code 415-956-3953. It has outdoor seating and it has $1 sign on Yelp. Quite affordable if you ask me. Thank you. You're most welcome.

core technology DNA and our track record to solve extremely difficult problems with our breakthrough inventions and constant innovation.

Natural language understanding is an especially challenging form of artificial intelligence. It is complex. It takes a long time to perfect and requires a full technology stack to deliver value.

This creates a very high barrier to entry which is why there are not many companies delivering conversational voice AI.

With our proprietary speech-to-meaning, deep meaning understanding, and collective AR breakthroughs, along with our industry-leading cloud and edge offerings, we believe we have the best in-class technology.

The competitive and technological differentiation is why we win. We aim to power billions of devices and services, and rather than being a simple technology vendor, we help product creators innovate and monetize while delighting their users, which increases our adoption and revenue potential.

SanHons technology is already voice enabling millions of cars, TVs, mobile apps and IoT devices on a global scale thanks to our expansive set of languages and international presence.

We are seeing robust demand from new and existing customers and it is clear our technology is resonating and delivering on expectations.

Our revenue grew by 43% from the previous quarter and Nitesh will discuss our financial results in more detail shortly.

Our user queries, one of the key measures of customer adoption into our conversational AI platform was also up triple digit year over year. And in just one and a half years, our monthly queries have increased by more than three times.

We further continued our momentum with new products, enhanced new customer agreements, and added key relationships in Q2. For example, we launched SoundHand for Restaurants, an AI assistant that allows restaurants to automate the phone ordering process, addressing the twin challenges of staffing shortages and increased demand for take-outs, so that restaurants can take more orders and maximize sales. Not to mention that the current environment, these businesses are seeing increasing wage pressure.

The initial customer feedback has been extremely positive and additional customer interest is building gradually. We have already seen some well-known brands sign up with interest with hundreds more.

This is the start of a new, tremendous market opportunity that we believe we are perfectly positioned to address.

We have shown amazing success with the types of partners we have announced so far. And while we are strong, and while they're strong, they take years to build that strong foundation.

What excites me the most about SoundHand for restaurants is that the time to customer adoption is extremely fast. We have already seen customers up and running in a matter of days, and this should only improve as we scale into thousands of customers.

This new offering has great potential to make an impact in a much shorter timeframe due to the shorter sales cycles and faster deployment rates.

One of those existing relationships where we are now seeing the strong foundations play out is Hyundai. This quarter, we announced an expanded agreement with multiple brands and multiple languages around the world. The new agreement brings Samhain's Edge N Cloud Voice AI technology, music recognition software, voice commerce solutions and multiple languages to Hyundai, Genesis and Kia brands. The size and scope of this agreement will allow them to bring the power of voice AI to drivers in every class of vehicle in markets around the world.

Since launching Sanhan's Initial Voice AI Classroom in 2016, we have radically evolved it, globalized it from one language to 25, and now have scaled it into major enterprises across several industries.

Large brands such as Mercedes-Benz, Hyundai, Kia, Stellantis, Visio, Snap, and Pandora have helped build our foundation. We first extended this momentum with major announcements over the past several months, such as with Qualcomm, Netflix, Square, and LG Electronics, among others.

We launched Timehound for restaurants, the first of many steps to enter the enormous voice commerce industry, creating a huge global addressable market for us.

While the macroeconomic environment has proved challenging for many companies, we are pleased that SoundCloud is performing right on plan and delivering against our own expectations for the first half of the year. Therefore, we confidentially reaffirm our 2022 revenue target and the potential opportunity in front of us is only expanding and we are aggressively moving forward. With that, I will now turn the call over to Nitesh to talk about our financial performance for the quarter.

Thank you, Kayvon. I share Kayvon's excitement about our first earnings conference call as a public company and the opportunity for ongoing dialogue with all of you.

With Q2's triple-digit bookings growth and strong customer engagement, we are building and executing on the foundation that will fuel our continued expansion.

Before going into the results for the quarter, I wanted to discuss our business model and how we generate revenue, as my remarks will often reference this framework.

For some of you, this may be repetitive, but it is very important, so I wanted to start here.

We break out our revenue into three distinct pillars.

product royalties, service subscriptions, and monetization.

First, we get royalty revenue when we voice-enable products such as cars, TVs, and the rapidly growing billions of IoT devices around the world.

First, we get royalty revenue when we voice enable products such as cars, TVs, and the rapidly growing billions of IoT devices around the world. Second, we get royalty revenue when we voice enable products such as cars, TVs, TVs, and the rapidly growing billions of IoT devices around the world.

We generate recurring subscription revenue when we voice enable services like food ordering, appointments, voice commerce, and customer service.

And third, we create monetization revenue when we connect those voice-enabled products with the voice-enabled services.

The sale generates revenue for the coffee shop, and we share the revenue that we receive from the transaction with the product creator, or car manufacturer in this example.

Most importantly, you get your morning coffee exactly when and how you want it.

These three revenue pillars create a network platform effect that compounds

expanding our addressable market, and increasing customer adoption.

This is the business we have been building.

Today, our revenue is more heavily weighted to Pillar 1 and that will continue to expand. We already see contributions from Pillars 2 and 3 and we see tremendous upside potential.

Now, let me move into the Q2 quarterly financial performance.

We closed the quarter with a strong cumulative bookings backlog of $283 million, representing a year-over-year growth of 207%. The contracts underlying our backlog range from one year to more than seven years, with a 4.5-year weighted average contract length.

Our long-term relationships highlight the confidence and commitment our customers have working with us in partnership to build a future together.

In Q2, we generate $6.2 million in revenue, up 43% sequentially from Q1 2022.

Prior year Q2 results were impacted by one-time revenue derived from a customer upon the early conclusion of professional services contract which added $4.3 million to last year's results.

Adjusted for that impact, Q2 this year had a 56% year-over-year growth. Revenues were predominantly driven by product royalties, where we continued to scale units and also saw expanding average price per unit.

Our growth margin improved to 60% or up 100 basis points sequentially.

Adjusting for that one timer in last year's results that I just mentioned, our growth margin was consistent with the prior year Q2.

Cost of revenues for the quarter was $2.5 million of 40% sequentially and up 53% from the prior year. Cups werelaughter,

The majority of our cost of revenue is associated with data center costs supporting our customers.

Those were impacted in the quarter by our migration across cloud vendors.

We are expecting to complete the migration this year, after which we expect margins to expand both over the short and long term from this, and as we further realize economies of scale.

Our operating expenses have historically been heavily weighted towards R&D as we have built our voice AI platform and deep patent portfolio.

We are now also ramping up our sales and marketing investments to accelerate growth.

At the same time, we continue to solidify our general and administrative functions as a newly public company.

In Q2, R&D was $18.9 million, up 35% year over year.

Sales and marketing expenses were $4.4 million, up 334% year-over-year off a small base.

This is a primary area of investment as we grow the team to drive improvements in lead generation, new customer acquisition, expansions into new verticals, and ultimately market share capture.

We expect this to expand over the next 12 to 18 months and then start to become a source of leverage on the P&L.

Our operating loss was $28.9 million in Q2, an increase from the prior quarter.

Adjustity Bata, which excludes the non-cash charges of stock compensation, depreciation and amortization and other non-operating activities with a loss of $20.4 million.

Net loss per share in Q2 was 19 cents. Please note that the 162 million weighted average shares outstanding used in the quarterly EPS calculation are impacted by our transition going from private to public. And as of June 30, our ending share count was approximately 197 million shares.

Our cash on hand at quarter end was $65 million. Our business model is capital late, so the P&L results largely flowed through to free cash flow.

That said, we are a newly public company and investing for growth.

To do that, we are leveraging the proceeds we received from going public in April while continuing to infuse new capital.

Beyond that, we are leveraging the proceeds we received from going public in April while continuing to infuse new capital. Moving to guidance now. Coming Up In April More Information! Episode 2

As we messaged last quarter, we believe offering annual revenue guidance is most appropriate given our rapidly evolving industry and significant growth potential. We are delivering on near-term commitments while focusing on the long-term potential in front of us. As such, for full year revenue 2022, we reaffirm guidance and continue to expect revenue in the range of $27 million to $33 million.

This expectation has not changed since we first communicated it well before the market dislocations of this year, and we continue to feel confident in this outlook.

In closing, given where we are as a business, progress will not always be linear, but our current momentum is unquestionable.

We are excited to be at this juncture and extremely excited about our path forward.

We are excited to be at this juncture and extremely excited about our path forward. Thank you, and we will now move to Q&A.

As a reminder, if you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, please press star one again.

Our first question comes from Michael Attimore from Northland Capital Markets. Please go ahead, your line is open.

Hi everybody. Nice results there and congrats on getting public here.

Hi everybody, nice results there and congrats on getting public here. Thanks. Bye.

So the bookings were very, very strong and it seems like you've almost hit your goal for the year there. I guess, you know,

I'm thinking the momentum would.

to carry through the second half of the year here. So I guess, how are you thinking about, you know, hooking trajectory throughout the rest of the year?

I'll start with that. First I'll say that I'll kind of make a comment on guidance and I'll give you a little more color commentary on the bookings if that's all right. As I noted, we've kind of established that we think giving revenue guidance on an annual basis is probably the best way. It kind of translates how the bookings will flow through. So again, we continue to feel confident of that outlook that we just provided of $27 million to $33 million.

As you noted also, we're very pleased with the bookings result through Q2, $283 million up 3X from prior year just indicates strong momentum and strong conversations that we're having with customers. So while we're not kind of articulating exactly where we expect to end the year, we're having a lot of great conversations with existing customers and how we expect to potentially expand across regions, products, brands. Where as we noted in the prepared remarks...

The second pillar, services offerings, particularly with respect to food ordering and the Sound Hound for restaurants offering, we're seeing tremendous traction. We've been, our sales team now that's scaling significantly has been on the ground talking to a lot of customers, a lot of restaurants, and there's just almost insatiable demand for what we're providing to them, particularly in this backdrop of labor pressures, wage pressures. So, I'm just...

very well suited for what they're looking for. And so really we have a backlog of people trying to get on board, and we have worked to kind of get them through the funnel and on. So we're feeling great about the momentum. You know, I will lastly say that bookings is one indicator. I know, Mike, you know this, but just more broadly, I'll say that bookings represent sort of pillars one and two when we voice-enable product and we voice-enable services. They capture that.

We're bringing these ecosystems, having a lot of great conversations on it, and bringing those together through monetization. Those are not reflected in revenue. Sorry, monetization is not reflected in bookings. That will actually just kind of naturally flow through without hitting the bookings number. I didn't mean to dance entirely off your question, but hopefully that gives some context and color commentary on that.

Yeah, for sure. Super helpful. I think you said also that the price per unit was going up a little bit. I guess one, did you say that? And two, is that specific to royalties or does that include all three pillars here?

So I did say that. I said average price per unit we saw go up in Q2. We've actually seen it continue to sort of go up. My comment was generic, but I could tell you most of our revenue was in product royalties, so it was applicable to product royalties. And the composition of that is multi-fold. Number one is we're again expanding across customers, across product sets. We've had a long...

customers, but as well it's about bringing solutions that can actually help realize greater value and ultimately for us that's increasing revenue per user. And that's why we believe it's not just distinctive tech here, it's also positioning and business model differentiation that gives us confidence where we're going.

Yeah, yeah. Okay, great. And then I know you've hired a CRO and he's been hiring salespeople, I guess.

You know how many salespeople are you up to now or how many do you you know want to get to by your end? So we're I'll touch on maybe the numbers briefly and then I'll like cave on add more on the excitement We have with the Azubin on board and what he's been doing to his team so so he I mentioned you know year-over-year At least the the numbers are Up three X in sales and marketing so we're investing not just on the sales side, but also in marketing I think you've eliminated in your research how?

sort of even with the limited business development team previously, we were still able to get pretty sizable deals, and now with Zuben on board really scaling that significantly. So we aren't breaking out the per sales, but overall our company is growing. We are at about 450 people. The sales team that used to be sort of single digits is growing well into the double digits, and he is in the tens, moving towards the tens of sales folks. But beyond that, it's also lead generation and marketing investments that he's doing.

which are amazing when you close them, but they do take a long time.

They are amazing when you close them, but they do take a long time.

to achieve them and we will continue to invest in that as pillar one. But in pillar two,

The cycles are a lot faster, so you could go from the meeting to being live with the customer. It could be on the same day and that's super exciting because and you're seeing that. I mean that's what we predicted when we...

designed that strategy, but now we're actually seeing it live in the market.

Excellent. Great news. Best of luck rest of the year.

Thank you. Thank you, Mike.

Our next question comes from Brett Noblau from Cantor Fitzgerald. Please go ahead, your line is open. Hi guys, thanks for taking my question and congrats on getting the first quarter on the books. I was just wondering if you could maybe walk through how we should think about bookings and that backlog flowing through to revenue. What needs to be met is the entirety of bookings consisting of non-cancellable contracts that have been signed. I guess any insights on how we should...

think about that flow through call over the next year or two years, three years. Yeah, yeah, thanks for the question Brett.

Maybe let me try to characterize it this way and then

Maybe I'll get some other color commentary if that's okay. So first, I'll just make the statement, our strong bookings backlog sets us up well for future revenue. In our view, bookings is a conservative measure of our success and doesn't include all the revenue components such as monetization. Bookings, they represent committed contracts with large enterprise customers, basically Pillar 1 product royalties and Pillar 2 subscription services. And they're based on minimum guarantees where applicable and customer volumes where we have confidence in such forecasts and we might get them from the customers directly.

and we may hedge them down if we don't believe they're conservative.

Any overages that we see, which we do see in our contracts, by the way, those just flow straight into revenue and therefore it's further upside. But to give you a composition of the 283 million of bookings that we have, their average length is about four and a half years. And there's a skew to the latter half of that, but they range from one to seven years, but that's kind of the average is four and a half years. So in other words, we expect to realize those bookings.

into revenue over the next several years, it just won't happen radically. And then I think I just maybe I'll add a

Because of these dynamics, and I appreciate where your question is going, we decided that given revenue guidance was the best way to kind of provide the best visibility of what we're seeing and how that's rolling into the P&L over the near term. And we expect, frankly, to continue to share annual revenue guidance as we go forward. Maybe last comment, I'll just say, you know, we are scaling—I hope this isn't too duplicative—but we're scaling into new verticals across new product offerings, expanding across geographies.

keep calibrating and making sure that you're getting the right information. But hopefully that gives a little bit of color commentary on that.

I think if we're okay with that. Oh, sorry, I was on mute. Thank you for that. But just to add another question, could you just elaborate on what the 4.3 million was in the compare period, early termination of professional services? What happened there? Why was there a termination? Any additional color on that?

Sure. I'll start. Okay, I'm going to add more color. There was a contract modification actually with an existing customer. The customer kind of effectively sort of had a pathway they were going towards and then ultimately sort of shifted gears. We continued to work on expansion with them, but the existing contract was basically that we concluded the professional services. The cash was collected, the termination clause.

said we sort of recognize the revenue at that point in time versus over spreading over a longer period of time. And we are on kind of working on other stuff with them. So that was kind of the context. It was sort of a lumpy impact to the prior year quarter in Q2.

Perfect. That's very helpful. Thank you guys.

Okay, thanks Brett.

Our next question comes from John Katzingras from Wedbush Securities. Please go ahead, your line is open.

Hi how are you? This is John Kidd, singer, songwriter Dan Ives. So we've seen... Hi John , how are you?

Each of the enterprises start being a bit more selective with capital due to increasing costs with inflation. Have you witnessed any potential slowdowns in the pipeline? Do you expect anything along those lines or any rapid acceleration of bookings? Thank you.

I'll start and Nitesh, you can chime in. We've seen the opposite in general, mostly because...

I'll start on Natasha can chime in. We've seen the opposite in general mostly because.

We are in AI and automation business and that really resonates in markets like this when people are either trying to

save costs or increase the revenue or become more efficient. Staffing is

that's challenging with staffing. For example, the Santa Ana restaurant product.

For example, the San Joaquin restaurant product.

restaurants aren't able to pick up their phone and

when they do pick up the phone, the customer explanation is not very good. So that solution is resonating with them. We have actually a waiting list for restaurants that want to sign up for that service. And then if you look at what's happening in the automotive industry or other devices like TVs and so on, the team is increasing revenue from those products as opposed to they used to sell the device and your relationship kind of ends with the end user and you have low margins. If you can monetize the user interaction.

that's kind of a new paradigm that a lot of device companies are signing up to. And we are a big part of that solution because we are the voice AI interface to these devices. We bring services with our three-player models and we provide a path to generate revenues while delighting the users. So the market conditions actually help our business. So, Nitesh, if you want to...

Yeah, I mean I might just add a couple brief things. I mean, I think that the pathway we've been on certainly for the past year leading kind of to this conference call as a public company, you know, the fact that I highlighted that we were kind of maintaining our expectations, we're able to deliver against that in a sort of macro environment where a lot of things have happened over the last nine months to say the least from inflationary pressures to geopolitical dynamics.

see our technology and they understand how it can help amplify their solutions, they're continuously sort of attracted to continue to engage with us and work with us and buy from us. And so, you know, we're helping scale and innovate and in a recessionary environment and a difficult environment, we can, you know, we have a strong value proposition, but even longer through whatever business cycle, it's about creating a much more seamless interaction of how humans interact with technology. We believe it's the next modality.

that will really step function change how we interact with technology that is becoming more and more pervasive in our world. And so we just think we're really well suited to deliver on these decade plus of great innovation that Kayvon and co-founders in the team here have built. So we're excited.

change, how we interact with technology that is becoming more and more pervasive in our world. And so we just think we're really well suited to deliver on these decade plus of great innovation that Kevon and co-founders and the team here have built. So we're excited. Thank you.

We have no further questions. I would like to turn the call back over to Kayvan Mohajer for his closing remarks. Thank you. When we founded SoundHand, we had a vision to seek conversational AI in our lifetime, and we are now a leader in this space. We have made a series of significant technological innovations, and we are now focused on rapidly scaling our business.

With our speech to meaning, deep meaning understanding, and collective AI breakthroughs, we believe we have a competitive and technological differentiation. Conversational AI is undoubtedly the future, and we have the only global, independent, cross-industry conversational AI platform. That is why we win. With that, I thank you for participating in our call today.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

Q1 2022 SoundHound AI Inc Earnings Call

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