Q2 2022 SoundHound AI Inc Earnings Call

August 11, 2022

Good afternoon, and welcome to sound hands second quarter 2022 earnings conference call.

After the speaker's presentation, there will be a question and answer session to ask a question you will need to press star one 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, Julien Hi, everyone. Good afternoon, and thanks for joining our second quarter 2022 earnings call.

With me here today is our CEO cable and Mohit here and our CFO Natasha.

I'll begin with some short remarks before moving to Q&A.

We'd also like to remind everyone.

Yes, we will be making forward looking statements on this call actual results.

<unk> 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 a discussion of the factors that could cause our results to differ.

Including those described in our prospectus filed April eight 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 GAAP 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 todays call and with that I would like to turn the call over to Kevin.

Thank you Scott before we get started I wanted to welcome Scott Smith downtown team, our new head of Investor Relations Welcome Scott and.

And thank you to everyone for joining the call today. We are pleased to welcome you to our first earnings call as a public company.

We celebrated our listing on NASDAQ under the ticker <unk> 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 <unk> early last year, showing that our technology is being adopted at an accelerated rate.

Samsung has spent many years building our foundation for this moment. We began this journey 17 years ago 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 Thats exactly what Youre doing earlier. This year, we welcome zucchini Ronny as Chief revenue officer to our leadership team.

<unk> brings tremendous experience to help us achieve our growth ambitions you are ramping up our sales and service organizations and continue to invest in R&D organization to rapidly expand adoption of <unk> 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 proposition.

Ovation 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 consumer expectation for convenience are rising.

The ball is in the process of becoming voice enabled and so it is unavoidable that the current status quo and familiar a shortlist of incumbent players needs to be re examined for too long innovation around voice AI has been static we believe we have taken into the next level with the technology that is at the forefront of the next major disruption computing conversation.

<unk> AI.

When we unveiled our disruptive technology in 2016 after more than a decade of innovation. It cut the work by surprise some players even deny 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.

Shlomi restaurants within five miles of San Francisco Airport that have four stars or more based on at least 10 review sorted by rating them by distinct than by highest price.

Several restaurants with more than four stars based on more than 10 reviews within five miles of San Francisco International Airport sorted by rating them sorted by distance been sorted by highest price.

When we show the ones that have more than 100 reviews are open after three PM tomorrow and have Wifi and outdoor seating and are good for kids, including Chinese Japanese Italian French and pass throughs.

Showing two restaurants based on more than 100 reviews that are open after three P. M on Saturday that provide free Wifi have outdoor seating and our kid friendly excluding Chinese restaurant, Japanese restaurants, sushi bars, Italian restaurants, French restaurants or fast food.

Okay.

EBIT the Starbucks hours on phone numbers in San Francisco that is open today and has wildfire and is within walking distance of the ferry building until me because a patio and is it expensive.

The first result at Starbucks the coffee shop located at Pier one the Embarcadero in San Francisco Today is open from 530 am to nine P. M. It's open right now at his phone number is area code 400, 595 6953, it has outdoor seating and it has $1 nine on Yelp quite affordable if you ask me.

Thank you.

You are most welcome.

Conversational AI is undoubtedly the future and we believe <unk> offers the only global independent cross industry conversational AI platform.

As you can see in our demonstrations are technologies 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 responded interact making people more productive and a better place.

We are in a unique position to maintain our leadership due to our core technology DNA and our track record to sub 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 faced a real risk of declining revenues are unique three pillar monetization ecosystem that mutational soon highlights puts us on a trajectory of increasing revenue per user and increasing adoption due to the revenue share with our product leaders.

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 delivering conversational voice AI with work with our proprietary speech, two meaning deepening understanding and collective AI breakthroughs, along with our industry, leading cloud and edge offerings. We believe we have the best in class technology our.

Our technology bridges to major industry gap's legacy in flexible extensive competitors, whose technologies outdated and big Tech players, whose voice assistance overrides other brand connection with consumers.

Consumers and replacing them with hidden agendas on conflict of 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.

Downhole technologies already voiced 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 of 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 seven 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 Columbus day clause brand.

Brand in Europe , and entering into an agreement with LG electronics.

Our business gained momentum in Q2 with cumulative booking backlog increasing to $283 million more.

More than three times year over year, and making the third consecutive quarter of triple digit growth, we're clearly taking market share and driving exceptional growth at the same time.

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

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

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.

Further continued our momentum with new products enhance new customer agreements and added key relationships. In Q2. For example, we launched <unk> for restaurants, and AI assistant that allows restaurants to automate the phone ordering process addressing the twin challenges of staffing shortages and increased demand for takeout, so that restaurants can take more orders and maximize sales.

Not to mention that the current environment. These businesses are seeing increasing wage pressure there.

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 townhouse automated conversational AI upon ordering with squares thousands of point of sale systems.

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

<unk> enables food ordering is particularly challenging is requires specialized speech recognition and complex natural language understanding which match our key differentiators very well. This is clearly an amazing product market fit 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 exactly the most about Southland for restaurant 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.

Rates.

One of those existing relationships, where we are now seeing the strong foundation play out is Honda This quarter, we announced an expanded agreement with multiple brands and multiple languages around the world. The new element brings <unk> edge and cloud voice AI technology music recognition softer voice commerce solutions and multiple languages to Hyundai.

Genesis and <unk> 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.

Before turning the call to <unk> I would like to make a few closing remarks in the first pick it off of our company's history. We worked tirelessly to create what we believe is the best voice AI technology and platform since launching townhouse initial both AI platform in 2016, we have radical revolted globalized. It from one language to 'twenty five and now have scaled it into major enterprises.

Across several industries large brands, such as Mercedes Benz Honda kiosks, Atlantis, Vizio snap and Pandora have helped build our foundation. We further extended this momentum with major announcements over the past several months such as with Qualcomm Netflix square and LG electronics, among others, we launched townhome 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 at how it's performing right on plan and delivering against our own expectations for the first half of it.

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 new test to talk about our financial performance for the quarter.

Thank you Kevin.

Sure Cave and 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 referenced 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 absorption and monetization.

First we get royalty revenue when we voice enabled 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 enabled 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.

As if you were to order a coffee from our 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.

Sale generates revenue for the coffee shop, and we share the revenue that we received from the transaction with the product creator for car manufacturer. In this example, most importantly, you get your morning coffee exactly when and how you want it.

Okay.

These three revenue pillars create a network platform effect that compounds, expanding our addressable market and increasing customer adoption.

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

This is to build this is a business we have been building today. Our revenue is more heavily weighted to pillar one and that will continue to expand we already see contributions from pillars, two and three and we see tremendous upside potential.

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

Because 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 five year weighted average contract length or.

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

In Q2, we generated $6 $2 million in revenue of 43% sequentially from Q1 2022.

Prior year Q2 results were impacted by onetime revenue derived from a 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.

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

Our gross 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 gross 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 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 continued to solidify our general and administrative functions as a newly public company.

Across our operating expenses noncash employee stock compensation was $7 9 million in Q2 up sequentially and versus the same prior year period due to increased head count 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 head count 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% year over year. This includes head count growth and non head count 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.

Adjusted EBITDA, which excludes the noncash charges of stock compensation, depreciation and amortization and other non operating activities was a loss of $24 million.

Net loss per share in Q2 was <unk> 19.

Please note that the 162 million weighted average shares outstanding used in the quarterly EPS calculation are impacted by our transition of 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 flow through to free cash flow.

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

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 our 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 be Lynne 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.

And we will now move to Q&A.

As a reminder, if you'd 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 Mike Latimore from Northland Capital markets. Please go ahead. Your line is open.

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

Thanks, Mike.

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

I guess.

The.

I'm thinking the momentum would.

Continue to carry through second half of the year here, So I guess.

How are you thinking about.

Bookings trajectory throughout the year Rusty here.

Yes, I'll start with that.

So first I'll say that we all kind of make a comment on guidance and I'll give you a little more color commentary on the bookings if thats all right. So.

We've kind of.

Sort of established that we think giving revenue guidance on an annual basis, probably the best way.

Mechanic and translate how the bookings will flow through and so so again, we continue to feel confident of of that outlook that we just provided of $27 million to $33 million.

You noted also were very pleased with our bookings results through Q2 to $283 million up three X 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 plant expect to potentially expand across regions products brands.

Where as we noted in the prepared remarks.

The.

The second pillar services offerings, particularly with respect to food ordering in the townhome for restaurants, offering we're seeing tremendous traction.

We've been our sales team now that scaling significantly has been.

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 at the solution just <unk>.

Very well suited for what Theyre looking for and so 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 so so we're feeling great about the momentum.

Lastly, say that bookings is one indicator I know Mike you know this but just more broadly I will say that bookings represent sort of pillars, one and two when we voice enabled product and we voice enabled services.

They capture that we're bringing these ecosystems, having a lot of great conversations on and bringing those together to monetization does don't they don't are not reflected in monitor and revenue. So sorry monetization is not reflected in bookings.

So that.

That will actually just kind of naturally flow through without hitting the bookings numbers. So I didn't mean to dance entirely off your question, but hopefully that gives some context and color commentary on that.

Yes, that's super helpful.

I think you said.

I'll say 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 is that all three players are.

So I did say that is that average price per unit. We saw go up in Q2, we've actually seen it.

Continue to sort of go up it is.

My comment was generic but to tell you the.

Most of our revenues and product royalty so it was applicable to product royalties.

And the composition of that is multi fold number one is where again expanding across customers across product sets.

We've.

<unk> along steady.

Steady track record on cloud solutions, we are bringing cloud hybrid cable I mentioned sort of edge products all.

Have different compositions of.

Pricing per unit, but.

We are 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.

Great. Thanks.

If I can add one.

Mike and I have one more I just thought but I think it's also important this game I didn't want us to be hidden in that prepared remarks, either but we also are cognizant that we think it's one of the strengths of our business model because.

There are other.

I will just say peers out there who.

Solution is is it just a cost component to their customers and they feel pressure because they are constantly having conversations about how do I bring my cost of cost of goods down with our customer where 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 Thats why we believe it is not just distinctive tact here. It's also positioning and business model differentiation that that gives us confidence of where we're going.

Okay, Great and then I know you've hired a CMO and hiring.

Hiring salespeople I guess.

Yes.

Salespeople are you up to now or how many do you want to get to by year end.

So.

I'll touch on maybe the numbers briefly and then I'll, let <unk> add more on the excitement we have with the as <unk> been on board and what he's been doing to his team. So so he.

I mentioned the year over year at least the numbers are.

<unk> sales and marketing so we're investing not just on the sales side, but also on marketing I think you've eliminated in your research how sort of even with the limited business development team. Previously we were we were still able to get pretty sizeable deals and now with <unk> on board really scaling that significantly so I don't we aren't breaking out that the per <unk>.

But overall our company is growing we're at about 450 people there.

Our sales team that used to be sort of single digits is growing well into the double digits.

And the <unk>.

Moving towards the tens of sales folks, but it's beyond that it's also lead generation and marketing investments as Youre doing so we're starting to get traction early but the other point I'll raise it just.

We're going after two large enterprise deals concurrent with like small medium sized restaurants that we're getting we're addressing a lot of different areas and what he is attacking which gives us excitement and maybe with that I'll, let kayvon Ed.

I would add I would.

To highlight that.

A lot of our historical booking success came from.

These long cycle deals, which.

Our 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 in pillar two.

The cycle a lot faster. So you could go from the meeting to be likely the customer it could be on the same day.

And that's super exciting.

And youre seeing that I mean, thats, what we predict that it's going to be.

Designed that strategy, but now you're actually seeing it live in the market.

Okay excellent.

Excellent.

<unk>.

Good luck rest of the year.

Thank you Mike.

Our next question comes from Brett Knoblauch from Cantor Fitzgerald. Please go ahead. Your line is open.

Hi, guys. Thanks for taking my question and congrats on the first quarter on the books.

I was just wondering if you can maybe walk through.

How we should think about bookings and backlog flowing through to revenue what needs to be met.

Is the entirety of bookings consisting of noncancelable.

I guess contracts that have been signed I guess any insight on how we should think about that flow through.

Call over the next year or two years three years.

Yes.

Yes, thanks for the question Brett.

Maybe let me try to characterize it this way and then.

Maybe I'll give some other color commentary if that's okay.

So first.

I will just make the statement are strong.

Bookings backlog sets us up well for future revenue.

In our view bookings as a conservative measure of our success and doesn't include all of 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.

They are based on minimum guarantees where applicable and customer volumes, where we have confidence in such forecast when we might get them from the customers directly and we may hedge them down if we.

If we if we if we don't.

I 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 is a skew to the latter half of that but they range from one to seven years.

But but that's kind of the average is four and a half year. So in other words, we expect to realize those bookings into revenue over the next several years. It just wont happen ratably.

And then I think I'd, just maybe ill add because of these dynamics and I appreciate where your question is gone we decided that given revenue guidance was it was.

The best way to kind of provide the best visibility of what we're seeing and how thats 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 will just say.

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 and instruction manner. So new revenue streams that we build may have different financial profile.

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.

And it's different from.

Like I said, when we sign up a restaurant on a recurring basis and so we will keep evaluating which measures make most sense and as we scale and different components, we'll happily keep calibrating and making sure that you are getting the right information, but hopefully that gives a little bit of color commentary on that.

Okay.

I think.

I think if we're okay with that and Oh, sorry, sorry, I was on mute.

Thank you for that but yes, just to add another question could you just elaborate on what the $4 3 million was.

And the compare period.

Early termination of professional services I guess, what happened there why was there a termination.

Any additional color on that.

Sure.

I'll start and Kevin can add more color there was.

We had it was a contract mod 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 continue 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.

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.

So that was kind of the context of a sort of a lumpy impact to the prior year quarter in Q2.

Perfect Thats very helpful. Thank you guys.

Okay. Thanks, Brett.

Our next question comes from John <unk> from Wedbush Securities. Please go ahead. Your line is open.

Hi, how are you. This is John keep fingers on for Dan Ives.

Hi, John .

How are you.

Each of our brands will start being a bit more subjects on selecting capital due to increasing costs with it.

<unk> have you witnessed any potential slowdown in the pipeline do you accept.

I expect anything along those lines or in your rapid acceleration of bookings. Thank you.

Yes, maybe ill start and it actually 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 cost or increase the revenue or become more efficient staffing is.

Got challenging staffing.

For example, the southern half of restaurant product.

Restaurants are unable to pick up the phone and.

I mean, they do pick up the phone the customer connection is not very good so that solution.

Is resonating with them.

Waiting list for restaurants that want to sign up.

For that service and then four if you look at what's happening to automotive industry or other devices Tvs and so on.

The team is increasing revenue from those products is a pursuit that used to be used as a device.

Youll relationship kind of ends with end user and you have low margins, but if you can monetize the user interaction.

That's kind of a new paradigm.

Device companies are signing up to them and.

And we are a big part of that solution because.

Your voice AI interface to these devices you putting services, we've got three P. R models, and we provide a path to generate revenues while delighting the users so.

The market.

Conditions that actually helped our business.

It actually if you want to.

Yes, I mean, I might just add a.

A couple of brief things I mean.

I think that the pathway we've been on.

Certainly for the past year, leading to this conference call as a public company.

The fact that I highlighted that we were kind of maintaining our expectations, we're able to deliver against that and 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 the geopolitical dynamics and so forth.

I kind of chalk it up to one.

Laser focus from the team and kind of commitment to delivering on our.

Our customer commitments I also believe it has to do with we're delivering solutions to amplify what Kayvon said, we're delivering solutions that customers really need and want and I would say in a lot of ways are 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 there continuously sort of attracted to to continue to engage with us and work with us and buy from us and so.

Yes.

Okay.

Eric.

Scale and innovate and in.

The recessionary environment and a difficult environment, we can we have a strong value proposition, but even even longer through whatever business cycle, it's about creating a much more seamless interaction of our humans interact with technology. We believe it's the next modality that will really step function change, how how we interact with technology that would be.

More and more pervasive in our world.

And so we're just think we're really well suited to deliver on these decade plus of great innovation that Kayvon co founders and the team here have built so so we're excited.

Thank you.

We have no further questions I would like to turn the call back over to <unk> for his closing remarks.

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

Conversational AI is undoubtedly the future and we have the only global independent craft industry conversational AI platform that is why we win with that I. Thank you for participating in our call today.

Ladies and.

This concludes today's conference call. Thank you for your participation you may now disconnect.

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Great.

Okay.

Good afternoon, and welcome to <unk> second quarter 2022 earnings Conference call.

After the speaker's presentation, there will be a question and answer session to ask a question you will need to press star one 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, Julien Hi, everyone. Good afternoon, and thanks for joining our second quarter 2022 earnings call.

With me here today is our CEO cable and Mohit here and our CFO , Nick <unk>, who will begin with some short remarks before moving to Q&A.

We'd also like to remind everyone.

That will 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 a discussion of the factors that could cause our results to differ.

Including those described in our prospectus filed April eight 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 GAAP 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.

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 todays call and with that I would like to turn the call over to Kevin.

Thank you Scott before we get started I wanted to welcome Scott Smith Fanhouse team, our new head of Investor Relations Welcome Scott and.

And thank you to everyone for joining the call today, we're pleased to welcome you to our first earnings call as a public company.

We celebrated our listing on NASDAQ under the ticker <unk> 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 technologies being at <unk>.

Update at an accelerated rate.

<unk> 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 Thats exactly what Youre doing earlier. This year, we welcome zucchini Ronny as Chief revenue officer to our leadership team.

<unk> brings tremendous experience to help achieve our growth ambitions, we are ramping up our sales and service organizations and continue to invest in R&D organization to rapidly expand adoption of town 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 proposition.

The world is in the process of becoming a voice enabled and so it is unavoidable that the current status quo and familiar short list of incumbent players needs to be reexamined for too long innovation around voice AI has been static we believe we have taken into the next level with the technology that is at the forefront of the next major disruption of computing.

<unk> AI.

When we unveiled our disruptive technology in 2016 after more than a decade of innovation. It cut the work by surprise. Some players even denied that he was real and others have been trying to catch up to ask 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.

Allergy.

Okay.

Shlomi restaurants within five miles of San Francisco Airport that have four stars or more based on at least 10 review sorted by rating them buy these pumps than by highest price.

Here are several restaurants with more than four stars based on more than 10 reviews within five miles of San Francisco International Airport sorted by rating them sorted by distance been sorted by highest price.

Let me share the ones that have more than 100 reviews are open after three P. M Tomorrow and have Wi Fi on outdoor seating and are good for kids, including Chinese Japanese Italia in France, and fast food.

So in two restaurants based on more than 100 reviews that are open after three P. M on Saturday that provide free Wifi have outdoor seating and our kid friendly excluding Chinese restaurant, Japanese restaurants, sushi bars, Italian restaurant, French restaurant or fast food.

Okay.

Give me the Starbucks hours on phone numbers in San Francisco that is open today and has wildfire and is within walking distance of the ferry building and tell me if it has a patio and is it expensive.

The first result at Starbucks the coffee shop located at Pier one the Embarcadero in San Francisco today. Its open from 530 am to nine P. M is open right now at his phone number is area code 4159563, 95, three it is outdoor seating and it has $1 nine on Yelp quite affordable if you ask me.

Thank you.

You are most welcome.

Conversational AI is undoubtedly the future and we believe Samsung offered the only global independent cross industry conversational AI platform.

As you can see in our demonstrations are technologies unmatched by the incumbent players, including the Big Tech our ambition our 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 responded interact making people more productive and a better place.

We are in a unique position to maintain our leadership due to our core technology DNA and our track record to sub 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 are unique three pillar monetization ecosystem that mutational soon highlight puts us on a trajectory of increasing revenue per user and increasing adoption due to the revenue share with our product leaders.

Let's summarize our unique positioning and opportunity.

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

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

With our proprietary speech, two meaning deepening 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 Gap's legacy inflexible expensive competitors, whose technology is outdated and big Tech players whose voice.

Assistance overrides other brand connection with consumers.

Consumers and replacing them with hidden agendas on conflict of interest there.

The competitive and technological differentiation is why we win.

Jon Hamm technologies already voiced 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 of 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 seven 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 Columbus day.

Brand in Europe , and entering into 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're clearly taking market share and driving exceptional growth at the same time.

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

Not to mentioned that the current environment. These businesses are seeing increasing wage pressure there.

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.

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

<unk> enables food ordering has particular challenges is requires specialized speech recognition and complex natural language understanding which match our key differentiators very well. This is clearly an amazing product market fit 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.

Right.

One of those existing relationships, where we are now seeing the strong foundation play out is Honda This quarter, we announced an expanded agreement with multiple brands and multiple languages around the world. The new agreement brings <unk> edge and cloud voice AI technology music recognition softer voice commerce solutions and multiple languages to Honda.

Genesis and <unk> 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.

Before turning to <unk> I would like to make a few closing remarks in the first pick it off our company's history. We worked tirelessly to create what we believe is the best voice AI technology and platform since launching townhouse initial both AI platform in 2016, we have radically devoted globalized it from one language to 'twenty five and now have scaled it into major enterprises.

Across several industries large brands, such as Mercedes Benz Honda kiosks, Atlantis, Vizio snap and Pandora have helped build our foundation referred extended this momentum with major announcements over the past several months such as with Qualcomm Netflix square and LG electronics, among others, we launched townhome for restaurants.

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

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 <unk> to talk about our financial performance for the quarter.

Thank you Kevin.

Sure Kayvon 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.

Okay.

We break out our revenue into three distinct pillars product royalties service absorption and monetization.

First we get royalty revenue when we voice enabled products such as cars Tvs and the rapidly growing billions of Iot devices around the world.

Okay.

<unk>.

We generate recurring subscription revenue when we voice enabled 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.

<unk> generates revenue for the coffee shop, and we share the revenue that we received from the transaction with the product creator for car manufacturer. In this example, most importantly, you get your morning coffee exactly when and how you want it.

Yes.

These three revenue pillars create a network platform effect that compounds, expanding our addressable market and increasing customer adoption.

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

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

The contracts underlying our backlog range from one year to more than seven years with the $4 five year weighted average contract length or.

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

In Q2, we generated $6 $2 million in revenue up 43% sequentially from Q1 2022.

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

Our gross 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 gross margin was consistent with the prior year Q2.

Cost of revenues for the quarter was $2 $5 million up 40% sequentially and up 53% from the prior year.

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

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 continued 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.

General and.

Administrative expenses were $9 4 million up 127% year over year. This includes head count growth and non head count spend across our global functions to support the operational activities needed as we scale as a public company we.

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.

Adjusted EBITDA, which excludes the noncash charges of stock compensation, depreciation and amortization and other non operating activities was a loss of $24 million.

Net loss per share in Q2 was <unk> 19.

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

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

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 our near term commitments, while focusing on the long term potential in front of us as such portfolio 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 be Lynne 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.

And we will now move to Q&A.

As a reminder, if you'd 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 Mike Latimore from Northland Capital markets. Please go ahead. Your line is open.

Yes, hi, everybody nice results, there and congrats on public here.

Thanks, Mike.

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

I guess.

The.

Im taking the momentum would.

Continue to carry through second half of the year here, So I guess.

How are you thinking about book.

Bookings trajectory throughout the year here.

Yes, I'll start with that.

So first I'll say that we all kind of make a comment on guidance and I'll give you a little more color commentary on the bookings if thats all right. So as I noted we've kind of.

Sort of established that we think giving revenue guidance on an annual basis, probably the best way to kind.

Kind of translate to how the bookings will flow through and 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 our bookings results through Q2 to $283 million up three <unk> from prior year.

Indicates strong momentum and strong conversations that we're having with customers.

Where as we noted in the prepared remarks.

The second.

The second pillar services offerings, particularly with respect to <unk>.

Food ordering in the townhome for restaurants, offering we're seeing tremendous traction.

We've been our sales team now that scaling significantly has been on the.

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 <unk>.

Very well suited for what Theyre looking for and so so really we have a backlog of people China to get on board and we have work to kind of get them through the funnel and so so we're feeling great about the momentum.

I would lastly, say that bookings is one indicator I know Mike you know this but just more broadly I will say that bookings represent sort of pillars, one and two when we voice enabled product and we've always enabled services.

They capture that and we are bringing these ecosystems, having a lot of great conversations on and bringing those together to monetization does don't they don't are not reflected in monitor and revenue. So sorry monetization is not reflected in bookings.

So that will actually just kind of naturally flow through without hitting the bookings numbers. So I didn't mean to dance entirely off your question, but hopefully that gives some context and color commentary on that.

Yes, that's 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 <unk> is that.

Pacific to royalties or does that include all three pillars are.

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 it is.

My comment was generic but <unk> been most of our revenues and product royalty. So it was applicable to product royalties.

And the composition of that is multi fold number one is where again expanding across customers across product sets. We we've had along steady.

Steady track record on cloud solutions, we are bringing cloud hybrid and Kevin mentioned sort of edge products all.

Have different compositions of.

Pricing per unit, but.

We're 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.

Great. Thanks.

If I can add one.

Mike and I have one more thought but I think it's also important this game I didn't want us 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.

There are other.

I'll, just say peers out there who.

Solution is is it just a cost component to their customers and they feel pressure because they are constantly having conversations about how do I bring my cost of cost.

Cost of goods down with our customer where 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 Thats why we believe it is not just distinctive tact here. It's also.

Positioning and business model differentiation that that gives us confidence of where we're going.

Yes, yes, okay, great and then I know you've hired a CMO.

The hiring salespeople I guess, yes.

How many salespeople are you up to now or how many did you wanted to do by year end.

So.

I'll touch on maybe the numbers briefly and then I'll, let <unk> add more on the excitement we have with as <unk> been on board and what he's been doing to his team. So so he.

I mentioned the year over year at least the numbers are.

<unk> sales and marketing so we're investing not just on the sales side, but also on marketing I think you've eliminated in your research how sort of even with the limited business development team. Previously we were we were still able to get pretty sizeable deals and now with zoom in on board really scaling that significantly so I don't we aren't breaking out but the per <unk>.

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.

It's in the tens.

Co moving towards the tens of sales folks, but beyond that it's also lead generation and marketing investments as youre doing so we're starting to get traction early but the other point I'll raise it just.

Things were going after two large enterprise deals concurrent with like small medium sized restaurants that.

We're getting we're addressing a lot of different areas and what he is attacking which gives us excitement and maybe with that I'll, let kayvon Ed.

I would add I would highlight that.

All of our historical booking success came from.

These long cycle deals, which.

Our 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 in pillar two.

Cyclecar a lot faster. So you could go from the meeting to be likely the customer it could be on the same day.

That's super exciting because.

And youre seeing that I mean, thats, what we predict that's going to be.

Behind that strategy, but now you're actually seeing it live in the market.

Okay.

Okay excellent.

Excellent.

Please.

Good luck rest of the year.

Thank you Mike.

Okay.

Our next question comes from Brett Knoblauch from Cantor Fitzgerald. Please go ahead. Your line is open.

Hi, guys. Thanks for taking my question and congrats again on the first quarter on the books.

I was just wondering if you can maybe walk through.

How we should think about bookings and backlog flowing through to revenue what needs to be met is.

Is the entirety of bookings consisting of noncancelable.

I guess contracts that have been signed I guess any insight on how we should think about that flow through.

Call over the next year or two years three years.

Yes, yes.

Yes, thanks for the question Brett.

Maybe let me try to characterize it this way and then.

Maybe I'll give some other color commentary if that's okay.

So first.

I will just make the statement are strong.

Bookings backlog sets us up well for future revenue.

In our view bookings as a conservative measure of our success and doesn't include all of the revenue components such as monetization.

Bookings they represent committed contracts with large enterprise customers basically pillar, one product royalties and pillar to subscription services and they're based on minimum guarantees where applicable and customer volumes, where we have confidence in such forecast when we might get them from the customers directly and we may hedge them down if we.

If we if we don't.

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.

But but that's kind of the average is four and a half year. So in other words, we expect to realize those bookings into revenue over the next several years. It just wont happen ratably.

And then I think I'd, just maybe ill add up because of these dynamics and I appreciate where your question is gone we decided that given revenue guidance was it was the best way to kind of provide the best visibility of what we're seeing and how thats 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 will just say.

We are scaling.

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 and instruction manner. So new revenue streams that we build may have different financial profile.

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.

And it's different from.

Like I said, when we sign up a restaurant on a recurring basis and so we will keep evaluating which measures make most sense and as we scale and different components, we'll happily kind of calibrating and making sure that you are getting the right information, but hopefully that gives a little bit of color commentary on that.

Okay.

I think.

I think if we're okay with that and Oh, sorry, sorry, I was on mute.

Thank you for that but yes, just to add another question could you just elaborate on what the $4 3 million was.

And the compare period.

Early termination of professional services I guess, what happened there why was there a termination.

Additional color on that.

Sure.

I'll start and Kevin can add more color there was.

We had it was a contract mod modification actually with an existing customer.

<unk> kind of effectively sort of had a pathway they were going towards and then ultimately sort of shifted gears and.

And we continue 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.

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 of a sort of a lumpy impact to the prior year quarter in Q2.

Perfect Thats very helpful. Thank you guys.

Okay. Thanks, Brett.

Our next question comes from John <unk> from Wedbush Securities. Please go ahead. Your line is open.

Hi, This is Jonathan lingers on for Dan Ives.

Hi, John .

How are you.

I will start being a bit more subjects on selected with capital due to increasing costs.

<unk> have you witnessed any potential slowdown in the pipeline do you accept.

I expect anything along those lines or in your rapid acceleration of bookings. Thank you.

Yes, maybe ill start and it actually 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 cost or increase their revenue or become more efficient staffing is.

Got challenging staffing.

For example, it does not have a restaurant product.

Sure.

Restaurants are unable to pick up the phone and.

I mean, they do pick up the phone their customer experiences.

Very good so that solution is resonating with them.

The waiting list for restaurants that want to sign up for.

For that service and then four if you look at what's happening to automotive industry or other devices Tvs and so on.

The team is increasing revenue from those products is a pursuit that used to be used at the device.

Our relationship kind of ends with end user and you have low margins, but if you can monetize the user interaction.

That's kind of a new paradigm.

Device companies are signing up to end.

And we are a big part of that solution because.

Your voice AI interface for these devices you bring services with our <unk> models, and we provide a path to generate revenues while delighting the users so.

<unk>.

Okay.

The market conditions that actually helped our business, but it actually if you want to.

Yes, I mean, I might just add a.

A couple of brief things.

I think that the pathway we've been on.

Certainly for the past year.

Adding to this conference call as a public company.

The fact that I highlighted that we were kind of maintaining our expectations, we're able to deliver against that.

Macro environment, where a lot of things have happened over the last nine months to say the least from inflationary pressures the geopolitical dynamics and so forth.

I kind of chalk it up to one.

Laser focus from the team and kind of commitment to delivering on our.

Our customer commitments I also believe it has to do with we're delivering solutions to amplify what Kevin said, we're delivering solutions that customers really need and want and I would say in a lot of ways. They are kind of fed up with the status quo and incumbency.

Yes.

Okay.

Sure.

Scale and innovate and in.

More and more pervasive in our world and.

And so we're just think we're really well suited to deliver on these decade plus of great innovation that Kayvon co founders and the team here have built so so we're excited.

Thank you.

We have no further questions I would like to turn the call back over to <unk> for his closing remarks.

Thank you when we found that somehow we have 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, two meaning deep, meaning understanding and collected AIG breakthroughs. We believe we have a competitive edge.

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.

Q2 2022 SoundHound AI Inc Earnings Call

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