Earnings Call Transcript - SOUN Q4 2025

Operator, Operator

Good day, everyone, and thank you for standing by. Welcome to the SoundHound Q4 2025 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Scott Smith, Head of Investor Relations. Please go ahead.

Scott Smith, Head of Investor Relations

Good afternoon, and thank you for joining our fourth quarter and full year 2025 conference call. With me today is our CEO, Keyvan Mohajer, and our CFO, Nitesh Sharan. We will begin with some short remarks before moving to Q&A. We'd also like to remind everyone that we will be making forward-looking statements on this call. Actual results could differ materially from those suggested by our forward-looking statements. Please refer to our filings with the SEC for a detailed discussion of the risks and uncertainties that could affect our business and for discussion statements that qualify as forward-looking statements. In addition, we may discuss certain non-GAAP measures. Please refer to today's press release for more detailed financial results and 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 undertake no obligation to update any forward-looking statements, except as required by law. Finally, this call is being audio webcast in its entirety on our Investor Relations website. An audio replay will be available following today's call. With that, I would like to turn the call over to our CEO, Keyvan Mohajer. Please go ahead, Keyvan.

Keyvan Mohajer, CEO

Thank you, Scott, and thank you to everyone for joining the call today. 2025 was a record year for SoundHound, nearly doubling our revenue year-over-year. We also had a record fourth quarter. Revenue was up 59%, while all key profit metrics improved. We broke another record in Q4. We signed over 100 customer deals, making it our biggest quarter yet. We won across different industries in a variety of regions. Just to name a few, we signed a new prominent automotive logo in Japan to use our AI assistant with a 7-digit unit commitment. In the U.S., we signed a multi-year deal with one of the largest telecommunications companies in the world to use our technology. We signed a multi-year global deal with one of the largest athletic shoes and apparel companies to power their AI customer service. We closed deals with health care providers, universities, insurance companies, financial institutions, e-commerce merchants, retail, military, and many more. Our execution with channel partners was also exceptional with multiple 7-figure deals in 2025. I'll dive into other business highlights specific to Q4 shortly. But first, I wanted to touch on a few recent market dynamics. The power of AI is disrupting traditional software and services companies, and this is creating further tailwinds for SoundHound. In this inevitable AI transformation, companies need a partner like SoundHound to help them rapidly reinvent themselves. We partner with our customers to overcome their challenges and achieve their ambitions, creating incredible end-user experiences for their employees and customers. With the exponential advances in AI, we believe we are entering a new era where companies with deep tech and data moats will create the most value. This makes SoundHound very well positioned with decades of deep tech innovation and data accumulation. SoundHound AI was founded with a mission to deliver voice and conversational AI experiences that are deeply integrated into user environments and deliver value where it matters most. This early vision now positions us perfectly for the Agentic AI revolution we are seeing today. We believe our Agentic platform is the only solution that is ready to be deployed across a multitude of vertical use cases and a huge and growing range of touchpoints and modalities from call centers to cars, robots, phones, apps, TVs, and websites, all with a unified AI agent framework. This means that our customers can build an agent once and deploy it anywhere. At SoundHound, we offer the best models and innovation regardless of where they come from. We can give customers access to big tech models, emerging models, other third-party models as well as SoundHound's own models that consistently outperform big tech players. With us, our customers will have access to the latest and greatest technologies as fast as they become available. And because of our deep expertise in conversational AI, we are able to optimize our own technologies to meet customer needs. This ranges from offering Polaris, our custom speech recognition foundation model to our unique method of arbitrating the conversation across on-device, cloud, on-premise, and even human-augmented services. This combination of capabilities is the foundation of our unique and differentiated Agentic Plus framework, which blends agentic, deterministic, and human-assisted understanding, representing the full mix of what our customers want. In addition, SoundHound has a massive amount of data and has processed billions of interactions over the years across all major global languages supported by having a physical presence in multiple markets and geographies. This allows us to compete and win against big tech while new players are faced with the traditional limitations of scale and reach we've long since overcome. With those considerations in mind, we believe SoundHound is the strongest bet in an ever-changing world of AI evolution. We recently previewed our Agentic platform to public audiences, and they were blown away. The Consumer Technology Association, the body that organizes CES, consistently calls our tech an example of one of the most exciting trends at the whole show. Our customers agree, and we are proud to navigate this exciting and dynamic period by their side. Here are some proof points, as I highlight, some of the many wins in this quarter alone. In automotive, besides the Japanese OEM previously mentioned, other notable customer wins include a new Korean OEM with a global footprint, an iconic Italian manufacturer of high-performance luxury sports cars as well as a Chinese and Vietnamese manufacturer. We also signed our first 2-wheeler and have seen strong interest from at least a half dozen other OEMs. Stellantis also expanded further with the adoption of live generative AI capabilities for real-time responses, and we added an Italian commercial truck company, which will offer SoundHound voice assistant to its wide range of vehicles. We also signed a multi-year renewal with one of the largest American automobile manufacturers to deploy our enterprise AI solutions. In voice commerce, coming off a successful CES, we are seeing lots of momentum. Thanks to our deep penetration in restaurants, this highly anticipated solution is quickly advancing to go live in the U.S. with a prominent German automotive OEM. The list of engaged OEMs is growing rapidly, and we are now starting to see early signs of the flywheel effect taking shape. In January, we also unveiled our fully agentic voice platform for in-vehicle and on-TV commerce and showcased a leading smart TV manufacturer and a national pizza restaurant working together seamlessly. The solution is expected to go live later this year. And we are quickly building out an ecosystem well beyond food ordering from the car or TV with Parkopedia and OpenTable partnerships announced in Q4 and further plans to extend to events and travel booking very soon. In restaurants, our Voice Inside solution is seeing high demand with a number of top 25 restaurant chains signing up to collect data for drive-thru efficiency. Panda Express also expanded into dozens more locations, while Casey's General Store agreed to a multi-year renewal and added Smart Answering to handle non-food ordering calls. We had franchise wins with both IHOP and Jersey Mike's. In retail and consumer goods, we signed one of the fastest-growing global health clubs in the U.S. and a multi-hundred unit personal care company to adopt our outbound innovative automated solution for customer retention campaigns. And for managing inbound calls, we signed 2 nonprofit organizations, one that has a large network of thrift stores and another one with a large number of fitness and health locations. In enterprise AI, we signed a record number of deals across various solutions and verticals, including in financial services, a New York-based global financial services platform company, a large American multinational payment card services corporation, and BNP Paribas. In health care, an eyewear and optical retailer, which operates or manages over 700 stores in 40 U.S. states, an independent health care practice that supports more than 1,300 locations in 45 states, and a Virginia-based health care and wellness service with over 80 health care facilities. In insurance, a Fortune 100 multinational insurance and asset management company headquartered in Germany, a global Japanese insurance company that has offices spread throughout the U.S. and one of the first motor clubs in the U.S. with more than 16 million members across 21 states. In government and education, a U.S. government-sponsored enterprise helping to make housing more accessible and affordable, a large Florida-based university to support their health system, and likewise, we signed on with a local government to a city in Florida. In hospitality, one of the world's leading providers of food and support services operating in over 25 countries and an American ticket sales and distribution company with operations in over 35 countries around the world. In telecommunications, in addition to the large telco I mentioned previously, we signed a European telecommunications company that provides cable television, broadband internet, and fixed telephony and a large British broadcast and telecommunications company. I mentioned some of the success we've had with large 7-figure deals in 2025 with our channel partners. And in Q4, we continued to build out our ecosystem with the following partners. With one of the largest telecommunications companies in the world, we are adding SoundHound Agentic AI call center automation to SMBs in their large business marketplace. In addition, we partnered with Bridgepointe, which expands our enterprise AI adoption across their vast network and a large customer experience management company providing services to approximately 150,000 businesses. We renewed our partnership with a global technology and professional services company that delivers technology solutions and mission services to every major agency across the U.S. government and a large multinational professional services firm to provide our solutions to financial services firms across Spain. Importantly, our enterprise AI technology is making a difference and helping businesses tackle some of their biggest challenges. One large health care network reported that their AI agent built on SoundHound platform now handles more than 1/3 of all patient appointment scheduling, helping to unclog the system that gets patients what they need more quickly. This customer is already looking to expand our platform to tackle additional use cases like prescription refills and pharmacy inquiries. In a completely different industry, telecommunications, another customer reported a 20% reduction in the labor costs associated with billing disputes, thanks to AI agents that analyze invoices and execute adjustments. And in auto insurance, our platform was able to help the customer increase containment by 10 percentage points with respect to very complex use cases in under 60 days. In short, we are seeing great traction because our technology is delivering real-world results. In closing, we had a record 2025. This is happening because we are an AI-first company and customers from a broad range of verticals are coming to us to automate their complex processes and make them more human-like to better serve their customers. We are leading the charge in a market disruption that is in the very early stages. We have a massive TAM, and we are poised to win. With that, I'll now turn the call over to Nitesh to talk about our financial performance, key growth drivers, and business outlook.

Nitesh Sharan, CFO

Thank you, Keyvan, and good afternoon, everyone. Q4 was our strongest quarter with $55.1 million in revenue, up 59% and improvements across all profit measures. For the full year, we delivered $169 million in revenue, up 99% versus the prior year, and up more than fivefold in the few years that we have been a public company. We achieved this record performance through our disruptive technology, breakthrough innovation, hyper-responsiveness to customers and by scaling across our broadening enterprise portfolio. And we operationalized this with cost discipline, driving a clear pathway to breakeven profitability. The market momentum in our space continues to accelerate. Generative AI, Agentic AI, and Voice AI are now base-level customer requirements. Customer service is undergoing a once-in-a-generation disruption and enterprises are clamoring for innovators like us to provide high customer engagement solutions to improve their top and bottom lines. From the beginning, we have built our business to deliver successful AI-driven outcomes and our pricing architecture is purpose-built for that. In a world where seat-based pricing models are quickly becoming antiquated because of their deteriorating price/value equations, our Agentic solutions seamlessly drive outcome-focused consumption and success rates that create economic incentives fully aligned with our customers. That's a sustainable model. It's a differentiated moat with our entrenchment deepening. Let me share some examples across our business. We have been growing the automotive installed base for years, and our monthly active users continue to expand rapidly with Q4 growth in excess of 50% year-on-year. More notably, their query activity or usage continues to accelerate with Q4 audio queries up roughly 75% from the prior year. And note that this is only cloud-based queries. We also offer edge-based solutions that don't require internet connectivity, so these volume metrics meaningfully understate the full auto customer engagement. The volume of queries we deliver in IoT and smart devices is even larger than the automotive base and also growing strongly. Our new voice commerce engines fit so well here and the idea of ordering a pizza or a salad naturally via voice ordering on your TV while watching the Super Bowl or Olympics personally resonates with me. On that point, in restaurants, we continue to grow locations, but what's even more directly impacting our revenue and our customers' business is order activity, which in Q4, we saw cross 9 million calls for the first time, up strong double digits from the prior year. That's a lot of meals from Chipotle, Casey's and many others. In our enterprise business, our AI platform is delivering measurably better customer outcomes quarter after quarter. Containment rates hit record highs, now resolving the majority of inbound interactions without any human escalation and with certain containment levels even crossing 90%. Our automation intensity crossed a meaningful architectural threshold in Q4, chaining multiple targeted actions per customer engagement into fully autonomous resolutions. Our omnichannel multimodal systems are driving better resolution rates, resulting in compounding returns per interaction. All this comes together in our comprehensive query volume, which now is in the billions per month, up 12x since we went public. With that, let me discuss the fourth quarter financial results in more detail. Q4 revenue was $55.1 million, up 59% year-over-year. The growth was driven across multiple verticals. Our enterprise AI business performed particularly well in health care and financial services. We also saw strong year-over-year growth in our restaurant business as our automation rates continue to improve, integrations deepen, and customer adoption continues to expand at a healthy rate. In automotive, we continue to accelerate our Asia business and see traction in the world's fastest-growing markets. As Keyvan mentioned, we signed a new Japanese automotive OEM in Q4, and we had several deals in Asia in 2025 with commitments of millions of units. This broad-based expansion once again enabled us to realize strong customer diversification with no customers contributing greater than 10% of our revenue for the quarter or full year. In Q4, our GAAP and non-GAAP gross margins were both up year-over-year. Our GAAP gross margin was 48% and adjusted for noncash amortization of purchase intangibles and employee stock compensation, our non-GAAP gross margin was 61%. We continue to drive efficiencies by modernizing infrastructure, optimizing cloud spend, consolidating legacy systems and improving the efficiency of our core platforms, such as shifting from third-party solutions to our own homebuilt ones. And our continued efforts to prune our portfolio of low-margin acquired contracts has been resulting in the sequential improvements in non-GAAP gross margin this year. We expect to continue focusing on profitable contracts and either adjusting or moving away from those that don't meet our minimum thresholds. That said, there are deals that have a clear near-term path to automation using our AI, and we will not hesitate to make the critical investments in them to build long-term sustainable profitable returns. R&D expenses were $24.8 million in Q4, up 22% year-over-year, largely due to acquisitions and related headcount and development costs. We continue to invest in innovation to maintain our technological leadership. For example, we continue building our Agentic AI solutions, leveraging our vast data to further improve our Polaris foundation model and are expanding our in-house real-time audio-to-audio and embedded vertical API integrations into production environments. We also continue to differentiate across the entire voice AI stack, including via best-in-class text-to-speech built on modern architectures for differentiated speed, accuracy, prosody, and with code-switching multilingual capability for an increasingly diverse and integrated world. Sales and marketing expenses were $17.4 million in Q4, reflecting an 82% year-over-year increase, primarily driven by acquisitions. We continue to invest in go-to-market efforts via direct and indirect sales as well as customer success to increase retention. In addition, we continue to elevate our brand and market presence to drive demand and lead generation. G&A expenses were $21.2 million in Q4, reflecting a 29% year-over-year increase, primarily driven by various legal, advisory, and other costs related to our acquisitions. We also continue to drive operational efficiencies throughout the organization and improve our global control environment. We had noncash employee stock compensation of $20.8 million and depreciation and amortization, including the amortization of intangibles of $10 million in Q4, all of which are included in our GAAP results. Adjusted EBITDA was a loss of $7.4 million, an improvement of 56% year-over-year. GAAP net income of $40.1 million and GAAP net earnings per share of $0.10 were positively impacted by the change in fair value of contingent liabilities of approximately $85 million. This relates to the acquisitions we have completed and is a non-operating and non-cash expense and primarily reflects the quarter-on-quarter fluctuation in our stock price. As such, this item has been excluded in our non-GAAP results. Non-GAAP net loss was $7.3 million and non-GAAP net loss per share was $0.02 in the quarter. This adjusts for items such as non-cash depreciation and amortization, M&A transaction costs, and stock-based compensation. Our balance sheet remains strong with cash and equivalents at quarter end of $248 million with no debt. With that, let me discuss our financial outlook. We are starting 2026 with strong momentum. As Keyvan mentioned, we broke a record in Q4 with over 100 customer deals across every industry we operate in. Our pipeline continues to build across several verticals. We have a strong foundational customer base to expand upon through full portfolio upsell and cross-sell, and we continue to aggressively release new Agentic and voice AI capabilities to dramatically improve customer outcomes. With the greater scale achieved in 2025, we have increased visibility in the near-term and expect to continue to grow rapidly over the long-term. For 2026, we expect our revenue to be in a range of $225 million to $260 million. As in prior years, there will be a ramp in revenue through the year given the nature of our customer base, underlying seasonality, and expected large deal timing, both for renewals and new deals. That said, we expect the seasonality to improve as our recurring mix of business continues to grow. Overall, this outlook affirms our expectation of another year of very strong growth. We remain committed to delivering accelerated growth while being mindful of the journey to profitability. Our strong cash position and debt-free balance sheet gives us the capacity to remain prudent and appropriately balance growth with profit maximization. We will continue to drive scale through targeted investments. Last quarter, I mentioned that we see additional acquisition cost synergies of $20 million on an annualized basis. And in Q1, we have already executed most of that, the effect of which we expect to appear in future quarters. I also noted last quarter that we are entering our breakeven phase after many years in heavy investment mode. This transition won't be linear or uniform. We expect it should be progressive and ultimately compounding. Our long-term expectation is that we can operate this business at scale with 70% plus gross margins and 30% plus EBIT margins. For the near-term, though, we expect to calibrate the investments based on the opportunities in front of us and their expected returns, and we will continue to balance the importance of delivering profitability in the near term with fueling sustainable, profitable growth over the long term. With that, we will now move to Q&A.

Operator, Operator

Your first question comes from the line of Scott Buck from H.C. Wainwright & Company.

Scott Buck, Analyst

As we went through the 4Q highlights, clearly, a lot of balls in the air. I'm curious, how are you handling from a deployment and customer service capacity standpoint? Are you starting to feel a little constrained?

Keyvan Mohajer, CEO

Thank you for the question. We are certainly active on many fronts. I have been stating for several quarters that this is the moment for us to increase our efforts, partly due to our presence in various industries, but also because the core technologies we use to enhance these experiences remain consistent. The extensive work we've invested in developing top-tier speech recognition, conversational AI, and orchestration is applicable across sectors, whether we are working in automotive or providing customer support for healthcare or insurance. The advancements in AI have allowed us to deploy, launch, and develop more swiftly. We can meet rising demand with fewer personnel and resources. Consequently, while demand is increasing, the resource requirements to meet customer expectations are decreasing. We anticipate this will contribute positively to our growth.

Scott Buck, Analyst

Great. That's helpful. And then I wanted to ask, you called out a number of renewals. Can you talk a little bit about any changes in pricing or upselling you're seeing as you go through the renewal process with customers?

Keyvan Mohajer, CEO

We have customers we've worked with for a long time, such as several automotive brands that have been with us for years. When these customers renew, it often serves as an opportunity for us to upsell, as we introduce them to the Agentic solution. The Gen AI solution we launched three years ago also represented an upsell moment, and now with the Agentic solution, it's another chance to upsell. Essentially, these renewals come with price increases and occasionally larger volume commitments. We are observing similar trends in customer service, particularly with long-standing clients; the Agentic platform upgrade can lead to higher pricing. For deals based on containment rates, we anticipate increased revenue as we manage more incoming calls. For instance, while industry standards for containment rates vary by use case, we’ve witnessed scenarios where rates have improved from 30% to 70%, 80%, or even over 90%. This means we can handle over 90% of incoming calls without needing human intervention, and we earn more as we increase our call containment. A portion of the revenue growth will come from upgrading our existing customers to the Agentic solution, even without a renewal or price hike, contributing to our overall revenue.

Operator, Operator

Your next question comes from the line of Brian Schwartz with Oppenheimer.

Brian Schwartz, Analyst

Congratulations on a very good year. Keyvan, I want to start with you. And your enterprise AI business clearly has strong momentum, especially in the higher regulated industries that you pointed out. You're building deeper entrenchment. But in the market, certainly over the last like 3, 4, 5 months, there's been a lot of fear about software companies' long-term growth that these larger LLM providers are going to be able to just build workflows above software companies' platforms and bypass them, and it's going to be much more challenging for companies to grow. So I was hoping you could address that, how you see the durability of the enterprise AI business as we enter this agentic era? And then I have a follow-up for Nitesh.

Keyvan Mohajer, CEO

Sure. That's a great question. There are two aspects to consider. First, regarding what's happening to software and services companies, not just SoundHound. For the past three years, we've experienced a tailwind due to generative AI. The automation trends are significant and are leading to disruptions in services and SaaS companies, as everything becomes increasingly automated. This has benefited us as companies that aim to automate seek our help. The second aspect is how advancements in AI affect companies like SoundHound, where software development is becoming easier. We view this also as a tailwind. A useful analogy is the transition from dial-up modems to broadband internet. Strong internet companies flourished during this transition, even if some failed to adapt quickly. The services they provided became much richer and more powerful. We see ourselves in a similar position, able to move faster and deliver better quality because we leverage AI to enhance our capabilities for customers needing AI solutions.

Brian Schwartz, Analyst

I wanted to ask you, Keyvan, because you're a pioneer in technology in this industry. I appreciate your perspective. My question for Nitesh is about how you are planning the efficiency progression of the business. Specifically, regarding the operating profile for 2026, the business is clearly accelerating. I believe you are improving your development efficiency as Keyvan mentioned with your Agentic and AI. How are you approaching the rest of the investment profile? Are you looking to accelerate your investments, maintain your current margins, or improve efficiency and EBITDA margins by 2026?

Nitesh Sharan, CFO

Thanks, Brian. I'll address that from a few perspectives. Firstly, regarding our focus on AI efficiency, there are numerous ways this is unfolding. Our product development efficiency has improved, and we're witnessing that. Our deployment and delivery efficiency has also enhanced, and we can see that too. Throughout the company, we are employing tools that may not be central to what SoundHound creates. In my G&A role, there are indeed many areas where we're enhancing efficiencies. Each of us has a responsibility to utilize the latest technology to manage costs wisely. As for your question on the company profile, I refer back to my earlier comments. We are transitioning from a phase where SoundHound heavily invested in innovation and recently focused on building go-to-market capabilities to this new era of breakeven. While we aren’t aiming for precision in delivering specific numbers every quarter, we firmly believe that we are only beginning to tap into a significant transformational shift. This includes LLM-driven capabilities and the voice AI era, offering consumers and customers unique, efficient, and seamless engagement methods, whether it’s for transactions, customer service enhancements, or reimagining traditional processes like billing inquiries or booking travel. We are just at the start of this journey, and we need to maintain focus because the potential returns are substantial. We intend to sustain the hyper growth we've achieved over the past few years, and we expect strong growth to continue in the near future. Therefore, every additional dollar invested will support growth while ensuring we do it efficiently. As we scale, we fully anticipate efficiencies in our operating leverage. We expect year-over-year improvements in EBITDA and continued leverage on the P&L. We anticipate driving efficiencies in R&D, and we will invest in both direct and indirect go-to-market channels, where we've seen significant benefits. Across R&D, sales and marketing, and G&A, we believe there are efficiency gains, which will contribute to us moving into the breakeven zone.

Operator, Operator

Your next question comes from the line of Gil Luria with D.A. Davidson.

Unknown Analyst, Analyst

Great. This is Lucky on for Gil Luria. You guys had pretty strong traction, it sounds like with auto OEMs, especially on net new in the quarter despite previous headwinds from tariffs impacting the industry. I guess is there anything to call out as to why you had particularly prominent success in that vertical this quarter?

Keyvan Mohajer, CEO

It was indeed a great year for us in the automotive sector. Earlier this year, we secured a major contract with a Chinese OEM, along with commitments for multiple millions of units. We also partnered with a robotics company in China and struck more deals in India. Furthermore, we are proud to have acquired a notable client in Japan. Our success stems from the excellent solutions we've developed over the years. We are recognized for providing the best solutions and collaborating closely with our customers to fulfill their aspirations. Our Pillar 3 vision is yielding positive results; we anticipated a flywheel effect from it. In brief, we power cars and devices in Pillar 1, enhance customer service for merchants in Pillar 2, and integrate them in Pillar 3. This integration allows drivers to order coffee, book appointments, and reserve tables, creating monetizable opportunities, which we refer to as voice commerce. This ability to offer value to drivers while generating revenue for ourselves and sharing it with the OEMs is driving our growth. Many OEMs are choosing to partner with us due to our strong technology, our reputation as a reliable partner, and our monetization approach with our Agentic AI in vehicles.

Nitesh Sharan, CFO

And hopefully, Lucky, you're also noticing that we're seeing this growth in the fastest-growing markets, too. So oftentimes in the fastest-growing markets, it's sort of where they want the best-of-breed technology, and I think that's what's playing out here as well.

Unknown Analyst, Analyst

I think that makes a lot of sense. Maybe the last question from me. As you enter your next phase of growth here, you touched on it already, but can you kind of stack rank the top investment priorities to capture the opportunity in front of you? And any update on your M&A strategy in light of the broad decline in valuations across software here recently?

Keyvan Mohajer, CEO

Our Agentic platform is an area we are heavily investing in. It delivers a much better user experience with a higher containment rate. The latest version of our platform utilizes AI to create AI, significantly speeding up the process of delivering experiences that previously required large teams and extensive time. Now, you simply instruct it, and it does the work for you. This advancement will enable us to operate more efficiently, enhance quality, increase containment rates, and attract more customers. This focus will span various sectors, including automotive and customer service. Another important area is voice commerce. We have pioneered this vision and are currently leading in the field. Although it's a great concept, it will take time for others to catch up because we have the largest number of merchants using our voice AI, including a significant number of restaurants, and we maintain a substantial presence in cars, TVs, and other devices. This positions us very well to introduce this to the market.

Nitesh Sharan, CFO

Yes, I can address the M&A aspect of your question. After a couple of years, I believe the M&A strategy we are pursuing feels correct. We will remain attentive to the market and potential partnerships, looking for opportunities to combine forces. So far, we have engaged with companies that possess excellent customer relationships, allowing us to jointly leverage our innovations to deepen those relationships and broaden our presence in relevant industries. We will continue to explore such opportunities. Given that we have completed a few transactions, there is now increased inbound interest. We follow a stringent and structured methodology to evaluate which opportunities may be worthwhile, maintaining that discipline throughout the process. While we review numerous possibilities, many do not align with our goals. We apply significant scrutiny when determining the right fit. With the fast pace of change, we recognize the potential of what we have built and aim to remain open to all the valuable partnerships we can form. Therefore, I believe that M&A will continue to play a crucial role in our strategy over the next few years.

Operator, Operator

Your next question comes from Mike Latimore with Northland Capital Markets.

Vijay Devar, Analyst

This is Vijay Devar for Mike Latimore. A couple of questions. So one, how many Amelia customers are live on your Agentic AI version 7.3 and are likely to go live this year?

Nitesh Sharan, CFO

Yes, hello, Vijay. We mentioned last time that we are making steady progress since our early adopter program last year, where we piloted with about 15 customers, and this ramped up through the summer. We are on a path to migrate the vast majority, over 75%, by the middle of this year. We continue to make incremental progress each quarter, which is evident in Q4, and we are already seeing acceleration in Q1. One positive aspect of our new Agentic platform, which we highlighted at the Consumer Electronics Show, is that we are getting excellent feedback from customers. Our Head of Sales has noted that customer responses have been superb. We are working on automated migration paths to help customers transition from previous versions to Amelia 7.3 as we roll out the new version. We are excited about how AI is improving our efficiency in delivery and enabling quicker migration patterns.

Vijay Devar, Analyst

Got it. So when the customer moves to 7.3, is there incremental revenue to SoundHound?

Keyvan Mohajer, CEO

Yes. So as I mentioned, just a pure higher containment rate is expected to increase our revenue. Many of our deals, we get paid when we successfully avoid a caller going to a human. And by going to Agentic, we've seen just as an example, numbers going from like a 30% containment to over 90% containment. In some cases, we also get paid more for the upgrading to Agentic. So it's a mix of both, but either way directionally positive for revenue.

Nitesh Sharan, CFO

The other thing we've seen with the recent version is sort of interactions that previously fell outside or would have to get escalated or things we can capture now at a much greater rate. So all of that is incremental revenue for us.

Operator, Operator

Your next question comes from the line of James Fish with Piper Sandler.

James Fish, Analyst

Just on the CX side of things, how is Amelia effectively winning new customers versus the contact center pure play, the CRM offerings, and even some of the other stand-alone AI solutions out there? Really, what's making them different that's resonating with customers? And then I've got a follow-up.

Keyvan Mohajer, CEO

Yes. SoundHound has built a strong foundation through our acquisitions, bringing together teams and companies with extensive experience in customer service. We have been in this field for a long time, equipped with advanced technology and data. Our expertise spans various industries like health care, insurance, and banking, and our established reputation and relationships add to our advantage. From a broader perspective, if a customer opts for a large tech company, they take on significant risk. Companies like Google or OpenAI mainly focus on providing tools rather than deep expertise in customer service. Relying solely on one major tech provider can lead to missed opportunities for innovation that might arise from other firms. For example, a commitment to Google’s models could mean forgoing benefits from OpenAI’s ecosystem and vice versa. At SoundHound, our approach is to deliver the best technology and models to our customers, regardless of their origin. Most of our solutions come from our proprietary models developed over many years, which typically outperform those of big tech in terms of accuracy, speed, and cost. However, if a scenario arises where a big tech model is superior, we integrate it into our platform for our customers. By partnering with SoundHound, customers are more likely to access the best solutions as they become available, in contrast to the higher risks associated with selecting a major tech provider. Additionally, there are emerging players in the market, many of which have only been around for about two years. Some are performing better than others, but we view them as lacking a solid technological foundation. They piece together solutions from various sources, such as speech recognition and text-to-speech APIs, similar to building with LEGOs. This gives SoundHound a significant advantage because we have decades of experience, our own proven models, and a track record of success in enterprise environments. We serve seven of the top ten banks and manage billions of queries, positioning us well in terms of service quality and reputation.

Nitesh Sharan, CFO

I’d like to add one point, Jim. I mentioned this in my prepared remarks, but it’s important in relation to your question. Fundamentally, the legacy models that were based on seat-based pricing aimed to increase user engagement without being directly linked to customer outcomes. That approach is at risk because our tools are becoming exceptionally effective, and we are actively developing them. Our solutions and economic model, including our pricing, are closely aligned with customers experiencing real value. For instance, did a prescription get refilled? Did an appointment get booked? Did food get ordered? Therefore, architecturally, we are in a stronger position to Keyvan’s point. Additionally, the alignment of economic incentives is a significant advantage for us.

James Fish, Analyst

Thank you for the detailed response. Nitesh, I have a follow-up question that I've been getting after hours. Is there additional M&A included in the annual guide? You have numerous opportunities and a strategic approach to acquisitions. I'm trying to understand if more M&A is anticipated in the guide. Additionally, considering the current environment, there's heightened sensitivity regarding stock-based compensation. You tend to deviate from the norm in this area. How are you planning to manage stock compensation going forward and address the historical dilution?

Nitesh Sharan, CFO

Sure. Thanks, Jim. To be direct, no, our guidance does not include any potential M&A that has not already occurred or is not integrated into our outlook. Our outlook is based on our existing business, the deals currently in progress, and the recurring activity from customers that we're upselling and expanding. As I mentioned previously, we do have discussions about potential M&A opportunities that, if they materialize and significantly impact our outlook, we will provide an update, as we've done before. Regarding stock-based compensation, I want to highlight something we're proud of at SoundHound. We believe in involving all employees in our collective success, which is why we offer equity to everyone in the company. This is not something every organization does, and it fosters a sense of ownership among all employees. However, we've experienced significant volatility that affects our financial statements, especially related to acquisitions, where the timing of stock valuation can vary. Even though we recognize the economic implications of dilution and where stock compensation fits into our overall pay structure, we strive to be competitive in attracting the right talent. We're also consistently reviewing our cost structure for efficiency improvements and have historically made adjustments, including in staffing when necessary. We aim for equitable distribution of stock compensation while being mindful of its dilution impact. Although it represents a higher percentage of revenue compared to other companies, as we grow, we expect that ratio to stabilize along with other operating metrics. Ultimately, we take pride in distributing equity to everyone here, which aligns us all as owners in the success of our company.

Operator, Operator

Thank you. I'm showing no further questions at this time. Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.