Earnings Call Transcript
SOUNDHOUND AI, INC. (SOUN)
Earnings Call Transcript - SOUN Q2 2022
Scott Smith, Head of Investor Relations
Good afternoon, and welcome to SoundHound's Second Quarter 2022 Earnings Conference Call. I would now like to turn the call over to Scott Smith, Head of Investor Relations. Please go ahead. Thanks, everyone. Good afternoon, and thanks for joining our second quarter 2022 earnings call. With me here 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'll be making forward-looking statements on this call. Actual results could differ materially from those suggested by our forward-looking statements. Reported results should not be considered as an indication of future performance. Please refer to our filings with the SEC for a discussion of the factors that could cause our results to differ, including those described in our prospectus filed April 8, 2022, in connection with our business combination. In addition, we may discuss certain non-GAAP measures. Please refer to today's press release for further details on the definitions, limitations, and uses of those measures and reconciliations from 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 today's call. And with that, I would like to turn the call over to Keyvan.
Keyvan Mohajer, CEO
Thank you, Scott. Before we get started, I wanted to welcome Scott Smith to the SoundHound team as our new Head of Investor Relations. 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 SOUN on April 28 of this year. Today, we are excited to share with you our strong second quarter results. We grew our cumulative booking backlog by 3x compared to the prior year, and our monthly queries have more than tripled since early last year, showing that our technology is being adopted at an accelerated rate. SoundHound has spent many years building our foundation for this moment. We began this journey 17 years ago in a small dorm room at Stanford University, where my co-founders and I decided that within our lifetime, we should be able to talk to computers the way we talk to each other, and we embarked on the journey to make that happen. We know that now is the time to scale, and that's exactly what we are doing. Earlier this year, we welcomed Zubin Irani as Chief Revenue Officer to our leadership team. Zubin brings tremendous experience to help us achieve our growth ambitions. We are ramping up our sales and service organizations and continue to invest in R&D organization to rapidly expand adoption of SoundHound's voice AI technology. We have already expanded to almost 450 employees globally, and I want 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. Innovation around legacy voice AI technology is long overdue. At the same time, AI and business process automation resonates even more than ever in times like these. We also know that customers are rapidly pushing for the next evolution in how humans interact with technology, and consumer expectations for convenience are rising. The world is in the process of becoming voice-enabled, and so it is unavoidable that the current status quo and the familiar shortlist of incumbent players needs to be reexamined. For too long, innovation around voice AI has been static. We believe we have taken it to the next level with the technology that is at the forefront of the next major disruption of computing: conversational AI. When we unveiled our disruptive technology in 2016 after more than a decade of self-innovation, it caught the world by surprise. Some players even denied that it was real, and others have been trying to catch up to us for years and have not succeeded. Let me play a short clip from one of the earlier demos that highlights some of the unique strengths of our conversational AI technology. Conversational AI is undoubtedly the future, and we believe SoundHound offers the only global, independent, cross-industry conversational AI platform. As you can see in our demonstrations, our technology is unmatched by the incumbent players, including the big tech. Our ambition and opportunity is to make conversational AI that is even better than humans in understanding, but as human and natural as possible in the way it responds and interacts, making people more productive and the world a better place. We are in a unique position to maintain our leadership due to our core technology DNA and our track record to solve extremely difficult problems with our breakthrough inventions and constant innovation. Furthermore, while other players that are pure technology vendors are under constant customer pressure to lower their licensing fees and face the real risk of declining revenues, our unique 3-pillar monetization ecosystem that Nitesh will soon highlight puts us on a trajectory of increasing revenue per user and increasing adoption due to the revenue share with the product creators. Let's summarize our unique positioning and opportunity. Natural language understanding is an especially challenging form of artificial intelligence. It is complex. It takes a long time to perfect and requires a full technology stack to deliver value. This creates a very high barrier to entry, which is why there are not many companies delivering conversational voice AI. With our proprietary Speech-to-Meaning, Deep Meaning Understanding, and collective AI breakthroughs, along with our industry-leading cloud and edge offerings, we believe we have the best-in-class technology. Our technology bridges two major industry gaps: legacy, inflexible, expensive competitors whose technology is outdated; and big tech players whose voice assistants overwrite other brand connection with the consumers and replace them with hidden agendas and 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. SoundHound's technology is already voice-enabling millions of cars, TVs, mobile apps and IoT devices on a global scale thanks to our extensive set of languages and international presence. We are doubling down on all these services as we ramp our go-to-market organization, thus enabling us to address the strong demand from our existing customers where we see tremendous opportunity to expand further. We are seeing robust demand from new and existing customers, and it is clear our technology is resonating and delivering on expectations. For example, in Q2, we announced a new 7-year agreement with Hyundai, and we entered into a new relationship with Square. Our momentum has continued with more recent announcements, delivering voice AI to the most popular Stellantis vehicle brand in Europe and entering into an agreement with LG Electronics. Our business gained momentum in Q2 with cumulative bookings backlog increasing to $283 million, more than 3x year-over-year and making the third consecutive quarter of triple-digit growth. We are clearly taking market share and driving exceptional growth at the same time. Our revenue grew by 43% from the previous quarter, and Nitesh will discuss our financial results in more detail shortly. Our user queries, one of the key measures of customer adoption into our conversational AI platform, was also up triple digits year-over-year. And in just 1.5 years, our monthly queries have increased by more than 3x. We are also seeing more penetration in new devices while we continue to expand with existing users. This expansive growth gives us confidence that we are continuing to deliver meaningful value to end consumers. We further continued our momentum with new product launches, enhanced new customer agreements, and added key relationships in Q2. For example, we launched SoundHound for Restaurants, an AI assistant that allows restaurants to automate the phone ordering process, addressing the twin challenges of staffing shortages and increased demand for takeout so that restaurants can take more orders and maximize sales. Not to mention that in the current environment, these businesses are seeing increasing wage pressure. The initial customer feedback has been extremely positive, and additional customer interest is building rapidly. We have already seen some well-known brands sign up with interest from hundreds more. Together with this product launch, we announced our first POS integration with Square, which will allow restaurants to use SoundHound's automated conversational AI phone ordering with Square's thousands of point-of-sale systems. This is the start of a new tremendous market opportunity that we believe we are perfectly positioned to address. Voice-enabled food ordering is particularly challenging. It requires specialized speech recognition and complex natural language understanding, which match our key differentiators very well. This is clearly an amazing product market space, and the demand from restaurants is significant. We have shown amazing success with the types of partners we have announced so far. And while they are strong, it takes years to build that strong foundation. What excites me the most about SoundHound for Restaurants is that the time to customer adoption is extremely fast. We have already seen customers up and running in a matter of days, and this should only improve as we scale into thousands of customers. This new offering has great potential to make an impact in a much shorter time frame due to the shorter sales cycles and faster deployment rates. One of those existing relationships where we are now seeing the strong foundation play out is Hyundai. This quarter, we announced an expanded agreement with multiple brands and multiple languages around the world. The new agreement brings SoundHound's Edge+Cloud voice AI technology, music recognition software, voice commerce solutions and multiple languages to Hyundai, Genesis, and Kia brands. The size and scope of this agreement will allow them to bring the power of voice AI to drivers in every class of vehicles in markets around the world. Before turning the call to Nitesh, I would like to make a few closing remarks. In the first decade of our company's history, we worked tirelessly to create what we believe is the best voice AI technology and platform. Since launching SoundHound's initial voice AI platform in 2016, we have radically evolved it, 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, Hyundai, Kia, Stellantis, VIZIO, Snap, and Pandora have helped build our foundation. We first extended this momentum with major announcements over the past several months, such as with Qualcomm, Netflix, Square, and LG Electronics, among others. We launched SoundHound for Restaurants, the first of many steps to enter the enormous voice commerce industry, creating a huge global advertising market for us. While the macroeconomic environment has proved challenging for many companies, we are pleased that SoundHound is performing right on plan and delivering against our own expectations for the first half of the year. Therefore, we confidently reaffirm our 2022 revenue target, and the potential opportunity in front of us is only expanding as we are aggressively moving forward. With that, I will now turn the call over to Nitesh to talk about our financial performance for the quarter.
Nitesh Sharan, CFO
Thank you, Keyvan. I share Keyvan's excitement about our first earnings conference call as a public company and the opportunity for ongoing dialogue with all of you. With Q2's triple-digit bookings growth and strong customer engagement, we are building and executing on the foundation that will fuel our continued expansion. Before going into the results for the quarter, I wanted to discuss our business model and how we generate revenue as my remarks will often reference this framework. For some of you, this may be repetitive, but it is very important so I wanted to start here. We break out our revenue into three distinct pillars: product royalties, service subscriptions, and monetization. First, we get royalty revenue when we voice-enable products, such as cars, TVs, and the rapidly growing billions of IoT devices around the world. Second, we generate recurring subscription revenue when we voice-enable services like food ordering, appointments, voice commerce, and customer service. And third, we create monetization revenue when we connect those voice-enabled products with the voice-enabled services, such as if you were to order a coffee from a voice-enabled coffee shop by speaking to your voice-enabled car on your commute to work. This natural, seamless interaction unlocks value for all parties involved. The sale generates revenue for the coffee shop, and we share the revenue that we receive from the transaction with the product creator or car manufacturer in this example. Most importantly, you get your morning coffee exactly when and how you want it. These three revenue pillars create a network platform effect that compounds, expanding our addressable market and increasing customer adoption. The monetization pillar extends voice AI from a valuable cost component to a new incremental revenue-generating pathway for customers, meaning the unit economics become increasingly more attractive as the ecosystem scales and expands. This is the business we have been building. Today, our revenue is more heavily weighted to pillar 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. We closed the quarter with a strong cumulative bookings backlog of $283 million, representing a year-over-year growth of 207%. The contracts underlying our backlog range from one year to more than seven years with a 4.5-year weighted average contract length. Our long-term relationships highlight the confidence and commitment our customers have working with us in partnership to build the future together. In Q2, we generated $6.2 million in revenue, up 43% sequentially from Q1 2022. Prior year Q2 results were impacted by onetime revenue derived from a customer upon the early conclusion of a professional services contract, which added $4.3 million to last year's result. Adjusted for that impact, Q2 this year had a 56% year-over-year growth. Revenues were predominantly driven by product royalties where we continued to scale units and also saw expanding average price per unit. Our gross margin improved to 60%, or up 100 basis points sequentially. Adjusting for that onetime or 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. 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 headcount and other adjustments associated with becoming public. In Q2, R&D was $18.9 million, up 35% year-over-year. We continue to expand our headcount and discretionary spend. We will continue to invest in R&D as we move forward to ensure we remain at the forefront of innovation while also helping to develop and scale new products and services. Sales and marketing expenses were $4.4 million, up 334% year-over-year off a small base. This is a primary area of investment as we grow the team to drive improvements in lead generation, new customer acquisition, expansions into new verticals, and ultimately, market share capture. General and administrative expenses were $9.4 million, up 127% year-over-year. This includes headcount growth and non-headcount spend across our global functions to support the operational activities needed as we scale the 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 nonoperating activities, was a loss of $20.4 million. Net loss per share in Q2 was $0.19. Please note that the 162 million weighted average shares outstanding used in the quarterly EPS calculation are impacted by our transition going from private to public. And as of June 30, our ending share count was approximately 197 million shares. Our cash on hand at quarter end was $65 million. Our business model is capital-light, so the P&L results largely flowed through to free cash flow. That said, we are a newly public company and investing for growth. To do that, we are leveraging the proceeds we received from going public in April while continuing to infuse new capital. Moving to guidance now. As we messaged last quarter, we believe offering annual revenue guidance is most appropriate given our rapidly evolving industry and significant growth potential. We are delivering on near-term commitments while focusing on the long-term potential in front of us. As such, for full year revenue 2022, we reaffirm guidance and continue to expect revenue in the range of $27 million to $33 million. This expectation has not changed since we first communicated it well before the market dislocations of this year, and we continue to feel confident in this outlook. In closing, given where we are as a business, progress will not always be linear, but our current momentum is unquestionable. We are excited to be at this juncture and extremely excited about our path forward. Thank you, and we will now move to Q&A.
Operator, Operator
Our first question comes from Mike Latimore from Northland Capital Markets.
Mike Latimore, Analyst
Congrats on getting public here. So the bookings were very, very strong, and it seems like you've almost hit your goal for the year there. I guess I'm thinking the momentum would continue to carry through the second half of the year here. So I guess how are you thinking about bookings trajectory throughout the rest of the year?
Nitesh Sharan, CFO
Yes, I'll start with that. First, I'll comment on guidance and provide more details on the bookings if that's okay. As I mentioned, we believe that giving revenue guidance on an annual basis is the best way to show how the bookings will translate. We remain confident in our outlook of $27 million to $33 million. As you pointed out, we're very pleased with the bookings results through Q2, totaling $283 million, which is three times higher than the previous year, demonstrating strong momentum and productive discussions with customers. So while we're not articulating exactly where we expect to end the year, we're having a lot of great conversations with existing customers on how we expect to potentially expand across regions, products, and brands where, as we noted in the prepared remarks, the second pillar, service offerings, particularly with respect to food ordering and the SoundHound for Restaurants offering, we're seeing tremendous traction. Our sales team, now that it's scaling significantly, has been on the ground, talking to a lot of customers, a lot of restaurants. There's just almost insatiable demand for what we're providing to them, particularly in this backdrop of labor pressures and wage pressures. It's a solution just very well suited for what they're looking for. And so really, we have a backlog of people trying to get onboard, and we have work to get them through the funnel. 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'll say that bookings represent sort of pillars one and two when we voice-enable product and we voice-enable services. They capture that. We're bringing these ecosystems and having a lot of great conversations. Monetization does not reflect in bookings. So I didn't mean to dance entirely off your question, but hopefully that gives some context and color commentary.
Mike Latimore, Analyst
For sure. Super helpful. I think you said also that the price per unit was going up a little bit. I guess, one, did you say that? And two, is that specific to royalties? Or does that include all three pillars here?
Nitesh Sharan, CFO
So I mentioned that the average price per unit increased in Q2, and we've seen it continue to rise. My earlier comment was broad, but I can specify that most of our revenue comes from product royalties, so it pertains to that area. The factors contributing to this are varied. First, we are expanding our customer base and product offerings. We have a consistent track record with cloud solutions, and we are incorporating cloud hybrid and edge products, each with different pricing structures. As we scale, both unit sales and price per unit are growing, which is a positive sign and reflects our expectations for the future. Sorry, Mike, can I add one more? I just thought it was also important; I didn't want this to be hidden in the prepared remarks either, but we also are cognizant that we think it's one of the strengths of our business model because there are other peers out there whose solution is just a cost component to their customers, and they feel pressure because they're constantly having conversations about how do I bring the cost of goods down. We're having a very different set of conversations. It's about providing a better solution 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 that's why we believe it's not just distinctive tech here. It's also positioning and business model differentiation that gives us confidence for where we're going.
Mike Latimore, Analyst
Yes. Okay. Great. And then I know you've hired a CRO, and he's been hiring salespeople. I guess how many salespeople are you up to now? Or how many do you want to get to by year end?
Nitesh Sharan, CFO
So I'll touch on maybe the numbers briefly, and then I'll let Keyvan add more on the excitement we have with Zubin onboard and what he's been doing with his team. I mentioned year-over-year at least, the numbers are up 3x in sales and marketing. We're investing not just on the sales side, but also in marketing. I think you've illuminated in your research how, with the limited business development team previously, we were still able to get sizable deals. Now with Zubin onboard, we're really scaling that significantly. We aren't breaking out the per sales. 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, moving towards the tens of sales folks. But beyond that, it's also lead generation and marketing investments that we are making. We're starting to get traction early. But the other point I'll raise is just the things we're going after: two large enterprise deals concurrent with small and medium-sized restaurants. We're addressing a lot of different areas, which gives us excitement. Maybe with that, I'll let Keyvan add.
Keyvan Mohajer, CEO
I want to emphasize that much of our past success with bookings has come from long-cycle deals, which are fantastic to close but require significant time to finalize. We will keep focusing on that as our primary strategy. However, our secondary strategy allows for much quicker cycles. You can go from the initial meeting to being operational with the customer on the same day. This is very exciting because we are witnessing it in action, just as we anticipated when we developed that strategy.
Operator, Operator
Our next question comes from Brett Knoblauch from Cantor Fitzgerald.
Brett Knoblauch, Analyst
Congrats on getting the first quarter on the books. I was just wondering if you can maybe walk through how we should think about bookings and that backlog flowing through to revenue. What needs to be met? Is the entirety of bookings consisting of non-cancelable contracts that have been signed? I guess any insights on how we should think about that flow-through over the next year, two, or three years?
Nitesh Sharan, CFO
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. First, I mean, I'll just make the statement, our strong bookings backlog sets us up well for future revenue. In our view, bookings is a conservative measure of our success and doesn't include all of the revenue components, such as monetization. Bookings represent committed contracts with large enterprise customers, basically, pillar one, product royalties; and pillar two, subscription services. And they're based on minimum guarantees where applicable and customer volumes where we have confidence in such forecasts. We might get them from the customers directly, and we may hedge them down if we don't believe they're conservative. Any overages that we observe in our contracts flow directly into revenue, which represents additional upside. To break down the $283 million in bookings we have, the average contract length is approximately 4.5 years, with some skew towards the latter half, ranging from one to seven years. With this average, we anticipate realizing those bookings into revenue over the next several years, but it won't occur evenly. Additionally, due to these dynamics, and I understand the intent of your question, we determined that providing revenue guidance would offer the best visibility into our current situation and its impact on our financial performance in the short term. We also expect to continue sharing annual revenue guidance moving forward.
Brett Knoblauch, Analyst
Sorry, I was on mute. But I guess just to add another question, could you just elaborate on what the $4.3 million was in the compare period, the early termination of professional services? I guess what happened there? Why was there a termination? Any additional color on that?
Nitesh Sharan, CFO
Sure. I'll start, and Keyvan can provide more details. We had a contract modification with an existing customer. The customer initially had a specific direction they were following but then changed course, and we continued to pursue expansion opportunities with them. The previous contract concluded the professional services, and we collected the cash. According to the termination clause, we recognized revenue at that time instead of spreading it over a longer duration. We are also working on other projects with them. So that was the background. It had a significant impact on the prior year's second quarter.
Operator, Operator
Our next question comes from John Katsingris from Wedbush Securities.
John Katsingris, Analyst
This is John Katsingris on for Dan Ives. So we've seen enterprises start being a bit more selective with capital due to increasing costs due to inflation. Have you witnessed any potential slowdowns in the pipeline? Do you expect anything along those lines or any rapid acceleration of bookings?
Keyvan Mohajer, CEO
Yes, I'll start, and Nitesh, you can chime in. We've seen the opposite, in general, mostly because we are in the AI and automation business. And that really resonates in markets like this when people are either trying to save costs or increase their revenue or become more efficient where staffing is challenging. For example, the SoundHound for Restaurants product, restaurants aren't able to pick up their phone. And when they do pick up the phone, the customer experience is not very good. So that solution is resonating with them. We have actually a waiting list for restaurants that want to sign up for that service. And then, if you look at what's happening in the automotive industry or other devices like TVs and so on, the team is increasing revenue from those products as opposed to how it used to be: you sell the device and your relationship ends with the end user and you have low margins. But if you can monetize the user interaction, that's a new paradigm that a lot of device companies are signing up for. And we are a big part of that solution because the voice AI interface to these devices, we bring services with our three-pillar models, and we provide a path to generate revenues while delighting the users. So the market conditions actually help our business. But Nitesh, if you want to...
Nitesh Sharan, CFO
Yes, I might just add a couple of brief things. I mean, I think the pathway we've been on for the past year, leading to this conference call as a public company, the fact that I highlighted that we're maintaining our expectations, we're able to deliver against that in a macro environment where a lot of things have happened over the last nine months, to say the least, from inflationary pressures to geopolitical dynamics and so forth. I'd chalk it up to, one, laser focus from the team and commitment to delivering on our customer commitments. I also believe it has to do with delivering solutions that customers really need and want. In a lot of ways, they're fed up with the status quo and incumbent opportunities that they have. When they see our technology and understand how it can help amplify their solutions, they're continuously sort of attracted to engage with us and work with us and buy from us. And so we believe we're scaling and innovating in a recessionary environment, in a difficult environment, and we have a strong value proposition. Even longer, through whatever business cycle, it's about creating a much more seamless interaction of how humans interact with technology. We believe it’s the next modality that will really step function change how we interact with technology that is becoming more pervasive in our world. And so we just think we're really well-suited to deliver on these decades of great innovation that Keyvan and co-founders and the team here have built. So we're excited.
Operator, Operator
We have no further questions. I would like to turn the call back over to Keyvan Mohajer for his closing remarks.
Keyvan Mohajer, CEO
Thank you. When we founded SoundHound, we had a vision to see conversational AI in our lifetime, and we are now a leader in this space. We have made a series of significant technological innovations, and we are now focused on rapidly scaling our business. With our Speech-to-Meaning, Deep Meaning Understanding, and collective AI breakthroughs, we believe we have a competitive and technological differentiation. Conversational AI is undoubtedly the future. 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.
Operator, Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.