SoundHound AI, Inc. (NASDAQ:SOUN) Q1 2024 Earnings Call Transcript May 9, 2024
SoundHound AI, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and thank you for standing by, and welcome to SoundHound Q1 2024 Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Scott Smith, Head of Investor Relations. Please go ahead.
Scott Smith: Good afternoon and thank you for joining our first-quarter 2024 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 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’d like to turn the call over to our CEO, Keyvan Mohajer. Please go ahead, Keyvan.
Keyvan Mohajer: Thank you, Scott, and thank you to everyone for joining the call today. Once again, we are reporting very strong growth. First-quarter revenue was up 73%. Just a few days ago, we reached the milestone of being a public company for two years. While the tough external conditions of the last two to three years have weakened or eliminated many organizations, we have become stronger. We have nearly tripled our first-quarter revenue in just two years, while better leveraging our expenses, and we have more than doubled our cash position to its record high of approximately $225 million on the balance sheet. Our three-pillar strategy is working. This quarter was a special quarter for our pillar two, where we offer AI customer service solutions for businesses.
About 30% of our revenue was from pillar two with over 10,000 locations laid in production and over 100,000 in our pipeline. Just a year ago, these numbers were negligible. And for the first time, our next-generation drive-thru AI service dynamic interaction is now live with one of the top global QSR brands, and the results are incredible beyond expectation. The main challenge our customers face on the first day of being live with dynamic interaction was that our AI was so fast at taking orders that their kitchen could not keep up with the pace. Of course, they’re addressing that on their side and are pleased with the results and immediately decided to expand to more locations. As we’ve said before, our AI solutions save cost for our customers, improves the experience of their users, and also increases revenue by adding throughputs and proactively offering upsells.
Dynamic interaction is a SoundHound technological breakthrough like no other. We believe its impact on voice and conversational interfaces will be as meaningful as the Apple multi-touch technology on touch interfaces. If you have not seen it in action, check out the videos on our website. We have built a competitive moat with our proprietary technology that is creating a massive opportunity in customer service. We have agreements executed with several other large QSR brands that will be deploying dynamic interaction in the next few months, for example, Church’s Chicken. The earlier version of our drive-thru AI experience has been live for several years and continues to thrive. White Castle continues to expand its footprint with more locations opening, including one of their busiest locations next to Disney World.
Another major QSR with over 2000 locations uses our AI for drive-thru and continues to expand our offering to more locations as they add more drive-through capabilities to their existing in-store and takeout services. Next, our Smart Ordering offering continues its strong adoption. Smart Ordering uses our voice AI for answering all inbound phone calls to take customer food orders and to answer numerous questions, allowing restaurants to free up their staff to focus on making food and engaging with customers in-store. We handle millions of calls per month, and we power national brands such as Chipotle, Casey’s, Firehouse, Noodles, and Five Guys. Last quarter, we announced the pilot with Jersey Mike’s. The pilot was successful, and they’re adding more locations.
We also expanded with Applebee’s and now have our voice AI offering across multiple franchisees, resulting in an additional 500 locations this quarter alone. We introduced a product called SoundHound Employee Assist, which uses our conversational voice AI technology to support employees like a copilot across a variety of task via their headset. We already have several customers benefiting from this new service, and we will have more to share soon. Last year, we expanded our AI customer service offering beyond restaurants with Smart Answering, a product that handles multiple calls at once 24/7, conveniently filtering out spam calls, providing verbal and SMS responses, taking configurable actions, capturing leads with intelligent messaging and answering questions about policies, hours, products, services, pricing and more.
Smart Answering is showing rapid growth within pillar two and already has hundreds of locations signed up from single-location small businesses to brands such as Planet Fitness. We estimate our pillar two total addressable market to be over $100 billion with over 1 million restaurants and approximately 30 million businesses in North America alone that we can offer our solutions to. And with dozens of languages we already provide to our pillar one customers, we plan to also go international in pillar two. We believe with large language models and generative AI and most importantly, the data science and machine learning behind our proprietary software, the time is now. Very few companies can offer businesses of all sizes and affordable fast and easy to implement solution that addresses their growing needs.
While other point solution providers and legacy call center vendors are trying to evolve their offerings to include AI, we already have a fully automated and therefore, easily scalable solution. We own our tech. We have big data from real interactions and nearly 20 years of experience. This is why we are winning. Moving on to pillar one, where we power products such as cars, TVs, and IoT devices. Within this category, our customers choose us because they believe our technology is the best, and we help them protect their brand users’ data and because we partner with them to differentiate and innovate. We power millions of devices in dozens of languages. And this quarter, we reached an annual run rate of over 4 billion queries and in Q1, it represents a growth of more than 60% year over year.
Last year, we announced SoundHound Chat AI, which combines the power of large language models with our AI assistant, making it more capable and powerful. This is an upsell feature that will increase royalties from existing customers, and its unmatched quality is helping us win new customers. Last quarter, we talked about DS Automobiles being the first to quickly run a trial run to live production, which was unprecedented with car manufacturers. We have signed up new brands for SoundHound Chat AI, including Opel, Peugeot, and Vauxhall due to the success of their launch. And now this quarter, we are pleased to add Alfa Romeo and Lancia. We also went live into production with Stellantis vehicles in Japan. With our customer, Stellantis, we have been the first company anywhere in the world to launch a voice assistant integrated with ChatGPT into vehicles.
We are also pleased to have been awarded a design win for our first automobile customers in Latin America with Stellantis. This is a brand new competitive win. We also continue to gain interest and make progress with EV manufacturers. For example, a deal we won last quarter with a prominent US-based EV maker, we will voice-enable their full fleet of market-leading vehicles later this summer. This means we have gone from signing to in production in a matter of months, thanks to SoundHound’s industry-leading capabilities and market-ready products. Additionally, we won a deal with a leading Asian electric car manufacturer to embed our software that aims to bring affordable and luxury electric cars with powerful engines. This is a brand new automaker we have not announced before.
This quarter, we announced the collaboration with NVIDIA during the GTC conference. The solution we are partnering on combines SoundHound Chat AI with large language models running in vehicle on NVIDIA DRIVE for seamless voice interaction. Together with NVIDIA, we can now deliver in-vehicle generative AI responses with no connectivity required. We are also now partnering with Arm and have been officially added to their partner program. More to come on that later this year. Just today, we announced a partnership with Perplexity, which will bring cutting-edge online LLMs to SoundHound Chat AI. This allows us to offer a truly multifaceted, next-generation voice assistant to phones, cars and IoT devices. SoundHound Chat AI will leverage per Perplexity to provide accurate up-to-date responses to web-based queries that static offline LLMs cannot currently answer, expanding the type and complexity of the questions the assistant is able to answer.
The move makes SoundHound AI the most advanced voice assistant available on the market today. We believe we are the only voice AI platform to be able to quickly provide this unified integration, combining our own technology seamlessly with third-party providers. We have also reached an important milestone with Polaris. Our multimodal, multilingual, generative AI foundation model. Polaris now beats our latest state-of-the-art speech recognition model in terms of accuracy, speed, model size, and run costs, which already beat the other vendors we benchmarked against by a large margin, including models provided by the big tech. Polaris is now live in production with a growing percentage of our customers, and we will continue to provide updates on its progress.
We believe voice AI is a bigger opportunity than just conversational AI. Our data and know-how, along with our continued investment in this level of R&D will strengthen our position as a leader in our space. As I mentioned earlier, we have three pillars: royalties from voice-enabled products, subscription from voice-enabled services, and the third pillar is monetization from connecting those services to products. As we increase the notable names that we sign every quarter — and this quarter is no different — we get one step closer to mobilizing this third pillar, significantly increasing our addressable market while creating new, more convenient and accessible consumer experiences. We believe pillar three will create the voice commerce ecosystem of the future, and many customers are signing up in pillar one and pillar two in eager anticipation of us rolling out this monetization strategy.
We are excited to see our portfolio of customers using voice-enabled services continue to grow, which should allow us to begin to offer this new commercial ecosystem. In closing, we continue to build a strong business and fortify our financial position, all while gaining market share. We couldn’t be more pleased with the demand you’re seeing and the high praise we are receiving from the customers we are serving. With another quarter of strong growth and notable customer wins, our momentum continues to grow. We remain passionate about what we do, and that has not changed in the 20 years since we founded the company. We look forward to continued strong growth and creating value for our stakeholders. We are grateful to our amazing team that makes this all possible as well as our customers, partners, investors and shareholders.
With that, I’ll now turn the call over to Nitesh to talk about our financial performance, key growth drivers, and outlook for the remainder of the year.
Nitesh Sharan: Thank you, Keyvan, and good afternoon, everyone. Q1 revenue increased by 73% year over year. The results indicate another positive mile marker on our growth journey in which we exceeded $11 million in revenue in our seasonally smallest quarter of the year. We like where we are today, and we are excited about what we are quickly becoming. Our AI solutions attractively reside at a critical intersection. Macro factors like persistent inflation and wage pressures drive many of our customers towards automation for productivity. Concurrently, consumer demand for increased speed and convenience drive our customers towards automation to accelerate throughput and increase revenue. AI connects this intersection seamlessly, and generative AI massively extend the value proposition further.
The penultimate result is high consumer interest in SoundHound. With our recent acquisitions, SYNQ3, now fully in the mix, the benefits of integrating this pioneering restaurant tech organization with our years of voice AI innovations are clear. And the breadth of coverage we now have in the restaurant sector is so exciting and showing up in overflowing customer activity. One of the measures we use to gauge that traction is backlog. Last quarter, I introduced a combined pillar one and pillar two customer demand metric called cumulative subscriptions and bookings backlog. In Q1, we saw approximately 80% year-over-year growth to $682 million with an average duration of about seven years. As a reminder, this measure includes new subscription revenue streams and our traditional royalty contract.
The methodology for our pillar one contracts has not changed. We include only committed customer contracts for exactly the duration of the contract period and capture various facets of the deal and total contract value like construct. These facets include minimum commitment, target volumes, professional services, and other arrangements. We do not include renewals until the renewal takes place even if contracts include auto renewal provisions. For subscriptions, cumulative subscriptions and bookings backlog takes into account customers where we are the leading or exclusive provider and assumes a four-year ramp to fully scale with the total 5-year duration. We have incorporated reasonable assumptions about adoption percentages with lower percentages applying to pilot and proof-of-concept customers.
Furthermore, this metric does not include pipeline opportunities for which we have well over a 100,000-location opportunity for pillar two alone. This metric is intended to directionally convey our medium-term revenue growth prospects. Before I walk through the financial results for the first quarter, given the impact of the acquisition to various aspects of the GAAP financials, we are introducing two new non-GAAP financial measures for gross margins and EPS to help investors better track how we manage the business operationally. I’ll share more context in the relevant sections below. Q1 revenue was $11.6 million, up 73% year over year. We saw growth in Q1 across all major industry categories. Pillar two represented approximately 30% of revenue in the quarter, combining organic growth with positive contributions of roughly $3 million from the acquisition of SYNQ3.
We also had a strong quarter in pillar one as automotive royalties went up with volume increases year over year. Auto units and cloud users both expanded strong double digits in the quarter. Additionally, we continue to see growing demand in our generative AI solutions, and we are seeing meaningful opportunities starting to be realized for accelerated unit price expansion. We also signed a multiyear commitment in the TVs and devices category, and that led to strong double-digit growth from devices in the quarter. In Q1, our gross margins were 60%, down year over year, largely resulting from the acquisition, including the mix of lower margin call center agent business. On a stand-alone basis, gross margins were up year over year. Adjusted for acquisition impacts, notably the non-cash amortization of purchased intangibles, gross margins would have been 65.5%.
This is the non-GAAP gross margin metric I introduced above. While the call center business does pressure margins in the near term, we are excited about what this new capacity can do for broader business opportunities and equally so, for the valuable training data it provides our AI models. That said, our goal over time is to automate and modernize. So we expect gross margin improvements through the year and ultimately back to pre-merger levels. R&D expenses were $14.9 million in Q1, an increase of 5% year over year. We have streamlined our R&D cost, increased efficiencies, and are prioritizing investments in disruptive innovation to expand our suite of products to address a wider array of customer needs. We are accelerating the training and deployment of large language models to provide even more value to customers, enabling us to open many doors and a wide variety of new conversational AI use cases.
That said, we will continue to be thoughtful and opportunistic with greater emphasis on bringing unique value through best-of-breed large language models, including multilingual ASR foundation model, generative AI solutions, and voice AI capabilities that intermediate and arbitrate between our own models and partner LLMs. Sales and marketing expenses were $5.5 million in Q1, an increase of 14% year over year. We continue to invest in go-to-market and customer engagement to capture the strong momentum and heightened demand, and we are expanding reach through brand and industry marketing, demand generation and high ROI lead-gen strategy. Our sales reach continues to expand with both direct sales and through an amazing ecosystem of strategic channel partners.
We know the best go-to-market ROI comes from customers loving us. And this quarter, with one of the largest QSRs, we were introduced to their executive management team as the best partners their team has ever worked with. G&A expenses were $10.3 million in Q1, an increase of 41% year over year. The increases in G&A reflect two main elements that we talked about last quarter. Our year-over-year comparison continues to be impacted by investments in financial and non-financial processes and internal controls to support requirements under stocks 404(b) as we became a large accelerated filer last year, and this quarter also factors in acquisition related costs. All operating expense line items were impacted by the SYNQ3 acquisition, as well as higher employer-related tax costs and increased compensation.
Non-cash employee stock compensation was $7 million in Q1. As a result, our operating loss for Q1 was $28.5 million. This included non-cash acquisition impacts related to the fair value accounting that will likely introduce volatility into this line for the foreseeable future. OI&E was $4.2 million of net expense for the quarter, and net loss was $33 million in Q1 compared to $27.4 million in the prior-year period. This led to a net loss per share in Q1 of $0.12 compared to $0.14 in the previous year. Adjusting for non-cash acquisition related amortization of purchased intangibles, fair value adjustments, M&A transaction costs, stock-based comp, and other non-cash items, our non-GAAP EPS loss was $0.07 in the quarter. This is a measure we will continue to report upon in future quarters given it better normalizes the ongoing operating results of the business.
Adjusted EBITDA was a loss of $15.4 million in Q1. The year-over-year decrease was a result of the previously mentioned higher operating costs as well as the SYNQ3 acquisition impact. Net cash used in operating activities for the three months ended March 31, 2024, was about $21 million. Our cash position at quarter end was $226 million, of which $212 million was in . With this strong cash position, we have given ourselves some great optionality to drive the business forward and further improve our financial profile. We entered a new ATM program in the quarter to provide us with capital-raising flexibility, although our balance sheet and forward projections indicate we don’t have any time-sensitive capital-raising needs. It would only be necessitated strategically either for capital structure optimization purposes or if another attractive acquisition opportunity presented itself, where the economic value merited it.
All that said, we don’t take this strength for granted and are committed to being prudent stewards of capital, focusing on creating long-term sustainable growth and profitability. With that, let me discuss our outlook for the remainder of 2024. We are excited about the opportunities ahead and pleased with our top-line performance, coupled with the demand we are seeing in pillars one and two, and we are driving new opportunities in pillar three. We are ahead of pace in having pillar two exceed 20% of total revenue mix this year, and we see that mix increasing as we go into 2025. Given the Q1 performance, we are raising the lower end of our guidance and narrowing our initial range, which steps up our mid-point to $71 million. Therefore, our revenue guidance for the full year is now $65 million to $77 million.
We continue to believe the right expectation for subsequent quarters is roughly 50% year-on-year growth. We hope to outperform, but at this stage, we believe this is the appropriate expectation. Furthermore, we still expect to cross $100 million in revenue and deliver adjusted EBITDA profitability in 2025. As I noted last quarter, the increased cost impact on gross margins and adjusted EBITDA is temporary, and we expect both to improve as we move forward. With the SYNQ3 acquisition, we are working on migrating their cloud and AI infrastructure to SoundHound so in the immediate term, we have some duplicative costs. In addition, while a portion of SYNQ3’s revenue is AI-driven, they also have a legacy call center operation, which their team has been gradually upgrading with AI.
We expect to further accelerate this migration, which will ultimately calibrate their gross margins to ours over time. Overall, though, based on initial conversations with customers and partners, we are making great progress, and there is strong interest to even further increase the value we create for customers. I’ll close with another note of conviction in the business we are building. As I’ve said before, the path forward isn’t always linear. In particular, creating disruptive transformational innovation is not for everyone, but it’s a strong part of SoundHound’s DNA. When the pieces start falling together, though there’s a gravitational force at play. With our proven track record of progress, as each quarter passes, we get closer to our escape velocity.
Despite our achievements so far, we don’t take our success for granted, and we fight for it every day to aim higher and push the boundaries further measurably and persistently. Thank you. We will now move to Q&A.
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