SoundHound AI - Q3 2022

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the SoundHound AI third quarter earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Scott Smith, Head of Investor Relations. Please go ahead.

Scott Smith (Head of Investor Relations)

Great. Thank you, Gigi. Hi, everyone. Good afternoon, and thank you for joining our third quarter 2022 conference call. With me today is our CEO, Keyvan Mohajer, and our CFO, Nitesh Sharan. We'll 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. Please refer to our filings with the SEC for a detailed discussion of the risks and uncertainties that could affect our business and those that qualify as forward-looking statements. 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 is being audio webcast in its entirety on our investor relations website. An audio replay will be available shortly 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 (Co-Founder and CEO)

Thank you, Scott, and thank you to everyone for joining the call today. We have achieved a lot this year, and today I am extremely excited to report a record quarter across all key metrics. The demand we are seeing for our innovative AI-powered products and solutions is strong and is only getting stronger as we execute on more opportunities and with more customers. Even with a softening macroeconomic environment, the demand for AI field solutions continues to grow, and our value proposition clearly resonates with businesses. Our cumulative bookings backlogs are past the $300 million mark, resulting in over $200 million in the past 12 months alone. This key metric for our business has grown at an accelerated pace.

In fact, the 239% year-over-year growth we reported this quarter is the fourth straight quarter of triple-digit growth as we continue to increase market share across key segments. In Q3, revenue accelerated by 2.8 times year-over-year to $11.2 million. In fact, for the first nine months, we have already exceeded our full year revenue in 2021. This momentum demonstrates our strong partnerships and the market share we are taking. Cloud queries, a key measure for customer adoption of our conversational AI platform, reached an annual run rate of over 2 billion or currently about 180 million queries per month. Importantly, this growth is driven by increased usage from existing customers and new devices and users alike, reinforcing that our solutions deliver a very attractive value proposition for our customers.

We are clearly on the right path to leveraging the opportunities in front of us. In addition, we continue to aggressively expand our product suite to enable customers deeper access to our voice AI-powered products and solutions. For example, this quarter, we introduced our full suite of edge and cloud connectivity solutions, along with a new groundbreaking intelligent transcription offering. These products extend our market reach, helping a wider array of customers strengthen their brands, derive deeper insights in their own customer conversations, and control their most important data sets. Now, let me update you on a product we launched last quarter to show you how rapidly we are innovating our voice AI solutions. SoundHound for Restaurants is experiencing amazing demand, and there's a reason for it. Let me play a short audio demo highlighting some of the unique strengths of this voice AI technology.

Speaker 6

I'd like a classic cheeseburger with American cheese, but no mayo, and add avocado and a fried egg.

Speaker 7

Great. I've added a classic cheeseburger with American cheese, avocado, and fried egg, but without mayo to your order. Would you like anything else?

Speaker 6

Actually, can you make that cheddar cheese, remove the avocado, but add extra tomatoes?

Speaker 7

No problem. I've replaced the American cheese with cheddar cheese. I've removed the avocado from your order. I've added extra tomato to your classic cheeseburger. Would you like anything else?

Speaker 6

Yeah. I'd like an order of French fries and two orders of onion rings.

Speaker 7

Absolutely. I've added French fries and two onion rings to your order. Would you like anything else?

Speaker 6

I'm sorry. Can you remove an order of onion rings and add an order of french fries?

Speaker 7

Great. I've removed the onion rings from your order. I've added French fries to your order. Can I get you anything else?

Speaker 6

Yeah. I'd like 12 cupcakes, six chocolate, three vanilla, and three strawberry.

Speaker 7

Great. I've added six chocolate cupcakes, three vanilla cupcakes, and three strawberry cupcakes to your order. What else can I get you?

Speaker 6

That'll be all. Thank you.

Keyvan Mohajer (Co-Founder and CEO)

As you can see, our technology can handle complexity that is unmatched by the incumbent legacy players and the big tech. Our ambition is to make conversational AI even better than human in natural language understanding and also as human-like as possible in the way it responds and interacts. I am also excited to share with you that on November 17, SoundHound will unveil a breakthrough innovation in artificial intelligence to unlock the next generation of human-computer interaction. We expect this category-level breakthrough will raise the bar for human-computer interaction by not only recognizing and understanding speech, but also responding and acting in real time. We believe just like how Apple's multi-touch technology leapfrogged touch interface in 2009, our announcement next week will be a new disruption in human-computer interfaces.

With this new technology, we see the potential to unlock many new applications for conversational AI that were previously less compelling. We expect this to increase adoption of our innovative AI-powered products and solutions, resulting in a significant increase to our TAM. We encourage you to look out for our exciting announcement on November 17th. In a world that is swiftly moving towards widespread voice enablement, 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 voice AI technology to the next level so that users can interact naturally, especially when it comes to more complex queries. Over the past two decades, we have seen many technology vendors try to create technologies in voice AI, but often, more often than not, they have not succeeded.

The reason for that is natural language understanding is an especially challenging form of artificial intelligence. It is complex, 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 so few companies delivering advanced voice AI technologies today. We have proprietary Speech-to-Meaning, Deep Meaning Understanding, and Collective AI breakthroughs that we built from the ground up. Our technology bridges two major industry gaps, legacy inflexible, expensive competitors whose technology is outdated, and big tech solutions whose voice assistants override a company's most valuable asset, their brand and customer data. In addition to our disruptive technology, our disruptive business model is also a contribution to why we win. We generate revenues from three pillars of royalties from voice-enabled products, subscription from voice-enabled services, and monetization from bringing those services to products.

For example, say a driver opts to use the convenience of in-vehicle SoundHound technology to connect with a SoundHound-enabled restaurant to order a pizza for pickup on the way home. When that happens, we would make revenue from the transaction, the pizza restaurant would benefit from a new customer being channeled in their direction, and the automaker also takes a share of that revenue. While other providers that generate licensing revenue from products are under constant pressure to lower their licensing fees and face the risk of declining revenue, our three-pillar model increases revenue per user while increasing adoption. This is due to the revenue share aspect of our model, which incentivizes product creators who are able to use our voice technology to create new commerce opportunities and facilitate transactions. We aim to power billions of devices and services.

SoundHound's technology is already voice-enabling millions of cars, TVs, mobile apps, and IoT devices on a global scale, thanks to our expansive set of languages and international presence. We have had great success with the types of partners we have announced so far, and we continue to deliver voice AI technology to some of the most well-known brands in the automotive space and grow our relationship with IoT and device manufacturers. Here are a few highlights. With Hyundai, Kia, and Genesis, we saw significant international market expansion of our existing multi-year volume commitment. As a result, we had a strong revenue contribution as we expanded unit delivery in various brands and delivered on agreed milestones. Building upon our existing 17 automotive brands, we also announced an expanded relationship with Stellantis in Europe. In addition, we announced our first Mandarin solution already in production with DongFeng Peugeot-Citroën Automobile in China.

This indicates a strong relationship in China, which is rare in the technology industry for a non-Chinese company. This quarter, we announced integrations with LG and Harman as we continue to expand relationships with automotive technology platforms around the world. With Qualcomm, an announcement in January this year, we continue our joint efforts with Snapdragon, paving the way with our advanced voice technology for new use cases and innovative experiences. To show our strong relationship, I will be presenting at several keynote sessions at the Qualcomm Snapdragon Summit later this month. It is also important to note that we are very global, with customers shipping in 25 languages and continue to grow internationally as we scale.

As an example, in addition to our existing global footprint in automotive, we are working with some major global brands, including in the IoT, hospitality, and consumer segments, and this continues to grow. It takes years to build the foundation for such strong relationships. While we are excited about what we have built and the new opportunities we realized this quarter, it is nice to see that this success is also being recognized by our industry. In Q3, Speech Technology magazine awarded SoundHound the 2022 Speech Industry Award for driving ambitions in speech, recognizing SoundHound as one of the top providers of in-car voice systems. It is an honor to receive such recognition. Turning to SoundHound for Restaurants, our voice AI assistant that allows restaurants to automate the ordering process at drive-throughs, drive-ins, ordering kiosks, and over the phone.

This technology helps restaurants automate and innovate their order taking at a time when many are tackling rising food costs, staffing shortages, supply chain issues, and other headwinds. SoundHound for Restaurants results in businesses taking more orders and maximizing sales. Because our voice AI technology can help restaurants simultaneously grow sales and save costs, SoundHound for Restaurants has been an instant success. Because of the extremely fast onboarding, where we see customers live in a matter of days, I'm pleased to report that our technology is being implemented at a rapid rate. Our pipeline is easily in the tens of thousands of restaurants, and it will only grow since there is over 1 million establishments in the United States alone. In addition to selling directly to restaurants, we are rapidly building out our ecosystem with point-of-sale systems providers.

Last quarter, we announced our integration with Square, and since then, we have added integration with Oracle and Toast. These integrations allow SoundHound for Restaurants to seamlessly be integrating restaurants to automate voice AI ordering technology, significantly expanding our reach to millions of restaurant establishments globally. We have also been working with Mastercard to jointly develop voice-enabled solutions to deliver low-touch, high-engagement experiences for quick-service restaurants. While most other attempted solutions use a hybrid of humans and automation to tackle the complex challenges of food ordering, our fully automated advanced AI technology is on track to surpass a level of ordering success on par with humans. Because of this achievement, we are taking this partnership into a commercially large deployment phase, enabling us to expand in more locations and brands. Our pipeline is expanding both here in the U.S. and internationally, and this is only the beginning.

As Mastercard's trusted partner in retail initiatives, we look forward to expanding into other relatively untapped markets to deliver timely innovation for many retail brands around the world. With SoundHound for Restaurants, we are confident this presents a significant market opportunity that we believe we are perfectly positioned to address. Voice-enabled food ordering is particularly challenging, requiring a specialized speech recognition and complex natural language understanding, which match perfectly with our key differentiators. Next year, we expect this opportunity to begin to make a meaningful impact on both bookings and revenue, as we are already seeing shorter sales cycles and faster deployment rates. Over the long term, the potential impact is significant. In closing, since launching SoundHound's initial voice AI platform in 2016, we have radically evolved it, globalized it, reached with 25 languages, and begun to scale into major enterprises across several industries.

Large brands such as Hyundai, Kia, Genesis, Mercedes-Benz, Stellantis, Dodge, Chrysler, VIZIO, Snap, and Pandora have helped build our foundation. While we continue to expand on those foundational relationships, we are making meaningful progress in expanding our addressable market and as demonstrated with our new SoundHound for Restaurants solution. Like Amazon starting with books, this is the first of many steps for SoundHound to enter the enormous voice commerce industry. We are confident in our ability to both create and leverage a huge global addressable market. Our ability to simultaneously focus and be agile has always been one of our strengths and has enabled us to strategically innovate and bring the right technology to the market at the right time. As we look forward, we will remain agile and focused.

For that reason, yesterday, we announced to our SoundHounders that we are taking actions to streamline our company, including an approximate 10% reduction in workforce. We never take these actions lightly, but we know that success comes from leaning into challenges and the ability to navigate and appropriately respond to the environment around us. I genuinely want to thank those departing teammates for all they have done and contributed to for the past several years. We are in a unique position to maintain our leadership in core voice-enabled AI technology with our track record to solve extremely difficult problems with our breakthrough inventions. We are performing right on plan and delivering strong results. While the macroeconomic conditions have proved challenging, we are pleased to confidently reaffirm our 2022 revenue targets once again. Even in tough times, we have not wavered.

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, and hello, everyone. Q3 was a milestone quarter. We reported record revenue, delivered strong gross margin expansion, and saw EPS improvement both year-over-year and sequentially. With Q3's triple-digit bookings growth and strong customer engagement, we are building and executing on the foundation that will fuel our continued expansion. We closed the quarter with a strong cumulative bookings backlog of $302 million, representing a year-over-year growth of 239%. The contracts underlying our bookings backlog range from one year to more than seven years, with a roughly five-year weighted average contract length. Our long-term relationships highlight the confidence and commitment our customers have working with us to build the future together. These bookings form a critical foundation for our ongoing top-line results. As a quick reminder, we break out our revenue into three distinct pillars.

Pillar one is where we voice-enable products like cars, TVs, and IoT devices, and we book product royalty revenue. Pillar two is where we voice-enable services like food ordering, appointments, customer service, and we book recurring subscription revenue. In pillar three, we create monetization revenue when we connect those voice-enabled products in pillar one with the voice-enabled services in pillar two, similar to the example Keyvan shared earlier. This natural and seamless bridge between voice-enabled products and services unlocks value for all parties involved, the end user, the restaurant, and the product creator, with whom we share part of the transaction.

These three revenue pillars create a positive network platform effect that compounds, expanding our addressable market and increasing customer adoption. The strategic business model elevates voice AI from a cost component to a new incremental revenue-generating pathway for product creators, which is an extremely attractive proposition to our customers. Accordingly, unit economics become increasingly more attractive as this ecosystem scales and expands, and we are building this ecosystem within a massive addressable market. In Q3, we generated $11.2 million in revenue, up 178% year-over-year. Revenues were predominantly driven by product royalties, where we continued to scale units and also saw expanding average price per unit. This quarter, our product royalty revenue increased significantly, thanks to overall customer momentum and including a large edge deal with an automotive partner, whereby we received a multiyear minimum guarantee commitment.

This partnership has been steadily expanding, and we continue to displace the incumbent provider. The long-term commitment demonstrates the strong partnerships we are developing and the continued share gains we are experiencing. We also saw strong growth in pillar two, up 83% year-over-year, where we've begun to realize the traction we are seeing with restaurants and voice-enabled food ordering. There's so much potential in the service sector, and we are aggressively pursuing it to meet the strong customer demand and amazing product market fit that Keyvan mentioned earlier. While the mix of revenue between royalties and subscriptions will not be linear from quarter to quarter, we expect that over time, revenue will become more predictable as we expand more into pillar two, subscriptions, and pillar three, monetization.

We see subscriptions and monetization as more of a recurring revenue stream that will eventually be measured in metrics such as ARR and ARPU. Our gross margin improved to 77%, up from 59% in the prior year. This was largely driven by the mix of higher-margin edge solutions and the previously mentioned automotive deal. It is important to note that this dynamic will not always be the case since different quarters may have different product mixes. Nevertheless, we continue to expect full-year gross margin to be over 70%, which we believe is strong and appropriate for a thriving and expanding core software business. Cost of revenue for the quarter was $2.6 million, up 56% from the prior year.

The majority of our cost of revenue is associated with data center costs supporting our customers, which continue to be impacted by a migration across cloud vendors. We continue to expect to complete the migration by the end of this year. Our operating expenses have historically been heavily weighted towards R&D as we built our voice AI platform and deep portfolio of over 260 patents. We ramped up our sales and marketing investments this year to accelerate growth while solidifying our G&A functions as a newly public company. Across our operating expenses, non-cash employee stock compensation was $9.2 million in Q3, up sequentially and year-over-year due to increased headcount and other adjustments associated with becoming a public entity. In Q3, R&D was $19.4 million, up 35% year-over-year.

We will continue to invest in R&D to ensure we remain at the forefront of innovation in AI and machine learning, while also helping to develop and scale new products and services. Some of the key product innovations Keyvan noted earlier were a result of this and prior R&D investments. Sales and marketing expenses were $6.7 million, up 468% year-over-year, coming off a small base in the prior year period. This has been a focus of investment to fuel lead generation, new customer acquisition, expansions into new verticals, and ultimately, our ability to continue to disrupt and capture market share. The traction we are seeing in pillar two, in particular, is benefiting from this spend. General and administrative expenses were $9.6 million, up 138% year-over-year.

This includes headcount growth and non-headcount spend across our global functions to support the operational activities needed as we scale as a public company. We expect this trend to continue over the next few quarters and then start to become a source of leverage on the P&L. Please note that much of our stock compensation expense also sits in this OpEx line item. Our operating loss was $27 million in Q3, and adjusted EBITDA, which excludes the non-cash charges of stock compensation and depreciation and amortization and other non-operating activities, was a loss of $16 million, both improved sequentially. Net loss per share in Q3 was $0.15, an improvement from $0.35 in the prior year period and versus last quarter. As of September 30th, our ending share count was approximately 197 million shares.

Our cash position at quarter end was $33.4 million. We continue to leverage the proceeds we received from going public in April while continuing to infuse new capital. For example, in Q3, we added a new committed equity line of credit, which, once available, we expect will provide ongoing access to incremental capital to help us continue to fuel growth. In addition, we are currently in late-stage discussions to provide additional, more immediate cash to the balance sheet. Moving on to guidance. We are certainly mindful of the continued challenging market backdrop and are diligently calibrating our cost structure to ensure we don't overextend ourselves in these dynamic times. As such, we have taken actions to reduce our expenses with impacts to both our people and discretionary spend.

Those are never easy, but these actions will enable us to accelerate our path to profitability without materially impacting our ability to execute our business plan effectively. We are not immune to the global macroeconomic pressures, geopolitical dynamics, or foreign exchange headwinds. That said, our solutions are in many ways countercyclical because in times of inflationary pressures and labor challenges, automation and AI are even more critical. As such, for the full year 2022, we reconfirm the midpoint of the revenue outlook we provided previously and are tightening the range to $28 million-$32 million. This expectation has not changed since we first communicated, well before the market conditions worsened throughout this year, and we continue to feel confident in this outlook. With respect to longer-term expectations, we will share more specifics on 2023 at our next earnings call.

That said, I wanted to provide some context that will hopefully convey the momentum we are building here. First, the $302 million of cumulative bookings backlog that I noted earlier gives us high confidence on revenue that will either automatically roll into the P&L in accordance with software revenue recognition guidance, or as a result of expected customer unit volumes upon which we generate royalty revenue streams. As one reference point, the backlog conversion to revenue alone gives us high confidence that without us doing much incremental work, we would still realize sustained year-over-year growth over the next several years. Of course, that's not enough for us. We are working hard, growing markets, adding customers, and expanding with existing customers, and have substantial pipeline to show for it.

For example, the food phone ordering we have been discussing at length is effectively not even in our bookings yet. We see a material upside on top of that baseline. This new vertical has a better financial profile, more predictable revenue streams, better scalability leading to more favorable operating margins, and faster cycle from initial customer contact to cash flow. Most importantly, customers are all over it. Given these new product offerings, deep pipeline, and expansion we continue to expect, we are building the foundation for sustained strong growth over the next few years. Again, more to come as we enter 2023, but we felt it was important to share our confidence and conviction in what we are building here. We are delivering on near-term commitments while focusing on the long-term potential in front of us.

I said this last quarter as well, our progress will not always be linear, but our current momentum is unquestionable. We are pleased with the progress to date and extremely excited about our path forward. Thank you, and we will now move to Q&A.

Operator (participant)

As a reminder, to ask a question, you will need to press star one one on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from the line of Mike Latimore from Northland Capital Markets.

Mike Latimore (Managing Director and Equity Analyst)

Yes, thanks. Hi, guys. Great results there and looking forward to November 17th announcement.

Nitesh Sharan (CFO)

Hey, Mike. Thanks.

Mike Latimore (Managing Director and Equity Analyst)

You've had really strong bookings, really strong results. At the same time, you sort of you mentioned the macro backdrop. I guess to the extent there is some, you know, macro effect here, how does that affect, you know, kind of what you're seeing? It seems like you're seeing really good bookings, really strong growth. Are some customers just, you know, being a little slower or like what's the potential effect there, if at all?

Nitesh Sharan (CFO)

Sure. I can start here, Mike, and then I'll Keyvan will certainly add. Maybe I'll make some general comments, and then try to double-click in a couple of areas. First, I mentioned in the prepared remarks that in a lot of ways, what we're finding is that our solution despite sort of the macroeconomic dynamics are very well situated. If you take again the food ordering example that we talk about that we're seeing a lot of scalability, one of the major dynamics is labor shortages, the inflationary pressures on commodity costs to restaurants, you know, just overall cost of labor dynamics.

Mike Latimore (Managing Director and Equity Analyst)

Mm-hmm.

Nitesh Sharan (CFO)

When we go around we try to give a demo, a little example, of what the technology can do and as our sales team goes around and talks to restaurants, they're seeing so much, you know, demand for this, that we have this, I guess, another way of saying backlog, but a big pipeline of folks who are trying to get on board. We know that our solutions are very well suited. Automation and AI is very well suited for this market backdrop. Frankly, we believe even despite, you know, the market, you know, turns here, we still think there's gonna be sustained demand there. In that sense, it's actually there are some elements of it that are, like I said, countercyclical or tailwinds to the demand for our solutions.

I would say more broadly, you know, I'd say macroeconomically, the strengthening of the dollar, given our international exposure, certainly is a pressure point. In another way, I feel confident we've been able to reconfirm, reaffirm the revenue outlook, though despite throughout the year, we've had actual pressure on the top line that we've had to overcompensate, which is underlying core business growth.

Then maybe the last point I'll just cite, you know, I think that if I kind of look at where we're going as a business and the scale that our bookings backlog represent, the reason we kind of draw focus to that is, you know, we're disrupting, we're changing the market, we're changing how humans interact with technology, and we feel great about the progress we're making. The customers and the enterprises we're working with have sort of substantial footprints. While they may sort of recalibrate to address the market, you know, auto may, you know, what previously was supply chain pressures that maybe it, you know, sort of recalibrating around high interest rates and impacts on costs.

We're penetrating and disrupting, so we can still realize more of those bookings into revenue. We can still penetrate more of the market, and it's growth for us. Even if that macro, you know, 80 million global light vehicles produced per year kind of don't grow as fast or again, the restaurant, you know, business has some shifts from drive-thrus to sit-down to phone ordering. Like, our solutions can span a lot of those spaces. I don't want to, you know, I don't wanna drive by and say, like, everything's hunky-dory. We're definitely mindful, and that's why we took cost actions that are very difficult. We'll continue to calibrate and just make sure that, you know, we're thoughtful about where we're going.

you know, I'd say again, we're feeling generally pretty good.

Keyvan Mohajer (Co-Founder and CEO)

Yeah. I would confirm that, the pillar two business, actually the demand goes up when the economy becomes more challenging. We actually are experiencing that, which is, you know, very encouraging for us. Even in pillar one, if you look at, some of the, you know, announcements that some of our customers have made, they are claiming that in the next 10 years or so, in the long term, they want to generate revenue from their cars and devices that they are shipping. With our solution, they can actually accelerate that because that's the three-pillar model where we bring the services that you voice enable to the products that you voice enable and create this monetization ecosystem while they're even delivering value to the end user.

We see increased demand across, you know, all of our customers. You know, in an environment where every company is taking, you know, reduction in cost and being more mindful because of this uncertain future, it would be unwise for us not to take that action. We did have a, you know, in terms of numbers, it was relatively small, but we had a reduction in force yesterday that was difficult for us to do, but we were doing too many things because we just are very innovative. We have lots of technologies that can apply to so many things, but we have to be a little bit more disciplined that we took action.

I always think, you know, as a leader, company comes first, team second, myself last, and it's very easy for me to put myself last frequently. Deciding between company and team, those moments are rare. That was a moment that we had to decide and say goodbye to some of our friends yesterday.

Mike Latimore (Managing Director and Equity Analyst)

All right, got it. Thanks for the context. You know, on the voice ordering restaurant category, you guys definitely are, you know, a lot more sort of excited about this opportunity, I'd say, than at the start of the year. Can you elaborate a little bit more on it? You know, are the end users sort of local restaurants? Are there some big chains rolling this out? It kinda sound like you're getting a fair amount of subscription already, but maybe I misread that, maybe it's more coming next year. Just a little bit more detail on that would be great.

Keyvan Mohajer (Co-Founder and CEO)

Yeah. What's amazing about what we built is that it can go live instantly, especially when we integrate with point of sale systems, because restaurants already have their menu in the point of sale system, and they also manage the orders in the point of sale system. When we integrate our solution with that, when the restaurant wants to go live, it could be instant. Like, they could press a button eventually and go live. Obviously we are being more mindful of how we roll it out. We have a huge pipeline of restaurants that wanna go live, and we're kind of doing it gradually just to be mindful about the quality and so on. We can go after enterprise franchises. We have one brand that might have thousands of locations.

We can also go after the mom-and-pop small businesses, with one location as long as they're using one of the POS systems. We are actually going after, you know, smaller locations through the POS channel. We also have a huge pipeline of enterprise applications with lots of locations, and that's for the phone ordering. With drive-thrus and kiosks, we have announced our partnership with Mastercard and some of the brands, and there is a lot more of that coming. It's kind of the one solution that can apply to so many variations of implementation.

Nitesh Sharan (CFO)

Mike, maybe I could add just a couple of things, 'cause you alluded to the fact that maybe we are talking to it a little bit more than earlier in the year, and I think that's you know fair. I think as we've gone through the year and we've gone out you know improved the solution, got feet on the street talking to both the platforms that Keyvan alluded to and the restaurants, there's so much demand and there's such a perfect market, product market fit, and particularly in this time it you know. Honestly, that's kind of part of the focus that Keyvan gave to the end of the last Q&A. We know there's a ton of traction here, and we see this ramping substantially.

If you think of, you know, sorta just the economics part of this, there's over 1 million food establishments in the U.S. alone. You think of the recurring type of pricing on this, you know, this is well north of $1 billion per year, $ billions of dollars of opportunity. As we penetrate just small market shares, this is meaningful to the revenue opportunity. On our scale, that means substantive growth. Yeah, we're focused on it. We see it also from a business model perspective, very attractive because as you know, in the sort of pillar one, particularly in the auto space where those can be multi-year sorta cycles from first contact to cash flow, and that has accelerated by the way.

A lot of the autos are realizing that software is very important, the cockpit is very strategic, and so they are accelerating that pace to 18 months, even a year in many cases. This pillar two is actually almost, you know, instantaneous in some ways. It goes from, like, first conversation to a matter of weeks where we've onboarded, ingested the menu and we can be live and that's accelerating to days.

Frankly, as you scale from one cuisine to the next, or if it's a franchise that has the exact same menu, again, that can be instantaneous. I'll also make one other sort of side note of what we're talking about here, because, you know, when you look at the pillar one and you sort of say, who are the players in auto, you know, Cerence clearly is an incumbent. The big tech giants trying to play in that space. There really isn't many players in the pillar two, particularly food ordering, who have the capabilities and the appetite to go at it. There's some other players, but they don't actually have the full core engine, the technology to serve this. We have massive advantages.

You'll hear some others who might put benchmarks. One metric that people watch is order completion rates. If somebody goes and actually starts talking to the AI, like the example we gave, do they actually get what they want and consummate a transaction? You know, we see benchmarks that are in the 20%-30% range out there, and our solutions are targeting, you know, 70%+ even higher. Just to put a reference point, humans themselves are not 100%. I don't know your experience with food ordering, but sometimes with the friction in the background, you know, we have data points that say humans themselves are 85%-90%.

We're just really trying to find alternatives and ultimately it's in service of the customers to try to get, you know, what they want when they want it in a you know sort of enjoyable manner. We're so excited about this opportunity.

Mike Latimore (Managing Director and Equity Analyst)

Yeah. Yeah. I'm often missing a french fry or a chicken sandwich in a bag when I order, so. Very last one. Average length of backlog, you said was five years. Can you give a little more detail, like what percent of that's in, say, the, you know, front end or back end of that?

Nitesh Sharan (CFO)

What percentage of that is in the front end or back end? Okay, yeah. Got it. Yeah, average length is about five years. There is a bit of a back-end skew to it. You know, like we internally will use a metric, probably won't typically try to give like a duration metric, which kinda does a weighting of it. It does skew towards the back end of it, north of three years. You know, it's not ratable. If you took $30 million divided by five and said $60 million, you know, it has a bit of a back-end skew to it. Maybe I'll pause there if that's kinda Does that work sufficiently for now?

Mike Latimore (Managing Director and Equity Analyst)

Yeah. Fair enough. Okay, great. Thanks. Thanks a lot.

Nitesh Sharan (CFO)

All right. Thank you, Mike. Gigi?

Operator (participant)

Thank you. As a reminder, to ask a question, you will need to press star one one on your telephone. Again, to ask a question, you will need to press star one one on your telephone. Our next question comes from the line of Brett Knoblauch from Cantor Fitzgerald.

Brett Knoblauch (VP of Software and Internet Equity Research)

Hi, guys. How are we doing today?

Nitesh Sharan (CFO)

Hey, Brett. Doing well, thanks.

Brett Knoblauch (VP of Software and Internet Equity Research)

Good. Couple questions on my end. I guess as we look at the bookings backlog, you know, really kind of strong sequential year-over-year growth now that we have a kind of a couple of quarters to compare against. You know, 207% year-over-year growth last year gets us to $92 million in 2Q of last year. And then the year-over-year growth this year gets us to, like, $89 million. I guess what happened in between, you know, in the fourth quarter to the first quarter where you saw bookings increase by, call it, you know, $140 million over the course of four or five months? Can you point to anything in specific that kind of drove that?

Nitesh Sharan (CFO)

Yeah. Let me try it, and then check me here, Brett, if this isn't kinda where you're going. First I'd say to the math you were doing of last year, just to maybe put it out there, or maybe you already know, but just for the broader audience. The way our cumulative bookings backlog is sort of represented is these are new gross bookings that we receive from, you know, customer contracts, less recognized revenue off of those contracts associated with those in a quarter. Then that sort of net becomes the new cumulative bookings backlog. To the numbers you were talking about between Q3 and Q4, you know, that could have gone down because we recognized more in a quarter than we realized.

Those things can happen from time to time. Then I think you went to sort of like, well, going forward from there at the sort of $90 million level, and then we spiked up to, you know, 200 and then up to the 300 we are here. I'll make a couple of comments and again, I'll, I'm sure Keyvan will add. You know, we're seeing. You know, I'll start with maybe just almost like a fundamental. The customers we're going after are major enterprises, global manufacturers, global businesses that have major reach, and we're providing a software solution that can embed into millions and millions of products.

The way when we you know, sort of sign up a customer, and like if you take the auto example, you know, we'll sign up with a partner, and we'll be their voice provider for either cloud voice solutions or edge solutions. The arrangement will be a multiyear you know, basically serving their auto production to take a simple example, five years of auto production and these couple of product sets. Then what we do is with those customers, we'll sort of you know, in the contracts there may be minimum guarantees, and we'll basically just take the minimum guarantee, or there may just be volume estimates, and we'll try to you know, conservatively assume sort of what's baked into there and then bake that in as a booking.

In some cases, we have partners where we're on a one-year sort of recurring revenue base, and we'll book that as the booking. But effectively, we're just signing up more and more customers. That's both across autos, that's across other device manufacturers, that's across the services pillar, and pillar two. Again, just a reminder, I think you know this, Brett, but our bookings backlog only represents pillar one and pillar two. We're really talking about those autos, devices, TV manufacturers and services. You know, I think the growth is just reflective of momentum and great conversation.

One of the things we I think we've talked about before, but we built a lot of the foundation of that bookings up until sort of the latter part of last year, really on the backs of just a handful of business development resources, Keyvan, including going around the world talking to these major partners. If you look at our history, actually a lot of these partners were also investors in some cases. They sort of started working with us and they chose, you know, like, I'll work with you as a customer, but also, you know, wanted to invest. It talks to the depth of the partnership.

One of the things we've really done this year is also with bringing on board our new Chief Revenue Officer, Zubin Irani, you know, who himself came formerly as a CEO, decided to come on board with us and has really started scaling. He's built out, and that's been part of in my prepared remarks, I commented about the sales and marketing expenses going up. We have absolutely built out our sales function, and that's what the team is doing. They're going out and building partnerships, building relationships. I think you're seeing the fruits of that in some of these numbers. Long way to go, you know, we really believe we're just getting started here. That's a little bit of context. Hopefully that kinda covers a little bit of where you're going.

Brett Knoblauch (VP of Software and Internet Equity Research)

Yeah, no, that's extremely helpful. I guess speaking to the scalability, right? Say McDonald's comes to you tomorrow and wants to deploy your SoundHound for Restaurants in every location in the U.S. How quickly can you guys do that? I guess what is needed on your end from maybe like a headcount perspective? Is it, you know, do you need kind of a lot of professional services to go there and do this? Or can this be, you know, done fully remote? I guess just walk us through that.

Nitesh Sharan (CFO)

Just to refresh the questions for if a McDonald's or any restaurant comes on board, what is the step from sort of first conversation for us to get on board with them? That, just to summarize, Brett, is that correct?

Brett Knoblauch (VP of Software and Internet Equity Research)

Yeah, get on board with the product deployed.

Nitesh Sharan (CFO)

Yeah.

Keyvan Mohajer (Co-Founder and CEO)

Yeah. We have a standard menu ingestion that we have streamlined that can happen very quickly. Whether it's easier for chains because, you know, you kind of ingest once and then it works for, you know, ideally thousands of locations. But because we were preparing for like a million restaurants with different menus, we've become very good at that. The menu ingestion is streamlined. That can be done very quickly. The question is, how do they wanna deploy it? Is it a drive-through? Is it the phone ordering? Is it all of the above? We would just work with them to integrate. If they are using one of the POS systems that we have already integrated with, that's very easy because that's already done.

If they have their own customized POS or their own customized hardware, there's a little bit of hardware integration that would happen for customers that are really worth the effort, you know, that you integrate once and you go live in, again, over 1,000 locations.

Nitesh Sharan (CFO)

One of the things on the drive-through in particular, as we've talked about, and I think you know, Mastercard is a partner we're working with and they're you know, it's great because of their scale, first of all, and their integration and partnership. We work with them, and they help on the sort of implementation. We bring the core voice AI, and it just is great because of the reach, number one, but also just they have a very deep and strong business across the ecosystem clearly with the drive-through restaurants. You know, frankly, we see that pathway and partnership with them scaling.

Beyond that, for phone ordering, as an example, you know, we are working with other platform providers like Toast, like Square, we announced last quarter, Oracle, Olo. There are others where it gives you access immediately to tens of thousands, hundreds of thousands of restaurants. That's something that we believe is great on top. Again, once you kinda work with them, you're getting access to it, you do the menu ingestion, we're getting faster and faster with that. Then, you know, the other thing that we are learning and growing fast, every environment is slightly different. The acoustic dynamics at each environment can be slightly different.

The great thing of owning the core tech end to end and having sort of our ability to do machine learning at the edge to understand the environment, to get data and improve the accuracy just really makes us able to scale and improve quickly. All those things are sort of part of the process.

Keyvan Mohajer (Co-Founder and CEO)

I just wanna add that, it's also, we've future-proofed it, so it's very easy to then bring a restaurant integration inside the products that we voice enable. You're driving a car or you're using a TV that we voice enable, you know, we've announced with VIZIO, lots of cars that are already in market. It would be a click of a button for those product creators to bring food ordering and voice ordering inside their product. It's really when as you're building this foundation and ecosystem, you're future-proofing for those things to kind of just automatically happen.

Brett Knoblauch (VP of Software and Internet Equity Research)

Understood. No, that makes a lot of sense. Maybe looking at the quarter, you know, really strong quarter, you know, kind of revenue really exceeded, you know, consensus, definitely my estimates. I guess what drove the strong quarter? Then similarly, I guess why haven't you maybe raised the guidance, you know, for the full year given the outperformance in this quarter? Was it a specific like one-time deal? I know you talked about signing a large edge deal. Was there like a one-time payment that led to, you know, a big sequential increase in revs?

Nitesh Sharan (CFO)

Yeah. Maybe I'll take your questions a little in reverse order, if that's okay. I think, you know, we continue to reaffirm guidance, but yeah, we have strong, you know, confidence in that pathway. You know, we wanna establish ourselves as, you know, we kinda keep delivering on what we're saying, and we keep raising the bar, and that's certainly how we kind of drive the business internally. You know, we feel confident about what we see in this year and, you know, we have high conviction that we'll be able to deliver upon it. You know, it was driven. We saw strength in product royalties.

I mentioned in my prepared remarks, we did have a large deal that was a minimum commitment for multi years, and that was a material benefit to the quarter. Again, we work with these large enterprises, so we expect those will be happening more and more, or at least that's what we're shooting for. But also being able to scale from cloud solutions to edge solutions and offer more things to even existing customers, to penetrate into new geographies with existing customers, to get you know down brand into different brands. There's just a lot of ways we're able to utilize the existing ecosystem and scale further with our customers, but also add more customers. We saw a bit of that this quarter. It certainly reflected in the results.

As we go forward, sure, you know, we're gonna keep trying to do that. If we can beat and we're talking next quarter with you, Brett, about how we beat, then great. You know, we thought prudent, especially in this backdrop, for us to continue to, you know, just kinda hold the line. Hopefully just keep delivering consistently and strongly over time.

Brett Knoblauch (VP of Software and Internet Equity Research)

Got it. Perfect. That helps. Thanks for answering the question, guys. Congrats on the quarter.

Nitesh Sharan (CFO)

Thanks, Brett.

Operator (participant)

Thank you. I would now like to turn the conference back to Keyvan Mohajer, CEO, for closing remarks.

Keyvan Mohajer (Co-Founder and CEO)

Thank you, Gigi. When we founded SoundHound, we had a vision to see voice AI in our lifetime and make voice AI even better than humans in understanding and also as human and natural as possible in the way it responds and interacts. We power the only global independent industry, cross-industry voice AI platform, and we are focused on rapidly scaling our business. We continue to execute, and this quarter, our exceptional results demonstrated our business momentum. We had a record quarter across all key metrics. Let me summarize. Bookings grew 3.5x, revenue grew 2.8x, gross profit grew 3.6x, and queries surpassed 2 billion. With that, I thank you for joining us today, and I look forward to speaking with you when we report our fourth quarter and full year results next time. Thank you.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect.