Yahoo Finance SoundHound AI, Inc. (NASDAQ:SOUN) Q4 2023 Earnings Call Transcript
SoundHound AI, Inc. (NASDAQ:SOUN) Q4 2023 Earnings Call Transcript February 29, 2024
SoundHound AI, Inc. misses on earnings expectations. Reported EPS is $-0.06 EPS, expectations were $-0.05. 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. Welcome to the SoundHound Q4 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] 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: Good afternoon, and thank you for joining our fourth quarter and full year 2023 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 would also like to remind everyone that we will be making forward-looking statements on this call. Actual results could differ materially from those suggested by our forward-looking statements. Please refer to our filings with the SEC for a detailed discussion of the risks and uncertainties that could affect our business and for discussion statements that qualify as forward-looking statements. In addition, we may discuss certain non-GAAP measures. Please refer to today's press release for more detailed financial results and further details on the definition, 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 the information available to us as of today's date. We undertake no obligation to update any forward-looking statements, except as required by law. Finally, this call is being audio webcast in its entirety on our Investor Relations website. An audio replay will be available following today's call. With that, I would like to turn the call over to our CEO, Keyvan Mohajer. Please go ahead, Keyvan.
Keyvan Mohajer: Thank you, Scott, and thank you to everyone for joining the call today. Once again, we broke a new quarterly record for revenue this quarter, which surpassed $17 million and was up 80% year-over-year. We are winning new customers and expanding with existing ones. We continue to create value for our customers, their customers and their employees, while delighting users with our technology. At the same time, we're also driving efficiencies with an 80% year-over-year improvement in adjusted EBITDA. At SoundHound, we've made two important predictions for the future of AI. The first is that AI customer service will be as necessary for every business as WiFi and electricity. Second is that speaking will become the primary way we interact with the devices around us.
We believe voice and conversation is the most natural way to interact with technology, and fortunately for product creators, they can bring their products to life by simply adding a tiny inexpensive microphone. These predictions are the foundation of our three-pillar business strategy. Let me start with our first pillar, where we power products such as cars, TVs and IoT devices. We had a mature history in Pillar 1. We went from zero to over 20 automotive brands in just a few years. These brands represent over 25% of the automotive industry and we've added several brands just in the last few months. We powered TVs from legacy giants such as VIZIO to exciting new innovators such as Telly. We are in millions of devices and process billions of queries from cars, TVs and other forms of IoT devices.
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. Then something incredible happened. The introduction of large language model and generative AI created a positive disruption in our field. While the big tech companies were disoriented and have been scrambling to make their own models, which could take years, we were able to swiftly integrate multiple generative AI models within a matter of weeks. Our integration was clever due to our years of experience and technology foundation and that introduced our SoundHound Chat AI product with generative AI. SoundHound Chat AI can integrate with real-time domain and can go back and forth between multiple models seamlessly in a single conversation session, and is able to utilize even multiple models for a single query.
For example, they drive out the car and can ask for real-time weather, request sightseeing recommendations that match the weather condition, ask follow-up questions, then request to start navigation to one of the recommended destinations by simply referring to it such as, "Can you navigate me to the second option you recommend?" SoundHound Chat AI has rapid adoption. Launched in early 2023, we are one of the first companies to show how generative AI could be integrated into a voice assistant. While others are still only making broad claims to generate headlines, we've been building applications for generative AI. Thanks to our proprietary technology, which helps mitigate hallucinations and other issues that are inherent with [unharnessed] (ph) AI models, our applications are already live in production and in the hands of consumers across the world.
Let me highlight a few examples of our momentum and progress with SoundHound Chat AI. Immediately after it became generally available, other brand saw the potential to increase in car voice AI usage and improve the usage -- user experience using our product. That's because this is not just a simple API integration, but it's seamless back and forth between large language models, content domain and the onboard features of the car such as the navigation system. Throughout last year, we piloted our technology across a range of high profile OEM brands. We found that by adding generative AI capabilities to individual voice assistant, the frequency with which drivers and passengers engage with this increased multiple and the user satisfaction increased significantly.
The enhanced performance of SoundHound Chat AI for automotive has created numerous opportunities and we are proud to announce that it has become the first in car voice assistant with generative AI capabilities in the world to go live in vehicle beyond just an experimental pilot. Last year, Stellantis started a pilot with DS Automobiles, and due to the incredible results, they announced going live in production in 18 countries. Recently, more brands such as Peugeot, Opel, and Vauxhall have announced their plans to utilize SoundHound Chat AI. Given our strong partnership with Stellantis, we expect many more brands to go live into production this year. SoundHound Chat AI is increasing the product quality and user delight, but we also expect it to lead to an increase in revenue with the higher royalty rate for customers that choose to adapt.
SoundHound Chat AI is enabling automakers to add value to their drivers' experiences with new functionality. We believe we are at the very beginning of a refresh that will bring exciting new opportunities for car manufacturers, drivers of SoundHound as we upsell these new features. In addition to SoundHound Chat AI, we also launched a new incredible product called SoundHound Vehicle Intelligence in the fourth quarter. Drawing on SoundHound's voice AI, it allows automakers to simply and easily voice-enable their car manual. This means that drivers can use voice and conversation to ask about settings, special features, troubleshoot and more without having to spend time and effort listening to a cumbersome printed document. SoundHound Vehicle Intelligence is another innovation that we expect will improve product quality and increase our revenue.
We are working closely with well-known EV brands and have been gaining strong traction with luxury brands as well. For example, we won the business for a prominent U.S.-based EV major to voice-enable their full fleet of market-leading vehicles. In addition, we significantly extended and increased the volume of our existing committed contract with a large auto OEM until 2037. Creating value in our Pillar 1 category is not just limited to automotive. We also licensed our technology to smart TVs and many IoT devices. For example, we've integrated our AI voice assistant with Telly, a new disruptive smart TV provider. Another customer, VIZIO, an integrated platform for cutting edge smart TV, is a strong opportunity with our monetization model using voice commerce such as ordering food, groceries and supply on the TV, which is typically the largest screen in the most social setting of every home.
For IoT devices, the use cases are endless, and we are working with more companies every day to extend or go into production in multiple areas, such as with large appliance manufacturers, telcos, airplanes, robotics, printers, wearables, coffee machines and kiosk among many others. We are also thrilled that in Q4, we have a notable revenue contribution from a preeminent AI chip company. Although this company has been a close partner for us for a number of years, this was the first time we generated licensing revenue from the partnership, and we expect more value will be realized from this partnership in the future. Moving on to Pillar 2, where we offer AI customer services for businesses such as restaurants, home services, personal care and professional services.
As we predicted a year ago, AI customer service is now outperforming units. User adoption is on the rise and consumers are increasingly choosing to interact with conversational AI due to its reliability and extended capabilities. We believe disruption in the customer service industry will be one of the first major commercial applications for generative AI and large language model. It is also becoming affordable and accessible to merchants of all type. Businesses are beginning to see AI as a necessity, just like WiFi and electricity. We now have a proven scale in Pillar 2 as well. Today, our technology lies in about 10,000 merchant locations. We are fully engaged with over 100,000 locations in our pipeline and we have over 30 million businesses in our near-term addressable market.
We are at the very beginning of what generative AI will bring to the world and we are emerging as a market leader by offering application with real-world [use cases] (ph). There are two very clear reasons that we believe we are leading here. First, our solutions are built on proprietary technology and we alone own the entire technology stack. Second, our solutions are fully automated and therefore, easily scalable and capable of serving brands of all sizes from the largest brand in the world to your local favorite shop on the corner. We are offering easy-to-use, easy-to-implement solutions that make a real and immediate impact. I'll share some examples across our various offerings. Our SoundHound Smart Ordering product uses voice AI to support businesses by answering all inbound phone calls, taking customers' food orders and answering numerous questions, allowing restaurants to free up their staff to focus on making food and engaging the customers in the store.
Jersey Mike's, a change in over 2,000 locations, went live in Q4 with Smart Ordering and is rolling out at a rapid pace. Targeted for an initial 50 locations, we've already reached that goal today and we expect them to expand their partnership based on the solid results today. White Castle, our first drive-thru offering, continues to ramp up production. We are on pace to reach our goal of 100 lanes by the end of 2024. So far, we are also seeing our order processing of under 60 seconds, which is significantly faster compared to humans. In Q4, more large restaurant chain chose to integrate our voice AI ordering solution to help automate in-store operations, including Church's Chicken and a large hamburger chain located in the South, which have approximately 2,700 locations we can integrate our solution into.
With these larger deals for our voice AI solution, we're also seeing a number of customers look to bundle these solutions with our other offerings. For example, we deployed our new SoundHound product called Employee Assist, as restaurants look for multiple offerings to gain efficiencies in ordering and with employees. SoundHound Employee Assist is a game changer for businesses. It uses conversational voice AI to support restaurant employees like a co-pilot across a variety of apps via their headsets. For example, it can provide ingredients and allergen information to customers. It can also train employees with step-by-step instructions to ensure the product is prepared correctly without them ever having to remove their glove, consult the manual or distract another staff member, significantly reducing the stress on the work.
Another incredible SoundHound product, Dynamic Interaction is our multimodal full-duplex voice interface for kiosk, drive-thrus, or any device with a screen. We are working with a number of partners and customers and our pipeline keeps growing. For example, Krispy Kreme has selected Dynamic Interaction. As you can see, our portfolio of restaurant solutions is taking shape and major brands from convenience stores to multinational restaurant chains are taking notice. They come to us to improve their order process, experience and accuracy of their order, while at the same time improving their bottom-line. Today, we have restaurant solutions live in all 50 U.S. states and now we are expanding internationally. With 25 languages in our arsenal, we believe we have a massive opportunity to go beyond English-speaking countries.
Next, Smart Answering is our phone answering solution that goes beyond restaurants and can be used by any company and any industry. With this product, we are empowering businesses of all types and how they respond to customers on the phone, allowing them to capture every business opportunity, while also mitigating costs. Smart Answering can handle multiple calls at once 24/7, conveniently filters out spam calls, saving hours of wasted time for any business. It also provides SMS responses, captures leads with intelligent messaging that asks important follow-up questions in addition to variable answers around policies, [indiscernible], products, services, pricing and more. We are already live with customers with Smart Answering and the feedback is incredibly positive.
Even the Smart Answering experience is fully automated. We can easily offer this product to smaller businesses that in the past couldn't have happened. And to massively increase our ability to scale and operate a solution with no such onboarding for any business, we've been piloting a self-service e-commerce approach in Q1 and seeing early adoption. Let me talk about SYNQ3. Following up on the announcement of our acquisition of SYNQ3, we've begun the integration of this exceptional team with SoundHound. SYNQ3 brings more than 20 national and multinational chains spanning drive thru, fast casual and casual dining segments as well as convenience stores to SoundHound's fast-growing customer base. Examples include Chipotle, Casey's, Applebees, Panda Express, Papa John's and Five Guys.
Because our voice AI is fully autonomous and does not use humans in the loop to perform, we are also able to rapidly scale our deployment without any degradation in quality. For instance, with SYNQ3, we recently completed the rollout of voice AI ordering to 2,400 Casey's General Stores, which also is one of the largest pizza chains in the U.S. Jointly, we are combining nearly two decades of SoundHound AI innovation with decades of SYNQ3 industry expertise and established relationships. Together, we will accelerate the deployment of leading-edge generative AI capabilities to the industry, while ensuring that our technology always works to preserve the best interest of our customers, their customers and society more broadly. The combination makes SoundHound the preeminent global provider of voice AI for restaurants, significantly extending our market reach.
Although, we only closed the transaction in Q1 of this year, we are already seeing tremendous momentum with their customers and the ability to offer them additional solutions such as Dynamic Interaction, Smart Answering and Employee Assist. The synergies are already taking hold and we are moving at a rapid pace. As I mentioned earlier, we have three pillars, royalty from voice-enabled products, subscription from voice-enabled services and the third pillar is monetization from connecting those services to those products. For example, drivers of the SoundHound-enabled cars will be able to use their voice to order food by just talking to their car and can do so before arriving at the restaurant, or they can make appointment to get a haircut, book a flight or perform other types of transactions.
We believe this will create the future of the voice commerce ecosystem and SoundHound is in a unique position to realize this vision and to our strong footprint in both devices and services. With our expanded national restaurant reach, we're seeing an acceleration of our Pillar 3 monetization strategy via transactions in millions of cars, TVs and IoT devices. We believe this is a powerful business model, which could add significant value to all participants. We would collect a fee for generating new leads for merchants and facilitating transactions, the store or restaurant benefits from a new customer being channeled in their direction and the automakers and the device makers take a share of this economy. Most importantly, the end user will have the convenience of using their voice to get things done.
We are excited to see our portfolio of customers using voice-enabled services continue to grow, which should allow us to begin to pilot this new commercial ecosystem. In closing, our revenue has grown on an average of over 50% over the last four years. This incredible growth during challenging times and against global market headwind is a testament to our strong foundation, demand for our technology and great partnership we've built with some of the most well-known brands in the world. Going forward, we expect to maintain this strong growth and see massive opportunities to accelerate even further beyond this year. The timely AI revolution is creating tailwinds in our favor. We believe that SoundHound has a unique advantage with its own IP to the case of experience building trust with global customers, a trove of data and the track record of innovation move fast and invent our way forward.
We remain at the forefront of conversational AI and that's why we have been working on Polaris, our multimodal, multilingual, generative AI foundation model, which could be another important tool for us as we position ourselves as one of the leading and major forces in this new era of AI. 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. Q4 revenue increased by 80% year-over-year. We finished 2023 with accelerating momentum and we are seeing exceptionally strong interest from enterprise businesses, most notably within the restaurant and auto sectors. In fact, demand for SoundHound solutions is so high that we now have a healthy waitlist of restaurant merchants and we're calibrating our resources to ensure we deliver for the customers. While we continue to be mindful of our pathway to profitability, delivering against this demand is paramount. Exceptional growth we realized was coupled with cost containment. We focused on cost discipline this past year and will continue to do so. For the year, adjusted EBITDA improved by over 50%, and in Q4, our results were even better with 80% improvement.
Excluding certain costs that were necessary to fuel our growth and transformation brings us close to the positive Q4 adjusted EBITDA target we laid out last quarter. For example, the near-term impact of switching to Big Four audit from PwC mid-year while becoming a large accelerated filer and upgrading some of our internal tools contributed to the majority of these costs. We expect these expense pressures to lessen as we go forward. The underlying drivers behind the remainder of the expenses are positive indicators of our future. First, we saw some tremendous growth opportunities in the second half of the year that we chose to invest in. We saw significant demand from enterprise restaurants in particular. Second, we saw a great opportunity to inorganically accelerate our go-to-market motion and capture a sizable and meaningful restaurant customer portfolio.
The acquisition of SYNQ3 clearly positions us as the leader in the restaurant AI space. Lastly, we accelerated investments in our administrative functions, notably around internal processes and controls, to ensure we have an even stronger foundation for the sustained long-term growth we expect to deliver. We fundamentally re-architected this company in 2023. We are more efficient, more focused, even more nimble and aggressively driving disruption and growth across voice-enabled products and services. Accordingly, we are updating a metric we have previously shared in what we call cumulative subscription and bookings backlog, which includes our previously reported cumulative bookings backlog to also now include new subscription revenue streams that we are focused on.
Cumulative bookings backlog takes into account the prior quarter-end balance plus new bookings in the current quarter minus associated revenue recognized. Cumulative booking backlog is still derived from committed customer contracts and this definition remains the same as the previous one. Subscription backlog takes into account customers where we are the leading or exclusive provider and assumes a four-year ramp to fully scale with a total five-year duration. We have incorporated reasonable assumptions about adoption percentages with lower percentages applying to pilot and proof of concept customers. We believe we can outperform these assumptions given the faster rollouts we are currently experiencing and expectation to work with these partners for much longer.
Similar to the previous definition, we do not include expected auto renewals for our Pillar 1 customers. This allows us to combine our Pillar 1 and Pillar 2 businesses into a single unifying metric. As we have communicated before, our cumulative bookings backlog mainly represented our Pillar 1 businesses. In Pillar 2, we have previously noted that ARR standardizes the annual subscription like potential of these contracts, while also indicating the better stability and predictability building in our financial model. That said, two different metrics on two different timescales doesn't synthesize our full potential in an easy-to-understand manner, so we believe this updated figure is more representative of our medium-term revenue potential. Ultimately, we are addressing a greater than $100 billion rapidly growing market.
So, this new metric gives you a view of the tangible customer activity we have won within that larger opportunity set. In Q3, I mentioned our cumulative bookings backlog was $341 million with automotive being the largest constituent. I also mentioned that separately, in the restaurant vertical, that at full scale out, we would have 4,500 locations signed up and roughly $25 million in ARR. When we look at the combined potential of our signed up customers at the end of 2023 across both Pillars 1 and 2, our cumulative subscriptions and bookings backlog was $661 million, up nearly 100% year-over-year on an apples-to-apples basis, thanks to growth in Pillar 1 and the incredible list of customers we have added in Pillar 2. Let me now get specific on our financial results for the fourth quarter and full year.
In Q4, revenue was $17.1 million, up 80% and within our guidance for the quarter. Full year revenue of $45.9 million was also within the outlook set at the beginning of the year. Revenue growth in Q4 was predominantly driven by automotive royalties with strong increase in units offset by slight decreases in average selling prices due to a higher volume of edge licenses that generally have a lower royalty than our cloud licenses. Note that particularly with some of our new generative AI solutions and ultimately with monetization, we think there are meaningful opportunities for unit price expansion. We also benefited in the quarter by a strong multi-year commitment of minimum guarantee volumes of our edge solution with an automotive partner and a new IP licensing opportunity with one of the preeminent AI chip makers that Keyvan referenced earlier.
Over the full year 2023, we increased auto units by 68% and active cloud users by 55% versus the prior year. And over the last four years, we have delivered an overall compounded annual growth rate of greater than 50%. In Q4, our gross margins were 77.2%, up over 600 basis points year-over-year, largely resulting from the greater scale in our business. This helped drive gross margins above 75% for the full year, also up over 600 basis points year-over-year, as we increased our revenue sequentially every quarter, and at the same time, improved our cloud and data center efficiency throughout the year. R&D expenses were $12.7 million in Q4, a decrease of 41% year-over-year, resulting largely from our corporate restructuring actions earlier in the year.
Despite the expense reduction, we continue to invest in disruptive innovation and expand our existing suite of products with solutions like Dynamic Interaction, Smart Answering, Employee Assist, Vehicle Intelligence, and SoundHound Chat AI. Sales and marketing expenses were $4.5 million in Q4, a decrease of 34% year-over-year, also due to the aforementioned restructuring. We continue to invest in go-to-market and customer engagement. As mentioned earlier, we are seeing tremendous momentum and heightened customer demand, largely resulting from the investments we have been making in sales and marketing. We will continue to invest in high ROI demand generation and brand awareness to ensure we further build upon the current traction. G&A expenses were $7.6 million in Q4, an increase of 3% year-over-year.
The increase in G&A reflects two elements, some of which was not contemplated when we guided last quarter. First, part of our spending was related to diligence, negotiation and closing of the acquisition of SYNQ3. Second, we accelerated investment in financial and non-financial processes and internal controls to support requirements under SOX 404(b) as we became a large accelerated filer. In total, these additional expenses, as compared to prior Q4, amounted to over $3 million and were the primary factors not fully encompassed in our previously provided adjusted EBITDA outlook. Across all operating expenses, non-cash employee stock compensation was $6.5 million in Q4. As a result, our operating loss for Q4 was $12.4 million, which reflects an improvement of 57% year-over-year.
Likewise, for the full year, we saw improvements in our operating loss of 35%, as we successfully grew the business while maintaining cost discipline. OI&E was $4 million of net expense for the quarter and net loss was $18 million in Q4, an improvement of 42% year-over-year. This led to a net loss per share in Q4 of $0.07 compared to $0.15 in the previous year, an improvement of 53%. Adjusted EBITDA, which excludes non-cash charges of stock compensation, acquisition costs, restructuring and depreciation and amortization was a loss of $3.7 million in Q4 2023, which was an 80% year-over-year improvement and a sizable dollar reduction down from an $18.8 million loss in Q4 2022. Net cash used in operating activities for the entire year ended 2023 was about $68 million, improving roughly 27% year-over-year.
Our cash position at year-end was approximately $109 million, of which $95 million was in cash and equivalents. Given additional actions we have taken in early 2024, our current total cash balance is an excess of $200 million. Our capital position is unequivocally a source of strength and gives us security and optionality we need to drive the business forward. With that, let me discuss our outlook for 2024. We are committed to continuing to fuel strong growth with cost discipline and returns focus. We expect to expand with our existing automotive partners and add Pillar 1 customers. We expect our Pillar 2 businesses to grow meaningfully and increase from less than 10% of our total revenue in 2023 to more than 20% in 2024. We see the overall top-line growing to within a range of $63 million to $77 million with $70 million as the midpoint target.
As we look further ahead to 2025, we believe we will cross $100 million in revenue and deliver adjusted EBITDA profitability. Our gross margins have been in the range of 70% to 80%, providing a strong indicator of our software business profile. Since we just completed the acquisition of SYNQ3, while we work on migrating their cloud and AI infrastructure to our own, we expect to have a temporary decrease in gross margins due to some of these duplicative expenses. In addition, while the majority 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.
As a result, we expect a combined company will show a one-time gross margin decrease in the early part of 2024, with steady improvement towards our historical levels as we get to the latter half of 2024 and beyond. Overall though, we see this acquisition is roughly EBITDA neutral over 2024 and accretive beyond. Lastly, let me comment on expected revenue seasonality for the year. Our mix of business will shift through the year, as I described, to a greater mix of Pillar 2. But we will start the year more automotive heavy, just as we ended 2023. As such, we remain affected by the seasonality in the automotive sector, which tends to be higher in Q4 and lower in Q1. Again, in 2024, we see our quarterly revenue building through the year and back-end weighted.
We believe we can grow our business roughly 50% year-on-year each quarter. Let me close by re-articulating our excitement about what lies ahead. Generative AI and large language models have created a generational technological shift. The old way is out. Customers are increasingly realizing they need partners like SoundHound to help pave the way forward. We are balancing the massive long-term opportunity with the inherent near-term volatility to navigate towards our goals. And we are bringing conversational voice AI to consumers everywhere, so they can seamlessly access the information and services they covet through the products and devices they most interact with. Thank you. We will now move to Q&A.
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