SoundHound AI, Inc.
Q2 2022 Earnings Call Transcript

Published: 12 Aug 2022

[Operator:]

Good afternoon, and welcome to SoundHound's Second Quarter 2022 Earnings Conference Call. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Scott Smith, Head of Investor Relations. Please go ahead.

[Scott Smith:]

Thanks, Jillian. Hi everyone. Good afternoon, and thanks for joining our second quarter 2022 earnings call. With me here today is our CEO, Keyvan Mohajer; and our CFO Nitesh Sharan. We will begin with some short remarks before moving to Q&A. We'd also like to remind everyone, that we'll be making forward-looking statements on this call. Actual results could differ materially from those suggested by our forward-looking statements. Reported results should not be considered as an indication of future performance. Please refer to our filings with the SEC for a discussion of the factors that could cause our results to differ, including those described in our prospectus filed April 8, 2022 in connection with our business combination. In addition, we may discuss certain non-GAAP measures. Please refer to today's press release for further details on the definitions, limitations and uses of those measures and reconciliations from GAAP to non-GAAP. Also note that the forward-looking statements on this call are based on information available to us as of today's date. We disclaim any obligation to update any forward-looking statements, except as required by law. Finally, this call, in its entirety is being audio webcast on our Investor Relations website. An audio replay will be available shortly, following today's call. And with that, I would like to turn the call over to Keyvan.

[Keyvan Mohajer:]

Thank you, Scott. Before we get started, I wanted to welcome Scott Smith to the SoundHound team, our new Head of Investor Relations. Welcome Scott. And thank you to everyone for joining the call today. We are pleased to welcome you to our first earnings call as a public company. We celebrated our listing on NASDAQ, under the ticker SOUN on April 28 of this year. Today, we are excited to share with you our strong second quarter results. We grew our cumulative booking backlog by three times compared to the prior year, and our monthly queries have more than tripled since early last year, showing that our technology is being adopted at an accelerated rate. SoundHound has spent many years building our foundation for this moment. We began this journey 17 years ago in a small dorm room at Stanford University, where my co-founders and I decided that within our lifetime, we should be able to talk to the computers, the way we talk to each other, and we embarked on the journey to make that happen. We know that now is the time to scale and that's exactly what we are doing. Earlier this year, we welcomed Zubin Irani, as Chief Revenue Officer to our leadership team. Zubin brings tremendous experience to help us achieve our growth ambitions. We are ramping up our sales and service organizations and continue to invest in R&D organization to rapidly expand adoption of SoundHound's voice AI technology. We have already expanded to almost 450 employees globally and I want to take a moment to thank those that have been with us from the early days, right up to our public listing. At the same time, I also want to welcome the many new and talented employees that share our passion and excitement about this new opportunity. While we are aware of the macroeconomic environment and the high levels of uncertainty surrounding it, we believe it is the perfect time for our value proposition. Innovation around legacy voice AI technology is long overdue. At the same time, AI and business process automation resonates even more than ever in times like these. We also know that customers are rapidly pushing for the next evolution in how humans interact with technology and consumer expectation for convenience are rising. The world is in the process of becoming voice-enabled, and so it is unavoidable, that the current status quo and the familiar shortlist of incumbent players needs to be reexamined. For too long, innovation around voice AI had been static. We believe we have taken it to the next level with the technology that is at the forefront of the next major disruption of computing, conversational AI. When we unveiled our disruptive technology in 2016 after more than a decade of self-innovation, it caught the world by surprise. Some players even denied that it was real and others have been trying to catch up to us for years and have not succeeded. Let me play a short clip from one of the earlier demos that highlights some of the unique strengths of our conversational AI technology. [Video Presentation] Conversational AI is undoubtedly the future, and we believe SoundHound offers the only global independent cross-industry conversational AI platform. As you can see in our demonstrations, our technology is unmatched by the incumbent players, including the big tech. Our ambition and opportunity is to make conversational AI that is even better than humans in understanding, but as human and natural as possible in the way, it responds and interacts, making people more productive and the world a better place. We are in a unique position to maintain our leadership, due to our core technology DNA and our track record to solve extremely difficult problems with our breakthrough inventions and constant innovation. Furthermore, while other players that are pure technology vendors are under constant customer pressure to lower their licensing fees and face the real risk of declining revenues. Our unique three-pillar monetization ecosystem that Nitesh will soon highlight puts us on a trajectory of increasing revenue per user, and increasing adoption due to the revenue share with the product creators. Let's summarize our unique positioning and opportunity. Natural language understanding is an especially challenging form of artificial intelligence. It is complex. It takes a long time to perfect and requires a full technology stack to deliver value. This creates a very high barrier to entry, which is why there are not many companies delivering conversational voice AI. With our proprietary Speech-to-Meaning, Deep Meaning Understanding, and collective AI breakthroughs along with our industry-leading cloud and edge offerings, we believe we have the best-in-class technology. Our technology bridges two major industry gaps

[Nitesh Sharan:]

Thank you, Keyvan. I share Keyvan's excitement about our first earnings conference call as a public company and the opportunity for ongoing dialogue with all of you. With Q2's triple-digit bookings growth and strong customer engagement, we are building and executing on the foundation that will fuel our continued expansion. Before going into the results for the quarter, I wanted to discuss our business model and how we generate revenue, as my remarks will often reference this framework. For some of you this may be repetitive, but it is very important, so I wanted to start here. We breakout our revenue into three distinct pillars

[Operator:]

[Operator Instructions] Our first question comes from Mike Latimore from Northland Capital Markets. Please go ahead. Your line is open.

[Mike Latimore:]

Yes. Hi, everybody. Nice results there and congrats on getting public here.

[Keyvan Mohajer:]

Thanks, Mike.

[Mike Latimore:]

So the bookings were very, very strong and it seems like you've almost hit your goal for the year there. I guess the -- I'm thinking the momentum would continue to carry through the second half of the year here. So I guess, how are you thinking about bookings trajectory throughout the rest of the year?

[Nitesh Sharan:]

Yeah. I'll start with that. So first, I'll say that we -- I'll make a comment on guidance and I'll give you a little more color commentary on the bookings, if that's all right. So we -- as I noted we've sort of established that we think giving revenue guidance on an annual basis is probably the best way to kind of translate how the bookings will flow through. And so again, we continue to feel confident of that outlook that we just provided of $27 million to $33 million. As you noted also, we're very pleased with the bookings results through Q2, $283 million up 3x from prior year, just indicates strong momentum and strong conversations that we're having with customers. So while we're not kind of articulating exactly where we expect to end the year, we're having a lot of great conversations with existing customers on how we expect to plan -- expect to potentially expand across regions, products, brands where as we noted in the prepared remarks, the second pillar, services offerings particularly with respect to food ordering and the SoundHound for Restaurants offering, we're seeing tremendous traction. We've been -- our sales team now that scaling significantly has been on the ground talking to a lot of customers, a lot of restaurants. And there's just almost insatiable demand for what we're providing to them, particularly in this backdrop of labor pressures wage pressures. It's a solution just very well suited for what they're looking for. And so really we have a backlog of people trying to get onboard and we have work to get them through the funnel and on. So we're feeling great about the momentum. I would lastly say, that bookings is one indicator. I know Mike, you know this but just more broadly I'll say that bookings represent sort of pillars one and two, when we voice-enable product and we voice-enable services. They capture that. We're bringing these ecosystems. Having a lot of great conversations and bringing those together through monetization does -- don't -- these are not reflected in revenue. So -- sorry monetization is not reflected in bookings. So that will actually just naturally flow through without hitting the bookings number. So I didn't mean to dance entirely off your question, but hopefully that gives some context and color commentary on that.

[Mike Latimore:]

Yeah. For sure. Super helpful. I think you said also that the price per unit was going up a little bit. I guess one did you say that? And two is that specific to royalties, or does that include all three pillars here?

[Nitesh Sharan:]

So I did say that. I said average price per unit, we saw go up in Q2. We've actually seen it continue to sort of go up. It is – my comment was generic. But I could tell you that most of our revenue is in product royalty so it was applicable to product royalties. And the composition of that is multifold. Number one is we're again expanding across customers, across product sets. We've had a long steady track record on cloud solutions. We are bringing cloud hybrid and Keyvan mentioned sort of edge products. All – they all have different compositions of pricing per unit. But as – we are just scaling and we're seeing both units grow and price per unit grow. So that's a good constructive signal and sort of indicative of what we see in the model and what we expect going forward. Sorry, Mike can I add one more I just thought. But I think it's also important I didn't want this to be hidden in the prepared remarks either but we also are cognizant that we think it's one of the strengths of our business model because I think there are other, I'll just say peers out there who – the solution is just a cost component to their customers and they feel pressure because they're constantly having conversations about how do I bring the cost of goods down with their customer. We're having a very different set of conversations. It's about obviously providing a better solution ultimately to their customers. But as well it's about bringing solutions that can actually help realize greater value and ultimately for us that's increasing revenue per user. And that's why we believe it's not just distinctive tech here. It's also positioning and business model differentiation that gives us confidence to where we're going.

[Mike Latimore:]

Yes. Okay. Great. And then I know you've hired a CRO and he's been hiring salespeople. I guess how many salespeople are you up to now, or how many do you want to get to by year end?

[Nitesh Sharan:]

So we're – I'll touch on maybe the numbers briefly and then I'll let Keyvan add more on the excitement we have with Zubin onboard and what he's been doing to his team. So he – I mentioned, year-over-year at least the numbers are up 3x in sales and marketing. So we're investing not just on the sales side but also in marketing. I think you've illuminated in your research how sort of even with the limited business development team previously we were still able to get pretty sizable deals and now with Zubin onboard really scaling that significantly. So I don't – we aren't breaking out the per sales. But overall, our company is growing. We're at about 450 people. The sales team that used to be sort of single-digits is growing well into the double-digits in the 10s – moving towards the tens of sales folks. But beyond that it's also lead generation and marketing investments that you're doing. So we're starting to get traction early. But the other point, I'll raise is just the things we're going after two large enterprise deals concurrent with like small medium-sized restaurants that – we're getting – we're addressing a lot of different areas and what he's attacking which gives us excitement. Maybe with that I'll let Keyvan add.

[Keyvan Mohajer:]

Yes I would add – I would highlight that a lot of our historical bookings success came from these long-cycle deals, which are amazing when you close them but they do take a long time to achieve them. And we will continue to invest in that as pillar one. But in pillar two, the cycles are a lot faster. So you could go from the meeting to being live with the customer. It could be on the same day. And that's super exciting because – and we are seeing that. I mean that's what we predicted, when we designed that strategy but now we are actually seeing it live in the market.

[Mike Latimore:]

Okay. Excellent. Great news and best of luck for the rest of the year.

[Nitesh Sharan:]

Thanks.

[Keyvan Mohajer:]

Thank you, Mike

[Operator:]

Our next question comes from Brett Knoblauch from Cantor Fitzgerald. Please go ahead. Your line is open.

[Brett Knoblauch:]

Hi, guys. Thanks for taking my question. Congrats on getting the first quarter on the books. I was just wondering if you can maybe walk through how we should think about bookings and that backlog flowing through to revenue. What needs to be met? Is the entirety of bookings consisting of non-cancelable I guess contracts that have been signed? I guess any insights on how we should think about that flow-through, call it over the next year or two or three years?

[Nitesh Sharan:]

Yes. Thanks for the question, Brett. Maybe let me try to characterize it this way and then maybe I'll give some other color commentary if that's okay. So first, I mean I'll just make the statement our strong bookings backlog sets us up well for future revenue. In our view bookings is a conservative measure of our success and doesn't include all of the revenue components such as monetization. Bookings, they represent committed contracts with large enterprise customers, basically pillar one product royalties; and pillar two subscription services. And they're based on minimum guarantees where applicable and customer volumes where we have confidence in such forecasts. And we might get them from the customers directly and we may hedge them down, if we don't believe they're conservative. Any overages that we see, which we do see in our contracts by the way those just flow straight into revenue. And therefore, it's further upside. But to give you a composition of the $283 million of bookings that we have, their average length is about 4.5 years. And there's a skew to the latter half of that but they range from one to seven years. But that's the average is 4.5 years. So in other words, we expect to realize those bookings into revenue over the next several years. It just won't happen ratably. And then I think -- I'd just maybe I'll add because of these dynamics and I appreciate where your question is going we decided that given revenue guidance it was the best way to provide the best visibility of what we're seeing and how that's rolling into the P&L over the near-term. And we expect frankly to continue to share annual revenue guidance as we go forward. Maybe last comment. I'll just say, we are scaling -- I hope this isn't too duplicative, but we're scaling into new verticals across new product offerings, expanding across geographies. Most important for us is to focus our efforts on building each opportunity thoughtfully in a structured manner. So new revenue streams that we build may have different financial profiles. For example, annual subscription revenue is very different than the nature of royalties that we get and these long-term enterprise contracts that are committed as you noted. And it's different from like I said when we sign up a restaurant on a recurring basis. And so we'll keep evaluating, which measures make the most sense. And as we scale in different components we'll happily keep calibrating and making sure that you're getting the right information. But hopefully that gives a little bit of color commentary on that. I think, if we're okay with that then.

[Brett Knoblauch:]

Sorry, I was on mute. But, I guess, just to add another question could you just elaborate on what the $4.3 million was in the compare period the early termination of professional services? I guess, what happened there? Why was there a termination? Any additional color on that?

[Nitesh Sharan:]

Sure. I'll start and Keyvan can add more color. There was -- we had it was a contract modification actually with an existing customer. The customer, kind of, effectively sort of had a pathway they were going towards and then ultimately sort of shifted gears and we continued to work on expansion with them. But the existing contract was basically that we concluded the professional services. The cash was collected. The termination clause said we sort of recognize revenue at that point in time versus spreading over a longer period of time. And we are working on other stuff with them. So that was the context. It was sort of a lumpy impact to the prior year quarter in Q2.

[Brett Knoblauch:]

Perfect. That’s very helpful. Thank you, guys.

[Nitesh Sharan:]

Okay. Thanks, Brett.

[Operator:]

Our next question comes from John Katsingris from Wedbush Securities. Please go ahead. Your line is open.

[John Katsingris:]

Hi. How are you? This is John Katsingris on for Dan Ives.

[Nitesh Sharan:]

Hi, John.

[John Katsingris:]

How are you? So we've seen enterprises start being a bit more selective with capital due to increasing costs due to inflation. Have you witnessed any potential slowdowns in the pipeline? Do you expect anything along those lines or any rapid acceleration of bookings? Thank you.

[Keyvan Mohajer:]

Yes, I'll start and Nitesh you can chime in. We've seen the opposite in general mostly because we are in AI and automation business. And that really resonates in markets like this when people are either trying to save costs or increase their revenue or become more efficient where staffing is -- that challenging with staffing. For example, the SoundHound for Restaurants product -- restaurants aren't able to pick up their phone. And when they do pick up the phone the customer experience is not very good. So that solution is resonating with them. We have actually a waiting list for restaurants that want to sign up for that service. And then, for -- if you look at what's happening in the automotive industry or other devices like TVs and so on, the team is increasing revenue from those products, as opposed to they used to be you sell the device and your relationship ends with the end user and you have low margins. But if you can monetize the user interaction, that's a new paradigm that a lot of device companies are signing up to. And we are a big part of that solution, because the voice AI interface to these devices we bring services with our three-pillar models and we provide a path to generate revenues while delighting the users. So the market conditions actually help our business, but Nitesh, if you want to...

[Nitesh Sharan:]

Yeah. I mean, I might just add a couple of brief things. I mean, I think the pathway we've been on certainly for the past year and leading to this conference call as a public company, the fact that I highlighted that we have -- we're maintaining our expectations, we're able to deliver against that in a sort of macro environment where a lot of things have happened over the last nine months to say the least from inflationary pressures to geopolitical dynamics and so forth. And I'd chalk it up to one, laser focus from the team and commitment to delivering on our customer commitments. I also believe it, has to do with we're delivering solutions -- to amplify what Keyvan said, we're delivering solutions that customers really need and want. And I'd say in a lot of ways they're fed up with the status quo and incumbent opportunities that they have. And when they see our technology and they understand how it can help amplify their solutions they're continuously sort of attracted to continue to engage with us, and work with us, and buy from us. And so we're [indiscernible] scale and innovate and in a recessionary environment in a difficult environment we can -- we have a strong value proposition. But even longer through whatever business cycle it's about creating a much more seamless interaction of how humans interact with technology. We believe it's the next modality that will really step function change how we interact with technology that is becoming more and more pervasive in our world. And so we just think we're really well suited to deliver on these decade plus of great innovation that Keyvan and co-founders and the team here have built. So we're excited.

[John Katsingris:]

Thank you.

[Operator:]

We have no further questions. I would like to turn the call back over to Keyvan Mohajer, for his closing remarks.

[Keyvan Mohajer:]

Thank you. When we founded SoundHound we have a vision to see conversational AI in our lifetime. And we are now a leader in this space. We have made a series of significant technological innovations. And we are now focused on rapidly scaling our business. With our Speech-to-Meaning, Deep Meaning Understanding and Collective AI Breakthroughs, we believe, we have a competitive and technological differentiation. Conversational AI is undoubtedly the future. And we have the only global independent cross-industry conversational AI platform. That is why we win. With that, I thank you for participating in our call today.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.