SoundHound: Needs More Capital To Drive Growth (NASDAQ:SOUN)

SoundHound (NASDAQ:SOUN), a voice AI platform that empowers customers to interact with products through speech, is gaining momentum as its products and services are being embraced by a variety of businesses across a number of different industries.

Its AI-enabled voice tech appears to be advanced beyond the majority of its competitors, and it has created a competitive advantage and moat by the success it has had in improving the AI voice tech over a period of years and iterations, which most of its competitors will have to go through in order to match where the company stands today, even as it continues to improve its product and services.

With the tech lead it has over most of its competitors and potential future competitors, combined with the labor shortage that is requiring tech answers to lack of workers, it’s a convenient time for SOUN to ramp up its sales and marketing in order to grow share.

In this article, we’ll look at what the business model of the company is, some of its recent numbers, and what the future looks like if it’s able to secure more capital to take advantage of the growth potential inherent in the markets it is competing.

The business model

The company has built a “proprietary Speech-to-Meaning, Deep Meaning Understanding, and collective AI breakthroughs” from the ground up, which management believes takes voice AI tech to the next level by allowing end users to interact in a natural way – whether with simple or complex queries.

To develop an accurate and compelling experience for customers it takes a lot of time, trial-and-error and iteration to deliver value, and the company believes it’s a high barrier-to-entry which gives it a competitive advantage and moat because there are very few companies that have the ability to deliver advanced voice AI tech at this time.

As for how the voice tech is deployed, it’s across a wide range of products and services, including restaurant ordering and products it receives royalties or subscription revenue from.

Revenue comes from royalties it gets from voice-enabled products such as IoT devices, TVs and vehicles; subscription revenue from voice-enabled services like the aforementioned food ordering in drive-thrus at restaurants, appointments and customer service; and the monetization it receives by connecting its services and products mentioned above, together.

For example, if someone pulled up in a car to order pizza in a drive-thru, and both were AI-enabled with SOUN voice, the company would get monetization from the pizza sale, as well royalty revenue from the car and subscription revenue from the drive-thru.

Some of the numbers

Revenue in the third quarter of 2022 was $11.2 million, up 178 percent from the $4 million in revenue generated in the third quarter of 2021. Revenue for the first nine months of 2022 was $21.6 million, compared to $16 million in the first nine months of 2021.

The majority of revenue in the reporting period came from product royalties. But revenue from its restaurant food ordering subscription business was up 83 percent year-over-year, underscoring the momentum the company is getting from that segment, which has enormous potential in the years ahead.

Management noted that the mix of revenue between subscription and royalties could change significantly from quarter to quarter because of its expansion into subscriptions and monetizations. How to think of the two the latter two is they will be measured in a similar way ARPU and ARR are measured.

Gross margin in the reporting period was 77 percent, compared to 59 percent year-over-year. The improvement came from a more favorable mix and a large automotive deal.

Expenditures in the quarter were up, with cost of revenue at $2.6 million, compared to $1.7 million in the third quarter of 2021; Sales and marketing increased from $1.2 million last year in the third quarter to $6.7 million in the third quarter of 2022; Research and development climbed from $14.3 million in the third quarter of 2021 to $19.4 million in the third quarter of 2022; G&A jumped from $4 million in the third quarter of 2021 to $9.6 million in the third quarter of 2022.

Consequently, loss in the reporting period was $27 million, approximately $10 million more than the loss of $17.2 million in the third quarter of 2021. For the first nine months of 2022 the company had a loss from operations of $76.7 million, up almost $30 million from the loss of $46.2 million in the first nine months of 2021.

Net loss in the quarter was $(28.9) million or $(0.15) per share, compared to a net loss of $(23.8) million or $(.35) per share in the third quarter of 2021. Net loss for the first nine months of 2022 was $84.7 million or $(0.59) per share, compared to a net loss of $(57.7) million or $(0.86) per share in the first nine months of 2021.

Cash and cash equivalents at the end of the third quarter of 2022 was $33.4 million.

One step the company is taking to lower costs is to reduce its workforce by approximately 10 percent.

As for its backlog, it has bookings of approximately $302 million, up 239 percent year-over-year, with contracts in a range of one to seven years, with a weighted average of about five years.

One of the crucial things the company must do in my opinion is to secure more capital to finance its growth initiatives. It said it “added a new committed equity line of credit” in the third quarter but wasn’t available yet. Management also said it was in late-stage discussions to secure more immediate cash to shore up its balance sheet.

It must secure the capital from those discussions or find it somewhere else in order to maintain growth and momentum as costs rise in association with the tremendous opportunities before it.

Conclusion

SOUN had a huge addressable market, but it’s one thing to have potential, and another thing to transition that potential into sales and profits.

With the tech lead it has over most of its competitors in the AI-voice market, the company needs to become more efficient, secure capital, and increase R&D and sales and marketing while maintaining a healthy balance sheet.

In order to maintain its moat and competitive advantage it does need to strike now and in the near future in order to separate itself from the pack and become the go to company for AI-voice products and services.

If the company had the available capital now, I would recommend it as a speculative buy that has significant asymmetric potential to delivery strong returns on a modest investment. But until confirmation of secured capital is announced, I would wait to take a position because the inability to raise enough capital for operations would put a lot of downward pressure on the stock; that’s especially true after the recent boost in its share price for no apparent reason.