SOUNDHOUND AI, INC. Q3 FY2023 earnings

SoundHound AI reported third quarter revenue of $13.3 million, up 18.6% from a year earlier. Executives called it a record quarter and pointed to a 52% sequential increase in the top line. Nine-month revenue came to $28.7 million, up 32.8%. Product royalties again carried the mix, while service subscriptions and monetization both shrank. Korea was the largest market by a wide margin, France grew briskly, and Germany fell sharply after the company reworked a hosting contract with a large automotive customer.

Cost control did most of the work on the bottom line. The operating loss narrowed to $14.5 million, a 46.3% improvement. The net loss narrowed 32.8% to $20.2 million, and the diluted loss per share narrowed 40.0% to $0.09. Operating margin for the quarter was -109.5%, a large step up from a year earlier. For the nine months, the net loss narrowed 17.4% to $70.9 million. Those gains trace to the restructuring announced in January, which cut about 40% of the workforce, or 180 positions. Research and development expense fell 34% in the quarter, sales and marketing fell 33%, general and administrative fell 28%, and total operating expenses fell 27%.

Cash remains the pressure point. Operating cash flow was -$20.2 million in the quarter, an improvement of 24.8%, and -$54.4 million for the nine months, an improvement of 26.1%. Capital expenditures for the nine months were $0.3 million, down 71.9%. The press release put total cash at roughly $110 million at September 30, 2023, while the 10-Q reports unrestricted cash and cash equivalents of $96.1 million. Interest expense rose 367% to $5.4 million in the quarter, driven by the $100 million senior secured term loan taken out in April, which carried an interest rate of about 14.0% at quarter end and matures in April 2027. Financing activity generated $155.2 million in the nine months, helped by $71.7 million from the equity line of credit and roughly $25 million from the Series A preferred issuance. The company also put an at-the-market sales agreement for up to $150 million in place in July and had not sold shares under it as of the filing.

Backlog offers some cover. Cumulative bookings backlog was $341.7 million at quarter end, up 13% from a year earlier. Remaining performance obligations were $13.9 million as of September 30, 2023. Deferred revenue, the current portion only, was $4.25 million, down 20.0% from the prior-year quarter. Management warns that neither figure tracks revenue closely because of mix and billing timing. On the product side, SoundHound added enterprise restaurant customers such as Jersey Mike's and Krispy Kreme, integrated with Olo's roughly 77,000 locations, and rolled out an in-vehicle assistant with generative AI through a pilot with DS Automobiles, a Stellantis brand. A branded assistant went live with Togg, a Turkish electric vehicle maker, and a Samsung collaboration targets voice AI drive-thrus starting with White Castle.

The outlook covers the fourth quarter of 2023 only, not the full fiscal year. Management guided to a range of $16 million to $20 million in revenue and continues to expect the company to be adjusted EBITDA positive in that quarter. Adjusted EBITDA in the third quarter was -$7.3 million, an improvement of 57%.

The risks are concentrated. Korea supplies most of quarterly revenue, and a single contract modification in Germany pushed that market sharply lower year over year. Deferred revenue is shrinking while revenue grows, which limits visibility into billings. SoundHound also revised prior-period financial statements to fix errors tied mainly to other income and expenses, with general and administrative adjusted by $64,000 and net loss by $1.075 million for the period ended September 30, 2022. Management is still assessing the effect on internal control over financial reporting. Inflation, interest rates and the wars in Ukraine and Israel round out the list of stated risks.