SoundHound AI, Inc. — Q2 2023 Form 10-Q
Business context and period: SoundHound provides voice AI and conversational AI products and services, including Houndify and SoundHound Chat AI. This unaudited report covers the quarter and six months ended June 30, 2023, compared with the corresponding 2022 periods. The company operates as one reportable segment.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $8.8 million | $6.2 million | $15.5 million | $10.4 million |
| Gross margin | 79% | 60% | 75% | 59% |
| Operating loss | $16.4 million | $28.9 million | $41.5 million | $49.6 million |
| Net loss | $21.9 million | $30.7 million | $48.3 million | $55.8 million |
| Basic and diluted loss per share | $0.10 | $0.19 | $0.23 | $0.48 |
- Q2 revenue grew 42%; six-month revenue grew 48%. Product royalties were the main driver, rising 47% in Q2 and 55% for the first half. Service subscriptions increased modestly, while monetization revenue declined.
- Management attributed royalty growth largely to a German customer contract modification and higher royalties from Korean customers. A distinct customization service for a French automotive customer had boosted 2022 comparisons.
- Gross margin improvement reflected lower hosting and data-center costs after migrations and revenue scaling. Operating expenses fell 28% in Q2 and 5% for the first half; reduced research and development and general and administrative costs followed the restructuring, while sales and marketing spending increased.
- Interest expense increased to $5.6 million in Q2 and $6.7 million for the first half, primarily reflecting the new term loan’s higher interest rate and debt-cost amortization. First-half expense also included $0.8 million of debt-extinguishment losses.
- Six-month operating cash use was $33.7 million, down from $46.8 million. Investing cash use was $0.3 million. Financing provided $154.0 million, including net term-loan proceeds, ELOC stock sales and preferred-stock proceeds.
Liquidity, debt and capital
- At June 30, cash and cash equivalents were $115.8 million; an additional $13.8 million was classified as non-current restricted cash. Total cash and restricted cash was $129.5 million.
- Term-loan principal was $100 million, with a reported carrying value of $66.4 million after unamortized discounts and issuance costs. The loan bears approximately 13.6% interest at June 30, matures April 2027, has no scheduled principal payments before maturity, and is secured by substantially all company and subsidiary assets, subject to exclusions. The company reported covenant compliance.
- The company sold all 25 million shares available under its equity line by June 30, generating approximately $71.7 million gross proceeds. Class A shares outstanding increased during the first half; the filing reported 203.2 million Class A and 37.5 million Class B shares outstanding as of August 8.
- Series A preferred stock raised approximately $25 million and carries a 14% annual dividend that accretes to liquidation preference. Its aggregate liquidation preference rose to $26.6 million on July 1, 2023.
Changes, outlook and risks
- The January restructuring reduced the workforce by approximately 40%, or 180 positions globally. First-half restructuring expense was $3.8 million; management expected only nominal additional expense through year-end 2023. Management said operating expenses should moderate while it continues investing in go-to-market activity, product development and customer engagement.
- Management expected available cash to fund operations for at least the next 12 months, while noting continued losses and the possibility of further financing or expense reductions. The filing provides no specific revenue or earnings guidance.
- A June modification to a German hosting contract reallocated an estimated $1.9 million tail-support fee into remaining obligations and was expected to be recognized in 2023. This timing shift is relevant when assessing the durability of reported revenue growth.
- Remaining performance obligations were $15.8 million: $7.5 million expected within one year, $5.2 million in two to five years, and $3.1 million thereafter. These estimates exclude certain usage-based and other contract amounts and may change.
- The company disclosed recurring losses, a $550.4 million accumulated deficit, concentrated customers (three customers generated 75% of Q2 revenue), and a seven-year cloud-hosting agreement with $92.5 million of remaining non-cancelable minimum payments. Inflation, interest rates, geopolitical disruption, competition, customer demand and access to capital are additional risks.
- After quarter-end, the company entered into a sales agreement allowing up to $150 million of at-the-market Class A stock sales; no shares had been sold under that program as of the report date.
Most important facts for investors to verify
- Whether royalty growth and improved gross margins persist without relying on contract changes or revenue-recognition timing shifts.
- Cash burn and financing needs relative to management’s stated 12-month liquidity expectation, including cash restrictions and term-loan interest and fees.
- Potential dilution from the completed ELOC, the subsequent $150 million ATM authorization, preferred-stock conversion and other outstanding awards and warrants.
- Customer concentration, the $92.5 million cloud commitment, and the company’s ability to meet secured-debt covenants while continuing to invest and reduce losses.