SoundHound AI, Inc.

Hello and thank you for standing by. This time I would like to welcome you to the SoundHound Q2 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. I would now like to turn the conference over to Scott Smith, Head of Investor Relations.

Please go ahead.

Good afternoon, and thank you for joining our second quarter 2024 conference call. With me today is our CEO, Kayvon Mahajer, and our CFO, Nitesh Charan. We will begin with some short remarks before moving to Q&A. We would 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. 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 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 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, Kevan Mahajer. Please go ahead, Kevan.

Thank you, Scott, and thank you to everyone for joining the call today. Before getting into the quarter, I wanted to talk about the announcement we made this morning to acquire a conversational AI leader, Emilia. This transaction is a natural extension of our strategy, and we saw a great opportunity to partner with a company that we believe will accelerate our mission of voice enabling the world with conversational intelligence. Our vision has always been to create a conversational AI platform that exceeds human capabilities, delivers value and delights end users, creates an ecosystem with billions of products, and enables innovation and monetization opportunities for product creators. Today's announcement is a continuation of that path. And now is the time for such a bold move. SoundHound is a leader in voice AI, and we have built a platform that we can perfectly leverage to expand into new markets. Coming together with Emilia is an important step along the way in this journey. And we are excited for a number of reasons. Most importantly, this significantly expands our penetration in conversational AI across new verticals and deep into hundreds of enterprise brands. We are doing this in end markets that are expected to grow massively over the coming years, with enterprise spending on generative AI projected to grow 15-fold over the next three years to nearly $250 billion. Together, we combine decades of experience in conversational AI. We have a highly complementary suite of products, and we believe we can offer best-in-class, scalable customer service support to a vast spectrum of businesses. The announcement today marks a significant and strategic expansion of SoundHound's existing customer service pillar. We are adding even more breadth and depth to this offering that has already seen substantial growth amid the accelerated adoption of voice and conversational generative AI solutions. Nitesh will provide some more insights into this deal and our overall M&A philosophy later on. Now on to the quarter. Once again, we are reporting strong growth. Second quarter revenue was up 54%, and cumulative subscriptions and bookings backlog roughly doubled year-over-year to $723 million. We also saw a steep increase in engagement with our technology. Our annual run rate of queries is now over 5 billion. We continue to see strong demand for our products, including Samhain Chat AI in Pillar 1 and our AI customer service solutions in Pillar 2. Our value propositions are resonating with the industry. Customers choose us because they believe our innovation cycles are at a high level and results in powerful AI technology. They also know that we help them protect their brand, users, and data. We have accumulated 20 years of intellectual property, and technical innovation remains in our core DNA. Last year, we announced Polaris, our multimodal, multilingual foundation model. Polaris now beats numerous benchmarks against state-of-the-art models in the industry. A growing number of our customers are switching to Polaris. The result is higher accuracy, better user experience, lower internal cost, and faster response times. We can also deliver tuning and customizations much faster. These customizations have historically required long and expensive machine learning training cycles. With Polaris, we can achieve them with just simple configuration changes. Now let me discuss some business updates in the second quarter. In Pillar 1, we now have cars in production in almost 20 markets and support dozens of languages. SoundHound Chat AI, our voice assistant with generative AI, is driving this high demand. DS Automobiles became the first brand to quickly turn a trial run to live production. This was the first in-vehicle assistant with generative AI capabilities to go into production anywhere in the world. And the results have been so well received at Stellantis has continued to integrate TamHan technology into a large number of models across multiple brands. In total, you're now live on the road with six Stellantis brands, Peugeot, Vauxhall, Opel, Citroen, and Alfa Romeo, and of course, DS Automobiles. TamHan Chat AI combines the power of large language models with our AI assistance, making it more capable and powerful. This is an upsell feature. that will increase royalties from existing customers and are booking this quarter increased as a result. This is important to emphasize. While historically there have been constant pressure from auto OEMs to lower their costs, for the first time we are seeing their appetite to pay more. They want to upgrade to sound and chat AI to deliver a much better user experience to their customers, and they're willing to pay the additional royalties to do so. Therefore, we expect our revenue per unit in Pillar 1 will increase over time as more customers adopt the generative AI innovation in SoundHandChat AI. Last quarter, we talked about being the first company to roll out this technology integrated in vehicles in Japan. And now this quarter, we are also pleased to have signed a new contract to be the first company to roll out ChatGPT-style capabilities to in-vehicle voice assistance in Latin America. Initially, this will be with three brands and go into production in Brazil, Argentina, and Chile. We also continue to gain interest and make progress with EV manufacturers. Earlier this year, we want to deal with a prominent US-based EV maker, which will go live immediately. Sanheim Chat AI will be integrated across its full fleet of market-leading vehicles. This will mark the first US-based OEM to integrate an assistant with generative AI capabilities. Additionally, we have expanded with an existing customer a fast-growing EV manufacturer in Europe to add SoundHound Chat AI to their digital assistant. Last quarter, we also announced a partnership with Perplexity to bring cutting-edge online LLMs to SoundHound Chat AI. This has allowed us to offer a truly multifaceted, next-generation voice assistant to phones, cars, and IoT devices. Perplexity helps SoundHound Chat AI provide accurate, up-to-date responses to web-based queries that static offline LLMs cannot currently fulfill. Expanding the type and complexity of the questions the assistant is able to answer. The Move made SandHandChat AI the most advanced voice assistant available on the market today, and we are currently in progress conversations with OEMs about having this capability go live.

Moving on to Pillar 2.

This quarter, we won the business of three sizable QSRs. This means that in total, we have now won deals with five of the top 15 QSRs based on the number of locations. One of the QSRs we engaged in, Q2, was a large, well-known pizza restaurant with thousands of locations throughout the US. This means that San Juan is now working with two of the biggest pizza chains out there. Each of these QSR brands represents a sizable opportunity to deploy our technology across thousands of locations. It's an exciting time. We are in a very fortunate position, so how we execute the business at this time will be critical to our performance in this space going forward, and we are mindful of this. Our customer service product portfolio is resonating with businesses of all sizes, so we are winning in large enterprises as well as small chains. It's become clear to us that very few companies can offer businesses of all sizes an affordable, fast, and easy to implement solution that addresses their growing needs. We own our tech. We have data from real interactions and nearly 20 years of experience. We believe we are winning because of the data science and machine learning behind our proprietary software. Last year, we introduced a product called Employee Assist, which uses our conversational voice AI technology to support employees like a co-pilot across a variety of tasks via their headset or a tablet. We already have several customers benefiting from this new service. Those include some large QSR brands, and I'm proud to announce two prominent coffee chains have also signed up this quarter. We are finding that many customers are choosing to sign up for employee assist in combination with our drive-through solution, Dynamic Interaction. They work together in tandem to handle and improve the customer experience while supporting their employees. SoundHound Dynamic Interaction delivers what we believe to be the next generation of all voice AI interfaces. It is full duplex, it's multimodal, it does not require constant use of wake-up words and turn-taking, and can be seamlessly multilingual. We believe its impact on voice AI and conversational interfaces will be as meaningful as multi-touch technology on touch interfaces. Our AI solutions save costs for our customers, improve the experience of their users, and also increase revenue by increasing throughput and proactively offering upsells. Our phone ordering solutions are continuing to ramp up with existing customers like Jersey Mike's, and as mentioned earlier, we are penetrating into thousands of pizza chain locations across the U.S. We announced Beef O' Brady's, where we are already live in all corporate locations and plan to roll out to 20 states very soon. Going beyond restaurants, Townham Smart Answering is showing rapid growth within Pillar 2. We already have hundreds of locations live from single-location small businesses to brands with multiple locations. Last quarter, we talked about Planet Fitness, and we have already gone live and continue to roll out more. We are seeing great traction in franchise retail businesses and across a number of industries. These include personal care, professional services, home and local services, automotive services, among others. We are excited about smart answering because the number of industries it caters to opens up a massive market for us to address with millions of businesses in the United States alone. The seamless implementation capabilities allow us to scale fast and the use cases for companies of all sizes are obvious. Whether it's handling multiple calls at once 24-7, conveniently filtering out spam calls, providing verbal and SMS responses, taking configurable actions, capturing leads with intelligent messaging and answering questions about policies, hours, products, services, pricing, and more. We have built a competitive mode with our proprietary technology that is creating massive opportunity in customer service. On to pillar three, where we are making great progress and accelerated that path this quarter with the acquisition of Allset. The ordering platform we acquired through Allset enables us to build a voice commerce ecosystem. The acquisition will ultimately enable consumers to use cutting-edge voice AI to order foods from their vehicles, phones, and smart devices. Additionally, the Allset team brings a wealth of marketplace experience and knowledge that will make a voice commerce ecosystem a reality. We are creating a new category, and together, we plan to provide dynamic and convenient ways for people to order food and complete a range of other transactions just by speaking naturally. And as we increase the notable names that we sign every quarter in Pillar 1 and 2, it also helps us get one step closer to mobilizing this strategy. With this strategic move, we have significantly increased our addressable market while creating new, more convenient and accessible consumer experiences. Our customer engagement with this vision has always been well-received. With existing and prospective customers, getting even more interested over time as our portfolio of customers using voice-enabled services grows. We always talk about the flywheel effect with this vision, and we are starting to see that take shape. In closing, we have consistently grown at a rate of 50% or more and continue to fortify our financial position, all while gaining market share, attracting new enterprise customers, and creating some of the most innovative voice AI technology in the world. We are proud of the best-in-class experiences we are creating for our customers and their customers. But our ambitions to keep aiming higher and push the boundaries continue to grow. As an example of that ambition, today we acquired Amelia. Amelia is an innovative company that shares our passion for AI-fueled conversations. We are looking forward to leveraging our shared capabilities to offer the best AI customer support solutions available anywhere. We are also pleased to welcome the team from Amelia to SoundHound and are excited about what we can do together. We believe the disruption in the market for AI we are seeing today is building towards our exact vision when we created SoundHound almost 20 years ago. A lot of our predictions are now becoming a reality. With another strong quarter where we beat market expectations for revenue, we couldn't be more pleased with the momentum we are seeing and the demand for our products and solutions. We look forward to continued engagement with our stakeholders as we create value. We are grateful to our amazing team that makes this all possible with their shared vision. 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.

Thank you, Kayvon, and good afternoon, everyone.

Q2 revenue increased 54% year over year. The results are another positive mile marker on our growth journey, where we achieved $13.5 million in revenue. This marks our fourth consecutive quarter exceeding $10 million in revenue. We meaningfully improved our balance sheet in the quarter by paying down our debt and completing the conversion of outstanding preferred equity. I mentioned before that our capital position is a source of strength, and we want to maintain that strength because it affords us the opportunity to go on the attack when it makes sense for us. We do that through organic investments to fuel disruption, partnerships to help scale aggressively, and acquisitions to accelerate our pace. One of the measures we use to gauge customer traction is backlog. In Q2, our cumulative subscriptions and bookings backlog roughly doubled year over year to $723 million, with an average duration of slightly less than seven years. Most of the expansion this quarter was in the restaurant space. although we continue to gain traction with automotive partners. For example, with Stellantis adding five additional brands going into production with SoundHound Chat AI. Today we announced, and Kayvon noted earlier, our acquisition of conversational AI leader Amelia. Let me spend a minute explaining how we think about M&A. First, we believe having a programmatic M&A approach can be value generating. Our acquisition philosophy stems from our overall strategy and vision, which is to voice enable the world with conversational intelligence and transform the next wave of how humans will interact with technology, increasingly with voice and natural conversations. We know the requisite underpinning technology to enable this vision is here now. In fact, we've built a lot of it ourselves, and we continue to see the customer demand and adoption for these capabilities growing. When we acquired SYNC 3 earlier this year, it was an accelerant for our restaurant business. Last quarter, when we announced the Allset acquisition, it was to catalyze our monetization pillar to connect voice-enabled services and products seamlessly together. Today's acquisition of Amelia is about accelerating more broadly in Pillar 2, customer service, and significantly expanding our industry reach. The primary filters we have been using to select appropriate acquisition targets have been, one, does it fit within our long-term strategy? Two, will it amplify or accelerate our pathway to realize that strategy? Three, can we effectively operationalize it and drive meaningful synergies? And four, can we buy it at the right price, appreciating the risks that inherently come from such transactions? Amelia checked those boxes for us. While it would be a meaningful acquisition with a lot of complementarity, we don't take the integration effort lightly and know it will take some time to get it right. But the prize together was too attractive to bypass, in our opinion, especially with the enterprise traction and demands we have been seeing in the marketplace. We just announced this today, so it's still quite early. And we know there will be questions, so please note that we plan to share more and dive much deeper on the opportunity we see. Stay tuned for more details. With that, let me now focus on and discuss the second quarter financials in more detail. Q2 revenue was $13.5 million, up 54% year over year. We continued to see growing automotive unit growth of healthy double digits in addition to unit price expansion driven by regenerative AI solutions and overall product expansion. The quarter benefited from a minimum guarantee edge solution purchased by Solantis and also from a year-over-year basis the contribution from SYNC3. Within restaurants, we continued to scale with customers, find meaningful new logos and further diversified product offerings. The quarter had nice balance across our pillars where a restaurant business comprised roughly 25% of revenue. In Q2, our gross margins were 63% down year over year, largely resulting from the acquisition, including the mix of lower margin call center agent business. Adjusting for acquisition impacts, notably the non-cash amortization of purchase intangibles, gross margins would have been 67%. While the acquired call center business does weigh on our margins in the near term, there is value in what this business can do for broader opportunities to come and what the data can bring to our models. That said, our goal over time is to automate and modernize. R&D expenses were $15.7 million in Q2, an increase of 34% year over year. We are prioritizing investments in disruptive innovation, like our Polaris initiative, to expand our suite of products to address a wider array of customer needs, and we continue fine-tuning the way we leverage large language models to provide even more value to customers at less cost. For example, we will continue to be thoughtful and opportunistic about which models we work with versus using our own and always keep the customer's needs at top of mind. In the end, our ability to arbitrate between models is a differentiator that we will continue to expand upon. Sales and marketing expenses were $5.7 million in Q2, an increase of 11% year over year. We continue to thoughtfully invest in go-to-market and customer engagement to capture the strong momentum and heightened demand. We are expanding reach through brand and industry marketing, demand generation, and high ROI lead gen strategies. G&A expenses were $9.5 million in Q2, an increase of 48% year-over-year. The increase in G&A reflects two main elements that we talked about the past few quarters. Our year-over-year comparison continues to be impacted by investments in financial and non-financial processes and internal controls to support requirements under SOX 404B, as we became a large accelerated filer last year. Our G&A was also negatively impacted by acquisition-related costs in the quarter. All operating expense line items were impacted by the SINC 3 acquisition. Non-cash employee stock compensation was $7.3 million in Q2. As a result, our operating loss for Q2 was $22 million. This includes non-cash acquisition impacts related to the fair value accounting that will likely introduce volatility into this line for the foreseeable future. OINE was $14.7 million of net expense for the quarter. Compared to previous quarters, the increase in OINE was mainly due to the one-time early repayment of our debt and associated extinguishment costs. We announced earlier in the quarter that we were able to repay the existing debt on favorable prepayment terms, allowing us to avoid sizable interest payments over the coming years. And the net loss was $37.3 million in the quarter. This led to a gap net loss per share in Q2 of 11 cents. Adjusting for non-cash acquisition-related amortization of purchase intangibles for value adjustments, M&A transaction costs, stock-based comp, and other non-cash items such as the gain on bargain purchase, our non-GAAP EPS loss was $0.04 in the quarter. Adjusted EBITDA was a loss of $13.8 million in Q2, improving sequentially by 10%. The year-over-year increase was driven primarily by acquisition impacts and growth investments we have been making in the business. Our cash position at quarter end was $201 million and no outstanding debt. We see a market that is moving fast and believe having a strong financial profile in times like these is crucial to success. We are in a position of strength and focused on creating long-term sustainable growth and profitability. With that, let me discuss our outlook for the remainder of 2024 and our prospects for 2025. We have made great progress. The core business is growing. Our technology is permeating across and resonating with an increasing roster of amazing customers. We expect the acquisition of Amelia to improve our financial profile. There are top line synergies, and we also expect to be able to extract a lot of value from the combined companies. It's a little early in the process to be too precise, so let me build up how we see the rest of this year and entry into next year. We are cognizant that a significant acquisition like this will require heavy integration, and will take time to fully align across the enterprise. We are baking this into our go-forward assumptions. As we noted in our press release this morning, we expect this acquisition to be accretive to earnings in the second half of 2025, and we now see 2024 revenue to exceed $80 million and 2025 revenue to exceed $150 million. There's much more potential here, but at this stage, it's appropriate for us to stay measured and calibrated on setting expectations. Amelia brings a diverse business with strong recurring revenue and also some other businesses that we are calibrating on to identify how best to fit them into our portfolio. In full transparency, there are lower growth and margin businesses where we want to assess the life cycle value of each contract to determine the best go-forward approach. These decisions may affect the pace of our growth or our trajectory on margins, so we need some time to finalize the plan. Ultimately though, We see a combined growth profile that is even more attractive than we were standalone with greater profitability. And we see tremendous value to share with customers, employees, and partners over the coming years. In conclusion, we are happy with where we are. We are aggressively moving forward. And while we know the path forward won't be linear, we have a clear vision that we are accelerating towards.

Thank you. We will now move to Q&A. Thank you. The floor is now open for your questions.

So to ask a question this time, please press star one.

We're going to pause for just a moment to compile the Q&A roster. Our first question comes from Gil Luria from DA Davidson.

Hi, good afternoon. One for Kayvon, one for Nitesh, both on the acquisition. This is a transformative acquisition. So why don't Kayvon, up until now, a lot of the strategy has been around autos and restaurants, pillars one, two, and three. There's a very good alignment in the strategy between those end markets and that pillar framework. How do you see that changing now that you'll bring Amelia into the fold in terms of what verticals you're going to have and what your focus is going to be in terms of pillars?

Thanks for the question. And transformative is the right word. Thank you for mentioning that. So the strategy just gets stronger. The acquisition gives us a lot more scale in Pillar 2. We always knew we were going to expand beyond restaurants. We've said that restaurants to us are like what books were to Amazon. They started with books. Now they sell everything. And we've always wanted to expand in AI customer service to other industries. And When we looked at, you know, we have an amazing tech that we can deliver to these brands, but it takes time to penetrate the customer base and understand their needs and even integrate with their infrastructure, especially for, you know, bigger enterprise customers. And Amelia has accumulated 26 years of customers and integrations. They also have great complementary products and technologies So this just accelerates that vision. It gives us a much bigger scale in Pillar 2. And a lot of their customers also fit into our Pillar 3. They work with retail, ticket companies, insurance, financial services, retail, hospitality. And a lot of those actually have a very nice fit into the Pillar 3 vision.

Got it. Thank you. And Nitesh, I know you asked in your prepared remarks for a little more time, but I want to talk as you talk about managing a company that next year is going to have $150 million. You're saying that a creative second half 2025, strictly speaking, that just means your earnings would be higher than they would have been otherwise. In terms of the overall margin structure and where that could put you when you're managing a company that big, does it bring closer your breakeven in terms of your ability to generate cash flow, adjusted operating margins, and then even gap operating margins? What does it do to the timeline of hitting those milestones? Sure.

Thanks, Gil. So yeah, I'll put the caveat up front. More details are certainly to come. We just announced this today that there will be filings and certainly a lot of details for us to talk through. But let me give you the high level construct and the way we see this and the way we see us moving forward over certainly the near term, but more importantly, maybe over the medium and long term. So what we're really excited about here is Amelia is a software business, has strong customer traction, deep and generally really robust relationships that permeate over time. And where you can expand and add, upsell, cross-sell, expand services, products, and expand margins. They do have multi-components to their business, and we will integrate that with our profile. But I've said before, sort of pre this acquisition, over the long term, we should have you know, strong growth profile, very healthy software margins, 70-plus percent gross margins, and at scale, EBIT margins that are 30 percent plus. And I don't think that changes at all with the acquisition. I've said also that you've got to think of us in phases. You know, we are migrating to break-even phase after sort of call it, I'll call it cash utilization phase. And that's the next horizon for us, going into next year and beyond. I think you should think of us as investing in these tremendous growth opportunities, because we do think of these as generational shifts in how humans are interacting with technology, increasingly through natural conversations and increasingly through voice. And so we're going to be in sort of call it that break-even zone for a bit, and we'll be funneling incremental dollars into our growth opportunities, because there are tremendous growth opportunities. And so I think from an even margin and even what I mentioned about sort of accretive in the second half, to your point, that's earnings related. But even our profile is generally capital light. And so that translates very seamlessly into cash flow as well. So maybe to synthesize all of that is the combination we will have to integrate. There will be synergy opportunities. There are cost opportunities as well as we look across both firms that we'll be working through. But as you get into next year, certainly, We see earnings accretion. We see cash benefits and cash flow benefits. And I think as you start to think through end of 2025 into 2026, you're going to see a much more scaled, still strong growth company, very healthy gross margins, software-like, and even margins that are not at our full potential because we're going to be investing those incremental dollars in our growth opportunities. But certainly shortly thereafter, I think you could think of us as that that 30-plus percent even margin-type profile business.

Right. Thank you. Thank you.

Our next question comes from Dan Ives from Wedbush Securities.

And Greg Corder. Can you just talk about how conversations with prospective customers have changed? You know, let's say over the last three, six months, compared to even a year ago. Can you just maybe anecdotally talk about that, just given where everything's going from a technology perspective, new verticals, and I think the view of SoundHound, right, is obviously changing dramatically in the market. Thanks.

Yeah, so in Pillar 1, where we power automotive and devices products, the big change is that they are actually are willing to pay more for generative ai whereas you know we have 20 years of history here and there's always pressure to constant pressure to lower their costs um but we see it so for the first time we are seeing that that when we say hey if you want to upgrade to the sound on chat ai which brings generative ai there's additional royalty that you have to pay and they're willing to pay it so that's that's the anecdotal answer to the Pillar 1 question. In Pillar 2, the big changes that are for AI customer service, brands are coming to us. We used to go to them, we used to knock on their door, and we used to, you know, getting a meeting to pitch our value proposition was a big win. But now we actually have to calibrate how to handle all the incoming inbound demand. And they all want to move faster. They all want to be first. They want to go from pilot to production. They want to make sure we can scale with them. And that's a much better challenge for us to deal with compared to just getting meetings from them.

And then just like a follow-up, I mean, kind of like Gil asked, But even to take that, does it really feel like just given the momentum you're seeing, now is the time to do a deal like this?

Yeah, I'll take that one. Yeah, we think it's a great time to do a deal.

I mean, I think, first of all, you know, we're seeing our technology can permeate into different ecosystems. We built the core proprietary tech. you know, over many, many years. And we're seeing it live in action and getting a lot of traction across, you know, when we extended from autos into restaurants. And really now bringing in Amelia into the fold does a few different things, some of which we've highlighted in our press release, but there's really a lot more here. It's the diversification of industry. It's really skills and integration. They have a great ecosystem of channel partners, by the way, which we can leverage across other avenues of our work. And there's a great intersection of product synthesis. So when you look at other products that we've been deploying around our smart answering or employee assist, there's a great synergy that we could bring into their ecosystem as well. So when we look at things, again, I kind of laid on the prepared remarks, the framework, when we think of inorganic versus organic opportunities. When we see the market momentum, ultimately to your first question, what are customers seeing the really thirsting for solutions. It's not just buzz out there. It's like, how do you utilize this technology to help their customers and to help them grow? And it's not only productivity, it's actually about generating new revenue. We see that with the restaurants, for example. It's not only about productivity. Obviously, they have workers in store that are overworked and strained and freeing up their resources is one thing, but we see consistent improvements in upsell. And automation never shies away from asking for that large drink or that extra French fries. And And those types of things are actually revenue and really meaningful ticket items for a customer. So, you know, I think we're seeing those demands. We think, yes, totally cognizant of, as I mentioned in prepared remarks, that anything, you know, meaningful, there's integration effort and so forth. But I really, I think the way we look at it is over the long term, you know, when we look at the sort of the calibration of risks and opportunities, this is a time where to be aggressive and this is the time to be thoughtful, but definitely to be in go mode because we're hearing it directly from the customer. So I think, you know, I think the combination with Amelia is something we're very excited about.

Great. Thanks. Thanks, Sam.

Our next question comes from Mike Latimore from North End Capital Markets.

Great. Thanks, Jack. Congrats on all the developments here. Looks great. The query volume growth was 90% and last quarter it was 60% year-over-year. What caused that acceleration?

Yeah, a lot of it is automotive partners that upgraded to SoundHand Chat AI. We did mention that when you upgrade to Chat AI, because of the generative AI feature, the usage went up. So consumers are actually interacting with the assistant a lot more. In some pilots, it was an order of magnitude. So that's one. And also just scaling in Pilar 2, having more customer service customers.

Great. And then on Amelia, can you talk a little bit about the core technology here? Is it that they have a kind of a platform that can handle orchestration, integrations, data security? Develop agents on that and then they can bring in your tech or maybe just talk a little bit about kind of what's the core?

elements of their platform Yeah, so they have product size customer service Somewhat omni-channel so they support text and voice phone and chatbots for both User facing and employee facing and There is a lot of synergies on using our tech to power that. For example, for speech recognition, they're using third party APIs. We would replace that with ours. There's opportunity for improving accuracy and also cost savings. There was a cloud migration for them to bring their cloud to our cloud, another cost saving opportunity. just the way AI works, we think we can improve a lot of the user experiences, but it's not just a complete replacement. They also have done a lot of innovation over 26 years, so there's an opportunity to take the best of both. We saw that also with Sync 3. When we bought them, we thought, let's go and look at the best of both and create something better, and we've done exactly that.

Excellent. Great. Best of luck. Thank you. Thanks, Mike.

Our next question comes from Scott Buff from H.E. Wainwright.

Hi, good afternoon, guys. Thanks for taking my questions. First, I'm just curious, with the closing of Amelia, do you now have all the tools in the toolbox necessary to, you know, complete the three-pillar strategy and do it successfully?

Well, we've had the tools. We just needed the scale. And we reached a point where we thought we had that scale earlier this year. We are now in millions of cars and double-digit thousands. and locations in Pillar 2, so just connecting them together seems like at the right time. You also have national coverage of certain brands, like Chipotle, for example. And the acquisition of Allsets earlier is going to accelerate the integration. Now we just need to do the integration of bringing those Pillar 2 customers into Pillar 1 products. And With Amelia, we just massively increased our scale in Pillar 2. So going from thousands of locations, mostly in restaurants, now we are in almost 200 large enterprise brands in new verticals for us. So we are in retail now. We are in hospitality. We are in financial services, insurance, and health care.

Okay, so there are no holes in tech that you still need to fill. It's now just about accelerating the scaling.

Absolutely, absolutely.

Okay, perfect. That's helpful. And then you've had some nice wins and then obviously some big opportunities out in front of you. I'm curious from an implementation capacity standpoint whether or not you need to go through a process of significant hiring or between your own team and the team you're bringing on through Amelia, you have the hands on deck to meet that demand. Go ahead.

Yeah, I'll jump in. Yeah, I think we're in a good spot. We have been steadily hiring in pockets where we've needed it to accelerate. I think overall we've been at a good spot where attrition has been low and, you know, we have our talent who's really passionate about what they're driving and sometimes they do need additional resources or scaling with customers. And so there have been measured hiring. And we, I think, you know, we know in pockets where if we see an opportunity to go faster, we don't, I think we talked about this maybe a quarter or two ago, like we don't want a customer waiting for six months. So we really want to get the resources to be able to start to, to activate. But, you know, I'd say generally no, no major holes, but because there's, there's growth, there's going to be some hiring to support that. And then I also add that, you know, again, across the companies, there's, there's, there's synergy opportunities, both on revenue upsell and cross sell and, you know, leveraging that omni-channel opportunity where they bring to the table to amplify our voice capabilities. And, and I think there's just some overhead things that naturally there there's going to be cost synergies. So. That's the work that we're kicking off, really, earnestly. But, you know, to your point on, or maybe the prior, like, from a tech stack, no major holes. From a product capabilities, no major holes. From a resourcing, no major holes. But when you're growing, you're constantly expanding and you're kind of adding, too, as you go. And that's kind of what we're always mindful of to make sure that we have what we need to grow.

Yeah, no, that's helpful, guys. I appreciate the added color. That's it for me. Thank you. Great, thank you.

Our next question comes from Brett Knopla from Cantor Fitzgerald.

Hey, guys. Thanks for taking my question. Congrats on the acquisition. I guess just kind of digging a bit deeper there. I think in your prepared remarks, you guys talked about there being some slower growth, lower margin businesses, and probably in the flip side, some higher growth, higher margin businesses. Could you just maybe provide a framework for what that business is growing at and, you know, Additionally, walk us through why they sold for $80 million with expectations to do $45 million of revenue. It seems like a phenomenal purchase price for you guys, but I guess why the sellers agreed to that. I guess they just don't have it in them anymore. I guess you just talk about how that process happened as well.

Yeah, thanks, Brett. I'll say a couple of things.

First, again, more details to come. We'll see a lot more around the breakout and the details of the financial profile. The 8K that we filed this morning on the transaction actually walked through the deal economics, so maybe I'll just start there. So there actually were multiple components. So there was sort of an upfront piece, some cash, some stock. There was also a part of assumption of debt, And we paid back part of that debt that was announced concurrently. And then, you know, like we've done in prior acquisitions, we like to share in the economics over time with delivery against the milestones and expectations that we're setting in concurrence with the target. And so all those parts are there. I think 80 is probably just a partial view, just to be clear. So there is, again, some debt components and other things and some earn outs. But we do, I think maybe the essence of what your question is, is value. And certainly both parties need to say there's alignment of value for any deal to make sense. And we've been going through that with them. And part of it is when you do stock transactions, there needs to be an attribution to future value of that stock. And there's a real belief both sides of what we can become and what we're starting to become. So I think when you unpack all that from deal economics, that's why this transaction was successful, why we got it to this place. Then the other question was sort of an unpacking of the various pieces of the business. So we did articulate in the press release about the $45 million of ARR. They do have a strong recurring business that has been over time shifting from a licensing model. And so that transition has happened. And so that's what we valued, really. It was a growing ARR business across those industries we talked about earlier, a really rich set of customers, you know, too-big-to-fail banks and those types. So people that would take us a long time to really develop a system to support. And so we're very, very excited about that. But they do have other pieces. They have professional services. A lot of the deals they've had are complicated. There's implementation, customization services. And those can be very valuable. They tend to be a little lower margin. And so that's a little bit of what we were alluding to. And then they also have this piece of the business that's more call center-like. Think of it maybe in... escalation support type capabilities. And those are, you know, partners that we work with and revenue that they generate that is lower margin business. And we do openly, you know, need to dive in and understand contract by contract. What makes sense? In Gil's question earlier, I talked about what's the profile of business we're building. We're really happy as a AI centric, you know, next generation technology software provider that From my seat goes like, hey, 70-plus percent gross margin, 30 percent even margins at scale, you know, bits and bytes that can transition and scale very quickly. But when we need to provide services to support integration environments, we'll provide that. When there are, like we had with SYNC 3, some call center capabilities that are additive and, by the way, you know, appropriately measured with the customer where there's data that we can utilize to enhance the models and enhance the technology, we'll leverage that. So, yeah, there are different pieces of business, different growth rates, and we're going to calibrate, and we're just getting going. So, again, more details to come, so stay tuned.

Perfect. Thank you. That was very helpful. I think you guys also talked about how you like having the optionality to kind of go back and forth between different models that you're integrated with, whether it be Perplexity or ChatGDT. I was just wondering, from the cost side on Perplexity, from your point of view, I guess, how are they billing you? Is that a usage model? Is it a one-time setup fee? I guess, how should we think about that dynamic?

Yeah, so something we predicted before there were even multiple models was that, and this is more than a year ago, was that there will be multiple models. They will be good at different things. and some will be cheaper, some will be more expensive, and some will be owned and made by us, some will be open source. So we built an infrastructure to be able to tap into different models, arbitrate, choose the right one, and even for a single interaction, sometimes we go to multiple models at the same time. And that is working. It's seamless. The user experience is amazing. They don't need to worry about where it's coming from. They just get the right answer. And then it follows them as they ask different questions and so on. Now, in terms of billing, it's, again, some of these are models that we host. So the cost is mainly hosting. And for the APIs, like OpenAI and others, you can sign up for enterprise accounts to bring the cost down and get more scale with them, and that's something that we are doing. And then there are companies like Perplexity that have list prices, and then we have an arrangement with them that we can go to them when it scales to, for example, ref share arrangements or lower prices at scale. The future proves that for that, but it's too early to go into specifics of it.

Perfect. Thank you. Really appreciate it. Gratitude to Jax again, guys.

Thanks, Brett.

Our next question comes from Glenn Mattson from Blatterburg-Talman.

Hi. Thanks for taking the question. Building on that last question a little bit with the you know, expected new release of ChatGPT. Maybe, you know, can you just talk about how you plan ahead for something like that? And maybe there's obviously opportunities, but perhaps is there any risks associated with, you know, maybe they could come out with some functionality that could potentially be competitive on the very low end or something like that. So anyway, just generally speaking, managing the evolution of this process, as well as maybe you can hit on other factors of the competitive landscape when you talk about this, just in general, whether it be pillar one or pillar two?

Yeah, so in terms of advancements by OpenAI and other similar companies, we positioned ourselves so that as they do better, it benefits us as opposed to it's harming us. So we are able to use whatever they put out that's good, and if some of those overlap with something that we already have, we don't hesitate to integrate it because our goal is to deliver really, really good user experiences. And that was one of the advantages of SoundHound when the big tech players were kind of disoriented for more than a year. Oh, let's go build our own. You're never going to use OpenAI APIs. We did it in two days. And that really benefited us. We were the first to go live with our customers, and we were the first AI assistant that intervened with AI and so on. So we love it when they come up with something that is good because we say, hey, we can make our products better. I don't think they are going after our customers because it takes a lot of integration, a lot of hand-holding, and a lot of support. It's not just a model. We have to integrate, for example, in restaurants, we have to integrate with POS systems, and we have to integrate with their menu. We have to understand their needs. In automotive, it's integrating with the head unit and the navigation software in the car, the car control features. And those integrations, even OpenAI has probably said they are not going to go after those. They're becoming a platform to enable companies like ours, and they're advantage for us is that we have a lot of core technologies to augment what they have to really enable things that other companies are waiting for something to become available. We already have that, so we can go faster. I think I answered your question.

Beyond that, possibly the competitive landscape, if there's been any changes, possibly even down to pillar one or just across the board in terms of the

traditional competitors thanks yeah I'll jump in a bit so you know I think so pillar one you know we've really kind of the same same group and we've been gaining traction we've been gaining brands and we feel great and that's a primary common around automotive you know brought broader than automotive and the other devices that we operate in we've we've had a great position and and we continue to gain traction there within pillar two You know, it's a hot area. There are people coming, and I would say people who don't have the technology to compete who are struggling. And, you know, we really have felt this way. We've seen it. I think what we're seeing from customer attraction is that we are still, and we say this very humbly because things change in a heartbeat in tech land, we are step function above others in terms of technology capability and the solutions that we have, and frankly, the package of solutions that we have. from drive-through, phone ordering, employee assist solutions, and beyond. We're moving heavily beyond just at point site, but into in-app, into text, et cetera. And there's a ton of engagement that we have the full portfolio of solutions. So we really think we got a running start on the restaurant side. But yeah, it's a very, very attractive market. And it's maybe one of the most sort of logical use cases of AI. So I think we're going to continue to see entrants. We look at that as a good thing. It's a sign of a healthy market. But again, we feel like we've got a really strong position and really wouldn't trade our spot with anybody else.

Great. Thanks for that, Keller, Natasha, and Kayvon. Thanks.

Great. Thank you. Our next question comes from Leo Carpio from Joseph Conrad.

Good afternoon, gentlemen. First, congratulations on the deal and on the quarter. Going to dive a little bit further into Amelia, in terms of the deal, can you talk us through in terms of who approached who for this transaction? How did you become aware of Amelia? And then looking forward post-Amelia, what other verticals you may be interested in? Thinking here being that as you explore voice AI and develop the capabilities, you may discover second, third derivative technologies that may be of interest to you that could bolster your platforming capabilities.

Sure. Yeah, I mean, I'll start maybe with the framework I laid out and the prepared remarks. Like, first of all, we think that having or at least being open to the idea of having programmatic M&A and being aware of who the players are, you know, from partnership perspective, you know, to Glenn's question on from a competitive perspective. So being aware of what's going on in the marketplace is just part of who we are. So we're always aware. We've known of Amelia. You know, they've been doing some great things for a long time. And you can imagine in this space, particularly in the AI space over the last, I guess it's 18, 20 months now. A lot of bankers come out with ideas. And so we've had interactions and there's dialogue around partnerships and we were heavily kind of going in our verticals. And as Kayvon noted, you got to start with this sort of overarching vision. We believe we are here to voice enable the world with conversational intelligence. We think that there's a migration happening, omni-channel in essence, and it's going to permeate across all industries. So the the end-all period at the end of the sentence wasn't always, okay, we're in restaurants, done. We're in, you know, autos, done. It was always to sort of, as Kayvon noted, kind of evolve from our origin industries into beyond. So the question then is like, well, when and how and with whom are doing it organically? And those are iteration comments that were – or conversations we're constantly working through. So in this case, yeah, we connected – you know, we started to explore, just get to know, and then it sort of moved from there. And every, you know, I don't want to go into details on their situation and what they were motivated by, but ultimately kind of landed in, hey, is there a potential for a combination? And then you have to explore the complexities of deals, which, you know, these things don't happen in short order. They definitely are a long journey of due diligence and getting to know one another to understand, you know, the cultures and could there potentially be a fit and And so we've been, you know, we've been going down that for several months and sort of landed where we were. And then I think maybe just to hit the other part, you know, in terms of is this, I think your question was like industries, is this, is that the right set? You know, I'll try to address it this way, that humans have been interacting through voice and conversation forever, and yet our technology is kind of chasing that play. And we do think we're at the precipice of where human interactions and with technology in all manifestations can happen through natural conversations. And there will be great places where the touch type swipe is the best medium, but there will be more and more opportunities where conversations and using your voice will be the best medium. So I don't think there's a boundary on like this industry, that industry. It's really about journeys and consumer journeys. Again, makes sense for if you're driving your car, you want to pick up coffee. Great. Well, there's a connection. Makes sense when you're just at the drive through and you want to order your food. It makes sense if you're driving, you want to set some appointments or book traveler, you know, so forth. Like there's so many interactions. And so it's we're just getting started here. You know, we think this is the right action for us now. And so we're excited to embark on the journey with Amelia and continue on the journey that we've been driving for the past many years.

Okay, and then a quick follow-up question. In the restaurant side, the tentative conversations, have they switched from one where your marketing team is proactively reaching out to potential customers, or are they now flipping in terms of coming their inbound calls to you?

Yeah, we commented for the last couple of quarters, there really has been a pretty significant shift towards the latter, where originally, call it 15, 20 months ago, we were really on the outreach side, I think your question was predominantly for restaurants, if I'm not mistaken. So certainly in that industry, we're working through making sure that there isn't too much of a wait because we're working through integrations with some major QSRs, as Kayvon noted, trying to make sure we're serving all our customers equally with excellence. And so we're not working with everybody, so there's still more conversations to be had. But we're going out to conferences. We're getting leads. We're talking to people. Some of those conversations take place over time. The other thing that these are virtuous cycles. If you can do well in one instance, the word gets around pretty quickly. And also in a lot of these franchises that we're working with now, it's not just like a brand to a brand, but it's you work with you know, a corporate and then it gets down to the franchise level. And some franchisees have a big number of, you know, dozens and dozens of locations and some of them have, you know, hundreds of locations. So, again, it has really moved towards a respond to, but that doesn't mean we're going to slow down on our outreach. And, you know, we didn't really, I think, talk a lot about just beyond the restaurants and the smart answering capabilities where last time we talked about in the fitness space with Planet Fitness. You know, there's a lot going on on that side, too, beyond just restaurants that we're getting a lot of traction. And so just excited to keep going forward. And, you know, as long as we deliver great products, we think the customers will come.

Okay. Well, congratulations on the quarter. Thank you very much. There are no further questions at this time.

So this now concludes today's call. Thank you for joining. You may now disconnect.