SoundHound AI: Fake Revenue, Fake Bookings, and Fake AI

SoundHound is an unprofitable 19-year-old company with a broken business model and no clear path to profitability. Management has deceived investors about their technology, partnerships, revenue, and growth. Multiple large customers have paid SoundHound to cancel their contracts, but the company has recorded these one-time payments as product revenue. SoundHound also pulls revenue forward in time for products that customers have not yet built and for which SoundHound has not been paid. Given SoundHound's history of losing large contracts, we feel it's likely that much of this revenue will never materialize.

Initial Disclosure: After extensive research, we have taken a short position in shares of SoundHound AI Inc (NASDAQ: SOUN). This report represents our opinion and is not financial advice. Do your own due diligence and don't take financial advice from strangers on the internet. Please read our full disclaimer at the bottom of this report.

Misleading Investors About Their AI Capabilities

• To answer many user queries, SoundHound’s “AI” product searches Wikipedia and returns scraped content.
• SoundHound pitches their product as world-class “AI”, on par with ChatGPT, but this is not the case. The Houndify product uses commodity speech recognition to search a manually programmed knowledge graph. And it only works for a small set of domains, such as weather, sports scores, etc.
• SoundHound’s products often return incorrect information because the company’s software is manually programmed and labor-intensive to maintain. This results in outdated information being returned to users.
• SoundHound’s speech recognition tech is a commodity service that competes with comparable products from Amazon, Google, Microsoft, Apple, Cerence, and many others. SoundHound has admitted as much by removing claims about the superiority of their product from their most recent 10-K.
• SoundHound’s largest competitor in the automotive space is Cerence. Cerence spends far more on R&D than SoundHound and has been taking SoundHound’s customers.

A Money-Losing Company With No Clear Path to Profitability

• SoundHound is hiding the fact that it has lost some of its biggest customers, including Mercedes-Benz, Deutsche Telekom, and Netflix.
• SoundHound disclosed that keeping these customers was critical to the company building a sustainable business.
• While SoundHound’s fundamentals have deteriorated, the company has used one-time contract modification payments to inflate revenue and margins.
• Customers paid SoundHound to modify and cancel their contacts. SoundHound then used those one-time payments to hide their deteriorating financials, by recording the payments as normal product revenue.
• When SoundHound lost Mercedes as a customer, they received payment for the contract modification. SoundHound recorded the contract modification payments as “Product Royalties”, which made the company appear healthier than it actually was.
• Since SoundHound recorded the contract modification payments as product revenue, it also inflated the company’s gross margin. According to SoundHound’s accounting, the more customers they lose, the better their margins.
• In SoundHound’s 2022 10K, customers are named 26 times throughout the filing. It even goes into detail about the projects for each major customer. SoundHound removed all customer names from the 2023 10K, effectively hiding that they’ve lost some of their biggest customers.
• In the 2022 10K, SoundHound disclosed a retention rate of 80%, but this statistic is mysteriously absent from the 2023 10K.
• SoundHound claimed in marketing materials and SEC filings that their tech was a big part of Mercedes’s in-car infotainment system. In reality, SoundHound was a tiny part of the system and is now no longer included at all. The contract was won by Cerence, SoundHound’s competitor.
• SoundHound uses deceptive accounting to artificially inflate revenue. The company pulls revenue forward in time for products that customers haven’t yet built and SoundHound hasn’t been paid for.
• SoundHound was founded 19 years ago and has accumulated losses of $592 million and lost $91 million in 2023.
• In a clumsy attempt to rewrite history, SoundHound claims to have been working “stealth-mode” for 10 years. In reality, the company spent years developing multiple mobile apps that failed and were subsequently pulled from app stores. Two of the company’s apps are still available for download. One is a music identification app that competes with Shazam. It generated $634,000 in revenue in 2023. The other is a free app called SoundHound Chat AI. It was released in 2016 yet has less than 900 reviews in the App Store.
• SoundHound is losing money every year and there’s no clear path to building a sustainable business or earning a profit.
• SoundHound lost more than double their revenue in every year of their disclosed financials (2020-2023).
• Less than 1 year after their SPAC merger, SoundHound continued to hemorrhage cash, laid off half their employees, and resorted to dilutive financing to stay afloat.
• SoundHound claims that one day they’ll be able to monetize their voice assistant. Both Amazon and Google tried the same strategy and failed. The effort cost both companies hundreds of millions of dollars and ultimately led to large layoffs.
• SoundHound refuses to share basic business metrics, including the number of devices using their tech and the revenue per device.
• On the FY 2023 earnings call, management was unable or unwilling to answer simple questions about the company’s performance including the number of devices using their tech.
• SoundHound’s biggest competitor, Cerence, provides detailed metrics about the number of devices using their tech and their market penetration. SoundHound refuses to provide any such metrics.
• Data provided by Cerence shows that they dominate the automotive voice assistant market and that they’re taking customers from SoundHound.

More Accounting Problems & Red Flags

• SoundHound went public via a SPAC merger and used fantasy projections to sell their failing business to retail investors. The company continues to use these metrics to hoodwink investors.
• Bookings are presented as likely future revenue, but in reality it’s a farce. Bookings are not based on existing orders, or contracted purchases, but rather management’s fictional projections.
• The company’s auditor, PWC, identified revenue recognition as a “critical audit matter” in their 2023 10-K.
• SoundHound was unable to file their 10-K on time and was forced to file a NT 10-K with the SEC.
• Once SoundHound did file their 10-K, it included restated financials for both 2023 and 2022.
• The overdue 2023 10K also disclosed material weaknesses in internal controls over financial reporting.
• In 2023, SoundHound’s auditor, Armanino LLP, resigned and quit auditing public companies. Armanino was the auditor for a number of known frauds, accused frauds, pump & dumps, and failed SPACs including FTX, COSM, LTRY, ICU, MNTS, AUMN, and many more.
• SoundHound is controlled by insiders who have super-voting shares granting them 10 votes per share and 63% of the voting power.
• SoundHound proudly states that their EPS loss has gone down, but this is only because shares outstanding has ballooned from recent dilutive financing.
• As a “controlled company”, SoundHound is exempt from many of the corporate governance rules that protect public investors.

We believe that SoundHound AI Inc is worth little in its current form. The biggest asset the company has is the NOLs it’s accumulated from years of losses, and their value will only be realized if the company shuts down operations and sells itself to a company that actually makes money and can use them. However, since SoundHound is controlled by insiders whose interests are not aligned with shareholders, we think it’s unlikely that investors will see any value from the NOLs. We therefore give SoundHound a generous price target of $1.00.

Introduction to SoundHound

SoundHound was founded in 2005 and for many years its sole business was developing mobile applications. These included apps for music recognition, voice dialing, and digital assistants. The company has had mixed success with their mobile apps with none reaching the scale necessary to sustain the company.

SoundHound later pivoted to focus on digital assistants for the automotive, restaurant, and consumer electronics industries. SoundHound sells its voice assistant technology to OEM customers to integrate into cars, smart speakers, and other devices. It’s also packaged and sold to restaurants for voice ordering systems. Most recently, the company pivoted to focus on restaurant ordering systems for drive-thrus, which is a low-margin business.

Products

SoundHound has three main products:

Houndify: A voice recognition system and a knowledge graph that is used to voice-enable products and services. The Houndify API is accessible through the product’s website and can be tested free of charge.

SoundHound - Music Discovery: A mobile app for music recognition that competes directly with Shazam. The app was popular and generated millions of downloads but has never produced much revenue.

SoundHound Chat AI App: Another digital assistant app that competes with Siri, Alexa, and Google Assistant. The app was last updated in 2023 and is currently available in the Apple App Store and Google Play Store. The Chat AI App appears to have few users, with less than 900 reviews in the iOS Store.

Business Model

SoundHound has a three-pillar business model that to generate revenue:

1. Product Royalties: SoundHound collects royalties when their tech is integrated into a product such as a car, smart speaker, or appliance. The primary target market is the automotive industry, where SoundHound’s tech is integrated into the infotainment systems of cars.

2. Service Subscriptions: SoundHound generates subscription revenue from services that integrate the company’s voice assistant technology but don’t rely on a physical product. The primary target market is QSR restaurants, where SoundHound’s tech is used for voice ordering systems in drive-thrus.

3. Ads & Commerce: SoundHound hopes to collect commissions when users place orders using their voice assistant technology. This includes advertising revenue generated by directing users to specific products or services.

Competition

SoundHound operates in a few distinct businesses each with its own set of competitors.

Bull Thesis

The bull thesis for SoundHound is:

1. More products and services will integrate voice interfaces for user interaction.

2. Many products and services will use 3rd party voice assistant technology.

3. SoundHound will capture a significant portion of the voice interface market.

4. SoundHound will generate advertising revenue, which requires:

   • Striking deals with companies to promote their products or services for a fee.
   • Users must prefer to use SoundHound’s voice assistant over competitors, such as those offered natively on smartphones.
   • Users searching for products or services using SoundHound’s voice assistant tech.
   • Directing users to products or services that have paid SoundHound for placement.

The bull thesis requires a lot of things to go right for SoundHound. Unfortunately, the company has a history of failing to execute on its business plans, and so far it has failed to execute on the bull thesis it has laid out for investors.

Perhaps the most glaring problem is the mismatch between what the user wants, and what SoundHound’s digital assistant is incentivized to provide. The user wants the best result given their unique preferences and circumstances. As for the digital assistant, SoundHound is incentivized to push the user toward options that earn it the highest profits. This is a fundamental problem with the business model, and it’s part of the reason why Amazon and Google have struggled to monetize their digital assistant products.

source: Business Insider

In SoundHound’s case, the company has failed to get their voice assistant into enough devices to even try to monetize it.

To believe the bull thesis requires either an undiscerning eye, or a big leap of faith.

source: Bloomberg

source: TechCrunch

SoundHound’s Cheeseburger “AI”

SoundHound claims to have the best speech assistant technology on the market. Yet, after 19 years of failing to gain traction, their “world-class AI” is now primarily marketed towards helping people order cheeseburgers at fast-food restaurants. It takes some mental gymnastics to square the realities of the business with the rosy picture management is selling to investors.

SoundHound would have you believe that they have a revolutionary AI product on par with ChatGPT.

source: SoundHound 2023 10K

In reality, SoundHound sells a commodity voice recognition product bundled with knowledge graphs, which have been used for decades to organize and search data.

Wikipedia Scraper “AI”

For many user queries, SoundHound simply searches Wikipedia and returns scraped content. For example, when we asked Houndify “Who was the first President of the United States?”, it returned content scraped from Wikipedia.

If you run the same search on Wikipedia, it returns the page for First President of the United_States which then redirects to George Washington. Houndify’s response even starts with “Redirected from First President of the United States”, followed by the first sentence from the Wikipedia page on George Washington.

Here’s another example of Houndify searching Wikipedia and returning scraped content:

Give Houndify a try and see for yourself.

Not Breakthrough Technology

SoundHound has claimed that their speech recognition tech is superior to competitors and has been for years. This is easily proven to be false. For example, in 2018, an Amazon product manager gave a presentation on voice user interfaces that demonstrates features that SoundHound claims are unique to their technology.

SoundHound continues to make exaggerated claims about their tech, but recently omitted some of the more outlandish claims that were in the 2022 10K.

Diff of SoundHound’s 2023 10K and 2022 10K

SoundHound’s “AI” Returns Incorrect Information

SoundHound’s product has to be manually programmed for each domain of questions it can answer. Maintaining the software is labor-intensive and results in users getting incorrect answers because of outdated data.

For example, SoundHound’s Houndify claims that the population of Texas is 22,875,689, while the US Census Bureau reports that it’s ~30.5 million.

Houndify is off by a surprising 33%. We can only imagine what other incorrect information is being returned to users.

Meager R&D Spending Compared to Competitors

Most of SoundHound’s revenue comes from automotive customers and in that space, their largest competitor is Cerence. Cerence dominates the market, spends far more on R&D than SoundHound, and has been taking their customers.

Company Health

Lost Customers

SoundHound has lost some of its biggest customers, including Mercedes-Benz, Deutsche Telekom, and Netflix. These customers were critical to the company building a sustainable business and management has been trying to hide the fact that they’ve lost them.

SoundHound disclosed that keeping its large customers was critical to building a sustainable business.

and:

and:

source: SoundHound 2023 10K

Lost Mercedes-Benz Contract to Competitor

SoundHound claims in marketing materials and prior SEC filings that their tech was a big part of Mercedes’s in-car infotainment system. In reality, SoundHound was a tiny part of the system and is now no longer included at all. The contract was won by Cerence, SoundHound’s competitor.

Hiding That They’ve Lost Customers

In SoundHound’s 2022 10K, customers are named 26 times throughout the filing. It even goes into detail about the projects for each major customer. To hide the fact that they’ve lost key customers, SoundHound removed all customer names from the 2023 10K.

Diff of SoundHound’s 2023 10K and 2022 10K

Using Lost Contracts to Inflate Revenue and Margins

While SoundHound’s business has deteriorated, the company has used one-time contract modification payments to inflate their revenue and margins.

Customers paid SoundHound to get out of their contracts. SoundHound then used those one-time payments to not only hide SoundHound’s deteriorating fundamentals, but even inflate revenue and margins by recording contract modification payments as normal product income.

source: SoundHound 2022 10K

When SoundHound lost Mercedes as a customer, they received payment for the contract modification. SoundHound recorded the contract modification payments as “Product Royalties”, which made the company appear healthier than it actually was.

source: SoundHound 2023 10K

Since SoundHound recorded the contract modification payments as product revenue, it also inflated the company’s gross margin. According to SoundHound’s accounting, the more customers they lose, the better their margins.

source: SoundHound 2023 10K

SoundHound Refuses to Share Key Metrics

In their 2022 10K, SoundHound disclosed a retention rate of 80%, but this statistic is mysteriously absent from the 2023 10K.

Diff of SoundHound’s 2023 10K and 2022 10K

SoundHound’s competitor Cerence provides detailed metrics about the number of devices using their tech and their market penetration.

SoundHound refuses to provide any such metrics:

• Refuses to share the number of devices using their tech
• Refuses to share the revenue per device
• On the FY 2023 earnings call, management was unable or unwilling to answer simple questions about the company’s performance including the number of devices using their tech.

Meanwhile, Cerence’s SEC filings include data showing that they dominate the market for automotive voice-assistants:

source: Cerence 2023 10K

Destroyer of Capital

SoundHound was founded 19 years ago and has accumulated losses of $592 million including $91 million in losses in 2023.

source: SoundHound 2023 10K

Further, SoundHound lost more than double their revenue in every year of their disclosed financials (2020-2023).

source: SoundHound 2023 10K

Financial Troubles Within 1 Year of SPAC Merger

Less than 1 year after SoundHound went public via a SPAC merger, the company continued to hemorrhage cash and had to lay off half their employees.

source: Engadget

Stealth Mode for 10 Years

In a clumsy attempt to rewrite history, SoundHound claims to have been in “stealth-mode” for 10 years. In reality, the company developed multiple mobile apps that failed and were subsequently pulled from app stores. Two of the company’s apps are still available for download. One is a music identification app that competes with Shazam and generated $634,000 in revenue in 2023. The other is a free app called SoundHound Chat AI which was released in 2016, yet has less than 900 reviews in the App Store.

source: SoundHound 2023 10K

And management has the audacity to make their stealth mode claim under the heading “Market Momentum”.

Dilution

In our preliminary report, we noted that given their historical cash burn, SoundHound would likely seek additional financing. Soon after we published, the company disclose that it had issued shares using the existing At-The-Market (ATM) agreement. From November 13, 2023, to February 26, 2024, the company’s outstanding shares increased over 30% in just over two months, from 209,438,885 to 273,229,352! A significant part of this increase was from their use of the ATM agreement. We expected the company to dilute, but this surpassed our expectations, and showed just how aggressively SoundHound has diluted existing shareholders.

source: SoundHound 2023 10K

Before the rehashed news about NVDA’s 2017 investment sent SoundHound’s share price soaring, it traded under $3 per share. This suggests that when retail investors were piling into SOUN, thinking they were joining NVDA in a new investment, SoundHound’s management was quick to capitalize on the surge. They issued a boatload of shares, right as retail investors piled in. At the same time, management has taken advantage of the share price appreciation by accelerating their selling of SoundHound shares. Management appears to be less excited about the company’s long-term prospects than the retail horde.

Insider sales since Feb 13, 2024:

Since the share price jumped, insiders have dumped a whopping 7 million shares. This sheds some light on why the CEO went on CNBC/Bloomberg, hyped up his stock without giving any straight answers, played off the Nvidia stake as if it was new, and alluded to getting acquired (not happening), clearly playing coy, all while he and his inner circle were busy selling off millions of shares.

One might think, after all this dilution, no more is to come right? Well think again. As SoundHound states in their 10-K, “SoundHound will require additional capital to continue its planned business operations.”

SoundHound also issued 25,000,000 shares as part of their Equity Line of Credit agreement (ELOC), and at prices far below the current share price.

SoundHound has exhausted most of its ATM and its ELOC, so we expect the company will issue a new ATM agreement in order to raise more capital in the near future. Alternatively, they could also do another ELOC, or PIPE like they’ve done in the past. With their stock now experiencing high trading volume, issuing shares on the open market makes more sense.

In a nutshell, SoundHound’s approach to financing is super aggressive, much like what we saw with AMC, which took advantage of retail enthusiasm to repeatedly dilute shareholders. The CEO’s dodgy avoidance of straight talk, especially about the NVIDIA investment from 2017, only adds to the issue, as does the frequent selling by insiders. It’s a pattern of dilution and deception that’s hard to ignore.

Analysts Pumping Everything AI

There is a clear conflict of interest surrounding the financial analysts who are covering SoundHound. Out of the 6 analysts who revised and issued price targets following the disastrous report, all of them have direct financial ties with SoundHound. This current hype around AI reminds us of the market dynamics in the late 1990s. At that time, many sell-side analysts issued glowing reports on companies that were clearly overvalued. The analysts were incentivized to issue positive reports because their firms were making money from investment banking fees. The same dynamic is at play today with SoundHound and AI companies in general. The analysts are incentivized to issue positive reports because their firms are making money from investment banking fees. And AI companies are raising a lot of money, so they’re eager to please them with positive reports.

Payments for Advisory Services:

• Northland and Wedbush received payments of $500,000 and $750,000, respectively, in April 2022 to become advisors to SoundHound. [SOUN 424B3]

Underwriting Activities:

• HC Wainwright, DA Davidson, and Cantor all acted as underwriters for SoundHound’s ATM Facility. [SOUN 10-K]
• Ladenburg Thalmann acted as the underwriter for SoundHound’s ELOC financing deal. [SOUN S-1]

A lot of money is being raised by AI companies and investment banks are eager to get a piece of the action. Much like in the 1990s, there will be growing pressure on analysts to issue positive reports on these companies. The pressure could be direct, but more likely, firms will simply be more selective about which analysts get assigned to AI companies. Putting bullish analysts on these companies will help investment banks win business. This creates a conflict of interest that can lead to biased research reports.

Summary

SoundHound was a promising company with a good story, but after 19 years, $590 million of accumulated losses, and multiple pivots, the company still has no clear path to profitability. The company continues to incinerate investor money with no end in sight. For example, in each of the past four years, SoundHound lost more than double their revenue!

The people running SoundHound are bright and talented individuals, but sometimes smart accomplished people have a hard time admitting failure. We believe SoundHound is a clear example of this.

SoundHound’s technology is a commodity and has little value in the crowded and hyper-competitive voice recognition market. Most of SoundHound’s value is in their accumulated net operating losses, which can be used to offset future tax liabilities. With that in mind, we believe SoundHound is worth $1.00 per share, and we feel that’s generous.

• SoundHound
• SOUN