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 This results in outdated information being returned to users.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.