Cerence Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the CERN's second quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. It is now my pleasure to introduce Vice President of Investor Relations, Rich Yerganian.

Thank you, Andrew. Welcome to CERNS' second quarter fiscal year 2020 conference call. Before we begin, I would like to remind you that this call may involve certain forward-looking statements. These statements are subject to risks and uncertainties as described in the press release preceding today's call. CERNS makes no representations to update those statements after the date hereof. In addition, we may refer to certain non-GAAP measures in pro-form or financial information during this call. Please refer to today's press release for further details of the definitions, limitations, and uses of those measures in reconciliations of non-GAAP measures to the closest GAAP equivalent. Joining me on today's call is Sanjay Dhawan, Sorensen's CEO, and Mark Gallenberger, Sorensen's CFO. As a reminder, the only authorized spokespeople for the company are Sanjay, Mark, and myself. Before handing the call over to Sanjay, I'd like to announce a few upcoming investor events. We will be participating in several upcoming ones. All of them have been converted to virtual events, so the exact timing of our participation is subject to change. Please visit our events page in the investor section of our website for the most up to date information on our participation. The conferences include the Craig Hallam, Cowan, and Baird Investor Conferences, the Needham Automotive Investor Day, and Deutsche Bank's Global Automotive Day. Now on to the call. Sanjay?

Thank you, Rich, and welcome to everyone on the call. As you can see from our earnings press release, we had a fantastic second quarter. We set a record in the first half for total bookings. signed the two largest contracts in the company's history, announced several other important strategic wins, and delivered financial results that exceeded most of our guidance metrics. Compared to Q2 of fiscal 2019, our total revenue grew 23%, and while our gross margin was up slightly, on a non-GAAP basis, our operating margin improved 31%. adjusted EBITDA margin improved 26% and earnings per share improved 39%. But before I comment further on our strong quarter, I'd like to take a few moments to discuss a topic that is on everyone's mind, the impact of the virus on our business and how we are adjusting to it. At CELS, we're lucky in that across our employee base, we have had only one person test positive for the disease, and that colleague has since fully recovered. This is very good news because the first priority for me and my executive team is to ensure the health and safety of our employees. We have created a crisis response team that meets daily and is tasked with closely monitoring the situation across the world, keeping employees informed on the latest developments and planning for the necessary actions to protect our employees' health. and safety as we eventually return to working in our offices. While the global mitigation efforts are having a positive impact in slowing the spread, it has also resulted in a severe disruption of global economic activity, forcing most businesses to suspend operations or at the minimum work remotely. We are fortunate that we can have a measured approach to returning to the office because as a software company, The transition we made to work remotely was smooth and well executed. Internal analysis shows that our efficiency as a company has remained in the 90% range even with most of the company working remotely. Our China operations have already resumed normal activity which is encouraging as we look to them as a blueprint for the rest of the company. Unfortunately for CERN, as in almost every industry and company, the slowdown in the global economy will have an impact on our business. While CERN's delivered a strong performance for our fiscal Q2, based on the recent forecast from third parties, the auto side is expected to significantly contract in the near term before beginning to recover later in the calendar year. In response to this forecast, we have been proactive in adjusting our business Mark will elaborate more on the details. But we have taken a number of steps to reduce our expense run rate and conserve cash. The actions we have taken will still allow us to focus on supporting our current business as well as invest in the key products and technologies that we expect to fuel our medium and long-term growth. For example, our investment in our OneCloud connected platforms and the development of new products such as Car Life remain fully invested as these are the critical to the long-term growth of the company. While the coronavirus has recently had an impact on the overall business environment, Serence has continued to make progress in areas under our control. Year-over-year revenue grew 23% led by strong growth in our connected platform and professional services business. and these revenue streams have less dependency on AutoSAR compared to the license or edge product. Our connected revenue is only marginally impacted in the near term by COVID-19 because the vast majority of revenue associated with that business is the amortization of revenue from our balance sheet. The professional services growth is leading indicator future growth in license and cloud connected business because They represent the engineering work our engineers are contracted for to bring a new car platform to SOP. We have had a series of important announcements related to new business, reinforcing our industry-leading technology and strong competitive position. You may recall that we announced on our last conference call one of the largest contracts in company's history with the European OEM. This quarter we announced the largest booking in the company's history with a different European OEM for a contract value at 125 million for our edge solution. Subsequent to this booking, we also signed another record booking for 140 million with the same customer for our connected services solution. While an existing customer, these contracts extend our technology into a much broader range of makes and models. These deals reinforced the secular tailwind for our business, which is driven by the increased penetration of voice assistance and cloud-connected services technology in more types of cars each year. We have previously presented an expectation that 85% of the cars produced globally will have voice assistance, edge capability, and that 50% will have connected capability in 2023. up from 59% and 12% respectively in 2018. And contracts like this one gives us confidence in that forecast. We had several other important press releases over the last couple of months. We announced an agreement with Geely, a Chinese-based auto manufacturer who owns Volvo. The press release announces that Geely will use Sedan's R product across all their car brands and platforms. Serence Arc is a turnkey automotive solution that packages the company's state-of-the-art AI-powered voice assistant features, including wake-up words, automatic speech recognition, speech signal enhancement, natural language understanding, and text-to-speech, and offers them in an open, flexible, and fast architecture with minimal development and deployment time. This was a strategic competitive win for the company. We also announced that the Fiat Cluster Automobile Group has adopted our technology in their advanced Uconnect 5 global infotainment platform. This platform is scalable across all FCA brands and currently is providing innovative voice recognition technology for this advanced system. Most recently we announced Beantech, a strategic partner of Great Wall Motors, one of the largest car manufacturers in China will deploy 7R to build AI-powered voice assistant for all their cars. This was a significant competitive win for us and indicates our ability to win share in the important China market. For the first six months of the fiscal year, our bookings represent a record in the company's history, surpassing total bookings for all of fiscal year 2019. The message here is very clear. and many more. As we navigate these challenging times, we are dedicated to employee safety and equally to the ongoing support of our customers. We expect the next couple of quarters to present unpredictable business conditions from the perspective of the volume of the business and our ability to forecast it. Because of this unusual situation, we are withdrawing guidance We had previously offered for the full fiscal year 2020 and will not provide guidance for our fiscal Q3. Our decision is not taken lightly given our desire to be transparent as possible with investors. But we must acknowledge the uncertainty among our customers' business that makes it very difficult for us to predict our own in the near future. While we manage through the near-term headwinds, the long-term growth remains intact, driven by significant shifts happening related to how users interact with the cars. During lessons, drawing lessons from those shifts, the automotive industry is in a transitionary phase with a trend towards reimagining the user experience and many more. The goal is bringing all this together with continuous updates and refinements to constantly delight the user. I'm very excited about the opportunity for Serence to be a leader and innovator for enhancing this user experience inside the car. Whatever adjustments we have made to accommodate current business conditions is in no way impacts our ability to support our customers or advance our role as a critical part of the digital ecosystem of the car. I would like to turn the call over to Mark to review the financial results of the quarter. Mark.