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spk04: Ladies and gentlemen, thank you for standing by, and welcome to the CERNS Q4 2020 Ernest 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. I would now like to hand the conference over to your first speaker today, to Richard Yerganian, Vice President of Investor Relations. Thank you.
spk01: Please go ahead, sir. Thank you, Dylem. Welcome to CERNS' fourth quarter and 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, the company may refer to certain non-GAAP measures in pro forma financial information during this call. Please refer to today's press release for further details of the definitions, limitations, and uses of those measures and reconciliations of non-GAAP measures to the closest GAAP equivalent. Joining me on today's call are Sanjay Dwan, President and CEO of Serence, and Mark Gellenberger, CFO of Serence. As a reminder, the only authorized spokespeople for the company are Sanjay, Mark, and me. Once again, on this conference call, we will be demonstrating Serence technology. The prepared remarks will be read using our voice cloning technology driven by our neural AI-based system called Genie. What you are about to hear are computer AI-generated voice clones of Sanjay and Mark. Following the voice-cloned prepared remarks, the real Sanjay Mark will join the call for Q&A. Pay close attention to see if you can hear the difference. Before handing the call over, I would like to announce several upcoming investor events. They are all virtual events, so the exact timing of our participation is subject to change. The conferences include the Wells Fargo TMT Summit 2020, Raymond James 2020 Technology Investors Conference, the Needham Growth Conference, and the 2021 Goldman Sachs Tech and Internet Conference. Please visit the events page in the Investors section of the CERN's website for the most up-to-date information on our participation. Now on to the call. Sanjay?
spk05: Welcome to everyone on the call, and thank you for joining us to discuss Serence's fourth quarter and our fiscal year results. The majority of my comments will be on the achievements of our exciting first fiscal year as a standalone public company, but I would be remiss by not first reviewing the great results of our fourth fiscal quarter. By all accounts, our fiscal fourth quarter was the best quarter in the company's history. We had record revenue, record gross margin, record EBITDA, and record cash collections. The financial performance of the company was amazing with 10% revenue growth year-over-year and 22% revenue growth sequentially. In particular, non-GOP earnings per share at $0.61 per share was 88% above the midpoint of our guidance of $0.33 per share. The outperformance was primarily driven by great adoption of our products and services by the auto OEMs the strong recovery in the auto market, coupled with the prudent financial controls we have implemented in recent quarters. As you can see in the guidance that we provided in the press release, we expect our first quarter revenue to be up approximately 10% to 16% compared to the same period in the prior year. For the full year, we expect revenue to grow between 9% to 15% over fiscal 20. We recently celebrated our one-year anniversary as an independent company and despite the challenges from the onset of COVID-19, we are extremely pleased with the progress the company made during its first year. We separated from nuance with minimal disruption, delivered a steady stream of new products and technologies, had record bookings, including two of the company's largest contracts in its history, and delivered fiscal year results on track or better than the guidance that we provided at the beginning of the fiscal year before the arrival of the pandemic. Most importantly, we established Serence as a leading company in the very important conversational space for transportation and mobility, playing a lead role in a consumer's experience inside the car and with other forms of mobility. Our participation as an independent company at the Consumer Electronics Show earlier in the year resulted in over 500 meetings with customers, investors, and the press. By all accounts, the show placed us among the leaders for auto technology and innovation in the car. We also opened the NASDAQ market and hosted an analyst day to help introduce the company to investors and other stakeholders. Among the key accomplishments during Serence's first year, we saw bookings increase by more than 70% compared to fiscal year 19, resulting in an ending backlog of over $1.8 billion. These bookings included several highly strategic competitive wins with both our traditional OEMs and also including a number of electric vehicle manufacturers, including NIO, a company many consider to be the Tesla of China. We maintained our strong position in the embedded voice assistant market and expanded our portfolio of connected car customers. As CEO, my strategy is to drive the business with three priorities. The priorities are to drive product innovation, speed of execution, and cost control. Product innovation is the most critical element of a leading technology company, and I drive the team very hard on this. The steady stream of amazing technology and products we have introduced during the first year is very exciting. We enhanced our core technologies and leveraged our embedded position inside the infotainment system to gain access to all the sensors, cameras, and microphones. This allows us to deliver new capabilities such as gaze detection, emergency vehicle detection, and many others. We also introduced Serence Reader which can read articles with near human-like inflection and sound that even adjusts how it voices an article depending on if it is news, sports, or something else. One of the other key products introduced during the year was Serence Arc, developed and first introduced in the China market but now available in other geographic regions as a faster time to market lower cost solution for providing leading edge voice assistant capability in a car sedans are comes pre-integrated with cloud-based connected services and provides a turnkey solution for our customers we have introduced to new sauce applications car life and sedans pay car life a new suite of ai powered Software as a service or SaaS offerings that provides drivers with the best and most up-to-date information about their cars, helping them learn about the car's capabilities, or even scheduling service appointments when needed. Sedanspay uses voice biometrics to allow in-car purchases using your voice to initiate the transaction and will generate revenue on a transaction basis. I've only mentioned a few of the key products and technologies that we brought to market this year, which leads me to my number two priority, speed of execution. It is critically important to not only innovate, but to quickly translate that innovation into quality products and get them to market. One of the most important functions within the company is our product management group, charged with turning ideas into products. They have been extremely effective this first year, and as we look to fiscal year 21 and beyond, the new product momentum will continue to race ahead. The third priority to which I drive is cost control. We have to innovate, efficiently convert that innovation into new products, but also do so while keeping cost controls in mind. How successful we are at these three priorities is what ultimately leads to our financial performance as a company, And while Mark will review the details with you shortly, I want to point out some key financial achievements for the year. In February, we announced our first quarter results and updated our fiscal year guidance to reflect better profit performance on key metrics while keeping the revenue range the same. Shortly thereafter, we hosted our first Analyst Day event and introduced a midterm target model for fiscal year 24, showing a 15% CAGR from fiscal 19th. Then the pandemic reached our shores with the resulting impact on the auto industry becoming quite severe as stay-at-home orders were implemented throughout the world. We quickly made adjustments to our business, saving approximately $12 million of cost in the second half of our fiscal year. With the business holding up better than expected in our third quarter and the excellent results in our fourth, we were able to deliver better results than the guidance that we had provided pre-COVID. Another accomplishment during the year was our successful refinancing of the expensive debt that we received as part of the spin-out. This restructuring of debt is saving the company over $10 million in annual cash interest expense. Last quarter, we first presented to you a series of KPIs which we think provide additional insight into our business. We have updated those KPIs to reflect our fourth quarter results and have also added additional ones. The new KPIs are to provide insight into the trends of using connected services by drivers of cars with our technology. Overall, our KPIs continue to indicate strong business momentum. While connected cars shipped in fiscal 20 declined 16% when compared to fiscal 19, overall car production declined 19%. Certainly, COVID had an impact on both our connected car shipments and car shipments as a whole. The 14% growth in our billings per car is primarily driven by the expansion of connected services into more and more car makes and models. This is consistent with the secular trend of increasing penetration of this technology. The new KPIs we are providing are related to the use of connected services in the car. The chart on this page shows the number of active monthly users and the number of monthly transactions. You can see the consistent growth trend over time, then interrupted by the impact of COVID, and then the recovery. Overall, we would expect that as more and more cars become connected, that this chart will show acceleration in both the number of active users and monthly transactions. As we look to fiscal year 21, we expect to keep the business momentum going. In a recent study published by Adobe, 92% of people that use voice technology in a car say that it makes them feel safer while driving. Providing enhanced safety in a car is a core part of our mission. The same study also reports that 86% of respondents feel that using voice technology outside the car makes them feel safer in the age of COVID. This has created additional opportunities for the application of Serence technology to mobility solutions such as elevators. We will continue to aggressively pursue innovation in our core technology, launch new products and applications, and expand further into adjacent markets such as two-wheel vehicles, building mobility, and others. The future for Serence remains very bright and exciting. I would also like to thank all of our Sedence employees for their support in this successful journey. We cannot deliver these results without the dedication and support of Sedence's employees across the world. I would like to turn the call over to Mark to review the financial results of the quarter and for the year. Mark?
spk08: Thank you, Sanjay. I'll first review the strong performance for the fourth quarter and then review our results for the full fiscal year. I will then provide guidance for our first quarter of fiscal 21 and for the full year. By all accounts, our fourth quarter results exceeded all expectations. Revenue came in at $90.9 million, almost $11 million above the high end of our guidance. The higher revenue was driven by a strong recovery in our licensed business, which was up 43% over the third quarter, along with a 12% sequential growth in our professional services business. Our profit performance was exceptionally strong with non-GOP operating margin coming in at 42%, adjusted EBITDA at $40 million, or 44% margin, and non-GOP earnings per share of 61 cents. The lower spending plan that we implemented in April is the key factor for the elevated margins in the second half of the fiscal year, particularly in the fourth quarter. However, these cost savings will ultimately return in fiscal year 21, so I would caution investors and analysts not to read too much into the elevated margins achieved this quarter. Regarding the breakdown of our revenues, as previously mentioned, we had a strong recovery in our license business, which was up 43% from the third quarter and up 3% from the same period last year. Our variable license revenue recovered from the low point in the third quarter and was up 64% sequentially as auto production exhibited a very strong recovery during the quarter. For the full year, our license revenue declined 5% due to the impact of COVID-19, while auto production was down 19% over the same time period, according to IHS. Our fourth quarter connected services revenue grew by 9% year-over-year, driven by an increase of 23% from our new connected services. For the year, the growth for new connected services was 62% versus fiscal year 19th. We expect our new connected services to be a key driver of our growth in the future driven by a combination of the secular trend of more and more cars becoming connected as well as share gains. Our professional services business grew exceptionally well this year at 33% and tends to be a leading indicator of future growth potential for our license and connected revenues as this business represents the upfront consulting work performed to customize and integrate our software solutions prior to startup production. Not surprisingly, our strong bookings performance this year has led to growth in professional services. For the fiscal year, we were able to exceed all the key financial metrics of the guidance we provided before the onset of COVID-19. This is a significant achievement considering the impact the virus had on the auto industry. Our revenue performance reinforces our ability to continuously outperform the auto SAR, and our decision to adapt quickly by reducing expenses enabled the business model to outperform expectations. Our fiscal year ending backlog grew approximately 32% from a year ago and is slightly over $1.8 billion versus $1.36 billion a year ago. The growth in backlog was driven by record high bookings of $836 million for the year, which is up 70% compared to the prior year. The backlog is comprised of $967 million for licensed, $740 million for connected, and $106 million for professional services. This represents year-over-year growth of 59% for licensed, 12% for connected, and 8% for pro-services. Our guidance for the first quarter reflects strong year-over-year growth of 10% to 16% while global auto production is expected to be flat to down 5%. The business model will still benefit from the COVID-19 expense reductions taken in fiscal 20 as those expenses will be added back during the course of the year. As a result, the first quarter will see enhanced margins resulting in non-GOP gross margin of 71% to 72%, non-GOP operating margin of 34% to 36%, adjusted EBITDA of $31 million to $35 million, and non-GOP earnings per share of $0.48 to $0.55. For the full fiscal year, we expect to grow the top line between 9% to 15% representing another strong year of growth. The margins for the full year reflect a complete restoration of expenses that were reduced in fiscal 20 and the elimination of our hiring freeze, both to support the expected growth in the business. We expect another strong year of adjusted EBITDA and CFFO generation, and our non-GOP earnings per share is expected to be in the range of $1.81 to $2.05. So, in summary, we expect the momentum developed in fiscal year 20 to extend to fiscal 21 and beyond. Our employees are focused on our three priorities of innovation, speed of execution, and cost, which is keeping the company not only on a steep growth trend, but doing so while delivering excellent financial results. With a strong backlog that provides visibility well into the future, a steady stream of new technology and product introductions, and a strong business model, Serence is well-positioned for long-term, profitable growth. This concludes our prepared remarks, and now we will open it up to questions. Questions.
spk04: Thank you. As a reminder, to ask a question, you would need to press star 1 on your telephone. To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. I show our first question. It comes from the line of Raji Gill from Needham & Company. Please go ahead.
spk06: Yes, thank you, and congratulations on excellent results. Sanjay, a question on the growth that you're seeing in licensing, both on the backlog but also on the sequential. I was wondering if you could maybe elaborate further in terms of what you're seeing there in terms of the attach rates and what is kind of making you outgrow the overall automotive market, even though you're not necessarily tied to auto production. There is a certain percentage of revenue is tied to auto production, and you seem to be outgrowing that. Is there any color on the licensing And then just on the connected services, you know, being down on a year-over-year basis, how do we think about connected services in terms of the attach rates for calendar 21? What kind of main application do you think will drive a higher attach rate for connected services next year?
spk05: Thank you. Yeah, thank you. So in terms of the license revenue, again, I think we have talked about our penetration story over and over. Basically, what we see is that more and more voice conversational AI is becoming more and more important. More than important, it's becoming strategic as a function for the automotive OEMs, and they're basically bringing that technology more and more into, you know, what used to be mid to high-end cars, but also into the low-end cars as well. So that's the main reason why, you know, we continue to kind of, you know, increase and grow faster than the autos are, right? You know, that trend will continue. You know, we're absolutely seeing that, and I cannot, you know, make it more clear that, you know, the customer discussions are basically leading to, you know, absolutely this technology being, you know, very strategic to an auto car maker, basically. You know, on the connected services, same thing, right? You know, as you know, our architecture is hybrid, so we have, you know, a certain part of our product runs inside the car, and the And with cloud connectivity, we can provide even better set of services and better interesting capabilities to the driver of the car. And we see a similar trend basically happening there as well. The thing is that Connected Services gets recognized as a SaaS revenue. It's sold as SaaS. It's recognized as SaaS. So obviously, kind of, you know, the growth rates, you know, are, you know, slightly, you know, slower, you know, from the adoption standpoint and so on. But, you know, there is no difference from a trend standpoint. And if anything, we expect connected services, you know, as I look forward next three years to be a bigger growth driver for our business than anything else. And you will see some very exciting new connected services products that we'll be releasing in December, which I'm hoping will increase the growth rate even more.
spk06: Very good. And just for my follow-up, Mark, when looking at the piece parts of licensing and connected services, so just on licensing the prepay, there was 46% growth year-over-year in prepay. How do we think about prepay going into next year? You know, this year, obviously, because of COVID-19, there are extenuating circumstances which changed, you know, buying patterns for customers. So how do we think about that revenue stream next year? And then on the connected services side, the legacy, you know, saw some, you know, 3% growth year over year. How do we think about legacy revenue going into next year, and how does it kind of roll off throughout the quarters? Thank you.
spk08: Okay, sure. So, yeah, the first question as it relates to prepays, you know, last year we did $54 million in fiscal year 20. The year before it was around $43 million. If you go back to FY18, it was around $53 or $54 million. So, we seem to be in this range of, you know, low 40s to low 50s. So, going into fiscal year 21, I certainly would expect us to be within that range. If you recall in the past, I have said that we're sort of biased towards reducing prepays. However, that's not always inside our control because, you know, we have our customers' demand as well. And so that sometimes ebbs and flows. So I think going into FY21, my view is that it would be down from fiscal year 2020. but certainly I think it's going to still be within the range that we have seen over the last several years, which is low 40s to low 50s. So long-winded question or answer to your question, but I think that's about the range that we're going to see for FY21. Regarding the legacy connected revenue, we are seeing – that revenue plateauing in fiscal year 21. So last year we did about $63 million in legacy-connected revenue for the full year. I would expect for FY21 that to be flat year over year. And then starting in fiscal year 22, you'll start to see a decline in that legacy revenue as that program just winds down And by the time you get to fiscal year 26, fiscal year 26 should be the last year in which we'll see some revenue probably down in the $8 million range in fiscal year 26. Thank you. Very helpful. Thanks.
spk04: Thank you. Our next question comes from the line of Daniel Ives from Wedbush. Please go ahead.
spk03: Yeah, thanks. And great quarter. Again, can you talk about geographically, just talk about maybe China and India as markets and sort of what that represents in terms of a growth opportunity over the coming years?
spk05: Mark, I'll start, then you can jump in. Okay. So, you know, I think China, you know, we have been very focused in China almost 10 years now and, you know, have a very good market share for China, for China OEMs. We absolutely have a leading market share, 80, 90% for global OEM shipping cars into China. So that's, you know, clearly a major leadership. But even for China, for China, you know, where we compete with some of the local competitors, you know, we're neck to neck in terms of our market share in that space. So, you know, we announced a number of new customers, you know, almost four or five customers in the last quarter, you know, NIO being, you know, one of them and others as well. So overall, you know, I think, you know, we're making, you know, great progress there, basically. And as you know, China remains a very, you know, it has the largest, you know, new car shipment in any given year. And so, and we're participating in that very, very, very nicely. India is a smaller market, you know, as compared to China for auto. but we're definitely participating there as well. We did sign one of the top three local auto OEMs in the quarter, so that was a great win for us. Hopefully, we'll get the permission to announce the name soon. We're making progress, but it's clearly a smaller market as compared to China. Having said that, we have talked about the two-wheeler space. We announced our first two-wheeler customer in China last quarter, and we're also progressing with other two-wheeler manufacturers both in India and China because that's also a huge market where technology like ours can basically really assist the drivers you know, for a hands-free usage when their hands are supposed to be on the steering wheel and eyes on the road, they can basically use technology from CERNs to kind of, you know, do conversational AI, you know, based services. So we're looking at, you know, that space as well in active discussions with a number of e-scooter companies in that space as well. Mark?
spk08: Yeah, and so the only other thing I would add is China market for us, you've got two drivers, right? Indigenous Chinese OEMs as well as the foreign OEMs that sell into China. I think we've got a very good market position in both of those areas. I think the introduction of some of our As Sanjay mentioned, some of our technology for two-wheelers, that's where we're going to see some good growth, as well as, you know, the Sarence Arc product, which is really geared towards some of the lower-end, lower-cost markets. And so that would also be, I think, good opportunity and fertile ground for us to grow inside of markets such as China as well as India.
spk03: Great. Thanks.
spk04: Thank you. Our next question comes from the line of Chris Merwin from Goldman Sachs. Please go ahead.
spk09: Thanks so much for taking my question, and congrats on a great finish to the year. I wanted to touch on the backlog. It looks like that increased, I think, by about $400 million relative to last year. I think that's almost 30% growth. Can you just give us a sense of that incremental backlog that was generated? How much of that was licensed first, connected, and then also How should we be thinking about the timing of that backlog being recognized as revenue in the coming years? Thank you.
spk08: Yeah, so the license backlog grew quite a bit. It went from about $600 million last year to over $960 million at the end of this year. Year-over-year growth on that portion was almost 60%, so pretty substantial growth there. You know, followed by Connected and then lastly ProServices. But, yeah, in terms of our overall growth, you know, we had over $800 million in total bookings. When you factor out what we shipped out of Backlog this year, you know, our total growth in the Backlog, you know, it was about 30, you know, 32, 33%. So it's a very, very strong year for bookings. Regarding how that's going to, you know, shift in terms of revenue over the next several years, you know, that gives us a lot of good visibility. You know, clearly, you know, I would say, I don't have the numbers in front of me, but I would say, you know, 50% or more of this backlog is likely going to ship over the next, you know, three-year period. And so, you know, we've mentioned those numbers in the past. I think those numbers are still valid, you know, in terms of how much will ship over the next several years. And that, of course, it's not 50% every year. It's going to be much higher, you know, this year, of course, you know, and then as you get further out, those percentages naturally decline a little bit. But all in all, it gives us good visibility into the business. It really sets us up for good growth in the future, gives us some predictability as to what's going to be happening over the long term. And there will be, obviously, ebbs and flows, right? We had one ebb this year, which was COVID, where things kind of slowed down. But, you know, I do expect things to, you know, pick up, you know, next year and beyond. And beyond.
spk09: Great, thank you. And just one clarification, in terms of the – it sounds like license was the faster source of growth in the backlog, but I think, Sanjay, you mentioned earlier that connected is going to be a bigger driver of the business in the future. How do we kind of square those two things? Obviously, both pieces of the business are growing very well. We're just trying to understand, you know, what's going to be the bigger driver going forward here. Thanks.
spk05: I think – sorry, go ahead, Mark. Go ahead, Sanjay. Okay. So what, Chris, I was going to say was that, you know, we have introduced a number of new products last quarter, and then you will see some more, you know, very interesting connected services, you know, products that, you know, absolutely brand-new innovations that obviously were, you know, in early-stage discussions with a number of OEMs. And combined, I expect, you know, these also, along with this, we plan to release what we call our 1.x cloud, which basically will completely refresh our cloud performance, cloud offerings, and cloud services. And, you know, the early discussions we're having with a number of OEMs, you know, there's a lot of interest in the market around these new products, and I expect, you know, the you know, the bookings and revenue growth as I look forward, you know, will drive, you know, the growth even more. I mean, if you look at year over year, our new connected services grew, Mark, what, about 60%, right? Something like that as compared to the legacy, right? So the growth is pretty strong on the new connected services if you take the legacy effect out. That makes sense.
spk02: Thanks very much.
spk04: Thank you. I share our next question. It comes from the line of Chris McNally from Evercore. Please go ahead.
spk07: Thanks so much for the detail, guys, and a fantastic demo. I continue to impress. One model question and then one auto tech question. You know, on the model itself, I know you guys, your assumptions are, you know, bottoms up and not based on IHS per se, but just curious, you know, how conservative you may be on the actual global production number. You know, when we look, IHS is plus 13, LMC is plus 15 to 16%, and that's going to help, you know, drive your license revenue in particular. So just any detail that you can add around that.
spk08: Sure. I can start, and Sanjay, if you want to fill in. Yeah, we do a bottoms-up based upon our backlog. We try to sanity check all those estimates with third-party forecast information. I think when you look at our growth in fiscal year 20, we grew 9% year over year, while auto production for that same time period was down 19%. So we had a we had a 28-point spread in fiscal year 20. However, when you look at some of the prepays that we did in fiscal year 20 and you adjust that to be kind of flat year over year, that probably accounted for about four points of growth. So if you adjust for that relative to our guidance for fiscal year 21, you could effectively add another four points, just to kind of get you to an apples-to-apples comparison on you know, on the effects of prepays. And then, of course, you've got to factor in what I mentioned before, which is the legacy connected is plateauing, whereas historically, you know, that was growing each year. Now we're going to see that, you know, not grow in fiscal year 21. So, you know, those two points in conjunction with, you know, there is still a fair amount of uncertainty out there as it relates to COVID and, you know, different flare-ups here and there. may put certain forecasts at risk. You know, so, you know, we just want to make sure that we are conservative, you know, going into the year just because COVID is still an unknown, quite frankly.
spk07: Perfect. That's helpful. And we could follow up, but it sounds like license is still going to be, you know, quite strong next year. If we take the sort of the 10 to 15% growth that you have for the total business and assume there's not much in professional, we can pretty much lay that maybe not equally, but it sounds like license will be a little bit stronger than even connected for next year's growth?
spk08: I think license will continue to show growth, you know, and I think our pro services, even though we're coming off of a very strong year, I would also expect pro services to grow year over year as well, just because we've got a very good pipeline of new opportunities and new design wins. So I don't think I would put all the growth in license. I think also pro services is going to show good growth, not to mention the new connected services. That's been growing. So it's a smaller base, of course, but it's still showing very good growth, 62%. year-over-year growth on the new connected services. So, you know, I would expect all of our three line items to grow year-over-year. You know, it's not going to be all just in license.
spk07: Okay, that's perfect. Maybe it's just hard to nail down a specific number, but it sounds like the growth is continuing to be good in all these. Perfect. Maybe, you know, on to the new techs. You know, when you talked about the $75 million for 2024 in your first CMD and, you know, the new revenue streams, you have the three SEP opportunities, and I think you talked about Car Life and Seren's Pay, and I think we're going to get details on maybe even the third one soon. Could you just order of magnitude talk about the order book from those specific opportunities, maybe even just Car Life and Seren's Pay since they've been announced? You know, how much of the $800 million plus booking, again, ballpark, just to gauge how early are we in OEM interest for those products.
spk05: So, Chris, firstly, thank you for recognizing the demo. You know, the engineer in me was very excited about using Mark and my clone. And I think this was, I think, world's first, you know, where earnings call was done uh by by a clone while mark and i were sipping a cup of coffee and waiting for our turn for the qna it's an interesting experience um clearly we need to train them our ai models a little bit more on financial terms right so i i could see the uh the uh our clone was was getting a little uh jittery when it came to non-GAAP and some of those words. Yeah, no, I heard the same. That's the only word I could hear. Yeah, I think the financial terms we need to train more. So to my team, great job, but let's train the models more on some of these financial terms. But coming to your question, the The number for the new SaaS is small. We signed our first contract with a big OEM, but it was a small contract because they want to obviously POC it, go through some more work on the new products before they can make a bigger commitment. But we did sign one in the last quarter. There were a couple of bigger discussions going on, which I was hoping will be signed in Q4, but they have been spilled over into kind of Q1, Q2. And what we are finding, Chris, is that for some of the apps, customers, you know, remember these are rev share, you know, transaction, you know, type of, you know, models. where, you know, they are tied to not be the cogs of the car. The cogs of the car, the auto OEMs really know very well how to purchase. You know, when it comes to kind of, you know, purchasing connected services, which are a different business model, you know, there is a little bit more deeper discussions, you know, that happen. But our, you know, pipeline for the new product, new services is very strong. And I hope to kind of, you know, come back with – some hopefully major wins in the fiscal 21.
spk07: Okay, great. We'll look forward to that. Thanks again, guys.
spk04: Thank you. Our next question comes from the line of David Kelly from Jefferies. Please go ahead.
spk10: Hey, good morning, guys. Thanks for taking my questions and also really appreciated the demo. It was great. Maybe starting with the margin guidance, it's interesting. It looks like you're effectively guiding to your longer-term 2024 target this year. Just wondering, Mark, if you could walk us through maybe the assumed timing impact of the roll-off of some of those COVID-related cost cuts, you know, what benefits we'll see this year. And then from where we stand today, Mark, Do you see any upside to that 2024 EBITDA margin target of 35% given how we're tracking thus far?
spk08: Sure, sure. And I'll answer your last question first. And, yeah, given our performance, even when I adjust out the short-term savings that we realized because of the COVID actions that we took, I think long-term, our analyst model that we put in place for FY24 is conservative as it relates to the margin profile. I think it's still a little early for us to go in and update those numbers, but I want to give it a little bit more time. But I do believe that, you know, we assume like 65% connected services margin for FY24. We're doing close to 10 points higher than that already. For pro services, we assume 10% gross margin for FY24. You know, last quarter we did, you know, 20% plus. And so, you know, one data point doesn't necessarily, you know, dictate the new trend. But I do believe that, you know, we are going to be updating that model. and make those assumptions, you know, more in line with what we think is going to be achievable. And so I think, you know, bottom line is those assumptions probably were a bit, you know, conservative. But, you know, I think once we get to our next analyst day, we'll be sure to, you know, update those numbers and share that with everybody at the appropriate time. And so in terms of your first question, We will be bringing back those expenses that we cut back in the second half of fiscal year 20. You know, the way I look at it is in Q1, we'll probably be adding back around $3 million to $4 million of those expenses, and those would stay in for the whole fiscal year. And then we would probably add in another $2 million, you know, in Q2. maybe another $2 million to $3 million in Q3, and then about another final million in Q4. So, you know, that's about a, you know, if you kind of look at how it gets feathered in, that's about the $30 million increase in fiscal year 21 OPEX, you know, relative to our annualized run rate in Q4. This, of course, is non-GAAP, so take out the stock-based comp expense and depreciation amortization. So that's how I kind of look at how we're feathering in those expenses as well as the unfreezing of the hiring.
spk10: Okay, great. That's super helpful. Really appreciate all the color there. And then maybe just a question on the, I think you guys disclosed 14% growth in billings per car. I believe that was a fiscal 2020 number. You've talked about the layering impact of connected sales on top of licensing, but we also seem to be in the early stages of a cycle recovery that benefits licensing. Just curious how you all are thinking about the ASP expansion opportunity this year in 2021.
spk08: Yeah, so I think the ASP expansion that we saw last year, you do have the layering effect. Once more and more cars get connected, you're adding that revenue per vehicle on top of your embedded. And so that really helps drive that 14% year-over-year growth. But that's not the only thing. We're also seeing ASP expansion continue. with, you know, for example, our licensed products because we're adding more features and functions, more bells and whistles that you can demonstrate value and customers are willing to pay for that additional value. So we are seeing, you know, expansion not only because of the layering effect of connected services but also, you know, just because we're continuing to innovate and add more features and functions, we can get some growth there as well.
spk10: All right, great. Thank you. I appreciate you guys taking my question. Thanks again.
spk04: Thank you. Our next question comes from the line of Joseph Spack from RBC Capital Markets. Please go ahead.
spk02: Good morning. Thanks so much, everyone. Just going back to your outperformance versus the industry, especially in a portion of the business that is tied to production, so the variable portion. You've definitely been outgrowing that over time, but very specifically in the quarter, that was down about 12%, which actually is below what vehicle production was, which was maybe down 3%. So was there something unexpected there, or is that just sort of some timing of some of the programs that you guys are on?
spk08: Yeah, so I think it's a couple of things. One is a little bit of timing there, but also in Q4 of last year, there was some accounting true-ups that flowed through that revenue, that licensed revenue line, which I think kind of drove that number a little bit higher in the quarter. And that's why, you know, you tend to want to look at you know, year over year or trend lines versus just one quarter alone because there could be certain things that could potentially skew the numbers and, you know, you arrive at the wrong conclusion. So that's why if you look at FY20 variable license versus FY19 variable license, we were down 15% while the whole industry was down 19% or 20%. So we still outperformed from that four-quarter perspective. But in Q4 of last year, there was some true-ups that helped, you know, increase the revenue in that quarter of last year.
spk02: Okay. So that's sort of the spread you would expect, you know, the outperformance from a variable portion that you would sort of expect us to sort of... I would expect outperformance over, you know, over a trend period, you know, and...
spk08: With the technology getting more and more penetrated inside vehicles, it should be natural to assume that over those trend periods, we should be outperforming the auto production.
spk02: Okay. And just a bigger picture and more forward-looking, as we think about some of the new products like CERN's pay, etc., Any sense yet in talking to the automakers or customers in terms of how this is really going to work and adoptions or take rates, whether the automaker or dealers are going to pay for it or whether it's going to fall on the shoulders of the consumer? And maybe to follow on or that also, you know, one of the things we've been hearing a lot about during the pandemic is, right, you know, customers, for instance, looking for more convenience or, you know, touchless pay, et cetera. So was there anything you've seen even in the vehicles you have out there already or in conversations with customers that gives you, you know, more confidence that customers are going to, you know, want and keep these services?
spk05: So, Joseph, all very good questions. Firstly, I can absolutely say categorically that the conversational AI space is becoming more and more important from an OEM standpoint. I'm into customer discussions every week all over the world, and that's one single message that I hear again and again and again. Second, You know, we did get our first renewal of connected services. I mentioned this in my press release comments, basically. It's a small renewal, so, you know, not a big number to kind of, you know, boast about. But, you know, it's a good trend that customers, you know, care about. these services in the car and these were cars that were shipped six, seven years ago and they did a renewal with us to keep the service alive in those cars which are fairly old cars on the road. Third point I would make is that on the connected services side, there is a lot of interest, a lot of sales discussions going on The model that I see emerging is kind of, you know, that you've seen, you know, many OEMs are, you know, bringing that out. You know, for example, you know, if you go to, you know, bmwusa.com connected services, you will see a whole menu of, you know, connected services that you can purchase using a WACL VIN number and basically the cost gets, you know, passed to the consumer and They basically package these connected services. You will see our voice as a connected service as well. When you buy BMW after four years, you basically have to go and pay them an yearly amount to basically renew those services. And what I'm hearing from OEMs is more and more customers are getting used to buying these connected services through OEMs. And once the consumer is due, you know, a portion of that revenue flows down to us.
spk02: Thank you very much for all that.
spk04: Thank you. As a reminder, to ask a question, you would need to press star 1 on your telephone. To withdraw your question, please press the pound key. I assure our next question comes from the line of Jeff Van Rahee from Craig Column. Please go ahead.
spk06: Great. Thanks for taking my questions, guys. Love the demo. Just real compelling. But I appreciate you taking the question. A couple from me. On the connected car wins, can you talk about the competitive landscape, who you're seeing, what a typical deal looks like? And in particular, do you feel like you're holding your market share, gaining share over time, just a sense of how you see your share there trending? And then secondly, if you look at the pipeline coming into 2021, How does the scope of the pipeline now compare to 12 months ago? I mean, obviously a huge bookings year, and just wondering what you can share with respect to color about the size of the pipeline at this point.
spk05: Sure. So, you know, firstly, you know, I'll answer the second question first. The pipeline. size is absolutely bigger order of magnitude bigger as we enter fiscal 21 you know although you know we had a great booking for fiscal 20 you would think that you know we would have a pipeline that's you know depleted a bit and we have to go and rebuild it but the good news is that you know with the introduction of new products new technologies and a very active and engaged sales force you know, were able to kind of, you know, maintain a pipeline which is, you know, almost if I compare to the start of fiscal 20, you know, is north of 2X plus, right, from where we were when we started fiscal 20. So that's, you know, that's going great. I'm sorry, what was your first question?
spk06: Uh, the connected car competitive landscape and share.
spk05: Yes. So no, no major change there. Um, you know, we see, we saw, uh, you know, one OEM, we mentioned G League, you know, adopting us, you know, who owns Volvo. Uh, also that was kind of, you know, nice win back. Uh, we have seen one or two other win back from other competitors during the, uh, during the fiscal year. Um, There are a couple of similar discussions going on right now. Overall, I'm feeling quite good about our competitive landscape and how we're competing. I think the biggest piece here, how we're competing against our niche competitors, whether it's the Silicon Valley-based SoundHound or iPlytech based in China. uh you know i think uh we continue to work closely on the uh extending the digital life of a consumer in the car and then making sure you know that that we coexist very well with the likes of big tech companies whether those are big tech companies here in u.s or chinese big tech companies or other big tech companies so our our uh you know product strategy there you know completely aligned with what we are hearing from oems and consumers
spk06: Great. If I could just sneak in two quick ones. The two-wheeler, I don't know what you can share with respect to TAM or unit pricing, but just get a fair number of questions, people kind of wondering what the opportunity and scope of the opportunity is there. And then on connected services, you know, in terms of looking at the bookings, the individual bookings and when they go live, is there anything in terms of a bubble or a wave, if you will, of units that are expected to ship as you look over the next, 6, 12, 18 months, any particular windows where you say a lot of prior bookings are about to go live and start shipping?
spk05: So let me start and then Mark maybe you can jump in. So I think a little too early for us to share the trends on the two-wheeler space. We're in active discussions with about three more OEMs right now and we're positively surprised because they see the value of this technology and one would think that the average ASP would be much, much lower than the auto just because the cog is lower, right, than the automotive cog, but that, you know, we're positively surprised. So, but give us a little bit more time to kind of, you know, get, you know, a couple of more deals under our belt so that, you know, we're not just making statements based on, you know, one or two deals, right? Mark, do you want to answer the connected services question?
spk08: Yeah. So, I think on the connected services, you know, we are expecting, you know, SOPs and and a continued ramp-up of our revenue as well as our billings, right? Our connected billings would obviously be more of a leading indicator because of the amortization schedule we have with the revenues. So, yeah, I think for 21, you're going to see decent growth there. But I think in 22, you will start to see even more growth. SOPs hitting, and you're going to start seeing an accelerated growth in our new connected billings, kind of like a steeper slope in fiscal year 22 versus 21. So I think that's sort of the horizon. And as we've talked about in the past, fiscal year 20 and 21 would be you know, declines in our deferred revenues, and then you'll see that flip and become a source of cash again in fiscal year 22. And so it's playing out the way we expected it. I think in fiscal year 20, it was a little bit more pressure just because of COVID and production being down. But in terms of the overall shape of how the change in deferred revenues is going to flip in 22, And that's largely going to be driven by a nice increase in new connected billings in fiscal year 22. But we are seeing some growth in 21, but I think more growth even more so in 22. Great. Real nice execution here, guys. Thanks. Appreciate it.
spk04: Thank you. I'm sure no further questions in the queue at this time. This concludes our Q&A. I'd like to turn the call back over to Mr. Richardson. You're gaining for closing remarks. Please go ahead.
spk01: Thank you, Dilem. And thank you, everyone, for being on the call. Thanks for your support and interest in the company. We look forward to engaging with all of you in the near future. Have a good day. Thank you.
spk08: Thank you. Thank you.
spk01: Ladies and gentlemen, this concludes today's conference call.
spk04: Thank you for participating. You may now disconnect.
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