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spk04: Ladies and gentlemen, thank you for standing by and welcome to CERNS' first quarter 2021 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you will need to press star then one on your telephone. Please be advised that today's call is being recorded. If you need additional assistance, you may press star then zero to reach an operator. I would now like to hand the call over to Rich Erganian, Vice President of Advanced Relations for CERNS. Please go ahead.
spk05: Thank you, Michelle. Welcome to CERNS' first quarter fiscal year 2021 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. Serence makes no representations to update those statements after the date thereof. In addition, the company may refer to certain non-GAAP measures, key performance indicators, and 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 Gallenberger, CFO of CERNS. As a reminder, the only authorized spokespeople for the company are Sanjay, Mark, and me. While many were amazed by our voice quote technology last quarter, Sanjay and Mark will be live for the prepared remarks and Q&A, and I challenge you to be able to tell the difference from last quarter's conference call to this one. Before handing the call over to Sanjay, 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 this Wednesday, the 2021 Goldman Sachs Tech and Internet Conference on February 10th. And in March, we plan to participate in the Berenberg Capital Industrial Technology Conference, the Raymond James 42nd Annual Institutional Investor Conference, Baird's 2021 Vehicle Technology and Mobility Conference, and the Common Mobility Disruption Summit. Please visit the events page in our investor section of the CERN's website for the most up-to-date information on our participation. Now on to the call. Sanjay?
spk09: Thank you, Rich. Fun to be live this time. So welcome to everyone on the call, and thank you for joining us to discuss our first quarter fiscal 2021 results. I'll first review our strong performance in Q1, followed by a summary of the key product introductions during the quarter. This will be followed by comments about the near-term business environment and update of our key performance indicators, and then I'll hand the call over to Mark to review the detailed financial results. After a record fiscal year in fiscal 2020, we're off to a fast start in fiscal 2021. as our initiatives for innovation and market expansions continue. In Q1, we again delivered record revenue of $95 million, representing 23% year-over-year growth. Our performance was driven by strong growth in our license, connected services, and in our professional services businesses. While revenue growth is an important metric for the company, I'm extremely proud on how we drive the business to achieve profitable revenue growth. Our intense focus on this led to a non-GAAP gross margins of 75%, adjusted EBITDA of approximately $40 million, or 42% margin, and non-GAAP EPS was a strong 59%. Overall, our Q1 results surpassed expectations in every key financial metrics, and Mark will share the details later in the call. You may have seen our recent announcement further strengthening our professional services organization by hiring Sujal Shah to lead this group. Sujal comes to us from Harman and has extensive experience in the automotive space, and in particular, creating new service offerings that will lead to even more future growth opportunities in this part of our business. I want to welcome Sujal and wish him the best. As strong as our financial results were for the quarter, there were many non-financial highlights as well. One of the key achievements in the quarter was that we were awarded a design win for a major European OEM's next generation infotainment system expected to start production in 2023. We just received the OK to share the name, and the name of the European OEM is Stellantis. It's, as you all know, one of the top three auto OEM that was recently formed by the combination of FCA and PSA. This win is important for two reasons. First, we won back a customer that had been lost to a competitor when our business was still part of Nuance. And second, the deal includes many of the latest connected services and apps product offerings we announced just a couple of weeks ago at our Sedans in Motion event, a true testament of the strength of our new offerings and innovative technology. Another headline event was our agreement with Zivo, a Lear company, to deliver Serence-based conversational AI-powered contactless payments into vehicles via the Zivo market platform. This deal is significant because it represents a major bookings for one of our new Serence apps. The bookings to revenue cycle for these offerings is much shorter than our standard products, so we expect to see revenue from this deal before the end of the calendar year. It is our speed of innovation and execution that allows us to retain or win new design opportunities, and that capability was clearly on display at our Silence in Motion event. During this event, we introduced amazing technology that either represents best-in-class or brand-new capabilities focused on extending a driver's full digital life from outside the car to inside the car. We introduced Sedans Drive 2.0, a major upgrade to our core technology. Sedans Drive 2.0 features a combination of edge technology enhancements and improved and expanded connected cloud services capabilities. Whether it be the number of languages we support, the level of accuracy, the speed of response, or the human-like text-to-speech capability, we're confident Selence Drive 2.0 represents the very best of conversational AI technology available in the mobility market. During the Selence in Motion event, we also introduced a series of other new products. Silence Extend provides the ability for a driver to use their voice to control apps on their Android or iOS-based smartphones. Silence Extend removes the limitation of using your voice for a defined subset of apps on your phone and allows you to use your voice to control apps ranging from Microsoft Teams to ordering a coffee through your Starbucks app. This product plays a significant role in extending the consumer's full digital life from outside the car to inside the car. No one else offers this technology. To truly extend one's digital life into the car also means providing a seamless way for a driver to interact with smart home and IoT systems. This is exactly what Sedans Connect allows you to do using your voice. Supporting multiple IoT and big tech ecosystems, Sedans Connect allows the user to provide simple instructions or create custom smart home routines or rules. Even if you use different ecosystems within your home, Sedans Connect allows you to control them through one AI interface. Sedans Tour Guide is a new application that serves as a high-quality professional tour guide in your car. Whether selecting a pre-planned trip or using the application on the go, Sedans Tour Guide can inform the user about key points of interest and also book experiences like restaurants, museums, and other attractions. Seren's Look is a new product that has the capability to leverage gaze technology and or the GPS location of the car to provide information on points of interest along the road. The technology was recently demonstrated by Mercedes-Benz as its travel knowledge product. which allows the driver to ask about the POI, point of interest, outside the car, and the voice assistant responds with the information describing the POI. Seren's look is currently in production now. Serence Browse provides the intelligence of internet search engines in the car using conversational AI. Serence Browse connects to multiple sources in the real time, indexes continuously updated information from internet sources, and uses machine reading comprehension to deliver the best possible response. As I said earlier, innovation is key to our growth and competitive advantages. But innovation alone isn't enough. It's the ability to bring those innovations to market quickly with the highest quality and meeting or surpassing the requirements of our customers. I'm happy to report we had several awards during the quarter recognizing the contributions the Serence team has made to conversational AI technology in the car. And one from a customer recognizing the value of Serence as a partner. While we value the recognition from customers, the one we received from Baidu is worth mentioning for two reasons. First, Serence was the only automotive supplier Baidu recognized for their 2020 awards. And second, it's another example of how it's a story of Serence and Big Tech, not Serence or Big Tech. As part of the Serence in Motion event, we also formally launched conversational AI-based platform for two adjacent markets that we have been targeting, the two-wheeler and building mobility markets. There are approximately 90 million two-wheel vehicles produced every year, and we see the opportunity to penetrate this market with a truly unique solution. As we have mentioned before, we received our first win in this space late in fiscal 2020, and we believe we are well positioned for additional wins this fiscal year. In the elevator market, we have made significant progress completing proof of concept demonstrations with two of the top five elevator manufacturers in the world. The key to this business is that our product is capable of being retrofitted into existing elevators as well as incorporating into new installations. We are optimistic that we will have multiple elevator customers this fiscal year. Just the innovation, expansion, and acceptance that I just discussed. With the innovation, expansion, and the acceptance that I just discussed, our KPI continued to show good progress, and I'll highlight two in particular. The first was related to our average billings per car, which increased 20% year over year on a trailing 12-month basis. We previously compared year-to-date results to the prior fiscal year, but now are reporting on a trailing 12-month basis to provide a more accurate picture of the trends in the billings per car. The other noteworthy KPI was that our adoption metrics continue to show a strong recovery following the impact of COVID in the middle part of the last year. We would expect this positive trend to continue. We continue to see excitement from our customers about our product innovations and our long-term growth opportunities remain bright. In summary, the momentum created during our first year as an independent company continue into our second year. We believe the innovation technology that we have brought to the market will keep the momentum going. Our focus has been on driver AI to enhance the experience in a safer, more productive way. We will continue to expand in-cabin AI using voice and increasingly other modalities. Longer term, we look for opportunities where we can apply our AI skills into other areas like road AI. We have a long-term vision for the future of transportation and mobility, and I'm very excited about the role CERNS will play. I would like to turn the call over to Mark to review the financial results of the quarter and our guidance for Q2 and for the year. Mark.
spk02: Thank you, Sanjay. I'll first review the strong performance for the first quarter, and then I'll provide guidance for our second quarter and an update for the full year. Once again, our results came in stronger than expected, leading us to another record revenue for the quarter. Revenue came in at $95 million, which is $5 million above the high end of our guidance. and is a 23% increase from the same period last year. Our profitability metrics were very strong, and they all exceeded the high end of our guidance range. The non-GAAP gross margin was 75.3%. Non-GAAP operating margin was 39.7%. Adjusted EBITDA came in at $40.3 million for 42.4% margin, and non-GAAP earnings per share was 59 cents. The Q1 results are still benefiting from the cost savings that we implemented due to COVID last year. As previously mentioned, these cost savings will return during the course of this fiscal year. However, we believe that some of the gross margin improvements that we have seen in our connected services and professional services businesses are sustainable into the future. And these improvements will be reflected in our long-term model that we intend to update later this year. During the quarter, we generated approximately $11 million of CFFO, and our balance sheet remains strong with total cash and marketable securities at $127 million. During the quarter, we successfully renegotiated our term loan A with our banking partners, which is estimated to save the company $1 million in annual cash interest expense. The key changes were a lowering of the interest rate spread by 50 basis points, removing the LIBOR fixed floor of 50 basis points, and extending the maturity by 10 months to April 2025. Now let's review in more detail our revenue performance for the quarter. The record revenue was driven by three factors. First, our variable license product revenue was up 21% from last quarter and up 8% from last year. driven by a continued strong recovery in auto production since hitting the trough in the April-May timeframe of last year due to COVID. Second, our new connected services revenue expanded 24% from last quarter and was up 55% year-over-year due to a continually expanding customer base adopting our new connected service offerings. And third, our professional services business grew 9% from last quarter, and was also up 55% from last year, driven by an increase in engineering activity in order to get customers ready for their start of production. Additionally, our professional services revenue was higher than expected in the quarter due to the early completion of customer projects that resulted in an acceleration of about $2 million of revenue into Q1. Moving on to our Q2 guidance. Our revenue guidance for the second quarter of $92 to $95 million reflects year-over-year growth of 6% to 10% and takes into consideration the current risks and uncertainties of the semiconductor device shortages that are impacting auto production. According to IHS market, the semiconductor shortage issues are expected to be resolved by mid-calendar year, and IHS does not expect an impact to its full-year forecast, but rather a shift. to the second half of the calendar year. Due to our higher year-over-year revenue guidance for Q2 and the continued cost benefits from the expense reductions taken last year due to COVID, we are expecting all of our Q2 non-GAAP profit margin metrics to be up by 240 to 500 basis points versus the same period last year. For the fiscal year, we are updating our guidance to reflect our stronger than expected first quarter revenue and margin performance, and also considers the risks and uncertainties surrounding the semiconductor device shortages that I previously mentioned. Therefore, we are raising the bottom end of our guidance from $360 million to $370 million and keeping the high end at $380 million, which raises the midpoint of revenue to $375 million. Also, due to our continued strong profit performance, we have also increased all of our profit margin metrics by up to 200 basis points. Specifically, we increased non-GAAP gross margin to be 74% to 75%, non-GAAP operating margin to be 33% to 35%, adjusted EBITDA to be 35% to 37%, non-GAAP EPS to be $1.91 to $2.10, and CFO to be in the range of $67 million to $72 million for the year. Adjusted EBITDA for the full year is expected to be in the range of $131 to $140 million, which is up from our original guidance of $122 million to $135 million due to better-than-expected profitability and the updated revenue guidance. Please refer to our earnings press release or to the appendix of this presentation for more details of our guidance, as well as our gap to non-gap reconciliation tables. So, in summary, the business delivered another solid quarter. Our new products and technologies continue to enhance our competitive position, which is enabling us to maintain our strong market shares. And the business model continues to perform well as evidenced by our Q1 results and by raising our revenue and profit metrics for the year. The combination of strength in our core business, along with opportunities for new business from our new products and adjacent markets, paints a bright future for CERNs. This concludes our prepared remarks, and now we will open it up for questions.
spk04: As a reminder, to ask a question, please press star then 1. If your question has been answered and you'd like to move yourself in the queue, you may press the pound key. Our first question comes from Joseph Spack with RBC Capital Markets. Your line is open.
spk06: Thanks very much for the question. Sandra, I just want to sort of, I guess, off the bat, you know, talk about how you see the market here for evolving. Because I know nothing changes on your current programs or wins, but since the beginning of this year, you know, we saw Amazon at CES talk about selling the underlying access to Alexa to, you know, companies including Stellantis. Ford moved to Android OS, and that obviously comes with Google Voice. And then on the earnings call, they talked about integrating Alexa. So I know in both of those instances, there's nothing that precludes Sarence from being integrated. But it does seem like on the next gen, automakers might have more options going forward. So how do you view that development? And what is, in your view, the, if you will, like killer feature that keeps CERNs with the automakers and potentially more importantly, the customers using CERN services?
spk09: Sure. So Joe, from my standpoint, nothing new here. We have said from day one when we were formed as a company that we always see big tech, multiple big tech to coexist in the car. It would be a bad assumption to say that 22 hours of my life I spend outside the car and I have a certain digital life and then when I get into the car, it's a totally different you know, digital life, which is separate. It doesn't work, right? From a user standpoint, you always want kind of seamless. And the second thing that we have always said also is that the big tech ecosystem is not limited to one big tech company. You know, and I would challenge anyone to think through their own digital life and you'll get the answer that your digital life includes, you know, Amazon includes Google includes Apple includes Microsoft and so on and and so the big kind of you know reason for the coexist is that we work, you know, purely with the OEMs to provide the big tech independent, multi-big tech experience ecosystem bridges basically through voice, right? And so that remains kind of, you know, the key interesting thing. And, you know, the opportunities that you talked about and others basically were, you You know, we, if you look at our products like Connect, you know, we're connecting to not just, you know, Apple IoT home ecosystems or Amazon or Google or Samsung SmartThings or LG ThinQ or others. We do it all, right, basically. And we become kind of, you know, that bridge. Similarly, when you look at our, you know, Xtend product, it's not only for Android, it's for Android, and it's for iOS, right? So that becomes kind of the interesting reason why the coexist story becomes strong.
spk06: Thank you for that. I guess my second question would just be on the guidance, and you mentioned the semi-shortage and you know, IHS is calling for the recovery in the second half, although it does seem like expectations there might be slipping a little bit. But, you know, you don't have the benefit of that December quarter that they're counting on in your guidance. So, you know, I think it looks impressive here that you're able to, you know, as you pointed out, Mark, raise the midpoint. So can you just walk through maybe the offset there, what you're seeing more, you know, organically that's giving you that confidence?
spk02: Yeah, so I think, you know, the increasing penetration rates, you know, we see that continuing, you know, that trend like in the past. And so that's not slowing down. So regardless of what's happening with short-term auto production, those penetration rates, not only on the embedded, but also on the connected, those rates are continuing to happen. So I think that gives us comfort that we are still growing above the auto SAR. Last year, for example, we had a phenomenal year. We were well, well above auto production, which was down 19% when our business was up about 9% year over year. This year we are forecasting us to be higher as well above what's happening with auto production. But I think it really comes down to the technology and the increasing secular tailwind that we're enjoying in the auto space.
spk06: Great. Thanks. I'll hop back in the queue.
spk04: Our next question comes from Raji Gill with Needham & Company. Your line is open.
spk11: Yes, thank you, and congrats on excellent momentum in your business and in the marketplace. It's quite impressive. The growth that you're seeing in professional services, it's been kind of consistent and improving. I'm wondering how you think about that business line this year, but also in the future about growing that business, kind of what are the steps that you envision taking? And along those lines, how do we think about the margins in that business? I know you talked about you had been improving that. What are the drivers to improving the margins on the process line?
spk02: Yeah, sure. I can start, and, Sanjay, if you want to add some colors. You know, I'll start on the margin side. You know, we are making improvements that we think are sustainable, right? And those improvements are really around shifting some of the actual activities that are being done into lower cost locations, specifically in India and into China. And we think those improvements or those changes are going to help us improve the gross margins of our pro services, you know, which we believe will be sustainable. And as I mentioned, earlier, you know, we do plan to update our longer-term target model, you know, with some improved margin assumption for the pro services business in addition to the connected. We just want to give ourselves a little bit more time, make sure that, you know, the business model, the new business model proves itself out before we reset expectations on those assumptions. And I think Sanjay might want to talk a little bit about the revenue piece.
spk09: Yeah. So, you know, Raji, the main reason for our PS business is to, you know, strongly support our, you know, product integration into, you know, our customers' products. So we stay very focused on that. And those integrations, you know, exist in the car and also in the cloud. And we continue to kind of, you know, expand our PS, you know, footprint as well, you know, around all of that stuff. But remember, our core, you know, focus is our product business, our license, you know, the SaaS, you know, cloud services and so on and so forth. So, you know, while I see, you know, PS contributing strongly and I'm very happy for that and I'm very proud of the PS team to improving the gross margins and so on and so forth, And also expanding as well because, you know, the car is getting more and more digital. So there are more and more integrations needed with not just voice. The interesting thing about voice and conversational AI is it's touching every part of the connected car. And so we do get involved in kind of, you know, various different integrations, including with, you know, vision and, you know, other new technologies which are coming into the car. other new sensors which are coming into the car, and we'll continue to do that. And, again, like I said, you know, the opportunities are huge in PS, but we stay very focused on kind of, you know, making sure that the PS is, you know, very focused on our, you know, core, supporting our core product integrations.
spk11: And, Mark, there was a 39% sequential drop in fixed prepay. Obviously that business is lumpy. Wondering how you're thinking about prepay this year.
spk02: Yeah, so prepays can be lumpy. You know, it's more concentrated. You know, so as we've seen in the past, they can go up and down and so forth. You know, last year we did about $54 million in prepays, and, you know, we do expect prepays to be down this year. Historically, we've been in that range of low 40s to low 50s. And I think we're gonna stay in that range. So last year we were at the higher end of that range. This year I would estimate we'll probably be around in the middle of that range. And so that's where we see it trending this year.
spk11: And last question, Sanjay. How do you think about increasing ASP growth for your services? You're obviously providing a tremendous amount of value to the OEM. You enable a myriad of applications yet the ASPs are still, you know, fairly low compared to other services in the business, other applications that are being offered in the vehicle. So I'm wondering what are the steps that you're taking to improve the ASPs, and when do you think we'll see that improvement? Thanks.
spk09: So, Rajeev, the core business model was set in a certain given way that the company had when I first stepped in as the CEO about 20 years ago. almost 15 months back now, right? And what we are doing very systematically is to enhance that core business model. Overnight, we cannot change that core business model because that's been in existence for many years and OEM are used to buying in a certain way. uh, the, the core to our increasing the ASP strategy is kind of, you know, new products and new innovations. And, you know, I, uh, I cannot be more proud of, you know, how our product management and R&D teams have executed over the last year. Uh, you know, it was, you know, I hope you had seen the silence in motion event, you know, which was, you know, we brought all of our kind of, you know, new product and innovations out, uh, And these are not just product announcements. As we mentioned, we're getting we already have multiple design wins on these, which will, you know, show up as kind of, you know, increased, you know, ASP and increased revenue in the coming, you know, quarters and years, basically. So, you know, it's, the cycle is slower, given, you know, the way auto works, right? But having said that, you know, we're trying very hard to bring in kind of our apps business online to contribute revenue earlier and faster. You're making progress, and we're working very hard for it. Great. Thank you.
spk04: Our next question comes from Mark Delaney with Goldman Sachs. Your line is open.
spk08: Yes. Good morning. Thanks for taking the questions. I was hoping first to follow up about the coexistence with big tech companies and the company talked about seeing good evidence of that. But I was hoping you could elaborate a bit more and talk about how you're seeing your content per vehicle trend when you are in one of those coexistence types of situations as opposed to being more of a standalone technology. I think the question is about what sort of price you can get for your technology and if there's other services also being offered at the car. And I realize the company is doing a lot of new technologies, and those are additional monetization opportunities. So if you could help investors short those out, perhaps with some examples, that would be helpful.
spk09: Sure. So, you know, we have not seen any major swings from a coexistence standpoint. And, Mark, you can jump. after me as well. I'm just thinking loud here, basically looking at almost a dozen cars or so that we coexist with, you know, a big tech or not. So, you know, we've been able to kind of, you know, maintain the our pricing position with the value added by us and then by our products. And then the strategy, Mark, is to obviously expand with all the new cloud services and apps and other offerings, basically. There are some new discussions happening, a couple of OEMs, which are you know, also from a co-existing standpoint, and those, you know, are a little too early for me to comment on kind of, you know, what the pricing impact would be. Obviously, our goal would be to kind of, you know, maintain and enhance, right, you know, of the core tech and also the expanded, you know, products and technologies. Mark, anything you want to add, please? No, I think that's correct.
spk02: Yes, I think that's an accurate depiction, Sanjay.
spk08: That's helpful. Thank you for the comments there. And then for my second question, I wanted to better understand the growth in billions per car, which was very nice at the 20% growth. But you mentioned you changed the calculation about how you're coming up with that figure to be a little bit of a different time period. Would you be able to provide us with how that metric would have looked last quarter if you'd reported it under this current methodology? Thank you.
spk02: Yeah, we could certainly do that. The only real difference is that last year we were using fiscal year to date versus the prior fiscal year or fiscal year 19s. And the reason why we did that is we didn't have the specific data back in fiscal year 18, so we could only use fiscal year-to-date information and comparing it to fiscal year 19. Now that we're into the new fiscal year, we can use a trailing 12-month versus the prior trailing 12-month period. And so now we can compare it that way. And so, yeah, we can, you know, last year, Last quarter was exactly the same answer because, you know, it was the full fiscal year. So we used fiscal year 20 versus fiscal year 19. So the actual measurement or the result would be exactly the same as what we reported last quarter because it was trailing 12-month versus the prior year trailing 12-month.
spk08: Got it. Makes sense. Thank you very much. Yep.
spk04: Our next question comes from Chris McNally with Evercore. Your line is open.
spk10: Morning, guys. Thanks so much. Maybe if two questions, you know, one to Mark on just the model, and then Sandra, we could talk a little about the long term. I guess, Mark, you know, what we're trying to figure out is you used to have that great rule of thumb of, you know, 10% to 15% growth above production. It seems like with production moving around and obviously such a different growth rate and connected and professional, that may not be the case anymore. Is there any way that we could think about any rule of thumb for the outgrowth, you know, going forward, even if it's on an annual basis, just something rule of thumb, you know, because obviously you're going to grow a lot above, but it seems like it moves around year to year. So I just would love if you guys have thought anything like that through.
spk02: Yeah, that's a tough one. You know, it does move around. You know, last year we had a 28% or 28-point spread, you know, so well above the 10% to 15%. You know, it's almost like looking at, you know, trends, right? And if you look at the last four or five years, you know, we've been consistently above. We still think that's the case going forward because the penetration rates are not slowing. You know, I think last year, because we were so far above, you know, it just makes this year a little bit tougher on compares, right? So we're probably a little bit under that spread, but still above what auto production is going to be doing. You know, clearly still better than that, but maybe not quite as high as what we've seen historically. I think it's just going to ebb and flow, you know, what parts. There's a few things to consider. One is prepays were planning to be lower this year, so that's going to have to be reflected in that spread. Our legacy connected business, that's a flattening effect this year. As we all know, that program is coming to an end, so we're not projecting any year-over-year growth. you know, for fiscal year 21 for that business versus fiscal year 20. It's flat. So that has an impact as well. So it's hard to give you a specific rule of thumb, if you will, because it's a combination of many different factors that will have in flow. But I think the underlying fundamentals of the secular tailwinds, that remains intact. That's where the penetration happens. rates are continuing for the embedded and the penetration rates are continuing for the connected. And so that's what I would suggest you kind of focus on is those penetration rates.
spk10: No, that makes sense. And I think going forward, we almost sort of have to think about the licensed businesses as really the only business that we can do the rule of thumbs. And even there, we'll probably have to sort of take into account the year-over-year compares for the prepaid business. So that makes sense. And then, Sanjay, you know, I know you're going to update later in the year on 2024. I think, you know, we're all looking forward to that as it seems, you know, things are moving in the right direction. Could we maybe just focus on, you know, so the longest-term aspects of the 2024 guide, that $75 million, you know, that you had given, you know, looking at these future drivers, things like Car Life and Ferentz Paye, Could you just talk about your confidence in that one sort of line item? Do we have enough visibility out so that we've booked, you know, that much business out to 2024 or, you know, the pipeline looks extremely encouraging? Just curious, given the long-term nature and the potential there, you know, how much visibility do we have now versus, you know, sort of we still need things to unfold over the next couple of years?
spk09: Yeah. Yeah. So in the last quarter, we booked two deals which will contribute revenue to that line. So these are real bookings. We don't break them down from a number standpoint, but they're significant bookings. So that was good. At least it had started now. This current quarter, we have a strong pipeline And I'm expecting more than two deals, you know, that will be booked this current quarter that will also contribute towards that, you know, revenue line. We expect small revenues in this year. only assuming very little contribution from that, you know, but then obviously kind of, you know, as more and more cars, you know, ship with the apps and the new connected services, you know, the revenue goes up. So, you know, as of now, I'm feeling confident about the progress. Chris, it is hard work. We're working extremely hard, you know, and very focused to kind of, you know, take, you know, work step by step with, you know, every OEM to kind of, you know, bring these new capabilities in. Great. Thanks, guys.
spk04: Our next question comes from David Kelly with Jefferies. Your line is open.
spk03: Hi. Good morning, guys. Maybe just wanted to start with the Stellantis announcement. Can you give us a bit more color on the technology relationship there and maybe how you're thinking about the size of that incremental opportunity? Sure.
spk09: Sure. Mark, I'll start and maybe you can jump in to answer the size and all that. So the opportunity was basically with the official statement that we got clearance to mention just a few hours back was CERN has extended its partnership agreement to the cars of next generation of Stellantis. I'm reading it from the email from the comms team. So that's the official statement that we're allowed to say at this stage. It's their next-gen platform. You know, I can't go into the details of it because, you know, obviously it's for them to announce, right? And so that's the reason I'm having a little bit of difficulties, David, to kind of, you know, go into more specifics. I want to, but I can't, right? But, you know, we're extremely proud and happy to be brought in because this was, you know, one platform that we had before Sedans was formed. When Selens was still part of Nuance Auto, we had lost it to a competitor and, you know, we're just honored and extremely proud to be brought back in in the next gen. Mark, I don't think that we can talk much about size, right?
spk02: Yeah, yeah. Unfortunately, we can't get specific on any one particular customer unless we get their specific approval or okay. And at this point, we don't. With that said, though, it's a win that we feel is notable. We feel that because it was a win back, that in and of itself is notable. And just given, I think, given the size of this customer, I think you could sort of make an assumption that You know, it's a notable deal that we feel like it was worth mentioning.
spk03: Okay, that's all fair. I thought I'd give it a shot. And then maybe switching gears to the Zivo announcements. You know, you referenced the quicker bookings to revenue cycle. Just curious, maybe high level, if you could walk us through – again, you don't have to get into specifics here, but how the revenue structure of that business would work. I'd assume it's more of a transaction basis, but just curious to get some color around that would be great.
spk02: Yeah, I can start, and Sanjay, I'm not sure if you want to fill in any blanks, but it's like you said, it's like a revenue sharing or transaction-based approach, and it would get funneled through through the Zivo platform. And so, you know, our arrangement would be, you know, with Zivo. And so they would be managing those relationships. They would be doing, you know, the administrative work, what have you. And then as those transactions occur out there in the marketplace, we would get a portion of our piece of it. And so it's a revenue sharing type of arrangement based upon transactions. And then we would get paid by Zivo. you know, paid by Zeebo on that transaction.
spk03: Okay, perfect. Thank you. Sure.
spk04: Our next question comes from Jeff Van Ree with Craig Hallam. Your line is open.
spk12: Great. Thanks for taking my questions, guys. Just outstanding execution here, just continuing a really solid performance. A couple for me. I know you don't quantify as it relates to the bookings, or you do periodically, but can you give us some color, even quantitatively, about the bookings this quarter? You know, any observations, I think, about the size scope, sort of different twists to what you booked or what you thought you'd book, and along those same lines, same thing on pipeline. Sort of talk about the pipeline composition. Obviously, you have a lot of new products. I suspect you'll have some commentary about some of these new products you already have starting to fill the pipe, but Any other observations, edge-connected, places you're succeeding, things that are lagging, maybe those two critical pieces, maybe a bit more color?
spk02: Mark? Yeah, so, yeah, you're right about bookings. We don't do it quarterly, and, you know, we mentioned this, I think, last year, and as a reminder for everybody, we give mid-year update for our bookings and then fiscal year-end update to our bookings and our backlog. Okay. You know, we're going to stick to that because, you know, bookings can be lumpy from one quarter to the next, and we think that's the right practice. But not do it once a year, but do it twice a year. And so with that said, you know, I think we'll defer our commentary on bookings until our next earnings call. You know, however, you know, pipeline remains strong as we continue to expand, you know, our product offerings, you know, and also into adjacent markets. And that is naturally expanding the number of opportunities that we have going into our pipeline. And so that's the color I can provide at this point.
spk12: Maybe win rates on connected deals. Can you comment on that?
spk02: Yeah, I think the win rates are unchanged. We're not seeing any difference from what we've seen historically.
spk12: Fair enough. Then just last one on the PS side, obviously a very good number there and a very good leading indicator for what's really going on out there. From a utilization standpoint, where are you with respect to the capacity organization?
spk02: Sanjay, I don't have that number handy.
spk09: I'm not sure if you have it. We're about running close to 80% utilization. So utilization has defined build to billable and build to available. These are the two numbers we track, Jeff, right? So build to billable and build to available, and we are in our 80s. By the way, a few more percentage points that they can improve. Right. So, you know, with the appointment of Sujal, who's our new PS head, you know, he comes from Harman's, you know, PS organization and understands this extremely well. So the trick of improving the gross margin, there are two things. Number one, to look at the cogs. So basically kind of, you know, use, you know, as much, you know, offshore as possible in the right mix of offshore and onshore. So improve the cogs. And the second trick is to improve the utilization. So those are the two things that he's focused on.
spk12: Okay. One last brief one, if I could, COVID. What are your assumptions now? I know you mentioned some costs return clearly when you come back to more normalized environment. What are the assumptions in the model with respect to, coming back, what magnitude of sort of back in the office do you ultimately expect, and any thoughts on timing?
spk02: Yeah, so, you know, we did have some significant cost savings last year. We're starting to, you know, bring those expenses back in. I think for Q1 we were a little bit behind our hiring plan. So that was part of the benefit in Q1 as it relates to the margins. You're going to see more incremental of those expenses coming in in Q2, probably about the same magnitude in Q3, and then things are going to start to level off as we get into Q4, probably still going up but not at the same rate. So by the time we're finished with this fiscal year, I would expect all of those COVID savings savings that we took last year to kind of find their way back into the P&L along with the removal of the hiring freeze, which was really a cost avoidance that we had last year. And so, you know, we will, you know, net-net have higher headcount, you know, relative to last year because we unfroze that hiring freeze. You know, however, we did say that, you know, on the gross margin line connected in pro-services, some of those expenses, you know, we think are not going to be coming back just because we're making some sustainable improvements. And, you know, we'll be giving you an update to that long-term model, you know, in the coming months.
spk12: Sounds good. Congrats on the performance. Thanks. Yeah.
spk09: Yeah, Jeff, but I just want to add, you know, one thing that – you know, I'm just extremely proud of our team of how we're executing on profitability. I tried to say that in my comments as well. You know, I mean, there is, you know, you can compare us to, you know, many, many other companies and kind of, you know, delivering 42% EBITDA this year and then, you know, increasing the guidance for the whole year. Just very proud that, you know, we're able to deliver you know, profitable growth. That's something that Mark believes in, I believe in, and, you know, we're just proud that, you know, our team's able to deliver to that. Yeah, absolutely. Thanks.
spk04: Our next question comes from Michael Filatov with Barenburg Capital Markets. Your line is open.
spk07: Hey, good morning, guys. Thanks for taking my question. Just one quick one, really. I believe originally your 2024 outlook wasn't baking in much in terms of renewals on the connected services side. So I was just wondering if you have sort of any better visibility into sort of the expected renewal rates on the connected side and sort of where those renewals stand today. And maybe maybe you could remind us of when a bulk of those renewals will start to start to happen.
spk02: Yeah, so you're right about our model. We were conservative, and we didn't factor in any renewals in our 2024 model, mainly because we just didn't have any data points. So far, we still have that one that we announced, you know, last quarter. So that's really the only update that we've got, which we provided last quarter. I think as we get more and more updates, you know, over the next year or so we'll get more comfortable as to what those renewal rates will look like. But I think, you know, with that said, you know, the consumer is wanting the cars to be connected. So I think just the demand and the adoption rates, you know, that KPI that you saw on our slide deck, as those trends continue, I think the, the consumers are ultimately going to be pushing for that connected, for that connected car and for that connectivity to continue. So I think, uh, I think that that should bode well for us in terms of, you know, the, the future, uh, ability for, for these, for these renewals to, to come to fruition.
spk09: You know, I, uh, Michael, I, um, just completely coincidence. You know, I, uh, uh, drive a 2017 BMW. And, uh, uh, this weekend I did personally, I, you know, paid BMW $225, uh, for a package to, uh, connected services package per year, uh, to provide connectivity into my car, right? This is this weekend. So I can, you know, share my transaction with you and, uh, And, you know, if you go to connecteddrive.bmwusa.com, you will basically see kind of the packages that they have for, you know, various different connected services. And I bought the, there's a $50 one, there's, I think, $150, and then there's a $225. So I bought the $225 package because the connectivity in my car was, had expired as part of the new car purchase, right? And it's a yearly subscription.
spk07: I appreciate that. That was a great caller. And I know you provided some of the moving pieces around, you know, pro services revenue, and some of that was pulled forward into Q1. But maybe if you could talk about sort of the growth, you know, expectations for, you know, new connected versus the variable revenue and edge and what's really driving the growth and the updated, you know, midpoints of your fiscal year guidance. That would be helpful. Thank you.
spk02: The new connective, we see that continuing. The growth trends there continue to be good. In pro services, we had a very, very strong year last year. Year over year, it was up 55%. Part of that was driven by an acceleration of some PS revenue into Q1. I would expect you know, for Q2, the PS revenues to be down because of that, and that's been reflected in the guidance that we have given. But I think year over year, PS should be up as well. And so I think on all fronts, whether it's the licensed business, you know, the connected, the new connected business, as well as our PS business, all of those businesses are we expect all of them to be up year over year. And so all that's been factored into our guidance. We haven't gotten more granular, you know, on the specific revenue streams. But at the corporate level, you know, that's how we kind of build up to our total guidance for the year being plus 12% to 15% year over year. And each one of those individual business lines we expect to be up as well. Got it. Thank you very much. Yep.
spk04: As a reminder, to ask a question, please press star then 1. Our next question comes from Dan Ives with Wedbush Security. Your line is open.
spk01: Hi. This is Strecker on for Dan. So with just the recent GM headlines in electronic vehicles and then just the massive EV push overall, Can you, Sanjay, talk about how that just plays into this Aaron's growth story potentially over the next couple of years? Thanks.
spk09: Yeah. So, you know, as you know, we have announced many, many EV, you know, partnerships over the last, you know, many quarters, right? And from our standpoint, you know, the core assumption in the thesis of what we do is that the car is getting more digital, right? which basically means it's getting more connected, more electric, more autonomous, more shared. And the user interaction, you know, using AI, you know, is going to play more and more important role. That's the core thesis behind Selence. And, you know, as you saw in my slide that I presented to you at Selence in Motion and also in the earnings today, You know, we're really focused on driver AI, cabin AI, road AI, right? That's our focus because, you know, our core assumption is that the car is getting more digital and connected and electric. And with that, basically, AI is going to play a very important role in the driver interactions, in the... cabin interactions, in the road interactions, and what we want to do is basically be a premier company focused on providing the AI platforms for that. That's our core thesis. Thank you.
spk04: There are no further questions. I'd like to turn the call back over to Rich Jurganian for any closing remarks.
spk05: Thank you very much, and thank you for joining us on the call this morning, and we hope to see you at one of our upcoming conferences over the next few weeks. Thank you, and have a good day.
spk04: Thank you. Ladies and gentlemen, this does include the conference. You may now disconnect. Everyone, have a great day.
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