Cerence Inc.

Q2 2021 Earnings Conference Call

5/10/2021

spk05: Good day, and thank you for standing by. Welcome to the SARINS Q2 2021 earnings call. At this time, all participants are in a listen-only mode. After this week's 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 speaker today, Richard Yorganian. Please go ahead.
spk01: Thank you, Salah. Welcome to CERNS' second 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. CERNS 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 the non-GAAP measures to the closest GAAP equivalent. Joining me on today's call is Sanjay Dwan, President and CEO of Serence, and Mark Gallenberger, CFO of Serence. As a reminder, the only authorized spokespeople for the company are Sanjay, Mark, and me. Before handing over the call 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 the Craig Hellams 18th Annual Institutional Investor Conference on June 2nd, Niedermann Company's 5th Annual Virtual Automotive Technology Conference on June 8th, and BEARDS 2021 Global Consumer Technology and Services Conference on June 10th. Please visit the events page in the investor section of the CERN's website for the most up-to-date information on our participation. Now on to the call. Sanjay?
spk02: Good morning. Thank you, Rich. Welcome to everyone on the call, and thank you for joining us to discuss our second quarter fiscal 2021 earnings. It always amazes me how many companies call their quarterly reports earnings calls when they aren't producing any earnings. For Serence, this is truly an earnings call. For our call, I will first review our strong financial performance in Q2, followed by a review of our first half bookings. This will be followed by a few comments on some notable events that took place during the quarter. Next, I'll update our key performance indicators and then hand the call over to Mark to review the detailed financial results. In Q2, at $98.7 million, we once again delivered record revenue, representing 14% year-over-year growth. Our performance was driven by strong growth in our license and connected services product lines, with both up approximately 20% year-over-year. As you can see, there was minimal effect on our revenue from the semiconductor shortage affecting the auto industry, although our Q3 guidance does take into account a modest impact. While revenue growth is a key part of our story, we believe profitable growth is also important. Our relentless focus on cost and efficiency led to a non-gap gross margin of 77%. adjusted EBITDA of approximately 39 million, or 40% margin, and very strong non-GAAP EPS of 69 cents. Mark will share the details later in the call, but overall, we're incredibly pleased with our second quarter results and how business continues to excel. As we have done in the past, Our practice is to report bookings at the halfway point of the fiscal year and report backlog at the end of the fiscal year. Our total first half bookings were 293 million, approximately flat to the second half of fiscal 2020. Last year, we had a burst of multiple significant awards that fell within the first half of the fiscal year. We expect that burst to happen in the second half of this fiscal year. In fact, we are off to a very strong start in Q3 with over 100 million bookings already booked. Overall, our pipeline continues to be strong and our win rate remains extremely high. We had no competitive loss of notes in the first half and we won back an important multinational customer than had chosen a competitor when the business was still part of Nuance. Additional first half booking highlights include strategic customer wins with Hyundai and a prominent Japanese car company. It is important to note that bookings for our new application products were approximately $33 million. This is a solid start for building the bookings foundation to support our 75 million of applications revenue expectations in our target 2024 model. We expect these bookings to deliver initial revenue before the end of the calendar year. You may have seen our press release last week announcing P97 Network as a partner in the ecosystem of our Selens Pay application. This further solidifies Selens Pay in the market and will connect drivers to safe, seamless payments through the P97 mobile commerce platform currently available to more than 30% of the retail fuel sites across the US. Continuing the momentum in our newest offerings, we were awarded two important decisions in the two-wheeler market with one of the most prestigious and fastest-growing two-wheeler and ATV companies in China and an iconic domestic motorcycle brand that you would all recognize. We made further progress in the elevator market and expect to share more progress with you on our next earnings call. Aside from these important developments, we had several notable events and achievements in the quarter. Two electric vehicles, the Hyundai Ioniq 5 and the Daimler EQS were launched in the quarter to rave reviews. We're proud to be a key AI supplier for both of these amazing cars. We announced new product capabilities to seamlessly work with Google's Android Automotive OS, allowing Serence technology to more deeply coexist with all Google applications. With Serence's best-in-class conversational AI built on top of Android Automotive OS, automakers can now ensure their native digital assistants and seamlessly coexist with Google Automotive Services, including Google Assistant, without compromising brand ownership and while preserving their unique in-car experience. Next, Serence was a proud recipient of numerous Project Voice awards that honor global best-in-class achievement in voice and conversational AI. The awards were for Company of the Year, Developer of the Year, Executive of the Year, best use of TTS, achievement of the year, and best automotive solution for our incredible work with Daimler on the newest MBUX offerings. At CELNS, our mission is to develop a technology that's experience-focused on providing a safe, more enjoyable experience for the driver and their passengers. We do this better than anyone else because that's our sole focus. Our engineers are constantly challenging themselves about how we can do better, develop new capabilities, and leverage more information generated by the car sensors and cameras to accomplish this mission. It is why we have business with not only the long-time established automakers, but also most of the new EV car companies around the world. We appreciate the recognition of the work that we do. And finally, we made an investment in Cerebramec, a startup with deep automotive experience and a platform using connected car data and augmented learning to maximize the value of connected vehicles. Working together, our companies plan to enable OEMs to create new revenue streams based on connected car data by creating new AI-powered applications, insights, and services that improve the in-car experience and enhance safety and security. I also want to add a few comments on the all-important China car market. The indigenous China car market historically has been our least penetrated geography, but that is starting to change dramatically. We count among our customers several of the EV startups such as Xpeng and NIO, but we are also building our presence in some of the traditional OEMs in China such as Great Wall Motors, Cherry, Geely and Wuling. Wuling, the automaker in China with the highest volume, went so far as to create an ad campaign featuring Serence specifically for the Indonesia market. Wuling, like most automakers, understand the user experience inside the car is becoming the soul of the car and a key brand differentiator. No company can create that unique brand experience for a car better than Serence. Moving on to our KPIs, overall, they continue to indicate a positive outlook. Since all of the KPIs except the adoption metrics are based on trailing 12-month basis, the impact of COVID-19 still skews the data, especially the KPIs of certain technology penetration and the number of connected car shift. We would expect those KPIs to normalize with our next report. Our average billings per car, which increased 10% year over year, continues to demonstrate our value add to our customers through increasing content per vehicle. As conversational AI becomes a standard for connected car, the adoption rate of using the technology will continue to rise dramatically. This is evident in our adoption rate KPI slide, where both active users and the number of transactions are on a steep positive slope over the last two years when compared against the previous two years. When technology is easier to use, more people will use it, and that is what you see in this chart. I expect to see this continue to rise as more and more cars have conversational AI compared to the old ways of interacting with the car. In closing, I'll end in much the same way I began We're incredibly pleased at our performance in the record results we delivered. We are operating from a position of real strength with tremendous excitement and commitment from our customers, a robust product and innovation roadmap, and a significant growth opportunity on the horizon. Our long-term vision is to play a key role not only in driver AI, but also cabin and road AI. We will rely on the vast experience of our team, but also look to inorganic opportunities to help us achieve our vision. I'm pleased with what we have been able to accomplish so far, but I also believe we are still in the early stages of our potential and what CERNs will fully achieve. I would like to turn the call over to Mark to review the financial results of the quarter and our guidance for Q3. Mark?
spk13: Thank you, Sanjay. I'll first review another strong quarterly performance, and then I'll provide guidance for our third quarter and an update to our full year guidance. Once again, we achieved record revenue as results came in stronger than expected. Revenue came in at $98.7 million, which is almost $4 million above the high end of our guidance, and is a 14% increase from the same period last year. Our profitability metrics were also very strong and exceeded the high end of our guidance range. The non-GAAP gross margin was 77%. Non-GAAP operating margin was 37.6%. Adjusted EBITDA was $39.3 million, or 40% margin. And non-GAAP earnings per share was 69 cents. Due to exchange rate fluctuations, we had a foreign exchange gain of approximately $0.08 per share, which is accounted for in the other income line item. During the quarter, we generated more than $16 million of CFFO and our balance sheet remains strong with total cash and marketable securities at $137 million. Now let's review a detailed breakdown of our revenues. The record revenue was driven by two factors. First, Our total licensed product revenue was up 22% year over year. Our variable license revenue was up 32% from the same quarter last year, driven by a continued strong recovery in auto production since the drop during the April-May timeframe of last year due to COVID. While difficult to quantify, we believe our variable license revenue was partially impacted by the semiconductor shortage slowing down auto production during the quarter. Our variable license revenue is where you would see the direct impact from lower car production. Second, our total connected services revenue grew 18% from last year. But more importantly, our new connected services revenue, which excludes our legacy business, expanded a strong 51% year over year due to a continually growing customer base adopting our new connected service offerings. Now, moving on to our guidance for Q3, our revenue guidance for the third quarter of $94 to $97 million reflects year-over-year growth of 25 to 29 percent and takes into consideration the current risks and uncertainties of the semiconductor device shortages that are impacting auto production. Forecasts from various firms about the time required to resolve the semiconductor manufacturing issues are changing frequently. We are closely monitoring the situation and believe we have accounted for the impact on our guidance. Keep in mind, only about 35 to 40 percent of our business is directly impacted by auto production in any given quarter. For the fiscal year, we have updated our expectations based on a stronger than expected first half on both the top and bottom line. We now expect our full year revenue to be in the range of $380 to $390 million, which is up from our original guidance of $360 to $380 million, and non-GAAP EPS to be in the range of $2.22 to $2.37, which is up from our original guidance of $1.81 to $2.05. please refer to our earnings press release or to the appendix section of this presentation for more details of our guidance, as well as our gap to non-gap reconciliation tables. So, in summary, we had another strong quarter of excellent financial performance. While we remain cautious in the near term due to the semiconductor shortages impacting the auto industry, we are continuing to benefit from the secular tailwinds caused by the digital transformation of the auto industry. Our long-term prospects remain bright and our focus on innovation and growth, while at the same time crafting a profitable business model, will benefit the company and our shareholders well into the future. This concludes our prepared remarks, and now we will open it up to the call for questions.
spk05: Okay. As a reminder, if you have a question, please press star 1 on your telephone keypads. Once again, that's star one. We'll pause for just a moment. And your first question comes from the line of Chris McNally from Evercore.
spk09: Hey, Sanjay. Hey, team. Thanks so much. So the first question is around the booking detail you gave for the new applications. Really appreciate that, the $30 million. And it sounds like there's some short lead time from the prepared remarks. Could you just add some qualitative details Data around, you know, is it interest in life, pay, Saren's look, and then anything else around kind of the overall demand for these new areas? You know, maybe RFP interest because, you know, clearly this is the added extras on the connected business.
spk02: Sure. So that $30 million that we mentioned comes from two – Two customers, one of them we announced, which was Zivo, that works with a number of OEMs. And the second one is a direct contract with another European OEM. And for the first one, it's the set in space, the main product. For the second one, there are multiple products included in that bookings, which is the one with the OEM directly. In terms of the momentum, since Q2 into Q3, we have one more OEM that has signed up for our apps products, and that one is for the travel guide product, basically. And that is included in, you know, we mentioned in our remarks that there is, you know, over 100 million of bookings in Q3 that has already happened, which is a very strong start. And there is one more OEM which is going to launch the TravelPro app. The pipeline remains strong. I can, you know, there are probably, you know, half a dozen to 10 plus, you know, RFP slash, you know, core conversations going on with that number of OEMs right now.
spk09: That's great. And then to lead into the question around overall booking. So you gave a first half number. You had such a big year last year, you know, without OEMs. you know, knowing the full pace of second half, is sort of an internal target or a goal to keep up that sort of absolute level of bookings, you know, 800 million plus? I know timing is always hard to call because, you know, the last month of Q4 will matter a lot. But just high level, can we try to sustain that high level of bookings for the year?
spk02: Yeah. Yeah, I think we do think we don't guide our bookings number, Chris, as you know. But our internal goals definitely are to meet or beat last year's bookings number. We do have the pipeline to achieve that. So it's not just a pipe dream. It's supported by facts and a strong pipeline and a strong start to Q3. You know, like I said in my prepared remarks, you know, in last year, Q2 was a big, first half was bigger than second half. This year, this fiscal year, it all appears that it will be reversed. The second half will be a bigger bookings half as compared to first half. And the timing of that, as you all know, it's totally driven by kind of, you know, OEMs and and their cycles and so on and so forth. So we don't control that. It's a big, very important decision that OEMs have to take. But to summarize, pipeline is there, and we surely hope that we'll meet or exceed last year's 800 million number.
spk09: That's great to hear. And then if I could just squeeze in one real auto techie potential on new opportunities here. Sanjay, thus far, voice HMI has really not been a focal part of active safety, and we're seeing a huge push across the industry, and politicians are getting involved about basically safety and level 2+, about driver monitoring and DMS. Just a high-level question, do you see a lot of opportunities for voice to be a part of ADAS going forward, particularly in things like heads-up display and interaction around driver monitoring?
spk02: Yeah, we're definitely seeing more and more interest to bring these technologies together. And it's not just for basic, simple voice prompts and all that stuff for your DMS system that comes from the voice AI platform. It's more deeper integration to create more safer driver experiences. And that's the reason, Chris, we're very focused on, you know, creating and expanding our platform beyond voice AI to kind of, you know, bring, you know, vision into it and tie them tightly together, you know, not just for a better driver experience, that is also important, but more so from a safety and security standpoint, right? So that's more to come on this. But yes, we're definitely seeing OEMs getting more and more interested to tie the two together.
spk09: Thanks so much, Tim.
spk02: Thank you.
spk05: Your next question comes from Colin Langan from Wells Fargo.
spk06: Oh, great. Thanks for taking my question. Just to start, any clarity on what your assumption is for the semi-impact into Q3? Because it looks pretty benign in your guidance. I thought your comments said that it's like 30% to 35% of your sales are impacted by auto production, but I thought 50% is license revenue, so I would have thought it would be a bit higher. Yeah, any color there, what's the underlying assumption? Seems some pretty awful headlines coming out of the auto companies for this quarter.
spk13: Yeah, so, Colin, you know, the 35% to 40%, that really kind of focuses more on the variable portion of our license. So, you know, we do have the fixed portion of our license as well. So, you know, those can be lumpy. Those can vary, you know, from one quarter to the next. And so that's kind of how we get to that 35% to 40%. In terms of answering your first question on auto production, You know, we are, you know, getting a lot of the same information that you guys are getting in terms of, you know, what the OEMs are saying. Things look like they're a little bit worse than expected. This is getting a little bit longer than people expect in terms of right-sizing the supply chain and correcting it. You know, we also look very closely at IHS third-party report information, and that information, I believe, is down as well a couple of points. I think when we initially – Went into the year, we were thinking around 13%, I think, and now I think that's down around 11% or 12%. And so we factor all that in. But offsetting some of that is the secular part of the story, right, where, you know, we are seeing increasing penetration of this technology. And so that does help offset some of those short-term downward issues as it relates to the semiconductor supply chain. And, you know, we try our best to try to factor, you know, that in as well into our guidance, which does provide to some degree an offset to some of the short-term issues.
spk06: Got it. And you mentioned a win in the two-wheeler market. Any color on the size of that market opportunity? I guess I'm not as familiar versus a light vehicle. Is it any sort of framing of how big of the opportunity is and how much momentum you might have there?
spk02: Let me start, and Mark, you can jump in. So the win, we talked about two wins, one in China, one in the U.S. The one in China, we can mention the name now. It's a company called CFMoto, which is one of the largest two-wheeler companies in China. The U.S. one, we cannot mention the name yet, but it's a name, like I said in my remarks, all of you will recognize, right? So we are working on quantifying this from a TAM standpoint in the upcoming analyst meetings. So we will provide more clarification for, you know, the time assumptions and so on and so forth. But needless to say, you know, the almost, you know, between 60 to 80 million two-wheelers are shipped, you know, slightly about the same size, slightly lower than the automotive market. So it's a huge space in itself. Although, you know, quite different in terms of its requirements and all that stuff, right? But safety is, you know, driving the need for voice to be more integrated onto these two wheelers. We had announced earlier one Xiaomi 70MI company as our first win. With this announcement today, we're adding a couple of more OEMs, and then our sales team is working with many, many, almost all of the other OEMs to kind of look at basically what to showcase our products and get design wins into those opportunities as well. So that's the scope. for now, and like I said, the exact kind of TAM assumptions and all that stuff, we will share in our this year analyst conference. Mark, anything else you want to add?
spk13: No, I think you covered everything. The only thing I would highlight is also in terms of the TAM, a large portion of that volume is in Asia where there is just more of the two-wheelers being sold in that part of the world. And so that's why we are focusing. We're focusing globally, of course, but we are really focused on the Asian market for two-wheelers.
spk02: Yeah. Yeah, I think Japanese OEMs ship almost 50% of the volume of the world. in two-wheelers, so that's a very important geography for us. Chinese OEMs are very important. Indian OEMs are very important. And clearly we're focused on European and U.S. OEMs as well.
spk06: Got it. All right, thanks for taking my question.
spk05: Your next question comes on the line of Daniel Ives from Webb Bush.
spk04: Yeah, thanks. Can you hit on with electric vehicles, especially what we're seeing coming out of China? I know you can't talk about model wind, but can you just maybe talk about activity there?
spk13: For the EV market in China, you're asking, Dan? Yep. Yeah, so, you know, the EV market is clearly a key market for growth. Today it really doesn't drive much business for us today just because the volumes are not there. But in terms of, you know, growth opportunities, we are clearly very focused, our sales organization is clearly focused on, winning those accounts because we do see many of these companies gaining significant traction in the foreseeable future. And so, you know, from our perspective, it's something that we simply, you know, we're not going to ignore that part of the market just because the volumes are low because we do think that's going to be a significant secular trend. And so, you know, we are focused on winning business in those areas. with those customers, and we already have evidence of some of that. So clearly, yes, it's not a big market today, but it will be in the future.
spk04: Thanks.
spk05: Our next question comes from Joseph Spack from RBC Capital.
spk12: Thank you. Good morning, everyone. How are you? Great. Thank you, Joseph. So, one of the things I like to look at is the variable revenue growth in licenses compared to production, because that is sort of the part that's, right, more tied to production. And, you know, you had some good outperformance here, again, this quarter, despite really that regional mix, right, hurting you because you mentioned, you know, you're making more progress in China, but, you know, you're still underweight that region. And that's been the the bigger part of the growth. So I guess, A, that sort of supports, Sanjay, your comment about good progress in China. But what I'm curious about is that dynamic obviously flips this quarter, right, where the outgrowth or the industry volume growth is going to be much more weighted towards North America and Europe, even if it's maybe a little bit lower than we thought a couple months ago. So I'm curious, given that dynamic, how should your performance hold up relative to production because if your growth is coming more from China, it would seem like you might, if the content growth is coming incrementally from China, it would seem like just the sheer math of it might make it a little bit more difficult this coming quarter. Go ahead, Sanjay.
spk13: No, Mark, please, after you. Go ahead. I was just going to say one of the things that I am seeing going into this quarter is you know, some new SOPs, right? So business that we've won historically, now those are starting to, you know, hit volume production. And so that, you know, has been factored into some of our guidance, which I think, you know, should play out nicely for us. So that's one aspect that, you know, I did have factored into our guidance because of some SOPs that are hitting And Sanjay, I don't know if you want to add anything else.
spk02: No, what I was going to say was that, Joseph, China is for us to improve further our penetration. For North America and Europe, we have good penetration. It's, you know, is to increase the further adoption and hence, you know, growing the revenue per car and so on, right? That's kind of, you know, the picture. China, we have a very strong competitor there called iFlytech, as we have talked about that before. And we have a laser focus on how we are going to increase our penetration in China further. We have very good penetration. We go head-to-head with iFlytech. This is China for China market. But, you know, there is still a lot of room left for us to win back and so on, which we are absolutely making progress, no questions. And then for the rest of the world, like I said, you know, we have good penetration. We need to improve the revenue per car and the big opportunity in the rest of the world, in Europe and in America as far as cloud services, right, to increase in cloud. That's the expansion strategy. So, you know, we have taken into account, you know, a number of these puts and takes for our guidance. And overall, as you saw, we increased our yearly guidance from, you know, 360 to 380 million originally to 380 to 390 million, which is almost 15% to 18% growth from last year.
spk12: Yeah, no, thanks for that, Sanjay. I guess just while we're on China, you know, something – I'm sure you're well aware of that's been a bigger topic over recent years is export controls with China and AI. And since you're making a lot more progress there, can you just remind us of where does that IP actually lie? How much is shared between the regions? And what, if any, sort of protections do you have if relations between the countries around AI gets choppier?
spk02: Mark, do you want to handle that?
spk13: Yeah, so, you know, we do have a significant presence of employees in China. You know, I think it's around 300 people. You know, there is IP that gets developed there, but, you know, the vast majority of our IP is outside that part of the world. You know, one thing to keep in mind is, you know, a lot of the OEMs, global OEMs are shipping into that region. And so a lot of our contracts are structured, you know, where their home base is. And so, you know, I don't foresee any real issues there. You know, a lot of the IP is based outside of China, so I don't see any significant issues that we would anticipate.
spk12: Okay. And maybe just one housekeeping. I know in the past, Mark, you said the prepay line item for the year I think would be flattened down, and I know it can be really choppy and it's difficult to know in advance, but given that year-to-date it's up mid-teens, it would seem like it would have to be down mid-teens for that to still hold. Is that still a valid assumption for the year, or did anything change there?
spk13: Yeah, I think last quarter we were around 10-ish or so, and this quarter, so we were kind of kind of, you know, a little bit below the run rate this quarter. We were, you know, above the run rate, really driven by one customer that, you know, we had a, you know, counted for over 50% of the entire fixed amount. So that kind of drove us, you know, towards the higher portion. So, you know, I think for the balance of the year, just because of what happened this quarter, we're probably now going to be you know, flat to up from the prior year. That would be my rough guess right now. But it's difficult to give guidance on that line item. But last year we did about 54 million in total. And for the first six months we're at about, you know, 27-ish, call it. So that kind of feels like we're sort of on that same run rate as last year. And you're right. We did say we'd probably be flat to down this year. I think now it's probably going to be at the flat level, you know, and possibly up. It's difficult to predict.
spk12: Yeah, understood. But thanks for that, Collar. Sure.
spk05: Thank you. Your next question comes from Rozzy Gill for Needham & Company.
spk11: Yeah, thank you, and congrats on all the great momentum in a tough environment. Mark, on the gross margin upside, I was wondering if you could perhaps talk about some of the puts and takes there. You know, the professional services business was down quarter over quarter, which has a lower margin, so you might have benefited from a favorable mix shift to licensing connected. but you also are kind of guiding gross margins kind of in this 76%, 77% range going forward. So is this, you know, the true gross margin profile of the company that you want to manage to? Any thoughts on what's happening on the margin side?
spk13: Yeah, I think this quarter, you know, in particular, like you said, the pro services was down, so it was a mixed shift, you know, towards, you know, more of the higher revenue licensed business. you know, really contributed to the better margins for the quarter. You know, pro services was down, and so, therefore, the margins were down. We're actually, you know, we're hiring resources that are not billable yet. So, you know, that's declined our utilization rates to some degree there. You know, and so, and then you've got the connected services business. That continues to really, you know, outperform. You know, we We were, you know, a year ago, we were probably 10 points lower. Now we're now solidly in the mid-70s, non-GAAP gross margins for the connected business. And I expect that to continue. And so I think that's going to take hold and stick with the business. For pro services... You know, I think for the full year, we'll probably still be in that mid-teens to high-teens target that we talked about previously. You know, this quarter it was in the single digits on a non-GAAP basis, mainly because the revenue was down. And like I said, we've been hiring recently, and those resources are still going through some training, which does affect the utilization rates. But, yeah, all in all, you know, licensed gross margins, it's going to stay in that historical, you know, 97% to 98% range. I think for connected, we've seen a nice, you know, increase in trend over the past year, and that's in the mid-70s actually, you know, 77% in particular for this past quarter. And pro services, I think, you know, we're still good with the target, which is the mid-teens to high-teens for the full year.
spk11: Okay, that's super helpful. And in terms of the annual revenue guidance, Mark, the upside, so you mentioned that the prepay revenue is going to come in maybe flat to up slightly versus down. So that's contributing some of the upside. But I wanted to talk a little bit about, you know, what you're seeing on the new connected revenue. It was $12 million this quarter up. 51% year over year. It looks like it's on track to be doing about 50 to 51 million for the year. So that's versus 34 million last year. So, you know, strong, potentially very strong annual growth for new revenue, new connected revenue. Thoughts about that? Also thoughts about how to think about the, you know, the legacy connected revenue as we kind of progress throughout the year?
spk13: Yeah, so I think the legacy connected, it's going to stay at this level. with, you know, around $15 million. So I would be modeling that out flat. And then once you get into next fiscal year, you know, fiscal year 22, right, that's when we would expect to start seeing declines in that legacy connected revenues. And then for the new connected, you know, year over year, it's projected to show nice gains. You know, we showed, you know, 51%, you know, this quarter. You know, I think, you know, I think for the balance of the year, we should see, you know, a little bit more growth as well on that line item. But I think some of the upside is really going to be driven by some of the variable, right? The variable is Even with some of the pressure from the semi-shortages, we are seeing the increasing penetration, and we are seeing some new SOPs hitting in the second half of the year, which we are factoring into our models.
spk11: Yeah, and just to follow up on that, and I'll step back in the queue, you do talk about the variable revenue being tied to auto production. However, it is growing above the rate of auto production. And so, are you seeing kind of, obviously, you must be seeing an uptick in the attach rate for your embedded licensing in the head unit of the vehicle, throwing out, you know, outpacing just, you know, cars being shipped off the lot. Maybe just talk a little bit about that versus, say, last year, and then, you know, just going back on the new connected revenue you know, what are we seeing there in terms of the drivers throughout the year? Thanks.
spk13: Yeah, so I think we are seeing, you know, some pretty good catch rates. You know, we continue to have good win rates. You know, as Sanjay had mentioned on the call, we didn't see any losses that were notable. You know, and I think, I think in terms of the new connected, you know, we do have the investment in the one cloud architecture that we just released, and I think that's going to help us be more competitive in that space as well. So all in all, I think, you know, we're seeing good momentum on a lot of these fronts.
spk05: Thank you. Your next question comes from the line of Mark Delaney from Goldman Sachs.
spk08: Yes, good morning, and thanks very much for taking the question. You spoke about some of the progress the company has made with its products and the ability to work with Android Automotive, and I think we've had some prior discussions on this with Ford and Google as one example starting to work together more closely, but maybe you can talk a little bit more qualitatively what you may be seeing now that you've made some progress with the capability of Sarence with the Android ecosystem, what other OEMs may be saying, and maybe what that leads you to think in terms of your thesis around being able to coexist with big tech.
spk02: So, Mark, the thesis, you know, we believe in the thesis. Our customers, most importantly, believe in the thesis. And it's a thesis that, you know, we built based on customer feedback, right? And I think, you know, we have always said that, you know, there is, what the consumers and the drivers want is a seamless experience from their digital life outside the car to the digital life inside the car. And a core part of the thesis is that no single big tech company can provide the full bridge to the complete digital life of a consumer because a consumer digital life includes multiple different big tech experiences. And finally, the reason OEMs believe in this thesis is because they want to own the brand experience. You can't outsource the core brand experience, and voice and voice AI is an integral part of that core brand experience. So the thesis is, you know, we believe in the thesis, and we are working with various different big tech companies, including on the Google platform with Android Automotive and so on. I think the reason we highlighted this in our earnings is because we released the gas coexistence on Android Automotive as a product in Q2. And so we wanted to basically make sure that we highlight that. But the core thesis, we're making progress on that.
spk08: That's helpful. Thanks. For my second question, Microsoft is planning to acquire your former parent company, Nuance. And I realize there's a field of use restriction around mobility. Can you remind investors when that expires? And what's your current thought process if this transaction is completed? Do you think over time that there's going to be increased competition? And does it change at all how you think about trying to go to market? Thank you.
spk02: No, we're personally really happy for Nuance and Nuance shareholders and our ex-colleagues, you know, for this partnership with Microsoft. It makes a lot of sense, and, you know, it's very clever of Microsoft to acquire Nuance. So we're happy to hear that announcement. It once again kind of, you know – strongly outlines the importance of the technology that both Nuance and Serence are working on. Our field of use agreement with Nuance is for five years from the date of spin. That basically means we're getting close to ending the second year now, so there are three more years left onto this field of use agreement. And under this agreement, Seventh has to stay within transportation and mobility with its technology, and nuance has to stay within healthcare and enterprise just so that the two companies don't compete and step on each other for five years. The second year is almost over, so there are three more years to go. In terms of our understanding of Microsoft acquisition of nuance, we don't expect expect any more competition for sedans because this acquisition is purely driven and was focused around healthcare.
spk09: Thank you.
spk05: Thank you. Your next question comes from the line of David Kelly from Jefferies.
spk12: Good morning, everyone, and thanks for taking my questions. Maybe a first one for Sanjay, realizing the KPIs are skewed a bit by a unique last 12 months here, but you did see another step up in average contract duration. You've ramped from, I believe, five years to six, and now it's 6.5 in the last year. year plus or so. Can you talk about some of the drivers of that and then maybe how you are thinking about the longer-term opportunity as the market continues to shift to cloud connectivity?
spk02: Yeah. So, David, that's, you know, you said it totally right. That's purely driven by more cloud contracts. Cloud contracts are, you know, for longer duration and as a result kind of, you know, moves that KPI. Um, we're definitely seeing, um, you know, a strong, um, uh, uh, progress on the cloud and the connected services side, um, including in the, in the bookings that you mentioned, including in the, uh, uh, the current, you know, quarter, you know, a hundred plus million of bookings that, uh, that we mentioned cloud is playing, you know, more and more important role. And, uh, And we're, you know, we're very comfortable with our offering there because we have revamped our one class, you know, you know, Serence Drive 1.x, you know, initiative, which we launched it as Serence Drive 2.0. And we also, you know, strengthened our connected services portfolio. And we also added, you know, apps. So the core platform is The new version is out there, which, you know, is very robust and competes extremely well on accuracy and latency and so on. And a very rich connected services portfolio, which is, you know, which goes across multiple different big tech, as I mentioned earlier. And the third piece is the apps piece. So, you know, we continue to – I do – I do think that we will continue to see more progress in that KPI.
spk12: Okay, great. Thank you. That's helpful. And then maybe one for Mark. Mark, I was hoping you could give us a sense of the cost action benefits in the quarter. And I believe you're lapping about $12 million in temporary cost reductions into the back half of this year, assuming some of that is embedded into the second half margin outlook. But could you also talk about some of the puts and takes as we think about the margin guide go forward?
spk13: Yeah, so we are adding back those expenses, and we're essentially right on plan from what we said we would be doing. And we said that we'd be adding a couple of million, you know, per quarter. This quarter, I believe, we've got modeled about another $3 million of operating expenses, and a large component of that's going to be hitting the R&D line. And then once we get into Q4, you know, I think that's probably about another $2 million to $3 million. And so that's been factored in. But basically, you know, what we said we were going to do in terms of, you know, feathering back in these expenses that we cut last year, we're pretty much, we're very, very close to being right on our plan for the first six months. And so that That plan's unchanged. We're going to continue to add those expenses back. We're seeing the projects to support those investments. And, you know, we do watch it carefully. So if something happens where, you know, either projects get pushed out or what have you, we would make adjustments accordingly. But things are playing out as we expected.
spk12: Okay, really helpful.
spk13: Thank you both.
spk05: Thank you. Our next question comes from Jeffrey Ray from Greg Ollum.
spk10: On the RFPs, I just wonder if you could expand a little bit. I'm kind of curious, you know, how the finalists in terms of the RFPs over the last six, 12 months have changed. Sounds like your win rates have remained extremely high, but I'm just wondering about the variance and who you believe was your finalist in those key deals. And then also, you know, again, as you kind of look in the rearview mirror and you look at the pace of RFPs and the aggression within those RFPs for connected services, has it met your expectations? Any surprises in the kinds of services that the customers are looking for in those RFPs?
spk02: So the RFPs in terms of, you know, competition performance, you know, very similar landscape that we have shared with you and the investors, you know, previously, um, you know, there is, you know, the companies like, uh, iFlightTech, SoundHound, um, you know, Sensory and others that, that we run into. Um, and then, you know, in, uh, many of these, you know, uh, um, discussions, uh, you know, how, um, the big, big tech coexistence will work, um, you know, around kind of, you know, enhanced, you know, CD experience for CarPlay or, you know, or Google experience or Amazon, you know, Alexa experience and all that stuff, you know, basically comes in. The multiple big tech coexistence is there, you know, where I'm referring to, for example, there are two main RSCs going on right now as you speak. And when I look at kind of, you know, what the OEMs are, are wanting in those, you know, and the experiences that they want to be addressed, you know, what I just said is what they are asking for. So, yeah, very similar landscape. In terms of what other new things they're thinking about, you know, I briefly touched it in response to Chris's question earlier, which is, you know, more and more discussion about kind of, you know, combining voice AI with vision AI is something that, you know, we are experiencing more and more, mostly around kind of, you know, safety functions.
spk10: Fair enough. And then as it relates to renewals, I think you may have had a few on the connected side, but just Just curious when you'll start to get glimpses as you're lapping some of those deals to see what renewals look like on Connected.
spk13: Mark? Yeah, so I think it's still a little ways out. We did have one in particular, but, you know, I think you probably won't be hitting those until, you know, 2022. you know, calendar 22 and 23. And I think that's when we'll start to see more of those coming up for the renewals. So we still don't have the data points that we were looking for, you know, in terms of being able to give specific guidance on, you know, economics and so forth. But I think as time goes on, we'll be gathering more of those data points. Got it. Fair enough. Great quarter, guys. Thanks.
spk10: Thank you. Thank you.
spk05: Thank you. Your next question comes from Michael Filato from Burnbrake Capital.
spk07: Thanks for taking my question. Just a quick one on the billings KPI. I saw it increased 10% again, you know, per car. And I'm just kind of curious, you know, what sort of drove, what's driving that? You know, is it a mixed impact? You know, OEM is focusing on more sort of, you know, higher-end models, trying to focus on more profitable models. Does that help you in some sense, or is there any sort of pricing leverage you're getting on maybe new features? So maybe just a bit of detail around billing's growth.
spk13: Yeah, so I think a big driver for that obviously would be, well, it's two things. One is we are getting more content per vehicle, and so, you know, more bells and whistles allow us to price accordingly, right? You know, in this business, you don't get price increases with the same products. You've got to basically, you know, continue to outperform on new product introductions and that would provide the offset to any sort of pricing pressure. You know, the other element to keep in mind is in that billings per cars, as more and more cars get connected, that creates, you know, that layering effect or a compounding effect to that metric. So you know, we would like to see that continue because when more and more cars get connected, then we're not only selling the license, but we're selling the connected component as well. So that creates the other compounding effect. So those are the two elements. Sure, that makes sense.
spk07: And just one follow-up here on the gross profit margins and connected. You know, what's really driving that sort of step change that we've seen over the last, you know, year or two in the gross profit margins for that business? And I mean, what do we think about sort of the – where does this plateau in terms of this business and in terms of gross margins? You know, where does this top out, do you think?
spk13: Yeah, so I think you got two pieces, right? The first piece is, you know, we really had the team focus post-spin from nuance on this line item and to try to, you know, get the best deals that we possibly can. with some of our contracts. And so those were renegotiated. And then, of course, you are going to get some economies of scale as this business ramps. So those are the two key drivers. Personally, I think we're probably getting up to that level in terms of plateauing. I think it's going to be, you know, being at the mid to like 75% to 77% range, I think it's going to be a bit of a challenge to, you know, get another 10 points, for example. We saw the big improvement last year, and it far exceeded all of our expectations. And so I think for modeling purposes, I think we're probably, you know, close to that point where things are starting to level off. Understood. Thanks so much.
spk05: Okay. This concludes your Q&A session.
spk01: Well, thank you, everyone, for joining us on the call this morning, and we look forward to engaging with you with upcoming virtual events. Thank you, and have a good day.
spk13: Thank you. Thank you.
spk05: This concludes today's conference. You may now disconnect. Presenters, please hold.
Disclaimer

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