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spk05: Good day. Thank you for standing by and welcome to the CERN's Q3 2021 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you would need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, press star 0. I would now like to hand the call over to your host, Rich Jernigan, please go ahead.
spk01: Thank you. Welcome to CERN's third quarter fiscal 21 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. CERN makes no representations to update those statements after the date hereof. 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 Dhawan, 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 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 the Raymond James 2021 Diversified Industrial Conference on August 24th, Collins Transportation and Mobility Conference on September 9th, the RBC Global Industrials Investment Conference on September 10th, and the Jefferies Software Conference on September 14th, and the Evercore Auto Tech Forum on September 21st. Please visit the events page in the investor section of the CERN's website for most up-to-date information on our participation. Now on to the call. Sanjay?
spk08: Thank you, Rich. Welcome to everyone on the call, and thank you for joining us to discuss our third quarter fiscal 2021 financial results. For our call, I'll first review our strong financial performance in Q3, followed by a review of 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. Once again, we delivered a strong financial performance. This is especially the case when considering the headwinds to our licensed business due to semiconductor shortage. Our revenue came in at the high end of the range, was aided by strong year-over-year growth in our variable license product line, being up 74% year-over-year. The business model continued to deliver better than expected performance with non-gap gross margin at 79.1% and adjusted EBITDA at 38.7 million, or 40%. The result was non-GAAP EPS of 62 cents and cash flow from operations of 24.1 million. When combining our year-to-date results with our guidance for Q4, our full year forecast is expected to come in at the high end of the range. Mark will provide details in a few minutes. During Mark's comments, he will also be updating all of you on our midterm 2024 model. The model was first published in February of 2020 at our first analyst day. We had hoped to hold our second analyst day in early September as a live event in New York City, but unfortunately, the rise in Delta variant of COVID-19 has led us to delay that event until later in the calendar year. We did feel, however, it was important to update you on the 2024 model given the positive updates to the original model. Much has happened since we first introduced our midterm model, especially in regard to new product development and adoption, our decision to enter adjacent markets, and a better understanding of how subscription renewals may play out. We have also been able to make sustainable improvements in some of our assumed gross margins. The result is a midterm model with a significantly higher revenue target and improved margin expectations. You will hear the details shortly, but as a management team, we're very pleased to be able to communicate these updated model assumptions. One of the areas that will help us achieve our mid-term target is in the new applications and connected services. Some of these applications and connected services we have discussed before, such as Sales Pay, Car Life, Tool Guide, and others still to come. include in this category such products as Sales Connect, Browse, and Extend. What was especially encouraging was the momentum we saw during the third quarter related to bookings for these new products, in addition to the more than 30 million in bookings we referenced on our last conference call. This bookings momentum was partly the reason we were able to increase our revenue expectations for 2024 target models. We also had several notable events and achievements in this quarter. During the quarter, over 60 different car models from more than 15 different OEMs reached startup production or SOP. The 60 different car models was a record for the company. SOP usually follows two, three years after design wins. and represents a critical milestone because it is at that point when the licensed and connected services begin to generate revenue for the company. The range of cars hitting SOP in the quarter was also impressive and included high-end luxury cars from such companies as JLR, BMW, and Mercedes, to some of the hottest new cars on the market from OEMs that include Ford, Toyota, GM, Volkswagen, Renault, and Stellantis. All of the major geographic regions were represented, including about a dozen SOPs for cars in China. We announced an agreement with CirrusXM, the leading audio entertainment company in North America, that will provide their customers the ability to use their voice to change a channel. Safety and convenience are why using your voice in the car is important, and this is especially true when you have to look at the console when changing a channel. With this technology, it will not only make it safer environment for the driver, but also through our AI, the system will learn your favorite channels and suggest others you may like as well. Another important agreement was struck during the quarter with Harman. This competitive bid will combine Serence's leading conversational AI technology with Harman's Ignite platform. Harman, a leading tier one supplier to automakers, will integrate Serence's AI-powered voice recognition technology into their Ignite platform so they can offer hands-free, secure access to the platform's extensive capabilities, providing an intuitive and powerful experience to their drivers. We also entered into collaboration with Visteon, another leading tier one supplier to the auto industry. In this case, however, the collaboration will combine core Selen's conversational AI, including global language support with Visteon's Android-based smart core technology platform. The solution has been selected by a leading motorcycle manufacturer and will launch in 2024, powering a 12-inch display that offers connected apps and over-the-air software download capabilities. This is an important collaboration as we seek to expand our presence in the two-wheeler market and is an example of our successful ability to do so. There were two other events worth noting during the quarter. First, we were notified of our addition to the S&P 400 BITCAB index. We were pleased to hear of our inclusion in the index. as we took it as a recognition of the hard work of the entire CERN's team to consistently deliver strong growth and profitability. We are laser-focused on continuing this path of building a company to the most trusted co-pilot in a car. I'm also pleased to see that our Chief Information Officer, Bridget Collins, was recognized for all of our fantastic efforts on behalf of CERN's. Bridget was named 2021 Boston CIO of the Year in the corporate category, chosen by her CIO peers. As I said in the press release announcing her recognition, Bridget has been an integral part of my team from day one and is a perfect example of level of talent in the sales leadership team. Moving on to our KPIs. As expected, several of the KPIs returned to a more positive trend as the quarter most affected by the reduction in cars produced due to COVID fell out of the 12-month trailing period. Specifically, the percentage of cars shipped with Selen's technology increased to 53%, and the change in the number of cloud-connected cars shipped turned to a positive 12% from what had been a negative number. Our average billings per car increased a healthy 13% year over year. The main contributor to this growth is the increasing percentage of cloud connected cars. The largest increase in the number of monthly active users is indicative of the automakers bringing to market infotainment systems that are more capable and easier to use than Apple CarPlay or Android Auto. For sure, Some automakers are in a better position than others to compete for a driver's mind share, but the momentum is clearly building for growing adoption of a well-implemented and OEM-branded human-machine interface in the car. Our multifaceted growth strategy to deliver sustainable growth continues to play out. It starts with a strong core of leading conversational AI technology for the car, and extends to new applications in adjacent markets. We continue to push the innovation envelope for our customers so that they can offer their customers the safest, most enjoyable experience inside the car, which also represents a seamless transition of their digital life from outside the car to inside the car. You may have heard me say this before, but I think it is worth repeating. I drive the sales team to adhere to three priorities, As a tech company, we must continue to innovate. Since the spin-out into an independent company, I'm very proud of the number of new products and technology Serence has brought to market. Second, innovation is only an idea unless you execute and turn that idea into a product that you can deliver to your customer on time and with quality. And third, to focus on cost when designing new products because innovation Ultimately, we are in a business to make money for our shareholders. I think our financial performance is a good indication of the emphasis we put on cost efficiency. These are the guiding principles we will continue to rely on as the company continues to grow. The previous slide identified how we have expanded the business by developing new products and entering adjacent markets. Our long-term vision for the company is much larger than that. Our goal is to be the central AI brain of the car, essentially becoming a driver's trusted co-pilot. We see the next big opportunity is to combine vision with voice. We believe this has application not only in driver monitoring, but also in road and cabin monitoring as well. Certainly, this is an area you will hear more from us in the future. I'd like to now turn the call over to Mark so he can review with you the details of the quarter, our Q4 guidance, and also positive update to our midterm 2024 model. Mark?
spk02: Thank you, Sanjay. I'll first review another strong performance for our fiscal Q3, and then I'll provide guidance for our fourth quarter. I'll follow those comments with an update to our 2024 midterm target model. We delivered another strong quarter, on both the top and bottom lines. Revenue came in at 96.8 million, which is at the higher end of our guidance of 94 to 97 million, and is a 29% increase from the same period last year. Our key profitability metrics were also very strong and exceeded the high end of our guidance range. The non-GAAP gross margin was 79.1%, mainly driven by favorable product mix. our non-GAAP operating margin was 37.7%, adjusted EBITDA was $38.7 million, or 40% margin, and our non-GAAP earnings per share of $0.62 exceeded the high end of our guidance by $0.05. During the quarter, we generated more than $24 million of CFFO, and our balance sheet remained strong with total cash and marketable securities of approximately $157 million. Now let's review a detailed breakdown of our revenue. Our strong revenue growth compared to last year was driven by two factors. First, our total license revenue was up 54% year over year. Our variable license revenue was up 74% from the same quarter last year, driven by continued recovery and auto production. You may recall that our Q3 from last year represented the trough revenue quarter due to the impact of COVID-19 on auto production shutdowns. We believe our variable license revenue during the quarter was impacted by the semiconductor shortage slowing down auto production. Although we cannot exactly quantify how much the semi-shortage impacted our business, our variable license revenue is where you would see the most direct impact from lower auto production. Second, our connected services revenue grew 19% from last year. But more importantly, our new connected services revenue, which excludes our legacy business, expanded a strong 46% year-over-year due to a continually growing customer base adopting our new connected service offerings. Our professional service revenue was down 5% year-over-year simply due to the timing of project completion schedules, which affects revenue recognitions. Moving on to our guidance for Q4, our revenue guidance of 97 to 101 reflects year-over-year growth of 6 to 11 percent and takes into consideration the current risks and uncertainties of the semiconductor device shortages that are continuing to impact auto production longer than we had expected. We are closely monitoring the situation and believe we have accounted for the impact in our guidance. Keep in mind that only about a third of our business is directly impacted by auto production in any given quarter, which shows up in our variable license revenue. We expect to generate between $36 million and $39 million of adjusted EBITDA and between $0.55 to $0.61 per share on a non-GAAP basis. For the fiscal year, we have updated our full year expectations based on our Q4 guidance. As you can see, we are now forecasting materially higher revenue, profit margins, and EPS estimates versus our original guidance that we communicated to you back in November of last year. Although we did not contemplate the semi shortages in our original guidance, we are still delivering better than expected results despite this unexpected event, which reaffirms that the digital transformation of the auto industry is alive and well. We were planning to hold an Analyst Day event in early September in New York City, and during that event, update you on the 2024 midterm target model that we first presented in February of last year, or about 18 months ago. We were hoping that international travel restrictions would have been lifted by now, but they remain in effect due to the increase of COVID-19 cases resulting from the Delta variant. Because we prefer to hold a live event and have our key executives from around the world participate, we decided to delay the event to later in the fall. We don't have a specific date, but we will continue to monitor developments related to the virus and keep you posted. So rather than waiting for that event, we decided to provide you with an update to our midterm target model today. We categorized our changes in two buckets, growth, and profitability. First, I'll cover growth. According to IHS, the forecast of penetration rates have increased for edge AI and connected AI products and services that are getting designed into automobiles. However, this is being offset by lower auto production IHS forecast post-COVID. We've added new revenue streams to our midterm model, including connected renewals and new service offerings such as entertainment, then connect and browse. Additionally, since our last analyst day, we've announced plans to enter two adjacent markets, two wheelers and elevators, and these markets are now reflected in our midterm target model. Second, I'll cover profitability. We've updated our margin assumptions based on sustainable improvements that we've made to our business over the past 18 months. First, our connected margin assumption has increased from 65% to 77%, driven by our successful OneCloud architecture project and negotiating more favorable contracts with some of our third-party providers. Secondly, we are seeing good, sustainable progress on improving our professional services delivery model and increasing our utilization rates, both of which have enabled us to increase our margin assumption from 10% to 35%. And thirdly, we expect economies of scale in our SG&A functions as our business continues to grow. As you can see, these changes are expected to drive some fairly significant revenue improvements. First, on the top line, we have increased the original target from $600 million to $700 million. This is due to several factors, including a greater contribution from new applications and services, an estimated $65 million and contribution from new adjacent markets, including elevators and two-wheelers, and a stronger contribution from professional services. We have seen initial bookings during this fiscal year for some of our new applications and services, which gives us confidence in being able to achieve these targets. But we expect the revenue contribution from them to be more back-end loaded, meaning they're not going to be linear and they're going to follow more of a nonlinear curve. Keep in mind, this stop-line growth takes into account the lower forecasted auto production in 2024, according to IHS, but is offset by increasing penetration of connected cars. So all in all, we are pleased to be able to raise our revenue target by $100 million. From a non-GAAP gross margin perspective, we increased it by 100 basis points to 76%. We see sustained margin improvements, in our delivery of connected services and professional services, more than offsetting the lower margins expected from some of the new mobility markets, which are expected to have an element of hardware in the overall solution. For non-GAAP operating margin, we are now modeling 36% compared to the previous 33% due to gross margin improvements in SG&A economies of scale on higher revenues. All this leads to a significantly higher adjusted EBITDA of $260 million, or $50 million higher than our original model, an incremental $100 million in revenue, or a 50% drop-through rate. So in summary, we had another 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 strong and, as demonstrated in our updated target model 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 we will now take your questions.
spk05: At this time, if you would like to ask a question, press star 1 on your telephone keypad. Press star 1 to ask a question. And your first question comes from the line of Joseph Spatt with RBC Capital Markets.
spk12: Thanks so much, everyone. I wanted to dive in first a little bit to the updated 24 forecast. You know, if I look at the segment that is beholden, I guess, to volumes in that license segment, and I look at what IHS was looking for, you know, in early 2020 when you first sort of put that out, it looks like it's, you know, maybe 4% lower global production volume. So just order of magnitude, since you're keeping that flat, are you saying, you know, the take rates is sort of, you know, making up that, call it $10 to $15 million? Is that the right interpretation?
spk02: Yeah, that is correct. You know, we are seeing the lower IHS production forecast like you're seeing, you know, but we are seeing updates from IHS which is showing some increase in penetration rates or what you're calling the take rates. And so, you know, I think generally speaking we're comfortable, you know, with those two offsetting and keeping the numbers where they are.
spk12: Okay. Okay. And then just on the margin component of this, so connected services, I know you raised that from 65%. I think you've even hinted before that that could settle in around that mid-70s level, but you're kind of already there. So I guess I'm curious as to sort of why there isn't sort of further upside there. And then the new mobility markets, I was just a little bit surprised that that was, I know it's a smaller dollar amount, but I'm surprised it's lower because I thought you were just sort of leveraging, you know, the tech you're already using to other markets. Maybe you could just explain that a little bit.
spk02: Yeah, so I think in terms of, you know, the new mobility markets, I'll cover that first. You know, there is an element of hardware, which generally is going to be a lower margin component. You know, there will be obviously leveraging of existing technologies, but when you combine it with a with a hardware component for a total solution, you know, we are, you know, we are, you know, factoring in that blended component. And so that's why we think, you know, coming out of the gate where we want to, you know, model 45% for those margins. And similar to what we did, you know, when we first launched our analyst model 18 months ago, we try to be you know, somewhat conservative, you know, just because we are entering new areas and we don't want to put ourselves out there too aggressively. But, you know, if things change over time as this market starts to develop further, then we can certainly, you know, have some room to potentially increase those margin assumptions.
spk12: Relative to... Sorry, if I could just quickly follow up on that, maybe... I didn't properly understand on the new mobility markets. What hardware? I thought that's like the motorcycle segment, so you're providing the whole box with the voice, right? I know you have the thing with Vistion, but I thought you were just providing the voice component. Sure, sure.
spk02: Yeah, I think what we, you know, and Sanjay can cover a little bit too, but I think more of it's on the elevator side where there would be hardware on elevators.
spk08: So, yeah, so, Joe, in the two-wheeler space, you know, there is really no hardware. We're working with the tier ones like Mistion, Bosch, others who provide, you know, hardware, the so-called head units, right? And a lot of our software also runs on the phone of the rider. So, yeah. So there is, you know, really no hardware component there. The hardware component that Mark is mentioning is on the elevator side. Because elevators have a long life and, you know, a large installed piece of elevators were shipped with no kind of, you know, capability of running edge AI. You know, there is a piece of hardware that we have built that retrofits an existing elevator with edge AI capabilities. And that is what Mark is referring to. Our core business model, though, just to be very, very clear, is software SaaS in the elevator business as well. Although we, you know, we're sort of forced to kind of, you know, put this piece of hardware out at a slightly lower margin, but really the product that we are leveraging and shipping is the core AI product that you reference to, which is common across auto and so on.
spk12: Okay, thank you. And sorry, Mark, I cut you off on the connected margins.
spk02: The connected margins, you know, when we first introduced the analyst day model 18 months ago, we had 65% margin assumption. We, you know, we kind of blew through that and we're running now, you know, low 70s to high 70s. So, you know, we're, we're, we're there. We feel like we can sustain that even, even into the future. You know, we will have some, a little bit of pressure as the, as the legacy connected revenue declines over time. So that puts a little bit of pressure on the blended margins, but yeah, But like we've done in the past, we tend to be a little bit conservative with these assumptions, and it's always better to be able to improve them over time. But right now, we're comfortable with the 77%. Thanks very much, guys.
spk05: Your next question comes from the line of Luke Junk with Beard.
spk04: Good morning. Thanks for taking the questions. First, I wanted to ask on the two-wheeler markets. Obviously, you highlighted the relationship with Visteon in that market, and I had a couple of questions related to that. One, if you could speak to the nature of that relationship a little bit more. Effectively, does this give you a couple bites in the apple in the market? And then overall, do you feel like overall commercial momentum in the two-wheeler market is getting closer to a tipping point here? Obviously, you're now including it in your 24 model, which is encouraging.
spk08: Yeah, so we're, Luke, you know, very delighted to have this relationship with Tion, you know, who's definitely, you know, in the, you know, have a great penetration into the two-wheeler market as well, besides auto. Our model is to be the AI platform of choice, not just for cars, but also for two-wheelers and other modes of transportation. And what we are trying to do very systematically is to basically reach out to those other adjacencies as well. And two-wheeler is a very important one because of the safety aspect You know, I'm a rider. I'm a two-wheeler rider, and, you know, the safety is so important, and you can't touch the phone, and there are times when you want to kind of, you know, communicate with other riders and so on and so forth. So bringing these features out, you know, is extremely important, and, you know, conversational AI plays a very important role. And so we're, you know, working both either directly with the OEMs or also, you indirectly through the Tier 1 channels across different markets. We're right now engaged in China, India. We are heavily engaged in Japan, who controls about 50% of the two-wheeler market. We are engaged with Tier 1s and OEMs in Europe and also in the United States. But we're definitely very happy to announce this relationship that we put a joint press release out earlier in the, you know, a few weeks back, and we're certainly looking forward to further traction.
spk04: That's great, Collier. Thank you for that. Second question I wanted to ask about the 24 revenue model, specifically the fact that you're now adding connected renewals to the model, and I know you're awaiting a on that and it was thought that this would be a possibility down the road. But I'm wondering, is there any data that you can share behind that decision and just in general, what's informing your view there specifically on the connected renewals?
spk02: Yeah, so I think we have one or two data points since our last analyst day where we've had renewals. So that's encouraging to see that our customers are looking to extend those cars beyond their original, you know, multiple-year subscription period. I think also what we're seeing is even with some of our new connected subscriptions, those are trending to be longer in period. So that gives us the indication that customers know that there's value in that and that they're willing to commit for longer upfront periods of time. And so, you know, and then also looking at some of our internal, you know, schedules as to when some of the original contract periods are ending, we felt like there should be some upside. We haven't disclosed exactly what that upside is built into the model, but we are now factoring some of that into, you know, fiscal year 24 based upon, you know, a couple of data points that we've already seen and the fact that some of our newer contracts are actually extending beyond what some of the the previous contracts were.
spk04: Great. Thank you both for that color. I'll go ahead and leave it there.
spk05: Your next question comes from the line of Mark Delaney with Goldman Sachs.
spk06: Yes, good morning, and thanks very much for taking the questions. I was hoping to start with a question about your expectations for the percentage of vehicles that have CERN's technology and how you expect that to evolve. The number of starter production vehicles that you talked about for this most recent quarter I would think is a good positive indicator as those new programs ramp up in volume and give you guys some good visibility into how many vehicles may have Cerence technology on them going forward. And I think it's probably a pretty important input as well into the 2024 model. So maybe talk about how you see that evolving and if you could also touch on your expectations in the 2024 model about what that penetration rate may look like.
spk02: Yeah, so penetration rates, I think they're going to continue to grow over time. You know, we looked at some of the IHS data for penetration rates, in particular on the connected side. Those have grown, you know, from 18 months ago. I believe it was around 60 percent penetration rate for connected cars 18 months ago. Now it's in the high 60 percent range. And so we've, you know, we've tried to factor that into our analysis. However, offsetting some of that is the fact that IHS is lowering the total volume forecast for 2024 post-COVID. So when we see the puts and the takes between those two, we decided to hold that revenue stream flat for the core portion of the business. So that's kind of how we've sort of articulated and built out the model.
spk06: Okay. Maybe you could also talk a little bit more on your degree of visibility into the 24 model. You've given some helpful commentary already on the margin side, but maybe on the $700 million of revenue, on the one hand, you're signing contracts that are multiple years in length, and even for cars not in production yet, you're probably getting to the point where you're already having one or in pretty advanced discussions for 24 types of launches three years out. I can see some potential good visibility, but you also have a content per vehicle consideration that's feeding into it in some of these newer markets. you talked about having some maybe conservatism on margins. Is that sort of logic holding as well for the revenue side of the equation, or is there more uncertainty on that piece of it? Thanks.
spk02: Yeah, I mean, I think you know how it's a long sales cycle in auto, right? So, you know, we've got a cycle of two to three years. So it gives us a pretty good outlook. And I think for fiscal year 20, we had a substantially – wrong bookings year. If you recall, it was over 800 million. I believe it was 835 to be exact, which was significantly higher than the prior, you know, fiscal year. You know, we've given you an update already for the six months ending, you know, March for this year, which is also, you know, shaping up to be another very good year for us. So that I think all of those bookings, which is the leading indicator, you know, gives us more confidence and more visibility into 2024 and beyond. And so, it really comes down to, you know, a lot of that bookings momentum. I think the SOPs that we just had a record for this past quarter is also an indication of, you know, those bookings over time translating into real revenue and getting ramped into production. So, You know, that, you know, those SOPs is, I think, more evidence that, you know, it's bookings first and then ultimately as you execute well, you know, you get ramped into, you know, volume production. I think the SOPs, you know, even though we had a record, you know, quarter, you know, those are just starting to ramp. So you'll start to see those benefits in out years, right, going into the year. once those new products and those new cars hit their stride, if you will. So it's not like a step function change where SOPs in one quarter and then you flip a light switch. It does take time for those to ramp into volume production. And, you know, by 2024, a lot of those will probably be right in the middle of their prime for production. Thank you.
spk05: Our next question is from the line of Colin Leggan with Wells Fargo.
spk10: Thanks for taking my question. Just following up on that, I mean, how should we think about how these sort of new markets are going to ramp? I mean, you know, in terms of new mobility, is that going to – has anything hit yet, or is it we're going to start seeing something actually start to contribute next year? Same thing with – I assume there's some stats already out there – within connected services, how quickly is that ramping? And how much of your targets is already kind of in the backlog that you've won and how much has to be won? And I guess to make my question long, sorry. And any color on the two-wheeler market in terms of how large it could be and how many vehicles might actually need your services?
spk02: Yeah, so Sanjay, you want to start that one or you want me to?
spk08: No, I can certainly start that. So both for the two-wheeler market and also for connected services and apps, we will have revenue in the current fiscal year. We were initially saying that we will have revenue by the current calendar year, which is Q1 of next fiscal year. but I'm confident to say now that we will have revenue in both new mobility markets and also in new connected apps and services in the current fiscal year. So that's good. Secondly, you know, in terms of how much of the back – of the revenue is already in the backlog. I don't have that breakdown. Your question was from a 2024 model. But when we come back and we refresh our backlog at the end of the year, start of the next fiscal year. So in October, November, when we come back in our next conference call, we will obviously refresh our backlog. you know, to the street. And at that point, you know, we try to give some more color about that during that. But needless to say, we're feeling confident about it. That's the reason, you know, we put these numbers in the current model update, basically. Was there anything else that I missed, Colin?
spk02: I think in terms of, you know, the ramp for some of these new products, You know, some of these will be on the same sort of design cycle as some of our core products. And so, you know, that's why I think, you know, as I mentioned in my prepared remarks, it's going to be nonlinear in terms of, you know, how we think the revenue will be ramping up into those fiscal 2024 target revenue assumptions. So I think that was the other question that you had. Right. You know, is it? How back-end loaded is it? And I think it tends to be a little bit more back-end loaded for some of these newer products because some of these products will be following a similar design cycle and ramp up with our core business.
spk08: Right. Right, Mark. And I think just one more thing to add that I missed was I think, Colin, you were asking with the TAM, you know, what's the available market, you know, for these products, right? Yeah. So we struggled a little bit. We were thinking of including a TAM analysis in this deck for all of your reference, but the TAM numbers that we have are management TAM numbers. And what we are doing right now is getting a third party to independently do the TAM analysis, who doesn't have... the management information just to kind of, you know, validate and, you know, and give you a more independent view of the TAM rather than a management-only view of TAM. So we decided, Mark and I decided not to include that in this release of the target model, but certainly in the future, you know, we hope to kind of, you know, share with you the TAM analysis as well.
spk10: Got it. And just, I guess, one quick follow-up. I mean, on your 2024 pretty big jump in professional services margins, what is the key drivers of that?
spk02: Yeah, so it's really twofold. You know, one, we're focused on, you know, improving the utilization rates of those resources. It is people-driven. And so that's one component. The other component is to, you know, shift the mix of onshore and offshore resources. And so as we change that mix, that's improving some of our overall labor costs.
spk10: Okay. Thank you very much for taking my questions.
spk05: Your next question comes from the line of Raji Gill with Needham Company.
spk03: Yes, thank you for taking my question, and I appreciate the update to your 24 target. A couple questions on that target. So I'm wondering how you plan to recognize revenue for the new applications and services as well as the new mobility markets. Any clarity there in terms of revenue recognition?
spk02: Yeah, a lot of those are going to be transaction-based. So, you know, clearly we'll be recognizing revenue as we see those transactions occurring. And so it's going to follow that type of revenue model. Some may be subscription-based. You know, there are some that are going to have that subscription element, and those will more or less, I guess, track similar to what we do with our Connected subscriptions, which would be an amortization schedule over the life of that period, the subscription period.
spk03: Got it. And on the fiscal year 24 target, so with the new connected number staying basically flat from the original guidance and likewise with the edge business, I get it in terms of overall units might be coming down, you know, 3%, 4%, 5% based on IHS. But I would think, though, that the ASPs would be increasing over the course of those years that would offset any kind of unit degradation, as well as the attach rates for cloud-connected increasing. So I'm just a bit surprised that that number would be flat, even if there's kind of a small unit correction. So maybe you could just kind of clarify that in terms of – you know, your thought process of keeping those numbers the same?
spk02: Yeah, so I think on the connected piece, you know, we had ASP expansion already factored into the original 2024 target model that we originally put out 18 months ago. And so we're still factoring in those ASP expansions in this model. You know, the other thing to keep in mind is you know, unlike the variable licenses, which are recognized in the quarter, you know, there is an amortization schedule. And so because of COVID, you know, there were fewer cars shipped, right, over the past year. And so that's going to have a lingering effect, you know, on those amortization schedules. And so you've got to keep that in mind as well. However, a lot of that's offset by the fact that the penetration rates or the take rates for connected cars is increasing. And so, you know, we kind of looked at all of those factors and, you know, took some judgment and said, you know what, I think all in all it's going to be about flat because of all this, all the different changes that are happening.
spk03: I see. Okay. And for the cash flow from operations, you increased that by $50 million. You talked about paying off some debt. I'm wondering how you're thinking about the capital structure in light of this new updated target.
spk02: Yeah, I think the capital structure and our high-level plans are still, you know, the same, which is, you know, the first priority is to keep funding the organic investments, which we believe, you know, are fully funded. You know, the next priority is to, you know, see if there's other external ways that we can grow and accelerate our strategy and our plans through inorganic investment. You know, if you recall earlier this year, we had an investment, small investment, but an investment in Cerebrum X data analytics company, and we would expect to do do more of those activities as those opportunities arise. And then the last piece is to, you know, pay down the debt. I think, you know, those priorities are still the same. You know, they haven't changed those priorities. And so first, you know, grow the business and invest organically. Second, inorganic. And then, you know, if there's any excess cash, accelerate the pay down of the debt. And so, you know, whether we had the You know, we increased the DA and the CFO million dollars, but the underlying priorities are unchanged. Appreciate it. Thank you.
spk05: Your next question comes from the line of Michael Palito with Bergen.
spk07: Hi there. Thanks for taking my question. I guess just thinking into the connected services business, the Cisco 24 outlook again. Again, a little surprised it's flat, but, I mean, maybe you could provide a little more detail if possible around maybe your renewal rate assumption or what percentage of sort of the revenue base today you expect to be rolling off of the initial contract by Cisco 24, and then maybe just any details around what your ASP assumptions would be on those renewals that would maybe help provide some context. Okay.
spk02: Yeah, you know, I think it's still a little premature to give those level of specifics because we just have very limited data points, unfortunately. And, you know, I don't like to extrapolate one or two data points, you know, into how we think all these are going to unfold. Each deal is going to be somewhat, you know, different and have their own, you know, uniqueness, if you will. So I think it's a bit premature to give those types of specifics. You know, but at a high level, you're thinking about it the right way, right? I mean, I think when it comes to renewals, there's going to be a percentage of cars. It's not going to be 100%. You know, I think in terms of renewal durations, those will probably be, you know, still multiple years, but probably not as long as the original contract period because those cars are just naturally older now. And so I think those are... Those are a couple of influencing factors. And then I think what I'm seeing is good news is the fact that more and more of these cars are getting connected and more users are actually using the technology. And so I think because of that, there's going to be more opportunities for us to engage in these renewals because the end consumer is ultimately the one that's going to be driving the demand for it, right? And so I think as the technology becomes more user-friendly, it's giving us and our customer an opportunity to extend those cars beyond the original contract period.
spk07: Got it. Understood. And then one other question sort of stepping away from the 50 or 24 outlook. You know, one of the notable advantages I think that, you know, you guys have talked about before with sort of your competitor, the Google Gas system, right, is that its ability to offer sort of this ecosystem, this plug-and-play system, you know, with its own services and whatever. So, Sanjay, maybe you could provide a little more detail around what your strategy is, Saren's strategy is to build out a sort of a similar ecosystem whether that's Saren's building them internally or working with, you know, other parties to sort of, you know, help compete against that ecosystem model that Google offers?
spk08: So, you know, we're trying to be sort of, you know, neutral to various different ecosystems because, you know, we're very focused on supporting Google or Amazon or, you know, Apple in their ecosystems, the big tech ecosystems that we know of here, or, you know, any custom ecosystems that may be kind of, you know, coming on board, you know, with companies, you know, for example, Harmon Ignite ecosystem is one such example that I referenced in my remarks. But again, we're not just stopping to that, you know, we're also looking working closely with the Chinese ecosystems as well. So the way we're trying to approach this is we're not trying to build a competing big tech ecosystem. Instead, we're trying to be compatible with the big tech ecosystems which are out there. and also support any custom ones that the OEMs may want to support.
spk07: Understood. Thanks a lot.
spk05: Your next question comes from the line of David Kelly with Jefferies.
spk11: Hi. Good morning, guys. Just a shorter-term and then a longer-term question. Maybe starting with the Q4 guide, you know, specifically the sequential sales target, I think being flat to modestly higher here, you know, we're all hearing about the ongoing variability and production schedules and, you know, understanding clearly you're less exposed to the cycle and this would primarily be a variable license discussion, but just wondering if you could talk about kind of what you're seeing heading in the fourth quarter and visibility to the top line.
spk02: Um, yeah, so, A lot of it really comes down to short-term, the semi-shortages, right? That's sort of the influencing portion of our model. And as you rightfully said, that kind of translates into our variable license revenue line. And so, you know, I think when we first started, you know, seeing about the semi-shortages six plus months ago, I think all of us thought it was going to be a first half event for the calendar year. That's not, that has not turned out to be the case. It's now spilling into, you know, the second half and there's talks about, you know, being a calendar 22 event as well. So it just, it's, it's just been, it's been, it's taken longer for, for the auto industry to sort of, you know, correct this semi shortage that's fairly pervasive throughout the industry. And, And so we try to factor that into our guidance as best as we can, you know, for Q4. You know, I've seen reports where, you know, auto production is expected to be actually I think down a little bit, you know, quarter over quarter for calendar Q3, which would be our fiscal Q4. So, you know, we try to dial that in as best as we can. We use a lot of the IHS forecast, but we also, you know, try to, get a sense for what our customers are telling us, you know, short term as well. And so that's basically, you know, what we're trying to model. You know, the pro services, I think, you know, that's been flat the last two quarters. I think based upon some of our completion dates, you probably start to see the pro services, you know, ramping up sequentially. And so that's kind of how we built up the model for Q4.
spk11: Okay, great. That's really helpful. And maybe sticking with pro services, the 24 revenue target, fairly meaningful raise there for that business. We tend to view it as an indicator for future business for Sarin, your development relationships with OEM. So we're just hoping maybe you could give us a bit of color on what's driving that raise and how you think about professional services opportunity.
spk02: Yeah, so I can start, and Sanjay may want to, you know, jump in as well. But I think what we see today is, you know, we've had a very good growth in our pro services since we've, you know, we originally set the target. I think originally when we set the target 18 months ago at $85 million, that was on the conservative side, quite frankly. And, you know, based upon our performance since then, it's been – it's been good revenue growth for us. And so we're being, I would say, you know, basically less conservative on that front. And then we're also looking to, you know, go beyond what we just do traditionally with our pro services, right? We want to still leverage these valuable resources, but, you know, add more value to our customers, you know, in the car and do some more work in the car, but beyond what we have traditionally done too. So I think that's going to help us to grow that top line as well.
spk11: Okay, perfect. Thanks for taking my questions.
spk05: Your next question comes from the line of Jeff Vanhie with Craig Halem.
spk03: Great, thanks. Thanks for taking my questions. Hey, guys. Just a couple for me. You know, maybe start with the bookings. I realize you give the update mid-year and end of fiscal. There had been some aspirations that it was, you know, reasonable to think you could possibly hit the target or hit the bookings you delivered in 20, even though it was a huge year. You still feel the same, still feel like that's a reasonable aspiration. And again, while you don't quantitatively comment on it or outline it for the quarter, can you give maybe a little bit of qualitative about the value bookings in the quarter?
spk08: Yeah, that aspiration is still there, and we're feeling good about it to achieving that aspiration, and we'll come back with details in Q4.
spk03: On the bookings or sort of new business front, I'd be interested if you took maybe your last major win or last couple major wins Anything you'd observe there around sales cycles, bake-offs, who were the finalists, sort of deciding factors as to why you got the win? Maybe just a little real-time caller about the competitive environment.
spk08: So the competitive environment is, you know, similar. You know, the niche players like, you know, SoundHound, iPlytec, Sensory, and others, you know, basically show up for the bake-offs. And... And then in the bigger architecture discussions, the coexistence with big tech shows up in the architecture discussions. So that element has not changed. I think we're seeing quite positive reactions from customers about the kind of broadened portfolio, especially of our cloud. We are seeing some cloud wins Cloud only wins against previously losses that Serence may have lost. And so that's positive as well. And overall, kind of, you know, I think, you know, good positive reaction of the portfolio and so on. I think the other positive feedback that we are getting from the customers is that delivering the SOPs and running our PS programs where there is nothing in red is something that I'm extremely proud of because of our employees and of our PS team colleagues and R&D colleagues. because that results into obviously getting the product done and shipped, but also creates an amazing amount of goodwill with our customers as well. So as I reported to the board in our board meeting last week, we have no red programs, and we're really, really working hard to make sure that we deliver to the schedule and the quality that – OEMs expect us to deliver these programs.
spk03: Yeah, that's helpful. Thanks, guys. Really impressive execution, tough market. So thanks again. Appreciate it.
spk05: There are no other questions at this time.
spk01: Well, thank you all for joining us on today's call. We look forward to engaging with you at upcoming investor conferences or – in any other form, and hopefully sooner rather than later we'll be able to meet in person again. Thank you again for joining us this morning, and have a great day.
spk05: This concludes today's conference call. You may now disconnect.
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