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spk00: Good day and thank you for standing by. Welcome to the CIRN's fourth quarter 2021 earnings call. At this time, all participant lines are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star then 1 on your telephone keypad. Please be advised, today's conference may be recorded. If you require operator assistance during the call, please press star then 0. I'd now like to hand the conference over to Rich Yerganian, Vice President of Investor Relations. Please go ahead.
spk01: Thank you, Liz. Welcome to Serence's fourth quarter and fiscal year 2021 conference call. Before we begin, I would like to remind you that this call may involve certain forward-looking statements. These statements are subject to risks and uncertainties as described in the press release preceding today's call. Serence makes no representations to update those statements after the date 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 Sarence, and Mark Gellenberger, CFO of Sarence. 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. The conferences include the Credit Suisse 25th Annual Technology Conference on November 30th in Scottsdale, Arizona, and several virtual events, including the Goldman Sachs Global Automotive Conference on December 2nd, Raymond James Virtual Technology Investors Conference on December 6th, and the 24th Annual Needham Growth Conference on January 11th. Please visit the events page in the investor section of the CERN's website for the most up-to-date information on our participation at these conferences. Now on to the call. Sanjay?
spk03: Thank you, Rich. Good morning, everyone. Welcome to everyone on the call, and thank you for joining us to discuss our fourth quarter and fiscal year 2021 financial results. For our call, I'll first review our strong financial performance in the fourth quarter and full fiscal 2021, followed by a review of some of the key products we introduced during the year, awards recognizing our leadership in conversational AI, and notable events that took place during the year. Next, I'll update our key performance indicators and then hand the call over to Mark to review the detailed financial results, including our outlook for fiscal 2022. We're pleased that we have been consistent in delivering strong results on key profitability metrics throughout the first two fiscal years as an independent company. We're still in the midst of our customers' production constraints due to the semiconductor shortage, Yet, we were able to deliver year-over-year growth of 7.5%. Our revenue came in just about the midpoint of the range, was aided by strong year-over-year growth in our fixed license contract, which was up 54% from the previous year. The degree that the semiconductor shortage will continue to impact our customer's production plan is still an open question as we start the new fiscal year. For the full fiscal year, I am especially proud of our results given the challenges due to the semiconductor shortage impact on auto production and some lingering effects due to COVID. Topline growth was up 17% compared to fiscal 2020 and nearly all of the other profitability metrics were significantly above our original guidance provided at the beginning of the year. Bookings at 590 million came in very strong, including nearly $120 million for our new products and services, which will provide a strong, solid foundation for the revenue target for these products in our 2024 model. We believe these bookings will allow us to maintain market share for our licensed products and gain share for our connected services. These bookings led to a record backlog for the company of approximately $2 billion. What I'm most proud of was the win back from a competitor with the European OEM. This was business loss when the business was still part of nuance and the win back represents validation of the effort that the sales team has done to continue to innovate and elevate our product to a level the competition will find hard to match. For those of you I have had the pleasure of speaking with, you have heard me talk about the three key principles that I drive the company. Innovation, speed of execution, and cost. As a tech company, it is imperative for us to continue to innovate and bring new products to market that enhance our existing technology or provide new features or capabilities. This is how we will maintain our technology and market share leadership. I'm very proud of our R&D team that has delivered so many new products this year. In some cases, such as Serence Browse or Extend, the products were introduced during the year. In others, such as Serence Look, Swipe, and EVD, they were in production for the first time. I'm especially excited about our Serence Browse product. Browse fits perfectly with our core, and Extend, it would be common digital life ecosystem. Browse literally allows the driver to search the web for any information by using their voice while driving. Current Browse is also a good example of our speed of execution as the product went from inception to start of production with one of the top customers in just eight months. I'm also excited about our EVD or emergency vehicle detection products. We're the first company to provide emergency vehicle detection in the car and to be able to alert the driver so that they can safely get out of the way. This is an important safety feature that we expect will be adopted by more and more automakers. This capability is now in production. Two of our new products, Terrence Ride and Building Mobility, leverage our core technology for the car into the adjacent market of two two-wheel vehicles, and elevators. We have now won business in both of these adjacent markets and believe they can be significant generators of revenue in the future. As a company where these are focused on transportation and mobility space, this focus allows us to work very closely with our customers to make sure we're meeting their needs for their next generation infotainment system. You can expect another steady increase stream of enhanced AI technology and new products from CERN in fiscal year 2022 as well. Of course, as CEO, you would expect me to be excited about the new products we have brought to market, but it's always great to get independent acknowledgement of what we have accomplished. You can see from the slide, our AI technology leadership is recognized by companies and organizations from around the world. The Baidu Award is especially pleasing because, in some ways, they could be considered a competitor. They also rarely recognize non-Indigenous Chinese companies. The Automotive News Pace Award for Serence Pay is another one we are especially proud of since it recognized one of our newer applications, Serence Pay. These awards recognize not only the leadership we offer in conversational AI technologies, but also our ability to execute and deliver these new products to our customers. Serence is dedicated to our customer success, and we work extremely hard and collaboratively with our customers. Several of these awards are representative of that. While fiscal year 2021 was a good one from the perspective of our financial performance, there were also several important accomplishments we expect to keep that momentum going. Firstly, we had several wins in two-wheeler market, one with the leading global provider of two-wheeler motorcycles and four-wheel ATVs. We expect the first product to hit start production with our technology in calendar 2022. Second, We have been talking about the potential of our technology in the elevator market for some time now. I'm excited to report that we have won our first business. It is with one of the top manufacturers in the world, and we are excited to help them create the elevator of the future using computational AI. We expect to expand further in this market during this fiscal year. We have also won our first piece of business in another adjacent market that we have not yet disclosed. You will hear more about this in the near future. We had approximately $120 million in bookings for our new products and services, which is roughly 20% of our total bookings for the year. The interest in these new products has been very high, and bookings in fiscal year 2021 was what gave us confidence to raise our revenue target for these products in our fiscal 2024 model we shared with you last quarter. While the adjacent markets and new apps and services are key to our future growth, we still have a laser focus on strengthening our core business. To that end, we have added 14 new logo bins during the year, meaning 14 distinct pieces of business we did not already have. This included five competitive takeaways, including three in China. At 174, we have record number of SOPs, startup productions, during the fiscal year. As auto production recovers, we would expect this high number of SOPs to be an added acceleration to our business. In summary, fiscal 2021 was a very good year for setting the foundation for future expansion of the business. We fully expect to build on this success in fiscal 2022. Moving on to our KPIs, the results represent continued strength in the business. While auto production may be down due to the semiconductor shortage and COVID, we continue to ship our technology in more than one of every two cars produced on a global basis. More importantly, We saw an increase of 20% in the number of cars produced with our connected services compared to the total auto production growth of 9% over the same time period. Our strong growth is likely due to a combination of the penetration of connected car technology and market share gains. Our average billings per car increased a solid 8% year over year. The average contract duration continued to expand primarily due to the increasing mix of connected contracts with longer subscription periods. While still on positive trends, the data on KPIs shows a slowdown in monthly active users. We believe this is attributable to the lack of availability of new cars and COVID-19's residual impact on car usage in different parts of the world. I want to close my remarks by reminding you of our long-term vision for the company. Our goal is to be the central AI brain of the car, essentially becoming a driver's trusted co-pilot. To that end, we will see significant opportunity in the combination of vision and voice AI with applications in driver monitoring as well as road and cabin monitoring. This is an area you will hear more from us in 2022. Finally, before turning the call over to Mark, I'd like to acknowledge the launch of our inaugural ESG report this past Thursday. We believe we are good stewards of the principles of ESG and this report is a significant step in sharing that with all of you. You can download the full report from our website. I'd like to now turn the call over to Mark so he can review with you the details of the quarter and full fiscal year and provide Q1 guidance and our initial guidance for fiscal year 2022. Mark? Thank you, Sanjay.
spk06: I'll first review another strong financial performance for our fiscal Q4, and then I'll provide guidance for our fiscal Q1 as well as fiscal year 2022. We delivered another solid quarter of top line growth and even stronger bottom line performance. Revenue came in at 98.1 million, which met our original guidance of 97 to 101 million, and is a 7.5% increase from the same period last year, despite very difficult auto production conditions due to the semiconductor shortage. Most of our profitability metrics remain very strong, and exceeded the high end of our guidance range. The non-GAAP gross margin was 78.1%, mainly driven by favorable product mix. Our non-GAAP operating margin was 37.2%. Adjusted EBITDA was 38.8 million, or a 39.6% margin. And our non-GAAP earnings per share of 66 cents exceeded the high end of our guidance by 5 cents. During the quarter, we generated more than $23 million of CFFO, and our balance sheet remains strong with total cash, cash equivalents, and marketable securities of approximately $166 million. Now let's review a detailed breakdown of our revenue. Our strong revenue growth compared to last year was driven by three factors. First, our total license revenue was up 11% year over year, while our variable license revenue was down 13% from the same period last year due to the semiconductor shortage, we outperformed auto production, which declined by 16% for the same period. Our variable license revenue is where you would see the most direct impact from lower auto production, which is partially offset by the continued increasing penetration of embedded AI technology getting designed into autos. Our fixed license contract revenue increased 53% year over year as a result of two larger than normal deals that closed in the quarter. Second, while our connected services revenue was basically flat from last year, it includes a one-time adjustment of $1.7 million to correct an amortization schedule on a hosting contract. Without the adjustment, our new connected services revenue would have been up 18% year-over-year. And lastly, our professional services revenue was up 9% year-over-year due to the increase in the number of customer projects and activities that we have going on. Moving on to a summary of the full year, we delivered excellent results that were significantly higher than the original guidance that we provided at the beginning of the fiscal year. Despite the challenges our customers have had to face due to the semi-shortages, we delivered better than expected results on nearly every metric. On the top line, we achieved 17% growth year-over-year, which is approximately $17 million higher than the midpoint of our original guidance. We also delivered strong year-over-year growth, in every profitability metric, including adjusted EBITDA growth of 34% and non-GAAP EPS growth of 49%. Additionally, we generated over $74 million in CFFO, which is an increase of 66% versus last year. All in all, our second fiscal year as a public company continued to demonstrate the company's capacity for growth and the ability to deliver strong bottom line results. Now let's review a detailed breakdown of our revenue for the full fiscal year. All three product and service areas contributed to the sequential growth. License revenue was up 23% over the prior fiscal year due to growth in both variable and fixed licenses. Despite the impact of semiconductor shortages on auto production, our variable license grew 19% year over year, which is about 10 points higher than the auto production growth of 9% for the same time period. As previously mentioned, our variable license is the portion of our business most directly impacted by changes in auto production, yet we were able to deliver growth due to the continued penetration of conversational AI technology being designed into more autos, as well as the number of SOPs we had during the year. Our fixed contract license grew 31%. The amount of fixed contracts are difficult to predict, and while this year they totaled $71 million, we expect that number to come down in fiscal 22. Our total connected services revenue was up 12% for the year, driven by growth in our new connected services, which was up 31%. However, excluding the one-time amortization adjustment that I previously mentioned, our new connected services growth would have been 36%. With or without the adjustment, our growth in new connected revenue was quite strong. And our professional services revenue was up 9% year over year. While that growth is important, it's also worth noting that our non-GAAP gross margin improved from 12% in fiscal 20 to 21% in fiscal 21 as we continue to make sustainable improvements to our service delivery model. Due to the strong bookings during the year, our ending backlog increased by $200 million to a record of approximately $2 billion. The biggest driver of growth in our backlog was due to our new connected services business as more and more vehicles get connected. Backlog for our professional services also grew nicely, which is consistent with the increasing need for our engineering resources to support our customers on a global basis. And as expected, our legacy connected backlog continues to bleed off over time as we continue to provide the connected services to the legacy installed base. Speaking of our legacy connected business, as a reminder, the legacy connected business is a one-off connected contract that was part of an acquisition that Nuance did back in 2013. We have already explained how this legacy contract would be a cash flow headwind to our CFFO for fiscal years 20 and 21, because most of the cash associated with the revenue that we are now reporting was collected by Nuance prior to the spin. The cash flow headwind attributed to this contract is now behind us, and now our deferred revenue is expected to return to be a source of cash starting in fiscal 22. However, the revenue amortization has peaked in fiscal 21 and is expected to wind down starting this year. You can see from this chart the annual revenue contribution for the duration of this legacy contract, with the largest drop of $23 million occurring this fiscal year. So as we provide guidance for fiscal 22, the $23 million decline in legacy revenue will have an impact on our year-over-year growth rate. Turning to our full-year guidance, our fiscal 2022 revenue growth is expected to be in the range of plus 3% to plus 10%. This assumes using the most recent IHS auto production forecast of zero growth for the same period. However, after adjusting for the $23 million drop in our legacy connected revenue, our pro forma growth would be in the range of plus 9% to plus 16%. Keep in mind this guidance also assumes an expected decline in our fixed license revenue after our record-setting amount of $71 million last year. Our market share remains steady, and the revenue guidance reflects this assumption. As we previously talked about, we generally expect to grow about 10 to 15 points above auto production, which is expected to be flat this year according to IHS. and so our pro forma adjusted growth of plus 9% to 16% is generally in line with our expected growth rate above auto production. Additionally, the adjusted growth rate for this year is consistent with last year's growth of plus 17% and the year prior of plus 10%. As we did last year, we'll update our fiscal 22 guidance throughout the year as more clarity about the semi-shortage environment is received. Recall that last year, due to COVID, we initially provided guidance of 360 million to 380 million and continued to increase our estimates throughout the year and ultimately delivered 387 million in revenue, exceeding the high end of the original range. We believe it's prudent for us to factor some level of conservatism into our guidance due to the ongoing semiconductor shortage plaguing the auto industry and the continued uncertainty of the timing of when the semi-supply chain will ultimately be corrected. Regarding our EBITDA guidance, we're continuing to make investments in our business, particularly in R&D, so that we keep extending our technology lead and translate those investments into higher top-line growth. Although our EBITDA guide of 37% is down from our record-setting margins of 40% last year, Recall that we cautioned investors a year ago that our margins were temporarily inflated due to the COVID cost reductions and that we plan to add back those expenses throughout fiscal 21. Despite our increase in R&D, we still expect to deliver strong EBITDA margins in the mid to high 30s. We continue to improve the cash flow conversion of the company with CFFO to EBITDA conversions increasing from 39% in 2020 to 48% last year, and now projected to be over 51% this year. Moving on to our guidance for Q1, our revenue guidance of $91 to $96 million reflects a year-over-year change of down 3% to up 3%, or essentially flat, while according to IHS, auto production is forecasted to be down 21% for the same period. We've taken into account not only the IHS forecast, but also the current risks and uncertainties of the semiconductor shortages impacting auto production. The good news is that auto production appears to have troughed in the August-September timeframe and is starting to pick up again. Keep in mind that 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 31 and 35 million of adjusted EBITDA and between 47 cents and 53 cents earnings per share on a non-GAAP basis. So this concludes our prepared remarks, and now we'll open it up to questions.
spk00: If you'd like to ask a question at this time, please press the star, then the number one key on your touch-tone telephone. To withdraw your question, press the pound key. Our first question comes from Chris McNally with Evercore.
spk05: Hey, team. Okay, see where to start. Maybe if we could start on the big picture. You know, we're getting a lot of questions. We'd just love to have your, you know, reiterated outlook of 2024. Has anything changed since, you know, you initially gave that outlook for $700 million a couple months ago?
spk03: So let me start and then I'll ask Mark to add in Chris. So from my standpoint, no, nothing has changed. We stand by our guide for fiscal 24 and feel good about it. As you heard in my prepared remarks, the new products contribute a lot towards that guide and 20% of our bookings, about 120 million. was that from a booking standpoint. We also will be announcing some new aftermarket products. We have received an award letter for one of them already, which is not part of our booking yet. They will be part of our you know, fiscal, you know, quarter one bookings. So from that standpoint, you know, I feel good that our new products are, you know, further, you know, contributing towards, you know, the contribution. And lastly, you know, for the – once again, on the new product side, the elevator piece, you saw me mention that we have – one of the top manufacturers of elevators as our customer in fiscal 21. Having said that, we have decided not to take any bookings from that contract yet because we want to be cautious about what bookings we report to the street and so on and so forth. But the contract is one. we will be shipping for revenue in this current fiscal, in the new fiscal year, fiscal 22. But, you know, we have not taken any bookings yet, you know, because we want to be cautious about, you know, it's a new market for us. And, you know, we want to see sort of, you know, the volumes and trends and so on and so forth from that customer. So the net-net basically is, you know, in the fiscal 24 model, The core business is going strong, and we stand behind the growth that we have projected in our core business, whether it's license or connected services or professional services. And the new business of new apps and devices piece, we're making very good progress. So from my standpoint, no change to the fiscal 24 model, Chris. Mark, anything you want to add?
spk06: Yeah, I think the only other thing I would add is the fact that, you know, the secular tailwinds are still there as it relates to more and more penetration of this technology getting designed into automobiles. You know, IHS, you know, has increased their projections for penetration rates, and so I think that provides a nice offset to, you know, some of the some of the downward effects that, you know, not only COVID had on auto production, but also on the semi-shortages. And so, you know, that gives us also confidence that, you know, even though auto production is down over the last year and a half or so, you know, offsetting that is the increasing penetration rates. And the other thing I'll mention is the fact that, you know, a lot of these new products that we've designed and are now starting to get wins for, you know, that revenue will be back and loaded. And so, you know, the bookings that we're seeing today gives us that level of comfort that, you know, the revenue will come into that 2024 target model.
spk05: Okay, super clear. Appreciate it on 24. So if we maybe then talk more about the near term, and, you know, really the potential for your TAM, SAM or orders, right? It's only about a year ago, you talked about almost 80-90% win rates. And it seems like there's at least a $2 billion core market out there for voice AI. Sanjay, Without putting a time frame on it, is the proposals that you're going after, whatever share you get, 80% plus, is there a potential order number over the next couple of years where we could start to move into the billion-plus order range? Just maybe talk about the size of business that's out there for bidding on over the next 12 to 24 months.
spk03: You know, clearly, you know, we're happy with the, you know, bookings that we reported of, you know, 590 million, which is pushing our backlog to 2 billion. Last year, we reported, you know, 835 million in bookings. But our, you know, normal run rate used to be in the 400 to 450 million per year. This last, in fiscal 21, there was one European contract with a large European OEM that is going through some internal restructuring of their purchasing and other departments which basically moved the contract out from fiscal 21 into fiscal 22. You know, otherwise, you know, again, you know, we're very confident we're going to get that and, you know, further add into our bookings towards the goal of, you know, crossing billion dollars in bookings. As you all know, Chris, bookings are lumpy in nature. It's very hard to predict. But as long as we're making good progress and adding to our backlog, I feel very confident about the prospects of the company in the future. We work really hard to secure our core business wins We work really, really hard to kind of, you know, expand into our adjacent market. You know, you heard me earlier, you know, talk about some of those, you know, some of the progress there as well. So overall, you know, yes, am I happy with the $600 million bookings? Yes. You know, would I like to see more, you know, heading towards the billion dollars that you mentioned here? Absolutely. No questions, right? You know, the TAM extension and the TAM opportunities is clearly there. And you have heard me say that, you know, especially on the connected services side, right? So, you know, fingers crossed, you know, we'll keep marching towards that goal.
spk05: That's great. And I'm going to be greedy and just ask a third question because I know this question will be asked by everyone else. So I apologize for people behind me in the queue. But on the connected revenue issue, we understand the legacy comes off. But when we think about the new, Q3 to Q4, we had a move sequentially from $14 million to $11 million, where we tend to think about that as an install-based, so sequential positive business. Could you just talk about the quarter-over-quarter move in New Connected and any seasonality that affected that number? Thanks so much.
spk06: Yeah, you know, the majority of our revenue is simply an amortization schedule, but there are some contracts that are usage-based, and those will ebb and flow from one quarter to the next. And then also, you know, we did have that one-time adjustment to correct an amortization schedule in Q4. So that entire amount did hit Q4 new connected revenues. Okay, thanks.
spk00: Our next question comes from Mark Delaney with Goldman Sachs.
spk09: Yes, good morning, and thank you very much for taking the question. So can you talk a little bit about how to think and contextualize through the December quarter revenue guide? You commented on how your outlook is outgrowing IHS's view of auto production on a year-on-year basis, but the industry production rates are starting to pick up sequentially, and I think IHS is expecting that as well. and yet your December quarter revenue guide is for revenue to be down quarter to quarter. Maybe you can talk a little bit on some of the puts and takes that are leading to that.
spk06: Yeah, so you have to look at what we are sort of modeling internally for our Q1 revenues, and if you look at, the Q4 revenues, we did have a large amount of fixed contract revenue, which we don't expect to repeat to that same level. And so, you know, in last quarter, in Q4, you know, if you look at the slides, we had $25 million of fixed revenue, fixed license revenue, that is. And so, that's a pretty substantial number, and we don't expect that to repeat. So, When you factor that down, that number down quarter over quarter, that's really what's driving it. But we do expect variable licenses, which is most tightly coupled to auto production, we expect that number to increase sequentially.
spk09: Got it. And in terms of the number of vehicles with... Sarin's technology installed. You did talk about good competitive win rates and the five competitive wins, but the percentage of vehicles produced with Sarin's technology I think has been moving sideways and coming in at, I believe, 53%. Can you talk a little bit more on that, maybe what's constraining the attach rates of your technology, given that's one of your KPIs? Thanks. Thanks.
spk06: Yeah, so I think some of that, you know, is driven by the fact that we are using trailing 12-month data. And I think, you know, some of the COVID impacts are still, you know, being factored into the TTM results. You know, if I'm looking at some of the data that we don't publish on a quarterly basis, we, you know, we are seeing that trend increasing. So I think as we get further into this fiscal year and we drop off some of those older quarters, that should probably help that KPI.
spk03: Just also to add, Mark, we put a press release out last quarter, and then you heard me mention 174 SOPs that happened in fiscal 21. 174 startup productions is a record for our company. So feel like Mark rightly said, that number is TTM. But we're making good progress there.
spk00: Our next question comes from Luke Young with Baird.
spk08: Good morning. Thanks for taking the question. First, a question on the even margin guidance, and just hoping we could put a finer point on bridging to the midpoint as we look at some of the big moving pieces here between mix, R&D, and other factors. And really, the question here is, as I look bigger picture versus what you've said, for the 2024 targets, should we interpret the current year as sort of the biggest step function change in those dynamics relative to where you were in fiscal 2021 and where we're going a couple of years out?
spk06: Well, yeah, because fiscal 2021, you know, as we've been mentioning for over a year now that, you know, 21 is going to have inflated margins throughout the year as we, you know, brought a lot of those COVID expense reductions back into the P&L. And so even though even though we benefited short-term from those COVID expense reductions and we delivered record-setting margins, going into 22, we are factoring in the fact that all of those COVID expense reductions are now back into the P&L and that we're also going to continue to invest in our R&D to continue to innovate and to continue to extend our technology lead. And so you will start to see increases in R&D both on a dollar basis and as a percent of revenue. That's going to be probably the single biggest driver. And so back to your point, I think 22 is probably going to be the year in which you'll see the most year-over-year change to some of the margin assumptions. However, the targets that we have laid out for 24 in the target model are You know, we expect to be able to hold those margins even with these more expenses that we're building into the R&D expense line for fiscal 22.
spk08: Okay, great. Thank you. That's a helpful call, Mark. Maybe a question for Sanjay. A bigger picture, you know, multiple conquest awards mentioned both in the release and the you know, going through the commentary today. And I'm just wondering, you mentioned three of those were in China. Is there anything that we can glean competitively about sort of where the industry is going or what competitors are looking for that essentially, you know, where competitors are going that made those customers choose your solution versus peers?
spk03: You know, I just returned from my second Europe trip in UK, France last week. I was in Germany a few weeks before. Now that, you know, with COVID opening, you know, I have started traveling and going and seeing the customers after almost 18 months of, you know, virtual sort of interactions with the customers. And One thing that I'm consistently hearing from our customers, and by the way, I've also been to Detroit as well myself, and one thing that I'm consistently hearing from the customers is that the roadmap that we have put together over the last couple of years as an independent company is a solid roadmap. We're creating the best in embedded AI technology, which is coupled with the best of connected services and apps portfolio, which basically allows the customers to bring multiple big tech and the digital life of a consumer in the car. So I feel very good about our product positioning. And this is coming firsthand me sitting in the rooms now over the last month, month and a half with the top 10, top 15 OEMs around the world and getting their very direct feedback with regards to our product portfolio. I think we just need to keep working hard on continue the journey of winning the new designs of the vehicle architecture. and continue to deliver the products that we have been discussing with our customers.
spk08: I'll leave it there. Thank you.
spk00: Our next question comes from Colin Langan with Wells Fargo.
spk07: Oh, great. Thanks for taking my questions. I just wanted to follow up on the quarter-over-quarter decline in connected services. You mentioned the amortization adjustment, which I think it would still be down sequentially even including that. You also mentioned usage-based contracts might be down quarter per quarter. Why would that fall? Is that a seasonal reason? Is there something else I'm missing? I guess I think many people thought that was more of a steady rise with the adoption.
spk06: Yeah, we've had some prior quarters, Colin, where, you know, the usage just simply ebbs and flows. And I think it also ties back to, you know, the one slide that we've got in the presentation deck where things have slowed down a bit in terms of monthly users and so forth. And so I don't have a specific reason for why the decline has happened. but part of it could be just fewer cars, COVID related, so forth. But we don't view that as any trend or anything concerning. It's just sometimes these usage contracts will ebb and flow from one quarter to the next. And that's the piece that could move some of the revenue up or down from one quarter to the next. But I think I think the key takeaway is if you look over a four-quarter, eight-quarter trend, we continue to see continued growth in our new connected revenue line. That's really the punchline is that that trend is continuing to grow. Okay, got it.
spk07: And then just I'm sure you saw last week SoundHound announced a SPAC. I know they're in the vast majority of your comp set. I'm sure questions are going to come up. I mean, can you just remind us sort of how you compete against them and how your technology might be different in some ways as people might start lining both companies up against each other?
spk03: Sure. You know, I always respect our competitors, and SoundHound is a great company to compete against. you know, competition brings the best out in all of us and we welcome it. The, you know, I was, you know, surprised as hell on the valuation, you know, and I'll let you guys sort of, you know, do the math there. But, you know, at 20 million revenue, you know, we're 20 times their revenue, you know, piece and the company has been out there for 16 plus years, right? So that's the revenue piece aside. You know, on the product side, you know, two, three years back when I first joined as the CEO of CERN, you know, one of the areas that I felt, you know, the area that we were very strong was embedded AI, embedded AI in the cars. Our cloud portfolio needed a refresh from my standpoint, my assessment, and I brought in a CTO which was focused, he's not an auto guy, he's a cloud guy. And his charter with our product management team was to strengthen our cloud portfolio. Today, I felt two, three years back that our cloud portfolio was weaker as compared to our competition. And our R&D team, under our CTO's guidance, worked amazing wonders in terms of putting together an absolutely market-leading cloud portfolio. And again, don't take my word on it. Take the word of our customers. And our customers have recognized this. And as I said to you in our press release as well, that, you know, we're winning back some of the customers. You know, there was a European customer who was lost to our competitor here, you know, before my time, before Serence was spun out as an independent company. And we have won that. We have won the next generation of that customer back with, you know, a complete embedded end cloud portfolio that we have as a company. So, and the feedback, like I said, from my trip touching OEMs very directly over the last couple of months in Germany, in Detroit, in UK and France and so on, gives me the confidence to make the statement here on this call.
spk07: Okay, thanks for the call and thanks for taking my questions.
spk00: Our next question comes from Raji Gill with Needham & Company.
spk04: Yeah, thanks for taking my questions. Question mark on the fixed prepay slash licensing revenue business. You know, it's $25 million in the quarter. It looks like that's going to be up, you know, about 31% in fiscal year 21, getting to about $70 million, $71 million. When we're looking at fiscal year 22, and as you factor in your overall guidance, How do we think about the prepay revenue? I would assume that that line of the business would drop fairly precipitously, and then it would be offset by higher growth and licensing variable and new connected and other new applications. But I just wanted to get an extent of the drop-off in fiscal year 22 for prepay, given it's so high. And what drove the above-average growth in prepay in the September quarter? Because it was quite significant. Right, right.
spk06: Yeah. So as I mentioned on my prepared remarks, it was driven by two larger than typical deals that we had closed in the quarter. And if I look at historically, we may have, maybe one large deal in any given quarter, which tends to, as I mentioned before, it tends to swing those numbers around and they're difficult to predict the size of those deals. And so it's very unusual to have two happen at the same time. And that's really what sort of drove the spike in Q4. Like I said, typically it's one customer or it's a series of customers on smaller deals, which typically would keep us in that $10 million to $15 million type of range. And so it was just that timing which drove it. I think if you look into fiscal 22, you know, we do expect it to recede. You know, we certainly don't think it's going to be a repeat of last year where we had a 71 million record. And if you look at our historical range, we've typically been in that, you know, low 40s to mid 50 type range. If you go back three or four years, that's typically been the range from one year to the next. So this past year did exceed our historical ranges. And I think I've also mentioned to you in the past that if we deviate from those historical ranges, you know, on the upside, that's good for short term, but it also does create a little bit of a pressure on our next year and sometimes the year after growth because we have to consume or the customer has to consume those licenses. So because we were outside that range, you know, that does put a little bit of a damper on growth rates for next year and possibly into fiscal 23 as well as those licenses get consumed. You know, right now, it's hard to predict exactly where that number is going to be, but I would say that it's going to be, you know, down, you know, 12 to, you know, 13, 14 million or so year over year. So, that kind of gets you back into our historical range, but at the higher end of the historical range. That's what I'm anticipating.
spk04: Got it. I appreciate that. And when you're thinking about your fiscal year 24 target of 700 million, And you're reiterating that. It does imply a fairly significant ramp, re-acceleration in revenue growth in fiscal year 23 and then kind of continuing into fiscal year 24. I'm just curious, you know, what's giving you the confidence of that visibility, you know, given that we've seen, you know, prepay being a bit lumpy. We've seen some of these kind of changes in the usage case for the new connected revenue you know, is it just the kind of the new applications and new mobility markets that are adding it, or are you seeing something in the attach rates for new connected that's giving you confidence to hold that target of 700 million as you look at these new cars that are going to be being produced, including your cloud-connected voice revenue? Is that giving you kind of confidence that, you know, you can get to that 700? Thank you. I think, yeah, and
spk06: I'll start, and Sanjay may want to jump in as well. But I think really the bottom line is that the secular tailwinds and the digital car is not slowing down in any way. In some ways, it's actually accelerating. And so those penetrations of this technology is continuing to be pretty strong. And, you know, auto production, I think, is a speed bump. You know, things are kind of because of auto production being lower, first because of COVID, and second because of the semi-supply chain. Ultimately, if the demand is still there, the end demand is still there, and the penetration rates continue to grow even above expectations, then we're in a very strong position competitively. We continue to maintain our dominant share on the embedded side, And we do see, you know, growth potential, you know, and market share gains on the connected side. Not to mention, you know, some of the good progress we've already been able to talk about with some of these new markets.
spk03: Yeah, thanks, Mark. And, you know, just from my standpoint, I think, you know, if you look at our model and, you the four categories of revenue that we break the model down to. There is edge AI, which Mark just commented on, so feeling good about the target of $300 million there. For connected AI, the biggest piece that I'm focused on is new apps and services. We're expecting a contribution of about $90 million there. It's single digits in 2021. And this is where sort of the booking that we are making is extremely important for this new business. And you heard me say, you know, we have booked $120 million in fiscal 21 for, you know, some of these new products. And then lastly, you know, for the new mobility markets, once again, in fiscal 21, it's single digits. going to about $65 million, as you see in the model. That piece, once again, for two-wheelers and elevators, we've started making good progress there with a major win that I mentioned to you. We have not even taken any bookings against that yet, although we expect revenue in fiscal 22 on that. And the reason is we're being cautious to, you know, since that's a brand-new market for us, we want to understand it better before we, you know, sort of come back and share, you know, more details. But, you know, feel good about that, you know, 65 million, you know, target that we have set out for fiscal 2024. On the last item is the professional services. I don't see any problems at all going from 75 million in fiscal 21 to 110 in fiscal 24. Overall, as I break down the model and go line by line and so on, I think the team is working hard to achieve our goals.
spk00: Our next question comes from David Kelly with Jefferies.
spk10: Good morning, team. Maybe just starting with the contract duration step up, you know, it's a makeshift contribution, but really is a meaningful uptick, even from last quarter, I think a year plus, and that's, I believe, a trailing 12-month metric. So curious if there was or you're seeing some meaningful duration step up with some of the recent wins you've had and If there's anything else maybe we should be thinking about strategically that's been a driver and could continue to be a driver of that uptick?
spk06: Yeah, so in terms of that metric, I did look at it as well because it looked like there was a pretty nice uptick quarter over quarter. And actually, it has to do with the TTM effect, right, the trailing 12 months, where a year ago there was – there was a different concentration of our bookings, and there weren't as many connected contracts. So a year ago, with that one quarter, it had a shorter duration. And so that quarter has now dropped off from the TTM. So this just naturally increased for this quarter because that last quarter dropped off a year ago. So that was just more from a formulaic point of view, but I think when you look at the trend overall, we are seeing more and more of our customers willing to commit to longer contract periods. I think a lot of that has to do with the fact that the connected car is here, it's here to stay, and it's going to continue to grow, and they see the real value in making sure that you know, those cars on the road stay connected. And they are willing now to commit to longer periods than they have historically. And so I think that's starting to show up in our results.
spk10: Okay, got it. Thank you. That's helpful. And then maybe, Sanjay, a question strategically. You know, some competitive wins in China. You know, we tend to think of that market as being a bit faster to production. So just curious as to how you view Sarin's broader China momentum into next year. And, and then maybe one quick follow up on that. I know you don't break out 24 targets regionally, but could you give us a sense of how you've been thinking about China as a contributor, um, to some of the longer term targets?
spk03: Sure. Um, so, um, I think, um, you know, China, Chinese OEM, um, you know, very, very competitive space for sure. Um, You know, we have one major, you know, competitor in iFlyTech there. And I think you have heard me say, you know, we share roughly or slightly higher in the independent reports that I saw, you know, a few months back. Our market share, China for China OEMs in the cars shipped in China were a little more than 40% in market share. Our competitor is also roughly 40% slightly below us, and then 20% is everybody else. You know, we're very focused on, you know, growing our share there. And, you know, some of the competitive wins you saw, three of them were in China, which, you know, supports my statement that China you know, we're, you know, making progress against, you know, our competitors as well. And once again, you know, our full portfolio is the main reason because, you know, Embedded AI, we were always being, you know, very strong as a – traditionally as a company. So, you know, overall, you know, I see us, you know, making progress there, you know, and continue. It's difficult to forecast what that – actual market share would be next year, following year, and so on and so forth, right? But in terms of, you know, looking at the competitive space and our progress there, I think, you know, I feel good about, you know, taking this, you know, 41%, 42% market share and crossing the 50% in the very near future.
spk10: Okay, great. Thank you.
spk00: That concludes today's question and answer session. I'd like to turn the call back for closing remarks.
spk01: Thank you, everyone, for joining us on today's call, and we hope to see you at upcoming investor events. Thank you and have a good day. Thank you. Thank you.
spk00: This concludes today's conference call. Thank you for participating. You may now disconnect.
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