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spk01: Good day and welcome to the CERN's first quarter 2022 earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star then 1 on your touchtone telephone. If anyone should require assistance during the conference, please press star then 0 to reach an operator. As a reminder, this call is being recorded. I would like to turn the call over to Richard Gagnon, Senior Vice President, Investor Relations. You may begin.
spk06: Thank you, Michelle. Welcome to CERNS' first quarter fiscal year 22 conference call. Before we begin, I would like to remind you that this call may involve certain forward-looking statements. These statements are subject to risks and uncertainties as described in the press release preceding today's call. CERNS makes no representations to update those statements after the date hereof. In addition, the company may refer to certain non-GAAP measures, key performance indicators, and pro forma financial information during the 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 Stefan Ortmans, CEO of Serence, Mark Gallenberger, CFO of Serence, As a reminder, the only authorized spokespeople for the company are Stefan, Mark, and me. Before handing the call over to Stefan, I would like to announce several upcoming investor events. The exact timing of our participation is subject to change, so please go to the events section of our IR website for the latest information. The conferences include the virtual second annual Cowan Mobility Disruption Summit on March 2nd, the virtual Berenberg Industrials Technologies Conference 2022 on March 3rd, and the Raymond James 43rd Annual Institutional Investors Conference in Orlando, Florida on March 7th. Now on to the call. Stefan?
spk07: Thank you, Rich. Welcome to everyone on the call, and thank you for joining us to discuss our first quarter fiscal 22 earnings. I'm delighted to be here. It's been an incredibly busy and energizing few months. In addition to advancing our and launching new products and partnerships, I've spent a lot of time gathering feedback and exchanging ideas with customers, partners, employees, investors, and analysts, including many of you on this call. It is important and valuable to see the company with a fresh perspective and to get grounded both in our current realities and future opportunities. We recognize CERN has seen changes in our leadership since we last convened, and we made important decisions to advance our strategic priorities and position the business to drive long-term sustainable growth. Several factors have led us to lower guidance for the fiscal year. The reasons for this I will address later on the call. As I've told our employees, our industry is evolving at a rapid pace. and focus and speed are needed for success. This applies to CERNs and everyone else. When I think about the mobility industry and specifically for the automotive industry over the next 5 to 10 years, I believe 2022 will be an important year as electrification of the car reaches commercial scale at the end of last year. Cars powered by electricity are becoming more and more mainstream around the globe. For example, in China, over 15% of new cars sold today are electric vehicles. This tipping point has and will continue to accelerate the complete digitization of the car. Digitization will create new opportunities and challenges. In response, global automakers will accelerate the deployment of new innovation and adapt to changing consumer demands and regulatory developments. By the end of this decade, we believe the car will be fully and commercially redefined as a mobility solution, powered by two key platforms that work seamlessly together, autonomous driving and the digital cockpit and cabin. A fully digital cockpit and cabin will transform the experience for both drivers and passengers in a car. It will make possible much more than a driver simply speaking commands. It will make possible convenient, enjoyable and safe experiences for drivers and passengers, especially as our vehicles bridge our digital lives. It will create not just an enhanced driving experience, but also include the apps, content and services we use daily on our phones, in our homes and at work. These new capabilities will certainly occur inside the vehicle where CERNs today already excel for in-car experiences. They will also increasingly factor in elements outside the vehicle, such as the interactions with other cars, billboards, city infrastructure, pedestrians, and more. Taken together, CERNs will lead the way in cabin, driver, and road AI to keep the driver informed, passengers entertained, and cars on the road safe. Already, the user experience inside the car is becoming increasingly important to new car buyers, and no company enhances that experience better than Siren's. Today, our products and innovation are already in approximately 50% of all new cars, and we plan to expand more within the digital cockpit platform for future cars. As the market accelerates, we are well positioned to work with both incumbent car makers as well as new electric vehicle makers. To thrive in this world, we are focusing on things our customers really value and that we can uniquely deliver. We will continue to lead the dynamic field of conversational AI, delivering important innovations and leading technology for our customers. To that end, we have already made significant progress. We have a strong competitive position in the market, great technology that sets benchmarks for the industry and the global delivery team helping our customers create unique in-car experiences. And we have incredible employees. I deeply appreciate their dedication and resilience, their remarkable adaptability and commitment to supporting our customers. And each other is key to our continued success. I'm incredibly proud of how they continue to rise to the challenge. Taken together, We are well positioned to drive sustainable long-term growth. Going forward, we will ensure intense focus on innovation and execution to drive that kind of growth and the resulting value creation. Mark will provide additional detail, but I want to say a few words about the quarter itself. We had a strong start to the fiscal year, including recording our second largest booking quarter in the history of the company. This is a great overall indicator of the strength of our position in the markets we serve and the spectrum of products we have in our portfolio. Most profitability metrics in Q1 were above the guidance that we gave last quarter. Profitability was better than expected, mainly due to a favorable mix and lower expenses resulting from slower than anticipated hiring. Overall, today's results demonstrate the breadth and underlying strength of the business. The past two months have not only been a period of change at CERNS, but also a period of setting a stronger foundation for long-term sustainable growth at CERNS. The semiconductor shortage and its impact on our customers continues to be a headwind to our growth and the industry at large. There are still varying reports on how quickly the issue will be resolved, but clearly it is still a struggle for our customers. There continue to report of production cutbacks by our customers due to both the semiconductor shortage and the recent rise of the Omicron variant of COVID-19. Even those with the most optimistic views don't get the semiconductor shortage issue to be resolved until the back half of the calendar year. We continue to focus on two fundamentals, delivering great innovation to our customers and pivoting the company towards the future. You can expect from CERN a commitment to bold innovation, to long-term success and value creation, and to accountability to our partners, customers, and shareholders. And with that, I will turn the call over to Mark to review the financial results of the quarter. Following Mark's comments, I will provide guidance for Q2 and update the full fiscal year guidance. I will provide some additional commentary, and then we will take your questions. Mark?
spk12: Thank you, Stephan. Let me first review our financial performance for our fiscal Q1. Revenue for the quarter came in at $94.4 million, which is slightly above the midpoint of our guidance of $91 to $96 million. Year-over-year growth was approximately 1%, and quarter-over-quarter revenue was down approximately 4%, which is primarily driven by a $5 million reduction in our fixed license revenue from the last quarter. Profitability metrics remained strong and exceeded the high end of our guidance. Non-GAAP gross margin was 77.5%, mainly driven by favorable product mix. Non-GAAP operating margin was 36.8%. Adjusted EBITDA was $36.9 million, or 39.1% margin, and non-GAAP earnings per share was 59 cents, exceeding the high end of our guidance by 6 cents. During the quarter, we generated approximately $5 million of CFFO. Also, Q1 is the quarter in which our year-end employee bonuses are paid, which used approximately $5 million of operating cash. Our balance sheet remains strong with total cash, cash equivalents, and marketable securities of approximately $153 million and debt of approximately $291 million. Now let's review the a detailed breakdown of our revenue. Our variable license revenue was up approximately 4% from the last quarter, but down 40% from the same period last year. We are starting to experience the impacts of the larger than planned fixed license deals that we did last year and the year before, which is now creating a significant headwind to our variable license revenue growth. The reason is because those fixed licenses need to be consumed and netted out against the gross number of licenses consumed by customers each quarter. As a reminder, our fixed license revenue is a combination of prepaid contracts and minimum volume commitment contracts from our backlog and need to be consumed by customers in the future. The increased consumption of these fixed license contracts that we did in FY20 and FY21 is dampening our variable license revenue growth and is creating the headwind for this year and next year, as our customers consume those licenses. Exacerbating this headwind is our goal to reduce the amount of fixed license deals this year, creating a further challenge to the total license revenue growth. During the quarter, we had an exciting win with a new customer in the fitness industry. And since they made a commitment to paying us NRE as well as a minimum volume, we recognized $5.2 million in revenue. We're pleased that we were able to leverage our valuable technology and develop a new vector for growth so that we can expand into non-automotive markets. Another example of this is in Q4 of last year, we recognized $5.2 million in revenue related to a technology license deal with a big tech giant. Since these two contracts are non-automotive related, we wanted to break them out from our automotive business for an easier comparison. Our new connected services revenue grew approximately 23% year over year. However, Q1 revenue includes approximately $900,000 for an on-premise deal. Excluding this deal, our revenue growth was approximately 14% for the same period last year and up about 1% from last quarter after adjusting for the $1.7 million accounting correction that we had in Q4. I want to highlight that we have several older connected programs that are now winding down this fiscal year, which is offsetting a significant portion of our progress in growing our newer accounts, which is the reason for the expected slowdown in new connected revenue this year. However, I would like to highlight the KPI in our press release, which tracks the change in the number of SANS connected cars shipped on a trailing 12-month basis over the prior year. This shows 11% growth versus auto production growth of 2% for the same period and demonstrates our expansion of Sarin's connected cars on the road. As previously disclosed, our legacy connected revenue will decline in Q2 from $16 million in Q1 to $8 million in Q2 and is expected to remain at this $8 million per quarter level for the rest of the fiscal year. Our professional services revenue was down from last quarter and from last year due to the normal ebbs and flows of project starts and completions, but remains an important enabler for future license revenue growth and is expected to grow this year. I'd like to hand the call back to Stephan for further comments about the fiscal year and Q2 guidance.
spk07: Thank you, Mark. And before continuing, I want to note that in addition to our earnings today, we announced that Mark will be retiring from CERNS to spend more time with his family. Mark will remain with CERNS until March 11th, 22, after which he will remain with CERNS in an advisory role through mid-November 22 to ensure continuity of the business and an orderly transition to a new CFO. I would like to offer my sincere thanks to Mark for his years of service and leadership to CERN. He has been a great colleague. I'm sorry to see him go and wish him the very best in the future. We have retained a leading international executive search firm to identify a new CFO. Mitch Cohen, with significant years serving as a CFO and interim executive to a wide range of companies, will join Terence this week and will serve in a temporary role providing oversight of the finance organization. Since becoming CEO, I have been working closely with the leadership team to solidify plans for the business in the years ahead. With approximately 2 billion in total backlog entering this fiscal year, Terence remains fundamentally solid with a strong pipeline of opportunities. Our goals are clear. get more out of the significant resources we have available, drive more innovation that delights our customers, and deliver conversational AI for automotive and mobility. All areas where I know we can succeed over the long term. We have strong conviction that we are leading this dynamic field and creating value for our customers. I want to make sure that we remain focused on the markets, customers, and products that will deliver long-term sustainable growth. That everything we do reinforces our vision of leadership in AI for mobility. That we lean into the opportunities at hand. That same conviction drove our decision to update our fiscal year 22 guidance. I would like to emphasize some key factors that we considered. Our focus on sustained long-term growth arises from a careful study of the business as well as the rapid evolving factors in the auto industry that drives automotive production such as start of production, ramp up of new models and future production forecasting. This also includes but is not limited to semiconductor availability and the still unknown and ongoing impact of COVID-19. A critical factor remains the ongoing supply chain challenges driven by the semiconductor shortage, among other things. As you know, the automotive sector has a complex supply chain, and the semiconductor shortage continues to be a crucial factor in the current unpredictability of auto production. Additionally, since November, the rise of the Omicron variant of COVID-19 has further affected our OEM and Tier 1 customers. interrupting the production and delivery of new vehicles due to factory shutdowns and labor shortages, such as the one recently announced in Japan. An industry-wide recovery remains unclear for the rest of our fiscal year. As a result of further reviews and analysis and recent developments in the industry, we updated our forecast accordingly. Second, since being appointed CEO, I have reviewed each business unit's plan, forecast, and assumption, particularly the business that did not previously report to me. After my assessment, I believe the conversion from bookings to revenue will take longer than expected for these new products. While these new products and markets remain attractive revenue streams and will contribute to our growth, we now believe it will take longer than originally expected to recognize revenue. And third, our November guidance assumed a number of one-time technology license opportunities in fiscal 22. Although attractive opportunities remain, these may not all be realized during our fiscal year as previously expected. So with that as background, we are reducing our full-year revenue guidance by approximately 9%. from the midpoint of the original guidance of $412.5 million, and now expect FY22 revenue in the range of $365 to $385 million. This is a year-over-year decline of 1 to 6 percent from last year's revenue of $387 million. Regarding profitability, since we exceeded most of our profit matrix in Q1, we are comfortable with the spending that we had planned for the balance of the fiscal year. With the new revenue guidance, adjusted EBITDA margin is now expected to be in the range of 33 to 36%, and earnings per share between $1.80 and $2.16 on a non-GAAP basis. For fiscal Q2, we expect revenue in the range of 82 to 86 million. I would like to walk you through the bridge from Q1 revenue of 94.4 million to our Q2 guidance. First, we need to remove the revenue from the fitness deal of approximately 5 million since we don't expect any additional contribution from this market for the balance of the fiscal year. Then we need to account for the sequential decline of 8 million due to the legacy-connected revenue, which gets you to approximately 82 million. We have also taken into account the latest IHS forecast, which expects a slight decline sequentially, as well as the current risk and uncertainties of the semiconductor shortages affecting auto production. For profitability in Q2, we expect to generate between 26% to 30% of adjusted EBITDA margin and earnings per share between $0.31 and $0.83 on a non-GAAP basis. The leadership team and I are refining our long-term strategy and vision for CERNs, including a business model that sets our targets in the years ahead. We anticipate sharing this at our next analyst day. In the meantime, we are withdrawing the fiscal 24 target model previously provided, as we are defining the new vision and strategy for growth and profitability over the next five years. We have been on an ambitious journey since our spin two plus years ago, and we must remain dedicated to the fundamentals of innovation and customer satisfaction. Leaning into the practices that have generated so much of CERN's success over the last 25 years will deliver the long-term sustainable growth we envision. We are the leaders in our industry and intend to stay that way by developing cutting-edge offerings such as the newly announced CERN Co-Pilot and with proactive AI and digital twin capabilities. We will also continue our expansion into new markets such as two-wheelers, buildings, fitness, and other segments where we have had already early success and expect to benefit from accelerating growth. And as a reminder, we are halfway through our field of use restriction that will expire ten quarters from now. This will allow us to significantly increase our addressable market and we intend to state planning for that now so that we are ready to move quickly when the agreement ends. In closing, before I turn the call over for Q&A, I would like to reiterate several important points. We have a compelling competitive position and strong business fundamentals, as highlighted by our performance in the most recent quarter. We have a valuable opportunity to lead innovation and growth for conversational AI in automotive and mobility. And we remain intensely focused on long-term sustainable growth to realize that opportunity. We will now take your questions.
spk01: As a reminder, to ask a question, please press star then 1. If your question hasn't been answered and you'd like to remove yourself from the queue, press the pound key. Our first question comes from David Kelly with Jefferies. Your line is open.
spk09: Good morning, and thanks for taking my questions. Maybe starting with the guidance cut, can you give us a sense of the magnitude of the macro headwinds you're seeing, the IHS cuts and some of the recent shutdowns, versus the timing of the bookings being pushed out?
spk07: Good morning, David, and thank you for your question. You know, when looking at the recent development, especially on the rise of Omicron in November, late November, that actually worsened the semiconductor shortage, right? And you also know that we have zero tolerance in East Asia, and this really led to further supply chain disruptions and shutdowns. Since the beginning of the year, we have heard from a variety of customers about unexpected delays in their production schedules. To give you some idea, a big, large Asia OEM has been affected. A European OEM indicated massive cuts in their production, and one of our customers in China, a leading EV maker, projected a delay of up to nine months. And we see this also with other OEMs in Europe.
spk09: Okay, got it. Thank you. And regarding just the bookings timing and the push out there, I was hoping for a little bit more color on what you're seeing. And is there any expectation of a bookings cut here, or is this solely just a timing issue here? and the conversion revenue?
spk07: Yeah. I think, David, it's mainly a conversion issue, right? Bookings are still great. I mean, what we can already share and what Mark also mentioned, right, we had our second largest booking quarter in our history. So the fundamentals are really very strong, yeah? And this has nothing to do with the outlook. I think we have really a a strong basis here, right? And bookings are still fine. And this was also underlined by a couple of deals in fitness, as Mark mentioned, right? Also in the two-wheeler side. And in China, we made also three important design wins.
spk09: Okay, thank you. I appreciate you taking my questions.
spk07: And maybe one more. We had in Q1 our largest booking... of about one point of $149 million, right? That was for a specific OEM, that was a regional expansion, and it shows also the strength of our business and also of our product.
spk09: Okay, got it. Thank you.
spk01: Our next question comes from Ross Gill with Needham & Company. Your line is open.
spk10: Yes, thanks for taking my questions. Mark, just wanted to get a little more clarity on the change in the new connected revenue, kind of moving from $12 million, I believe you said, to $8 million for the remainder of the year. There are a lot of moving pieces that were new, at least new to me, hearing you versus, say, the previous quarters. Maybe if you could just kind of elaborate on the, you know, the timing of those and the one-time issues that you don't expect and just the breakout of the impact of the fixed variable revenue impacting your variable revenue. That was new to me in terms of that correlation between those two components.
spk12: We can start with the licenses first. Fixed licenses, as you know, are a combination of minimum commitment deals in which the customer contractually commits to a certain volume or their prepaid deals where they buy a number of licenses up front.
spk00: As
spk12: as those licenses get consumed, then clearly, you know, that's not going to be, you know, we'll get royalty reports, but those, those, you know, those need to be netted against the inventory of what they've already purchased. And so that's the, that's the correlation or interplay between, you know, these, these contracts that these fixed volume contracts and the variable licenses. And so, you know, As we've mentioned in the past, if we go outside our historical range, which has been typically in the low $40 million to mid $50 million range for these fixed license amounts each year, if you go on the high end of that range or even outside like we did last year, that does dampen the growth in the future until those licenses get consumed. On the flip side, if you go below those ranges, those historical ranges, then that actually limits your short-term growth, but it does help with longer-term growth. And so it's really a question of how many licenses have been purchased under the fixed contract and where is that in relation to your historical ranges. And so that's what we're seeing you know, happening this year and actually going into next year because, you know, over the last two years we've been at the high end or even, you know, above the high end of our historical range. So that's the interplay between the two, and that's why it's creating, you know, the headwind for our license. Regarding connected services, you know, the legacy contract, as we talked about previously, that is winding down. We have about $23 million reduction to that legacy amortization schedule this year alone. In Q1, it stayed at $16 million for the quarter, which was similar to what we had in Q4 of last year. But now you're going to see the step function down starting in fiscal Q2. And so that's going to drop to $8 million per quarter, so basically cut in half. And it's going to stay at $8 million per quarter for the balance of this year. And so that's the drive for the legacy.
spk10: What percentage of your fixed contract were minimum commitments relative to prepay? Because this is kind of the first time I've been hearing about fixed commitment of minimum commitments versus prepays.
spk12: Yeah, we've had those and we've disclosed those in each quarter. And so this past quarter, we had the $20 million of fixed commitments. That was all minimum commitment deals.
spk10: Got it. So you did $20 million were fixed commitments. All of them were fixed amendments, not not there were no prepays. Not in this quarter. Not in this quarter. Okay. All right. Thank you.
spk01: Our next question comes from Joseph's back with RBC. Your line is open.
spk04: Thank you. I guess I'm still trying to maybe process some of that recent information. But Mark, maybe you could just better help us here because, you know, I understand sort of the push and pull between variable and fixed. But it looks like if you were to sort of just say, okay, well, variable should have been down in line with what production was. you know, production was down 13% and that variable component was down 40% year over year. So would that have been like 10 million higher? So do you have, like, based on your audits, like how many licenses or sort of dollars have you effectively pulled ahead here that's going to weigh on the next, seems like, two years?
spk12: Yeah, I mean, I think if you look at, you know, year over year for the variable component, You know, the way I look at it is, you know, how much increase in consumption occurred from last year to this year. And we're estimating that to be approximately $6 million year over year. So if you sort of adjust for that incremental $6 million of consumption, it still gets you not at the 13% for IHS. It's more... you know, I think it's around down 24% year over year. If you look at the quarter over quarter, the increase in that consumption was approximately $5 million. So if you adjust for that, we were slightly ahead of IHS. And so that's the way, you know, that's the way to think about it. And it kind of goes back to our earlier comment, which is once you're going outside those historical ranges, you're going to see more consumption as those licenses get consumed by our customers. And so that's what's driving some of the effects this year.
spk04: Right. So just to understand the potential impact over the balance this year and something into next year, what's the cumulative dollar amount that you think you've basically pre-banked relative to what's been produced?
spk12: Um, I think for this year relative to last year, it's probably going to be an incremental consumption of about 30, 30 million or low thirties.
spk04: Okay. Um, and then, okay. Um, that, that, that's helpful. And then I guess the second question is, um, just the one time license deals that you were expecting, um, I guess that's the first time I've heard of that element. What was the magnitude of that? And, you know, it sounds like you're reevaluating the midterm guidance, but just broadly, how much sort of one-time deals were sort of assumed in sort of the midterm goals as well?
spk12: Yeah, we haven't broken that down specifically in terms of the three factors that Stefan contributed. to the drop in the guidance. And so, Stefan, I'm not sure if you want to answer that question with any more details or not.
spk07: So, Joe, good morning. What I can say, you know, in Q4, you know, I structured and brought in a deal with a big tech giant, yeah? And then in our planning beginning of the fiscal year, we made some assumption about this so-called technology or one-time technology deals. But it seems that we see now fewer opportunities based on the fact that maybe some of those opportunities will be pushed out to next fiscal year.
spk04: Okay, we can follow up later.
spk07: Thank you. The idea behind this, Joe, is that, I mean, you know, I think we are still restricted to the FOU, to the field of use, but we have also some technology like, for example, text-to-speech, swipe handwriting, which is very attractive for the big tech giants and others. And that was actually the starting point in Q4, but as I said, it seems that it would take a bit longer than originally planned. as anticipated.
spk01: Our next question comes from Colin Langan with Wells Fargo. Your line is open.
spk05: Oh, great. Thanks for taking my questions. I know you just withdrew the 2024 targets. Can you maybe just provide broad strokes of what has gotten sort of better or worse over the last quarter? I mean, how should we think about the near-term factors? Do they all translate in
spk07: So as I said, I think our fundamentals are actually great. You see it also with strong bookings in Q1, and we will speak more about it by the end of next quarter. I think currently all the headwind is coming from semiconductor shortage. and also from the worsened by Omicron actually, right? And this actually is a key driver here. I think I'm pretty sure that this will be fixed over the next couple of quarters. I cannot exactly tell you by when. There are some optimistic view within the next two to three quarters. There are also some pessimistic views that it goes until the end of calendar year 23. We are looking into this. You know, we have also added some of our strong relationships with the OEM. We're getting also here updates from OEMs and trying to align then our models for the next few years. You know also that I've just started in this role since December, so I'm more or less two months now in my new role. I'm getting excellent support from the business leader, but I think it will take a bit more time before sharing our new vision, our strategy, and then also our long-term model. Mark, do you want to add something to it?
spk12: No, I think that's accurate. I think that's correct.
spk05: And just to follow up on the reasons for the cut, because I'm a little confused because IHS actually has gotten better since you last updated. I think it was flat. Now it's up 2%. So why is that a negative factor? And then also on the fixed and variable issue, shouldn't that have been kind of anticipated in the original guidance that this should have been kind of known about when you originally guided?
spk07: Yeah, so I'll take the first one. Go ahead, Mark, please.
spk12: Yeah, I'll take the fixed. Yes, we knew about that when we were given guidance in November. Since then, there have been some changes to the mix, which made it a little bit worse, but that obviously was not the driving factor. And I'll let Stefan answer the other part of the question.
spk00: Mm-hmm. Mm-hmm.
spk07: Yeah, so also when looking at IHS, right, and you know we're starting our fiscal year in October, then it's more or less a zero-gram, it's flat, but what we're also hearing from our customers, right, that the semiconductor shortage varies from company to company, as well as the level of impact here, right, and in some cases, yeah, the are not delivered for example with our solution or something is missing here but the car is delivered and this has of course an impact on our revenue projection and what I mentioned also is we did really an intensive search here with some of our key OEMs and what I mentioned at the beginning is that we see already that some large OEMs really acknowledge that they are far behind their volumes
spk05: Okay, thanks for taking my questions.
spk01: Our next question comes from Jeff Vannery with Craig Hallam. Your line is open.
spk11: Great, thanks. Several questions. I guess just on Connected, have there been any notable renewals that have come up for renewal? Just wondering if you have, in fact, closed any of those or all of those that have been available to close. And then secondly, just obviously big numbers on the booking side, particularly with that very large contract, but could you talk to overall win rates in the quarter?
spk07: So first, let me take the renewals, right? As Mark also mentioned earlier, right, so we see that for older solutions, the expected renewals are lower than expected, yeah. because, I mean, that has to do with the automotive deployment cycle, right? And they're not going back five years from now, right? Their focus is more on innovation and bringing out the new solutions. And by that, I expect much more renewals, right? And then we have also a new way on innovations, right, where we can add more for Cernsia. Yeah.
spk11: And then the win rates?
spk07: Win rates, on the win rate side, I think we are doing pretty good, as said, right? In total, we have now one, four, two wheelers, yeah, with huge brands across the globe, so globally, and I'm very proud about this achievement. We are seeing also, we're seeing also our strong position in the core business in automotive also, especially across the globe. And it's also proven by the biggest booking deal ever of about $149 million.
spk11: Okay, last one for me then. I guess, you know, a lot of moving parts here and still just trying to wrap my head around it. But the second of the key factors, the bookings that will take longer than expected for new products to convert to revenues. Just touch on that again. Can you give me an example or two? Maybe you already did it, but, you know.
spk07: So, please note, right, so we are doing a bookings deal now, right, and then it will be on the street in two to three years from now on the core business. On the new mobility segments, right, like, for example, elevator, we had also, you know, elevator or two wheelers, right, we see also that's actually a nice opportunity for us in terms of growth and revenue contribution, right, but there are also some some learning curves on the OEM side as well, right, for two-wheelers and elevators, right? And therefore, I expect with the business leaders here also a slower conversion, booking conversion to revenue in this field.
spk11: And can you put any finer point on that? If it's two to three years on the auto side, what are elevators and two-wheelers then from booking to conversion?
spk07: It depends a bit. So in building elevator, it's hard to say because it's new to our business, right? But I think this market is still a bit slower than the traditional automotive segment. I see also in automotive actually a huge demand for accelerating deployment. I'm not sure what will happen to the inflation rate. For real estate, this might affect also the elevator opportunity here, and we did also a very conservative approach here. We didn't book actually the bookings here to the two billion to be on the safe side. For two wheelers, I think it's in the same range, maybe a bit faster than automotive, but also here the two wheeler manufacturers are also suffering on the supply chain.
spk11: Okay, great. I'll leave it there. Thank you.
spk01: Our next question comes from Chris McNally with Evacor ISI. Your line is open.
spk13: Thank you. Just a couple of clarifications. I feel like the fixed minimum contract has not been fully addressed. So to be clear, is that not one of the issues for the guy down currently, meaning it's not one of the three issues? conditions you've listed. I just wanted to make sure that was clear, the 30 million that Mark referenced.
spk07: I think I would say that that's part of the equation. Yeah, so we had also assumed that we have a faster, let's say, or less impact from the semiconductor shortage, right? And then it goes hand in hand. I mean, typically the consumption is four to six quarters. And now, based on the chip shortage, we expect it to take a bit longer.
spk13: Okay. So maybe that's one of the reasons why I guess we're all confused because upper 0.1 IHS, you know, really hasn't revised into anything. It's been stable for the last couple months. But you're saying the mix is affecting the fixed minimum contract? Exactly. Yeah. Okay. And then the second point, the new products, just again to be clear, is this new applications and services, you know, that's effectively in both connected and edge, or is this only in new mobility markets that you're expecting longer conversion from bookings to revenue?
spk07: So it's actually both, and here I'm talking about connected cloud, so new applications, so the assumption was that we can also bring in our solutions faster to the road on already SOP tasks. This seems to take a bit longer now that most of the OEMs want to have our latest and greatest technology on the new platforms because they put much more attention to new platforms. And then on the adjacent market, I think, yeah, that's actually what we observed and analyzed with the team is that we see here a slower booking to revenue conversion. Okay.
spk13: And if I just... And so, Stefan, if I could just be a little critical for a second, if it's both... you know, the Edge and the Connected, that was the businesses that you ran, you know, prior to being... We're not talking... Yeah, so, sorry.
spk07: Maybe it wasn't clear enough here, right? I didn't spoke about Edge. It's just related to connected apps, right? So, for example, to give you a quick example, right? You know, we had a deal last year with Civo. You know, it was about Seren's Pay. That's fully cloud-based, right? And you know that Lear, for example... restructure the business, and we put this booking out of our backlog.
spk13: And so the implication being that it's the OEM, for example, it's the platform that you're on has been moved?
spk07: Yes, for example, and for, yeah, on new apps.
spk13: Okay. And so that obviously has implications more than a 22 or 23 basis, because either you know when, meaning you said the booking wasn't lost, so I think that's what people are going to take this as. And so I'm not sure how bookings could not be affected if you're taking out something that was previously going to be converted to revenue.
spk07: Yeah, so I mean, that was the specific case with Civo, right? Mm-hmm. and we completely restructured this business. This business is gone, and therefore we took a hit ourselves, right, and we de-booked it from our bookings pipeline.
spk13: Okay, so that's obviously something that's pretty specific, yeah.
spk06: Yeah, Chris, there's still over 100 million in bookings even after the Zivo adjustment, so it is still a strong part of the business. What he's referring to is that what customers are doing is rather than, you know, putting these applications out on an as-available basis, many of them are choosing to wait until they introduce their next generation infotainment system and bundling the technology together. And that's, you know, part of the dynamic that we're dealing with. Okay.
spk13: So, okay. Just to be clear, because we're going to get this question a lot. What you're saying is that rather than going on like a mid cycle conversion where, you know, it could have been in the middle of a six year product cycle for some of the products it's being moved to the next platform, which can be five or six, but to be clear, you may have not lost that booking, but it could be moved multiple years.
spk07: Correct. That's correct.
spk13: Okay. And finally, just while I have you that the third one, um, one, one time technology license, um, uh, opportunities, what, what division was that going to be? Was that going to be within edge? Um, that they got moved for fiscal 22. And again, cause I'm just trying to be critical. This was obviously, you know, a division that you ran.
spk07: Yeah, no, that that's actually, it's, it's both edge and cloud. Yeah. And you know that, for example, we have in the part, are we still under the FOU agreement, right, that we have some restrictions, right, that our focus is clearly on mobility, transportation, right, and Nuance Mother Co. is actually doing everything else. They cannot go into or they cannot enter mobility and transportation. But we have some opportunities, for example, telling our unique, technologies such as TTS and we own TTS or handwriting to others outside of mobility.
spk13: Okay. Thank you. I'll follow up offline.
spk01: Our next question comes from Luke Junk with Baird. Your line is open.
spk08: Good morning. Thanks for taking the questions. A couple of philosophical questions. First, Stefan, I'm wondering if you could expand on your philosophy going forward around booking fixed license revenue relative to Mark's comments and the prepared remarks as to what a normal range in terms of revenue there would be. Where should that track going forward? And, yeah, I guess that would be the question mainly.
spk07: Okay. And let me start first, and then I will turn over to Mark. Um, so, so first of all, um, I think, you know, uh, traditionally we had a range of 40 to 50 million in terms of, of fixed licenses, right? I mean, you know, that OEMs are coming to us and, and trying to negotiate a better deal, right? And, uh, that's, that's normal or typical in the automotive industry. Um, now over the last two years or actually last year, uh, it was a bit higher than originally, uh, uh, expected. This gives us also some headwind now. Then we need to compensate this with more running royalties, which is always tough. And always for the consumption of such a fixed license deal, it takes us, as I said earlier, four to six quarters.
spk12: Just to add to that, I think the I think that the objective would be to sort of get back into the historical range, you know, and so it's going to take some time to do that. But, you know, I don't think we can necessarily eliminate these programs. But, you know, clearly I think, you know, last year in particular and even the year before, When we were at the high end of historical range, and last year we were well above that, you know, the goal would be to sort of, you know, get that over time, get that back into the historical ranges.
spk08: Okay, and then a second question I had, not necessarily in terms of top line, but a sort of consequent of top line, and that's regarding... profitability made the comment in your prepared remarks, Stefan, that you were comfortable with the spending level in the business right now for the rest of the year. And I'm just hoping you could expand on your approach to the expense base as you reset the excitation for revenue from here, specifically being around areas like R&D, how aggressively you think the company should be pushing.
spk07: Yeah. So, I mean, with respect also to the updated guidance, We put a lot of attention also to cost control, especially on R&D and professional services. On the other hand, I have to say that most of the R&D work is related to features committed to our OEMs, right? And for us, innovation is vital, right? It's key to success. And maybe as you have seen or heard, I mean, we went to Vegas, presented our latest technologies there and application, and the feedback was really awesome, right? It was great, right? So they saw that we have actually outstanding solutions, very competitive, right? From edge to hybrid to cloud solutions, right? We introduced, for example, our new assistant which has been also sold to a couple of customers right we presented for the first time proactive AI and digital twin that's also a new product that was also well received by OEMs and also we had a deal already in Q1 for the digital twin and then also we are expanding everything around connected services. We've presented, for example, Karaoke and other cloud solutions, and I think that seems very attractive to the market. And one of the executive guys from a big leading OEM said, okay, he wants to have everything in his new car. So that's very encouraging and promising to us.
spk08: I'll leave it there. Thank you.
spk01: Our next question comes from Michael Phillips with Derenberg Capital. Your line is open.
spk03: Hi, thanks for taking my question. Just the first one, you know, just again on sort of reinvestment into OpEx and R&D. I see there's a step down in the margin profile in the guidance. I'm wondering if you have sort of lower expectations for margins. I know you're kind of pulling that 50 or 24 model, but I mean, do you still think sort of high end of the 30% range is achievable long term, or do you think that you need to reinvest more to keep your products competitive relative to some of your bigger tech competitors?
spk07: Thanks for your question. I think we have now a really competitive platform. That's the feedback from more or less all OEMs across the globe, including China, right? I think we have actually also a focus on R&D. R&D is essential also to the long-term success of the company. Nevertheless, I believe we will adjust our outlook, our new target model, including the margin within the next analyst stage. depending a bit on the hiring of the new CFO.
spk03: Okay, understood. And I know, again, you'll address this probably at the end of the fiscal year 24 model, but you mentioned elevators. That's an area that, I don't know, it's quite interesting. It seems like, you know, because there's a hardware component to it, it would be margin dilutive. So do you still see that as sort of an attractive avenue for CERNs to go in, direction for the company to go in, or... Are you potentially rethinking some of those new end markets?
spk07: I'm still unpacking and exploring things which I was not responsible for, right? And this could be an area where we need to think carefully about the long-term future, right? But nevertheless, currently, it's an opportunity for us. We had high expectations also to see a faster bookings-to-revenue conversion but it seems a bit slowing down now. Yeah, that could be one, but give me please some time since I'm just two months in this new role here, and then you will get a crisp update during our next another stage.
spk03: Okay, understood. I'll leave it there. Thanks. Thank you.
spk01: Our next question comes from Mark Delaney with Goldman Sachs. Your line is open.
spk02: Yes, thank you for taking questions. I have two, if I could. Maybe first, if you could help us think about what a more normalized rate of growth in billings per car is. I think historical billings per car growth would have been overstated because of the use of these prepaid licenses. Perhaps now as your OEMs are consuming the licenses, it's understating billings per car. So what's a better number to think about on a normalized basis in terms of sustainable billings per car number?
spk12: So the billings per car, that has been adjusted for these prepay deals. So that hasn't influenced those numbers. If you saw this quarter, you know, the billings per car growth was actually zero on the trailing 12-month basis versus the prior year. And we looked into that, and it looks like there's actually one contract in particular on the connected side where the billings are coming down. It's for an older program which had a pretty high ASP. And, you know, because that's now starting to trend downward, that's what's happened to that billions per car. And then, you know, once that sort of levels off, then we would expect to see, you know, that downward trend to be alleviated.
spk02: Okay, and my second question, and I don't typically guide bookings, at least not specifically, but can you talk about bookings for fiscal 22 more qualitatively? Do you think it can be up year over year versus last year?
spk07: Yeah, so on the booking side, you know, 21 was a bit lower than the year before. Key reason is we had in 2020, In year 20, two big bookings events, mainly driven by me, on the automotive core. And that was maybe one of the key reasons. And then one deal also in 21 moved to 22. But other than that, I'm still very optimistic and excited about bookings. It shows actually the health of our future, right. And also the position in the market, and also the value of our product itself, right. So I'm very excited about this.
spk02: Okay, thank you.
spk01: There are no further questions like to turn the call back over to Richard Gagnon for any closing remarks.
spk06: All right, thank you to everyone for joining us on the call this morning. We look forward to future discussions. Have a great day. Thank you. Thank you.
spk01: This concludes the program. You may now disconnect. Everyone, have a great day.
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