This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk07: Good day and thank you for standing by. Welcome to the SARINS Q1 2023 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Rich Yerganian, Senior Vice President of Investor Relations. Please go ahead.
spk05: Thank you. Welcome to CERNS' first quarter fiscal year 2023 conference call. Before we begin, I would like to remind you that this call may involve certain forward-looking statements. Service makes no representations to update those statements after today. These statements are subject to risks and uncertainties as described in our SEC filings, including the Form 8K with the press release preceding today's call, our Form 10Q to be filed today, and then our Form 10K filed on November 29th, 2022. 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. The press release is available in the IR section of our website. Joining me on today's call are Stefan Orbins, CEO of Serence, and Tom Bowden, CFO of Serence. As a reminder, the only authorized spokespeople for the company are Stefan, Tom, and myself. Before handing the call over to Stefan, I would like to announce that we will be presenting at the virtual Baird 2023 Vehicle Technology and Mobility Conference on February 15th in an early March at the Morgan Stanley Technology Conference. Now on to the call.
spk04: Stefan. Thank you, Rich. Welcome, everyone, and thank you for joining us to discuss our first quarter earnings. I'm pleased to report we had a strong start to the fiscal year driven by our core auto business. Each of the key financial metrics provided in our guidance came in above the high end of the range. Tom will share the details with you shortly. At our investor day in November, we laid out our strategy for long-term sustainable growth for CERN, what we are calling Destination Next. We described the evolution of our technology and the role it plays in the car of the future an immersive companion that goes beyond conversational ai extending to all aspects of the user experience inside the cabin for both driver and passengers and even outside the car we also provided our long-term target models which reflect not only the increasing level of adoption of current of our current technology with programs already awarded, but also the future adoption of a greater suite of technology that CERNS will bring to the market. This was an important event that allows us to share with all of you the excitement we have for the future of CERNS. In the near term, the first quarter showed continued success across customers and product innovation. Working with our customers, we delivered 47 SOPs, start of production, in the quarter. including 18 initial program launches. We signed two competitive win-back contracts in the outer space, one in Europe, one in China. These are significant because both represent takeaways from consumer tech and validate our continued competitive edge. Our experience in large language models combined with our deep mobility experience and generative AI expertise is vital to drive innovation and expand our position as a category leader. In addition to various competitive design wins, we added two new logo wins, one in Europe for auto and one in China for two wheelers. The two wheeler win now brings the total of two wheeler customers to seven, and we expect that number will be even higher by the end of the fiscal year. Two wheeled vehicles continue to be an important adjacency providing a growth area for CERNs and our destination next strategy. While we are seeing slow improvements, the macro environment remains a challenge. Semiconductor shortages are still impacting auto production, although there has been some improvements of the supply. We are hopeful that the slow but improving trend for access to semiconductors continues. These shortages have led to an up demand for autos, where in many areas inventories remain low. There is a concern about a potential global recession in 2023, but that does not appear to have had any impact on auto production at this point. The latest forecast from IHS aligned to our fiscal year is for 2.5% growth year over year. After our strong first quarter, we are slightly raising the lower end of our full year guidance. We remain confident that we can achieve the goals we set for the fiscal year and continue to deliver predictable and medium and long-term sustainable growth. In addition to the business highlights for the quarter, I would like to also share with you some key innovation highlights across our products. With our razor sharp focus on innovation, we have a distinguished competitive advantage. It is evident that our customers rely on us to jointly create unique mobility experiences for their customers. As the automotive industry transitions to electric vehicles, these experiences will become an increasingly important aspect of differentiation for our customers. Continued innovation is key to our customers' visions and to our future growth, and the strong momentum for our current products and technologies provides a solid foundation as we extend our AI expertise to other areas. At the core of our current product portfolio is CERN's Assistant 2.0, the foundation of our co-pilot offering. This product is a perfect example of what we refer to as scalable AI, where we can take a product developed for the auto industry and with minimal engineering apply it to an adjacent transportation market such as two wheelers. As you may recall, CERN's co-pilot runs directly on a vehicle's head unit with advanced AI deeply integrated with car sensors and data to understand complex situations both inside the vehicle and around it, while securely integrating edge technology with cloud services to make driving more intuitive, connected, and enjoyable. It's clear that mobility OEMs see the advantages CERN's co-pilot brings to their vehicles. ASQ1 saw four automotive design wins from customers in Europe and China. With CERNS Assistant 2.0 as its foundation, CERNS Ride, our offering specific to the two-wheeler market, was awarded three design wins in the quarter, including a key win for a major Japanese manufacturer, where we had to compete against both consumer tech and niche competitors. CERNS Ride offers unique features like providing the rider with distraction-free navigation, route planning, and riding records. enabling a safer, more enjoyable experience. By using their voice, riders can now navigate, listen to music and other media, adjust settings, and even control their smart home devices, all without taking the hands of the handlebars or their eyes off the road. Further expanding the reach of our technology, CERN's Link is a comprehensive solution that bridges the technology gap between connected and not connected cars by providing the ability to capture vehicle diagnostic sensors and telemetry data as well as car geolocation and other useful information that is delivered to the end user through a mobile app with a rich user interface. With CERN's connected vehicle digital twin as its foundation, CERN's link is able to apply cloud-based intelligence on this data to enhance driver safety, security, comfort, and convenience. When we first introduced this product last September, we had already secured an important customer win in India, which is already contributing to revenue for the company. In Q1, we won our second customer, also in India, demonstrating continued adoption for this new solution. These key wins for CERN Slink and CERN Strike indicate continued adoption in adjacent and expansion markets, proving that we are focused on the right areas that can support continuous long-term growth. And lastly, during the quarter, we had a customer launch, a significant expansion of capabilities leveraging our car knowledge product. The innovation is an upgrade to the OEM's existing solution and makes accessing digital owner's manual information and remote vehicle controls as easy as possible, delivering additional value for their drivers. Customers can chat with the assistant both in the car and via Facebook Messenger from anywhere, asking vehicle-specific questions or remotely starting, locking, or unlocking their vehicle. The system leverages generative AI to understand more voice commands and provide more engaging responses. I'm very excited about our current lineup of products and our growth in important adjacent markets. but even more so for the products yet to come under the leadership of Chief Technology Officer Fatih Kadpal and Chief Proc Officer Nils Schanz. This slide may look familiar to you from our investor days, but we feel it's important to revisit to continue to ground ourselves in all what we have accomplished in the past 12 months and where our focus is moving forward. We have the customers, the innovative product and technology, and the strong competitive position to deliver long-term sustainable growth. Now it is all about execution. As you heard from me in November, and as remains true today, our goal is to deliver on what we have promised to our customers and investors. We have had a strong start to the fiscal year, and we are focused on keeping the momentum going. Before I hand the call over to Tom to review our Q1 results and Q2 guidance in detail, I want to reinforce the key points of our Destination Next strategy. Destination Next applies to all aspects of our business. It shapes our product strategy as we innovate to deliver a truly immersive companion experience in the car. It positions us as a key partner to our customers as they seek to create unique branded experiences. It doubles our self-addressable market over the next seven years, providing excellent opportunities for growth once we get past the FY23 transition year. And it puts the company on a path to deliver strong growth, profitability, and cash generation over the long term. The entire company is behind our destination next strategy, and I'm excited to keep you informed as you continue to make progress towards our long-term goals. I will now turn it over to Tom.
spk03: Thank you, Stefan. I'll come back to guidance in a moment, but first I want to share more on our Q1 results. One of our goals has been to develop a track record of doing what we say. With our strong Q1 results, we are providing another positive data point in accomplishing this goal. We are committed to continuing to build upon this trend to establish a proven track record of predictable performance. Q1 revenue came in at $83.7 million, well above the high end of our guidance. This is due to a combination of better than expected strength in our core business with higher than anticipated contributions from connected services, professional services, and fixed contracts. Consumption of existing fixed contracts in the quarter was lower than originally expected due to a longer projected consumption time for the Q1 prepaid deal than our model. The higher amount of fixed contracts in the quarter remain within the framework of 40 million fixed contracts for the full year. Because of the high revenue, we exceeded all of our profitability metrics we guided for the quarter. Non-GAAP gross margin was 70.4%. Non-GAAP operating margin was 20.5%. Adjusted EBITDA was 19.7 million. or 23.5% margin. And non-GAAP earnings per share was 36 cents. All these metrics came in above the high end of our guidance. During the quarter, cash flow from operations was approximately negative 2.1 million. While CFFO was negative in the quarter, we expect positive CFFO for the full fiscal year. Our balance sheet remains strong with total cash and marketable securities of approximately $120 million. Here is our breakdown of revenue of the quarter. Variable license revenue was up 22% from the same quarter last year and 38% quarter over quarter. The increases were due to reduced consumption of fixed licenses slowly improving auto production and increasing penetration. New connected services revenue was down 12% from the same quarter last year and up 3% from last quarter. The year over year decline was the result of several disclosed factors such as lower production of connected cars over the last two fiscal years due to semiconductor shortages, and expiring contracts for older technologies, separate from the legacy contracts. Finally, our professional services revenue was up 3% year over year and down 5% quarter over quarter. Professional services are a key indicator of future license and connected services revenue, as the pro services team includes the individuals who directly interface with customers to customize and implement Cerenc's technology on next generation OEM platforms. We don't see professional services as a revenue growth driver for the company, but instead acts as an enabler for future licensed and connected revenue. Moving on to the details in our licensed business. Overall, the licensed business remains strong and is indicating slow improvement from the issues that have plagued auto production over the last few years. We signed fixed contracts in the quarter worth $19 million, $18 million as prepaid contracts, and approximately $1 million as a minimum commitment deal. This was slightly above our estimate going into the quarter of $18 million. We continue to manage fixed contracts to an approximate $40 million level for the full year. While there was a small minimum commitment deal in the quarter, we do not expect minimum commitment deals moving forward. Proforma royalties were up 5% year over year and 7% quarter over quarter due to increased auto production. consumption of fixed licenses declined 14% during the same period. While difficult to accurately predict, we do believe the consumption of fixed contract licenses should peak in fiscal 2023. The majority of our KPIs continue to indicate strength in the business. Our penetration of global auto production for the trailing 12 months increased to 52% from 51%. This means over half of global auto production includes some level of CERN's technology. Of the total 11.5 million cars with CERN's technologies, those that used our connected services increased 4% quarter over quarter. We also saw a big increase in monthly active users. 19% year over year, indicating increasing popularity among consumers of our technology. Now turning to revenue guidance for Q2 and the fiscal year. One factor that we have an impact on our quarterly revenue is the value of fixed contracts in a quarter. Fixed contracts were 19 million in Q1. We expect fixed contracts of approximately 4 to 5 million in Q2, approximately 15 million in Q3, and none in Q4. Taking that into consideration, we are guiding to 64 to 68 million for Q2. With Q1 behind us and greater visibility into our fiscal year, We are also raising the lower end of our full fiscal year guidance from 270 to $275 million. You can see on this slide the revenue guidance and effect of the associated financial metrics. Overall, the business continues to perform as we outlined at our investor day and remain focused on innovation and execution to achieve our long-term goals. This concludes our prepared remarks, and now we will open the call for questions.
spk07: As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first Question comes from Luke Junk with Baird. Your line is now open.
spk11: Good morning. Thanks for taking the question. I want to start with a mechanical question this morning. And, Tom, can you just help us understand the lower-than-expected consumption of fixed contracts this quarter? I know you mentioned it had something to do with prepay. Is that timing-related, mix-related? And is it right to think that this doesn't flow through to full-year guidance or not? Thank you.
spk03: As we've talked about previously, typically a prepaid gets consumed on average over six quarters. The particular prepaid that we did in Q1, the projected consumption on that particular deal is estimated at about eight quarters. So from our modeling and from the way we had set our plans and guidance, you know, that has a positive effect in the short term.
spk11: Understood. Thank you. And then follow-up, I just want to ask a bigger picture question, Stephan. So wondering if there's any additional color you can provide on the co-pilot win backs in particular maybe if we could discuss key system capabilities you think to help to drive those win backs versus the competing consumer tech and i don't know if you could come and also on your previous positioning with these customers if that would make sense thank you um thanks for your question lucia and good morning
spk04: Yes, so our CIRNS system 2.0, so-called co-pilot-wide, is actually well received here at the OEM sites. We had various design wins last quarter in Q1. One was against a big tech giant, and another one was also in China. It was also a tech giant. And then we had also some very competitive design wins against a big tech agency. And what we see here and feedback from the market is actually outstanding, right? In all my discussions with the OEMs, right? They say, okay, well, this is really a cool solution, right? It's extremely fast in the response time behavior. It has a broad coverage, but it goes also into deep learning and what we said also generative AI search capabilities here, right? Combined with proactive AI, for example, leveraging sensor data, and also leveraging the information around the surrounding of a car, for example, road information and also this kind of weather forecasting here, right? And that was actually well received. We have a great prototyping solution here and OEMs want to work tightly with us together, right? Also seeing Copilot as a foundation, but in most of the cases, they want to have also a kind of their own branding and experience.
spk11: Got it. Thank you for the caller. I'll go ahead and leave it there for now.
spk07: Please stand by for our next question. Our next question comes from Colin Langan with Wells Fargo. Your line is now open.
spk08: Oh, great. Thanks for taking my questions. Just first question. Guidances, just to confirm, is it based on IHS and IHS has actually come down for September year-end. So is that incorporated and what is offsetting sort of that weakness in production?
spk04: Maybe let me start first and then I will ask also Tom for putting his color to it, right? So in general, right, so IHS came down roughly 3% from 6% year-over-year. Now it's in the range of 2.5% to 3%. And that goes actually hand in hand with our projection from the beginning of our fiscal year.
spk03: Yeah, we had baked in when we had done our original planning. We had taken a relatively conservative approach. Interestingly enough, IHS has come down more to the numbers that we were projecting. We don't use solely IHS in our forecasting because we get, you know, reporting from all of our customers every quarter on their royalty. So we use a combination of overall market trends and that what we're seeing from our individual customer royalty reports. And that's how we base our guidance.
spk08: Got it. Okay. That makes sense. And if I look at slide nine, you look at like new connected services, I think you highlighted something like a 19% increase in monthly users, but that line hasn't really moved very much. It's not really showing growth. So what is sort of keeping the growth back in that new connected segment, and when should that start to inflect back upward?
spk03: It's a combination. I mean, as we've talked about previously, there are some older platforms that are not up for renewal. that are kind of winding down. We've also lost kind of two years of revenue because cars were much lower, you know, we're down 20 million a year of production. And that represents connected opportunities that we would have had in the amortization of those revenues coming in in the current periods. As we talked about at Investor Day, there's a number of wins that will start to go into production at the second half of this year and into FY24. A lot of those wins include some of our connected services, which will start to help us to drive growth and get us more towards the growth projections that we had in 24, 25 and going forward. The usage, I think, is important. It doesn't directly correlate to revenue because it's the revenue of connected services that are shipping on the cars. But what it does do is to show that our technology is being used more, is being accepted, that some of our new enhancements are being recognized by the drivers and the passengers.
spk04: Maybe let me also add a bit color to it here, right? So I think what I just mentioned at the beginning, right? Co-pilot, CERN's link, CERN's right. They have all the connected components, right? And they will go live over the next 12 to 18 months with the specific OEMs. We see also really an uptick here in active subscribers, right? So one OEM reports also a big jump in the adaption of our so-called connected services offering. We are working also with a world leading premium OEM on so-called additional expansion of the current cloud with new cloud domains, with new proactive AI. for older capabilities, right, so that we can bring those services, cloud services, to SOP tasks, so tasks being on their own. So we have plenty of opportunities. And as Tom mentioned correctly, right, I think we are still in the transitional year. We are suffering still a bit from the auto production over the last two to three years, but we're seeing more and more opportunities for connected services. Got it. All right.
spk08: Thanks for taking my question.
spk07: Please stand by for our next question. Our next question comes from Raj Vendra Gill with Needham. Your line is now open.
spk09: Yes, thank you and congrats on good results and a good transition with this turnaround story. Question on the visibility, if I can. I know at the analyst day, you talked about kind of 95% visibility. into fiscal year 23, and then you talked about, I believe, 75% visibility into fiscal year 24. If I look at the slides on slide 12, you're kind of increasing your visibility for this year by about a couple points to 97% for the full fiscal year. I'm wondering how you're thinking about the visibility into the growth year, fiscal year 24, Has that changed given some of the design wins you're talking about, given some of the more stabilization in the fixed contracts? And does that also apply to some of the longer-term targets in fiscal year 25-26?
spk03: So, Raj, thank you for that. Thank you. We are happy about Q1 and continuing this story. Yeah, I mean, clearly we have stronger visibility to do FY23. As you know, we report bookings semi-annually, so we'll be updating our bookings in Q2. And clearly, you know, we had good bookings in Q1 that will help with that visibility for FY24. But so I hope to have more to say around, more specifics around how we're tracking to that FY24 growth initiatives that we laid out in Investor Day. But everything that we accomplished in Q1 helps us towards that journey and delivering those results.
spk09: Great. And if you could maybe update us on the Field of Use Agreement. I believe it's ending in two years. If you could just you know, clarify that, and once that field of use agreement is over, what other markets can you start to license your IP?
spk04: So, also, I think that's also a key focus area. Actually, we have three vectors here, right? One is the execution on our core roadmap, right, what we just explained with automotive, adjacency transportation segments, right? The other important aspect is driving innovation. And the third one is also paving the way for post-FOU opportunities. And you know, we have hired a very strong business development team also with a separate R&D team underneath, right? And they're working already on some opportunities for this fiscal year. And we hope that we can also report first revenue driven by this team by the second half and the second half of this fiscal year. And we are evaluating also other opportunities for, let's say, October 24. So I think that's one of our key focus areas also and also part of our destination next strategy.
spk03: Yeah, just to make sure everybody understands, you know, as we laid out in the investor day, we have the transportation adjacency markets. that are starting to take traction that Stefan talked about today. And then we have what we call the non-transportation. And as Stefan said, we've already seeded a team. And just for clarity, there are a couple of technology areas that are not subject to the FOU. And so we're able to seed that group and they're able to to drive some solutions and even some revenue prior to the FOU. The opportunity expands, and that's why we're trying to get this group seated and working well so that when the FOU expires in now less than two years, we have a well-developed team and capabilities to then look at expansion of all of that post the expiration.
spk04: And the other important aspect is also, you know, at the analyst day, we presented three pillars here, right? Scalable AI, then the multi-sensory experience platform plus tools, and then the companion, immersive companion solution, right? Scalable AI is also key to success, and we can easily apply those technologies to other markets beyond transportation, more or less at no cost. Appreciate it. Thank you.
spk10: please stand by for our next question our next question comes from jeff bonnier with craig holland your line is now open great thanks thanks for taking my questions guys and thank you for the increased transparency i appreciate all the incremental data points over time we're getting here it's very helpful um a couple uh several questions i could jump through these fairly quickly I think, Tom, you referenced bookings. Just to be clear, do bookings meet the plan for the quarter? And, NetNet, I know you don't publish an outlook in terms of what you're thinking internally for the year, but has the annual outlook on bookings changed, say, versus 90 days ago? And then along the same lines, just to just want to make sure I'm clear, the consumption number I think you talked about at the Investor Day was roughly 75 million of consumption expected in 23. Is that still the number?
spk03: So just on bookings, I mean, we'll update bookings in Q2. And the reason we do it semi-annual is it can be a bit lumpy. We did have some nice wins in Q1. I think Stefan alluded to that. And then on consumption, consumption will be, you know, a little bit lower because of this one particular prepaid where we had modeled kind of six quarters and it's probably going to be eight quarters. But that can vary too, Jeff, because it's all based on actual shipments from that particular tier one. So it could be even sooner. Yeah.
spk10: Okay. That's helpful. And then Stefan, as it relates to generative AI and in particular the GPT, large language model is looking very disruptive. I know Bard and some others are coming, but the GPT and some of the things it's been able to demonstrate seem to take a pretty significant leap forward in terms of what these large language models can do, giving you play in those worlds, but within a specific vertical. Do you see that as competition, coopetition? How do you view that? And then, you know, as you were just referencing a minute ago, you've got the expiration of the FOU. Does that suggest the future FOU opportunities also end up being a bit more competitive given what these guys are demonstrating? Just love to hear your thoughts there.
spk04: I think I don't see them as a direct competitor, right? So we have already created a prototype with ChatGPT. but also enhance with our deep knowledge about the car knowledge, about mobility AI experience. You know that we have also, for example, applications such as Browse, what we just also announced, the CERN's car knowledge, which went live with the North American marquee OEM. And you bring those information all together. You have the general knowledge. but also the automotive transportation specific knowledge, right? And this is actually our goal, and we're already in discussion with some of the OEMs what we can do together here.
spk10: Okay. Fair enough. I'll leave it there. Thank you.
spk07: Please stand by for our next question. Our next question comes from David Kelly with Jefferies. Your line is now open.
spk02: Hi team, this is Gavin Kennedy on for David Kelly. Thanks for taking my questions. Can you provide us with more details on your progress in transportation adjacencies? It looks like Saren's Ride specifically won three more design awards with two wheelers, and your two wheeler customers are now up to seven. How should we think about this in the context of your prior transportation adjacencies sales target of $1 million in fiscal year 23 and I believe $6 million in fiscal year 24?
spk04: I mean, you know that the two-wheeler market is a very important market to us here, right? Compared with automotive, they are producing roughly 50 to 60 million two-wheelers on a yearly basis, yeah? I'm really proud about this big design wins for one of the big brands in Japan, where we won an evaluation done in North America against the big tech players and some niche players, right? And the feedback was amazing, right? With respect to our audio AI stuff, our solutions, right? We won in terms of technology and also with respect to application. So we're doing exactly what a rider is looking for. That's one important aspect, so two wheelers. On the other hand, you mentioned also last quarter that we had also some significant design wins in the truck space. Also, we can easily adapt our CERN co-pilot to the needs of trucks here. So overall, we are doing pretty well. And the other important launch, which I mentioned today, was also related to CERN's link, where we are also connecting now non-connected cars via smartphones, via OBD, to solutions to give a better driver experience. monitor the behavior of the driver, geolocation, and so on and so forth. So I think we're doing quite a lot also going beyond the typical natural language processing here, right? And combining all pieces together, right? I think that's actually what we want to do, right? Driving this immersive experience for the transportation market.
spk03: Yeah, and just in these markets, as Stefan alluded to, there is a So most of these are connected elements, and therefore the revenue growth will build over time as you have to take that portion of the revenue and amortize it over the service life of the particular solution.
spk02: Got it. That makes sense. And then as a follow-up, just switching gears, I believe at the Investor Day you mentioned a cost management strategy to improve CERNs, and I believe these savings were included in your planning discussions. Can you provide any more details here on the cost actions you've been taking? And is there any low-hanging fruit that you've addressed in the near term? Thank you.
spk04: So I think you're absolutely right. And we're working here with a well-known consulting company together. And also that we have now a refocus on innovation, R&D, and customer deliveries. Therefore, we have now this two organization, a CTO office and CPO product office. run by Neil Shantz from Mercedes. He joined us a couple of months ago. And we're trying to optimize here the organization for driving more efficiency, productivity, and we're also on a good track. And yes, you're right. That's part of our plan for this fiscal year. Tom?
spk03: A lot of our cost initiatives were designed to drive efficiency. And then as Stefan just talked about, to drive alignment as we implemented the new leadership team across the company. We've done very well on that, and that program is well in place and being implemented. But I do want to say we're also investing, right? It's important that we continue with our innovation strategy. And so we've baked all of that into our guidance going forward. cost savings that we've achieved through the efficiency and productivity initiatives combined with some continuing investment to, and all of our investments are really in the R&D and technology areas to support our innovation agenda.
spk02: Okay, thanks for taking my questions.
spk07: As a reminder, to ask a question, please press star 11 on your telephone. Please stand by for our next question. Our next question comes from Chris McNally with Evercore. Your line is now open.
spk06: Thanks so much, team. Stephan and Thomas, if I could ask One of the things that you provided, which is really helpful, is the pro forma royalty to sift through on the licensing, the underlying trend. This quarter, you showed 5% year-over-year growth, but we've roughly seen a flatlining in this number when we look at it on a two-year basis. One of the questions that I think investors are trying to look forward is, when will that underlying metrics sort of move up so that we incorporate some of the large orders that we've seen that you've talked about some of the launches in connected, but I think seeing that essentially what is paid usage of your licensing move forward will give in, you know, sort of some, um, some confidence of the, you know, higher secular growth versus sort of the low single digit outgrowth that you're doing today.
spk03: So Chris, um, as we talk about in the investor day, um, there's a number of programs that are coming to SOP. We'll start to ship in cars that have deeper sets of our solution, which drives a higher price per unit, also gets some additional volumes from those deals. So I think you'll start to see that line hopefully start to tick up over the next few quarters going into where we show some strong growth in FY24.
spk06: That's great. And just maybe as a follow-up, not for this call, but I think maybe a metric that would be helpful going forward was sort of a percentage of units refreshed or you know, a launch percentage in 24 or 25 versus 23 or 22, something that we could start to kind of make our own estimates for. And again, you know, there's a lot of moving variables, but, you know, order of magnitude, does that start to become, you know, 5 to 10% above production growth? Does it become 10% plus above production growth? There's something in that order of magnitude to give us sort of the end goal of 24 and 25, because we see the orders, but I think we're trying to connect the pieces, you know, just to get into 24-25 would be super helpful.
spk03: Thanks.
spk06: Thanks, team. Thanks, Chris.
spk07: Please stand by for our next question. Our next question comes from Mark Delaney with Goldman Sachs. Your line is now open.
spk01: Yes, good morning. Thank you for taking the questions. First, when you think about some of the new wins and some of the take-backs that you referred to, are those consistent with the trend higher in pricing over time? That was something that was articulated at the analyst day.
spk04: so so yeah i think i think overall we have uh various new win-back opportunities right across the globe not just in europe but also north america primarily and and also in china some great opportunities i think overall in a very competitive environment but what i said at the beginning i think we are better than than even before in terms of competition right with our new products right without all the flexibility we are offering to oems And you bring also more and more features on the embedded side, but also on the cloud side. And that was actually what we also mentioned at the analyst day, that we see a nice increase in the PPU that's already embedded. And I think we will also show something over the next couple of quarters on the connected side, where we see also a nice upside. But overall, I think we are doing pretty well here.
spk01: Okay, that's helpful. Thanks. And then the second was on the connected business. I believe in the past the companies talked about some component of revenue that's tied to usage of the products and whether or not when your technology is on vehicles, are drivers actually engaging with it and using it? Maybe talk a little bit more on what you're seeing in terms of underlying usage rates broadly, and was there any impact from usage rates on revenue in the quarter?
spk03: Thanks. Today, most of our contracts are on the connected side are not tied to usage. We do have a small amount, and we actually saw a slight benefit this quarter from one of those contracts. And then I think going forward, as more and more of the OEMs move to over-the-air updates, that will also help us to implement more of our solutions on cars that are on the road may also help us with additional opportunities to have more usage or activation type revenue. So that was, you know, it was small, but it was a positive thing this quarter on one of our deals. Thank you.
spk07: At this time, I am showing no further questions. I would now like to turn the conference back to Rich for closing remarks.
spk05: Thank you to everyone for joining us on our conference call this morning. We look forward to engaging with you in the future. Have a great day.
spk07: This concludes today's conference call. Thank you for participating. You may now disconnect.
Disclaimer