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spk00: Good day and thank you for standing by. Welcome to the CERN's first quarter 2024 earnings conference 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 this session, you will need to press star 11 on your telephone. You will then hear an automated message advising you that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker, Rich Yerganian, Senior Vice President of Investor Relations. Please go ahead.
spk02: Thank you, Michelle. Welcome to CERNS' first quarter of fiscal year 2024 conference call. Before we begin, I would like to remind you that this call may involve certain forward-looking statements. Any statements that are not statements of historical fact, including statements related to our expectations, estimates, assumptions, strategy, goals, targets, and plans should be considered to be forward-looking statements. CERN makes no representations to update those statements after today. These statements are subject to the risks and uncertainties which may cause actual results to differ materially from such statements as described in our SEC filings, including the Form 8K with the press release preceding today's call and our Form 10K filed on November 29, 2023. 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 Ortmans, CEO of Serence, and Tom Bowden, CFO of Serence, As a reminder, the only authorized spokespeople for the company are Stefan, Tom, and me. Before handing the call over to Stefan, I would like to mention that we will be presenting at the Baird 2024 Vehicle Technology and Mobility Conference on February 29th and the Raymond James 45th Annual Institutional Investors Conference and the Morgan Stanley Technology Conference the week of March 4th.
spk03: Now on to the call. Stefan? Thank you, Rich. Welcome, everyone, and thank you for joining us to discuss Cirenc's first quarter results. Over the next few minutes, I will update you on the highlights from our first quarter and provide an update on our AI product strategy and the exciting interest we received from OEMs, partners, and press at CES. But first, a review of our Q1 highlights. As we have briefed you on previous calls, the R&D and product teams at CIRNS have been working at full speed, integrating the latest developments in generative AI and large language models into our automotive and adjacent transportation focused solutions. We believe our enhanced products and future roadmap represent an industry leading inflection point for the in-cabin experience for drivers and passengers. Not only are existing customers showing interest in deploying our new solutions as quickly as possible, but we have also seen interest in deploying our new innovations from OEMs that had previously chosen alternative solutions. Discussions with these OEMs and customers gain momentum during Q1 and post CES, resulting in a greater pipeline of business opportunities as we progress through the fiscal year. Notably, we made steady progress during the quarter in aligning our product strategy with key partners. We announced major engagements with NVIDIA and Microsoft leading up to CES. The hardware and toolchains available to us through these partnerships are important contributors to fulfilling our vision of creating the ultimate AI-based immersive in-cabin experience. In December, we introduced the CIRNS automotive large language model called CAN. CAN is an automotive-specific large language model leveraging NVIDIA's computing and hardware capabilities for the training of generic and OEM-specific models. CIRNS is working with NVIDIA to solve several key challenges, including shortening time to deployment by moving at true AI innovation speed. The collaboration with Microsoft focusing on the evolving in-cabin user experience and the future of connected mobility. We are combining our deep expertise and comprehensive AI-powered in-car assistance portfolio with the innovative technology and intelligence of... ...produce videos showing the new CERN's power capabilities in action in the ID.7 while providing very positive commentary. industry. As we look to Q2 and beyond, we have a number of priorities we are keenly focused on. First and foremost is to capitalize on the positive momentum generated from CES. Our objective is to secure new business with existing customers and aggressively target the potential win back opportunities. Second, We need to continue to hit our delivery targets for both existing and new projects, especially ones that are cloud-based and provide us the opportunity to generate revenue in a shorter period of time. However, OEMs control the final timeline of their start of production or software updates. And finally, execute on CERN's next-gen computing platform, facilitating a truly immersive in-cabin experience. Now I will turn it over to Tom to share our financial results. Tom? Thank you, Stephan.
spk01: Let me first discuss our Q1 FY24 results, followed by our guidance for Q2 FY24. Our Q1 results included several one-time events. One was the acceleration of the revenue associated with the legacy contract that we had previously communicated. We came in above our revenue target, primarily due to the net effect of two additional one-time events. Another was with a customer whose contract with Sarens provided additional services to the Toyota Legacy solution. This customer notified us of the decommissioning of their service in Q1, resulting in acceleration of the deferred revenue associated with their service in Q1 in the amount of approximately $9.9 million. Additionally, a separate customer notified us in Q1 that they had determined they had been overreporting royalties for a period of time. This resulted in a negative one-time true-up of $4.8 million to our license revenue. As we have reported in the past, and as recently as Q4 of last fiscal year, we do get notifications from customers when they realize they have either been under or over-reporting royalties to us. While the updates we usually get are positive true-up, in this particular case, the customer determined they had been over-reporting royalties, and therefore we took a reserve as part of our Q1 results. Q1 revenue came in at $138.3 million. approximately $6 million above the high end of our guidance, primarily due to the factors mentioned above. Adjusting for the items I noted earlier, our Q1 revenue still would have delivered a solid financial performance. Revenue for Q1 included no prepay contracts as communicated during our Q4 conference call. The results in the quarter were driven by our core transportation business. As revenue came in above the high end of our guidance range, combined with our focus on operational excellence, we exceeded most financial metrics. GAAP gross margin was 81%, GAAP net income was 23.9 million, and GAAP income per share was 53 cents. Non-GAAP gross margin was 81.5%, Non-GAAP operating margin was 49.4%. Adjusted EBITDA was 70.4 million, or 50.9% margin. And non-GAAP income per share was $1.12. During the quarter, we had negative cash flow of about 2.8 million. This was mainly due to the timing of customer payments we expect to receive in Q2. We expect positive cash flow for the full fiscal year. Our balance sheet remains strong with total cash and marketable securities of approximately $116 million. This chart is our breakdown of revenue for the quarter. Core revenue drivers remain solid. Q1 license revenue includes the one-time negative true-up mentioned a few minutes ago. This was a negative impact of approximately $4.8 million. Also, when comparing quarter over quarter, our performance in Q4 included a positive true-up of about $3 million. As expected, we did not execute any fixed prepaid contracts in Q1. Our penetration of global auto production remained at 54% on a trailing 12-month basis. as we continue to maintain a strong position in the market. Connected services revenue was up slightly from the prior quarter due to accelerated non-cash revenue associated with the legacy contract and an additional approximately $9.9 million associated with the other contract discussed earlier. Excluding this acceleration of deferred revenue, New connected revenue would have been up 5% quarter over quarter and 13% year over year. We expect a ramp in new connected services in FY24 as several key programs that have been delayed by customers go into production. We continue to see a solid pipeline of opportunities for connected services, even as some expiring programs of old technology restrain the near-term growth. Regarding the contract with the second customer who had a portion of their contract with us related to the legacy solutions, the revenue associated with that contract has been historically reported as part of new connected revenue line. The customer who reported their over-reporting of royalties, license revenue, and the other customer that required acceleration of deferred revenue related to the decommissioning of connected services associated with the Toyota solution will negatively impact our go-forward revenue by approximately $800,000 of license revenue and approximately $400,000 of new connected services revenue per quarter, respectively. As we have previously stated, professional services will vary quarterly based on the progress or completion of customer projects. We do not project professional services as a revenue growth driver for the company, but instead view it as an enabler for future license and connected services revenue. Additionally, our newer products and solutions include improved implementation and integration features, which lowers the utilization of professional services. Moving on to our license business, overall, the license business remained fundamentally strong. Proforma royalties in the quarter were impacted by the negative true-up due to overreported royalties, and to a lesser extent, additional program delays or slower-than-expected volume ramps from several customers. As a reminder, proforma royalties represent the value of variable license shipped during the quarter and those consumed as part of a fixed contract adjusting for one-time items including the three million dollar true up in q4 and a one-time volume discount pro forma license royalties were relatively flat quarter over quarter as we planned we did not execute any fixed contracts in q1 but do expect a contribution in
spk02: In Q2 of approximately.
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