Cerence Inc.

Please wait. The conference will begin shortly. We'll be right back. Thank you. We'll be right back. We'll be right back.

data set and deep relationships with our customers will continue to be true differentiators for CERNs. As we progress through the second half of the fiscal year, we have prioritized several objectives in order to strengthen our position in our core automotive business. First, balance our cost structure in accordance with our current levels of business while still ensuring we can successfully deliver on our Gen AI roadmap and customer commitments. Second, release several Gen AI solutions into production with high end user satisfaction. And third, convert the deals currently in the pipeline, including some win-back opportunities. Before I turn the call over to Dan Tempesta, our new CFO, I would like to take a moment to introduce him. Dan joined us in mid-March and was previously CFO of Nuance. As such, he is very familiar and experienced with the auto business and our solutions. With Dan's track record of leadership and experience in the space, we are happy to have Dan on board at this important moment in CERN's journey. I would also like to take the opportunity to thank Tom Bowden for his contributions and partnership during his tenure as CERN's CFO and look forward to his continuing support as a CERN's board member. With that, I would like to hand the call over to Dan to review our Q2 results in detail and share more about our guidance for Q3 and the full fiscal year. Dan.

Thank you, Stefan. Before I begin, let me just say to our shareholders that while this is clearly a challenging quarter to come on board, I am optimistic about the roadmap and new products that Stefan discussed. Also, I look forward to meeting with many of you during the several investor conferences and NDRs we have in the coming weeks. Turning to our results, our Q2 revenue of $67.8 million was above the high end of the guidance, mainly due to an unplanned fixed license of approximately $5 million. This license was directly related to a settlement of an obligation created by a large customer's over-reporting of royalties discussed and reported on last quarter's conference call. In addition, our connected services revenue line also benefited from an unplanned OEM underreporting true-up of approximately $2.6 million. Excluding these unplanned items, revenue would have landed within the lower end of our Q2 guidance range. Our adjusted EBITDA for the quarter was approximately break-even and benefited from higher than expected revenue in the quarter. Our Q2 profitability was negatively impacted by approximately $6 million related to the write-off of a long-term unbilled contract asset associated with one of our non-automotive customers that declared bankruptcy during the quarter. Our cash flow from operations was $1 million, and our balance sheet had total cash and marketable securities of approximately $115 million. As Stefan mentioned a few minutes ago, our GAAP results were also negatively affected by a $252 million goodwill impairment, This is a non-cash impairment charge that only affects our GAAP results. Turning to our detailed revenue breakdown, variable license revenue was $25.1 million, down 4% from the same quarter last year, and up 21% sequentially quarter over quarter. Fixed license revenue came in at $10.4 million for the quarter, $5 million higher than originally expected, due to the unplanned fixed license previously mentioned. Looking forward, we expect $20 million of fixed licenses in the third quarter. This will bring our fiscal 24 fixed license total to approximately $30 million, including the unplanned $5 million settlement, which is above our initial expectations of $20 million. Connected services revenue, excluding the legacy contract, was $13.6 million, as discussed earlier, and as discussed earlier, benefited from the $2.6 million true-up from underreporting by a customer, resulting in 30% growth for the same quarter last year and up 33% from the prior quarter. Excluding the true-up, connected services revenue was approximately $11 million, up 8% compared to the prior quarter. Excluding the impacts of legacy and the true-up, We expect only a modest ramp in connected services in the second half of 2024 compared to the first half. Our professional services revenue is flat year over year and down 10% quarter over quarter. As a reminder, while professional services is an enabler of both licensed and connected services revenue, we expect professional services revenue to remain generally flat. Going a bit deeper into our variable license revenue, we have adjusted this schedule. First, we've added a row to highlight the periodic adjustments that can occur with OEM reporting. While there are always small adjustments that can occur in the ordinary course, our intention is to include within this line individual OEM-related adjustments that are greater than $2 million in any given quarter. This will allow us to highlight items that are impacting the variable license trends. Second, we have updated the format to show at the bottom of the page the operational metrics that we have discussed and presented in the past. As previously mentioned, variable license this quarter was $25.1 million. Looking at our operational metrics, consumption of our previous fixed license contracts totaled $14.5 million this quarter. a reduction of 14% compared to the same quarter last year and in line with our expectations. As a reminder, because we have been managing down the annual value of fixed contracts, over time, this will result in a smaller consumption of royalties associated with past fixed contracts. As consumption levels decline, we expect that should correspondingly result in variable license growth in future periods. as royalties will accrue directly into revenue as production occurs. We continue to expect to normalize our consumption run rate by the end of fiscal year 2026, at which time any new fixed contracts should roughly align to the level of consumption during the year. Our pro forma royalties were $39.6 million and show a recent declining trend. As we review our key performance indicators this quarter, our penetration of global auto production for the trailing 12 months remained steady at 54%. We shipped 11.7 million cars with CERN's technology in the quarter, down 6% year over year, while IHS production for the same period declined 1%. Cars produced that use our connected services increased 23% on a trailing 12-month basis, compared to the same metric a year ago, as some programs that were previously delayed went into production. Total adjusted billings increased 9 percent in the second quarter compared to the previous year. Turning to our five-year backlog metric, we are making an approximately $200 million reduction to our five-year backlog, which brings that figure to approximately $1 billion. Incorporating the impacts just discussed, we are guiding our third quarter revenue to be between $66 and $72 million, which includes the $20 million fixed license previously mentioned. For the full fiscal year, we expect revenue to be between $318 and $332 million. Excluding the impact of any restructuring activities that may occur as we consider cost reductions, we expect fiscal year 2024 cash flow from operations to be in the range of $5 to $15 million. Before I provide our thoughts on fiscal 25, since the legacy Toyota contract is now behind us, I think it's important to discuss the 2024 revenues excluding the impacts of those services. We believe this view provides the new run rate revenue profile for the company. If you take the midpoint of our current fiscal year 24 revenue guidance, I just discussed on the previous page of $325 million, and exclude approximately $87 million of legacy-related revenue recognized in Q1, the adjusted revenue for the company for fiscal year 24 is approximately $238 million. We consider this new estimated run rate revenue relevant for both assessing our cost model as well as planning our business activities going forward. As we exit the first half of fiscal 24 with this new adjusted view of the run rate of our expected revenues, I do want to take a minute to look forward. While I am not prepared to provide 25 or midterm guidance at this time, I can provide a framework for how to begin to think about fiscal year 25 revenue. If you assume flat OEM production and flat pricing mix, Similar to what is incorporated in our last 24 guidance, our latest 24 guidance, we would expect significantly less fixed license consumption in fiscal 25 compared to fiscal year 24 as our past commitments continue to wind down. In addition, if you assume $20 million in new fixed licenses in fiscal year 25 and very modest growth in our run rate connected services, it would be reasonable to anticipate mid single digit growth off of the new estimated run rate of $238 million. For some additional color on the sensitivity of this view, those growth rates could be lower or higher depending on global auto production changes, date shifts in the introduction of new platforms, and pricing and mix shifts. Again, this does not represent guidance but is rather a framework for how to think about fiscal 25 revenue. Also, this framework is subject to change based on a number of industry and customer-related factors. With regards to our business in the adjacent markets, as previously mentioned by Stefan, they are developing slower than anticipated. Although we do believe there is an opportunity for revenue growth in these markets in the midterm, We are not expecting a meaningful uplift in revenue contribution in fiscal 25. Wrapping up my comments, I'd like to leave you with a few key thoughts. We believe that generative AI and LLM technologies are critical to our future product roadmaps, and we plan to ensure that our resources are focused to invest in these technologies and related product offerings. Additionally, we believe that our position in the industry our long-standing relationships with our customers, and our initial success with our recently announced Gen AI products provide us with a solid foundation to reinvigorate growth in the future. And finally, given the current financial headwinds, we plan to take cost actions in the near term that will position us to deliver stronger profit margins and stronger cash flows. That concludes our prepared remarks, and we will now open the call up for questions.