Cerence Inc.

Good day, and thank you for standing by. Welcome to the CERNT third quarter 2024 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 first speaker today, Richard Gergamian, Senior Vice President, Investor Relations. Richard, please go ahead.

Thank you, Felicia. Welcome to CERNS' third quarter of fiscal year 24 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, beliefs, outlook, strategy, goals, objectives, targets, and plans should be considered to be forward-looking statements. SARNs makes no representations to update those statements after today. These statements are subject to 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. Our Form 10K filed on November 29, 2023, and our most recent Form 10Q. 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 CERNS, and Tony Rodriguez, Interim CFO of CERNS. As a reminder, the only authorized spokespeople for the company are Stefan, Tony, and me. Now on to the call. Stefan.

Thank you, Rich, and good morning, everyone. To begin, I would like to briefly comment on our third quarter results. Our financial performance was as expected, with revenue in the middle of our guidance. Due to the decline in our stock price, we performed a goodwill assessment following completion of the quarter that resulted in a goodwill impairment charge of approximately $357 million, negatively impacting our gap profitability. With the exception of gross margin, which was within the range, all other non-GAAP profitability metrics were above the guidance we provided in our last call. Additionally, we had a strong quarter for cash flow from operations, which came in at $12.9 million. We remain substantially on track to achieve the full year guidance we provided in our last conference call. And Tony will provide the details later in the call. We recognize that some of you may be listening to our call for the first time and thought it would be helpful to provide a high-level overview of Sarence and our business. Sarence creates AI and voice-powered user experiences across the transportation industry, primarily for automobiles. We were among the first to bring voice interaction to cars, and today we count nearly all the world's leading OEMs and Tier 1 suppliers as our customers and partners. More than half of cars that roll off the production line globally include SIRENS solutions. So ads are that many of you have interfaced with SIRENS as the company behind the audio and voice technology in your cars, whether it be Mercedes-Benz, Volkswagen, Stellantis, Toyota, or many others. In fact, we recently surpassed half a billion cars shipped with our technology. As the automotive industry faces an incredible transformation, we believe CERNS is well positioned to partner with automakers to deliver what drivers want and need from the in-car experience. That is an intuitive, seamless interaction in which they can complete virtually any task, all without comprising safety. We believe there are three key differentiators that distinguish our offering. First, we have a lengthy history and deep customer relationships, giving us critical understanding of the unique dynamics in the automotive industry. We have extensive experience in both, in production and in development systems. And we work closely with our customer as an innovation partner helping to define and design their next generation infotainment system. Second, we have a strong IP position, approximately 700 patents and automotive specific data supporting an end-to-end solution that improves all aspects of the in-car user experience from the moment a driver begins speaking all the way through to task completion. Additionally, Our global footprint spans more than 70 languages to support OEMs worldwide. Third, we are deeply customer-centric, empowering our OEM customers with flexible and customizable solutions that put their brands at the forefront. So they can not only differentiate themselves from their competitors, but also maintain ownership of their data. Think about it. The infotainment system is a car brand's main interface with their customers on a daily basis. They don't want to just hand that brand equity over to a partner who doesn't have their interest as its top priority. Plus, we believe that OEMs want to maintain their ability to monetize the valuable data generated from their systems rather than handing it off to a third party. Our solutions address all of these considerations. As we look to the future as a preferred supplier of voice and AI in the car, we are moving quickly to advance generative AI and large language model powered innovation that we believe will be central to the automotive user experience of the future. I will provide more detail on that in a few minutes. Given our relationships with nearly all the world's leading OEMs, we have deep insight into the many challenges automakers are facing today. First, pressure for faster development cycles that consistently deliver a fresh user experience. Second, increasing software development requirements and the push on AI, all while balancing costs. And lastly, growing pressure from an evolving regulatory landscape. These factors are driving automakers and their suppliers to assess their strategies and investment, and that includes CERNs. As such, we are undergoing a business transformation intended to position CERNs to meet the current and future needs of our customers. On our last conference call, we also shared that given our lower revenue run rate profile, we would be undertaking cost reduction actions. that we expect to position us to consistently deliver positive adjusted EBITDA and positive cash flows. Along these lines, our objective is to realign our cost structure to create a more efficient organization while also focusing our resources on the product areas we expect to reap the most rewards, driving faster growth and improved profitability. We have partnered with a specialized firm to support us through our transformation efforts, which are well underway. As one of our first steps, we recently unified our product and core technology teams, which we believe will help to accelerate innovation and to drive efficiency to meet customer demands and elevate pain points as well as deliver on our AI roadmap. We expect to begin the next steps in our cost reduction efforts within the months. Our initial expectations are to achieve net annualized cost savings on a run rate basis of approximately $35 to $40 million, which will be predominantly realized in fiscal year 25. Next quarter, we will provide fiscal year 25 guidance and give more specifics on where those savings fall in the P&L. The gross savings are expected to be higher, allowing us to reinvest in the resources that are required to bring innovative new solutions to the market, including advancing our generative roadmap and next generation platform. We expect that some of the expense reductions will have an impact on certain revenue streams, primarily those that are less profitable. We are carefully managing these actions to mitigate the impact and focus our investments in the areas that we expect will drive our future growth and support OEMs as they continue to prioritize software and AI innovation. Tony will discuss this more in his remarks, and he will provide specifics along with official fiscal year 25 guidance on our next call. From a product and technology perspective, we have three main areas of focus. First, advance our core technology stack as a foundation for everything we do. We continue to innovate across input, output, conversational AI, audio AI, and other solutions like emergency vehicle detection. Bring in advanced capabilities and new features. Our turnkey offering, CERN's Assistant, provides a strong foundation for our new generative AI solutions. Second, we continue to capitalize on the traction we generated at CES in January for our generative AI-powered solutions that enables OEMs to leverage AI with customization and cost efficiency. We have made fast progress with eight OEM design wins since January and several global OEMs, including Volkswagen, Audi, Seat, and Skoda, already going live with these solutions. not only in new cars, but also those already on the road. We expect another four Gen AI customer programs to go live before the end of the calendar year. Also, based on a small sample size and short time frame, we are seeing a positive increase in price per unit for these offerings and an increase in user adaption and usage. Lastly, As OEMs are moving quickly and looking to CERNs as a trusted partner to help them efficiently bring AI into their cars, we are laying a strong foundation and developing an eager customer base that we have the potential to convert to our next generation AI computing platform down the line. This new platform leverages CERN's proprietary automotive large language model, enabling a single conversation interface to work across application to complete tasks based on user preferences. To give you a real-world example, imagine getting into your car after a busy workday. You ask the in-car assistant to summarize the text message you received throughout the day. It filters out a few less important messages and highlights one from your spouse that says, we are low on groceries. Should we go out to dinner tonight? You ask the assistant to find you a French restaurant with outdoor seating and an open reservation. Confirm the details, then send a text message back to your spouse, filling them in on the plans. The assistant confirms that there is a charging station near the restaurant, that you have enough battery to get there, and then starts the navigation. This is all done in a single interaction rather than multiple steps that require switching back and forth between applications. And you can speak naturally and comfortably to the system just as you would to another human. This new platform is in development, and we're working closely with several customers on their specific needs. We do not expect our transformation plans to slow this program down. In fact, our plan is to take some of the cost savings to reinvest them to scale and accelerate our Gen AI roadmap. In summary, we believe that our product strategy will further strengthen our ability to serve customers and lead to a healthy pipeline of business opportunities. I would like to now hand the call off to Tony to review our Q3 results and outlook for Q4. Tony joined us in early June as our interim CFO as we continue our search for a permanent CFO. Tony brings over 25 years of experience as a financial leader, managing all aspects of finance and accounting for both public and private global companies. After Tony's comments, I will be back for a few closing remarks, and then we will take your questions. Tony?