Cerence Inc.

Good day, and welcome to CERN's fourth quarter 2024 earnings call. At this time, all participants are listening on remote. After this previous presentation, there will be a question and answer session. To ask a question, please press star 1-1. If your question hasn't been answered and you'd like to remove yourself from the queue, please press star 1-1 again. As a reminder, this call may be recorded. I would like to turn the call over to Jason Gold, Investor Relations at CERN. Please go ahead.

Welcome to CERNS' fourth 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, beliefs, outlook, strategy, goals, objectives, targets, and plans, should be considered to be forward-looking statements. CERENS 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 Brian Krzanich, CEO of CERNS, and Tony Rodriguez, Interim CFO of CERNS. Please note that the slides with further context are available in the investor section of our website. Now onto the call. Brian?

Thank you, Jason. Good morning, everyone, and welcome to the Q4 2024 CERNS earnings call. I'm excited to talk to you this morning as CERNS' new CEO. While Tony will walk you through the details of our Q4 and fiscal year 24 earnings, I'm very proud of what the organization has delivered for Q4. The top line revenue of $54.8 million and adjusted EBITDA of negative $1.9 million, both exceeded the high end of our guidance. I couldn't be more proud of what the team has accomplished and the head start this gives us for 2025. Before I give you our forecast for 2025, I'd like to spend a few minutes now to talk to you about my vision for Ceres, which also gives you insight into why I chose to come to the company. So, CIRNS is at the forefront of the revolution that is occurring in the automotive industry as AI, specifically generative AI and large language models, grow in use and importance. CIRNS already has a large footprint in the automotive space with a broad range of products that bring voice assistance to the vehicle, including 28 design wins in fiscal year 24. Our vision moving forward is that every product in our solution portfolio will have artificial intelligence and specifically large language models built into them to bring simplicity and convenience to in-car interaction. And this is not a transition that will happen far out in the future, but rather one that has already begun in earnest. This is evidenced by the strong momentum we've seen for our generative AI solutions. with 10 customer wins and six program launches for these products in fiscal year 24, including Volkswagen, Renault, Skoda, Audi, and Smart. And importantly, more Gen AI programs shipped than any of our competitors and key wins across our solution portfolio with automakers like BMW, Great Wall Motor, and Zeker. It's worth mentioning that in these deals we've signed so far, our generative AI solutions are commanding unit economics that meaningfully exceed the rest of our portfolio, fueling PPU growth on the cloud side. These first deployments also show an increase in overall usage and adoption, and this is based on a small sample size and short timeframe, but we are encouraged by these results. This quarter, we also signed our first customer deal for the first generation of our new AI platform, which is based on a proprietary family of language models. By the fourth quarter of this year, we will launch the second generation of this platform, which leverages large language models across the entire solution and allows us to greatly simplify and speed up how we bring new products to the market. In fact, just last week, we introduced Calm Edge, which builds on our strength in embedded solutions as the first LLM running in automotive on the edge, allowing for advanced and simplified voice interaction with the vehicle, even when not connected. We did this in collaboration with Microsoft, who selected SIRENS as their preferred automotive industry partner as they announced their adapted AI models ahead of this week's Ignite conference. Microsoft is partnering with SIRENS and other industry leaders like Bayer and Siemens to create fine-tuned models pre-trained using industry-specific data to address customers' top use cases, as was highlighted in Microsoft CEO Satya Nadella's keynote earlier this week in their Ignite conference. The implementation of LLMs is an important transition for voice in the vehicle, and I want to spend a moment explaining why. In most cars today, in order to interact with the various systems in the vehicle, You have to use very specific commands. For example, to enter an address, you have to use navigation or to operate systems within the vehicle like air conditioning or windows. With the implementation of LLMs, we removed the need for script for interaction. And the assistant's ability to understand complex and multi-step commands in natural human language becomes virtually limitless. The vehicle now becomes an assistant that saves you time and simplifies your life. In addition to our deep technical expertise, the world's leading automakers and tier one suppliers love to work with CERNs because we're a uniquely neutral and highly specialized supplier, living and breathing automotive and speaking the same language as our customers, unlike our competitors. As auto OEMs face the threat of commoditization, much like what was seen in the mobile handset industry years ago, They are becoming increasingly focused on the in-cabin experience as a differentiator from their competitors, as well as the main touchpoint between their drivers and their brand. And they're also choosing to partner with Ference to drive their in-car experiences forward. Now looking at fiscal year 2025, we're issuing initial fiscal year 2025 revenue guidance of $236 million to $247 million. with related adjusted EBITDA in the range of $15 million to $26 million, and free cash flow in the range of $20 million to $30 million. And this anticipates a return to profitability that represents both our strong market position, partnerships with vehicle OEMs, and the hard work the organization has already done in terms of cost reductions, which Tony will cover in detail in a few minutes. For fiscal year 2025, we will transition from doing broad cost cutting to simplifying and streamlining our organization and our structure to continue taking cost and spending out of Serence. It's been my observation that Serence has been burdened by the operational and business process and complexities that resulted from the company's 2019 spin from Nuance. With a new set of eyes, I believe that I can provide a perspective to find more efficient and productive ways to accomplish the same task, while also finding opportunities to vastly improve our speed to market and get exceptional products into the hands of our customers at a more rapid and competitive pace. This is my first earnings call as CEO of Ceres, and I hope you see the vision and potential of the company that I do. And that led me to joining the company. CERNS is bringing AI and large language model capabilities to the vehicle now, not just in the future. Fiscal year 2025 will be a year of execution, streamlining the company and bringing these industry leading products to our partners in the market. Our fiscal year 2025 plan is to return the CERNS to profitability, a critical step to fuel the future growth. CERNS is a strong company with an exciting path ahead. It's now my job to turn this strong company into a great business. With that, I'll turn it over to Tony to go through the details of our quarterly numbers, our guidance, and our restructuring activities. Tony?

Thanks, Brian. Today I'll be covering three major topics. First, I'll review our Q4 and full year 2024 results. Then I'll go into some details of our restructuring. Lastly, I'll provide some guidance for fiscal Q1 and the full fiscal year of 2025. Let's get into the Q4 and full year 2024 figures. At the top, we achieved Q4 revenue of $54.8 million, which exceeded our high end of our guidance range of $50 million. Revenue ahead of guidance this quarter was aided by approximately $5 million in licensed royalty true-ups for two of our OEM customers. Our customers self-report royalty volumes that approximate their auto shipments that include our technology each quarter and periodically true-up to actual. This is not uncommon, and we will call this out whenever we believe it is meaningful to the numbers. Our gross margin of 64% in Q4 also exceeded our high end of our guidance of 60%. Approximately four points of this were due to the drop through benefit of the noted revenue true ups. Moving down our income statement, our adjusted EBITDA loss of $1.9 million well exceeded our guidance of a loss of $13 million. This was driven by the improved gross profit from the higher than expected revenue. and decreased operating expenses from the accelerated restructuring efforts during the quarter of approximately $6 million. As compared to prior year, Q4 revenue declined by $26 million, or 32%. This highlights some of the noise in our P&L that makes year-over-year comparisons somewhat difficult. The two biggest drivers of the year-over-year decline were that in Q4 of last year, we signed $12.8 million of fixed license revenue during the quarter and had $9.2 million of revenue associated with the Legacy Connected Services contract with Toyota. You may remember that this contract was acquired by Nuance in 2013 and that Toyota decommissioned the solution in Q1 of 2024. After Q1 of 2025, we expect that the full year-over-year comparison for our quarterly results will be more meaningful. Our non-GAAP operating expenses were $39.5 million for Q4, compared to $44.5 million for the same quarter in fiscal 23. The decrease of $5 million, or 11%, represents some of the in-quarter savings from the Q4 restructuring efforts. We ended the quarter with $130.4 million of cash and marketable securities, up $4.1 million versus Q3. Our free cash flow during the quarter was $4.7 million. With Q4 in the books, we landed at full year revenue of $331.5 million, or $244.9 million, excluding the legacy revenue of $86.6 million. Full-year adjusted EBITDA was $80.6 million. Adjusting for the impact of the non-cash legacy contract, adjusted EBITDA would have been negative $6 million, highlighting the importance of the Q4 cost restructuring efforts, which I will now spend a few more minutes discussing. Last quarter, we mentioned that we identified net savings of approximately $35 to $40 million. We are on track to meet or exceed the upper end of that range. This includes cost reductions across all of our major cost drivers, including headcount and facilities. We are discussing our savings on a net basis because we have identified costs for removal that exceeded this amount, but plan to reinvest a portion of these cost savings back into driving the growth of our next generation products. To help you with your models, the expense base for these net calculations was based on an annual run rate of our non-GAAP operating expenses of $189 million as we entered Q4 of this year. Additionally, we reduced certain professional services cost of goods sold by approximately $9 million. We took action to implement much, but not all of the cost reduction actions in Q4. We expect to action the balance by the end of Q1. Accordingly, we did realize some of the P&L benefits associated with the cost reduction efforts in Q4, but expect to see the vast majority of the benefits in our Q1 non-GAAP operating expense exit run rate of approximately $39 million per quarter. We identified approximately $16.3 million in one-time costs associated with these actions, split primarily between severance, retention bonuses, and consulting fees. We incurred $10.3 million of total restructuring expenses in Q4 and expect to incur another $6 million in Q1. Our Q4 free cash flow absorbed $7.5 million of these costs, and the guidance I will give for the fiscal 25 free cash flow will absorb the impact of another $8.8 million of these one-time restructuring costs that we don't expect to incur in future periods. We also expect some revenue headwinds from these actions, particularly in our professional services business where we have made the decision to reduce staff and refocus our efforts on projects that we expect will drive long-term client engagement. We have reduced our focus on one-off projects or those that we don't see having significant long-term potential upside. Our revenue guidance for fiscal 25 absorbs a headwind of approximately $5 to $7 million related to this. As we look at our revenue breakdown and operating metrics, variable license revenue was $25.3 million, down $5 million, or 17%, for the same quarter last year, but up from Q3. As planned, there were no fixed license revenue during this quarter. Q4 connected service revenue without legacy was $12.1 million up $1.3 million or 12% from $10.8 million the same quarter last year. And our professional services revenue was down 6% year over year. As a reminder, when we look at total license shift, Proforma license royalties is an operating measure we use representing the total value of variable licenses shipped in a quarter, including the shipment from fixed licenses where revenue was previously recognized upon contract signing. We refer to these shipments where revenue was recognized in a prior period as fixed license consumption. Our proforma royalties were $42.2 million, which were flat compared to Q4 of last year, and up from $39.6 million for Q3. Consumption of our previous fixed license contracts totaled $16.9 million this quarter, higher than the same quarter last year by 9%. However, because the annual value of fixed contracts has been trending down, over time there will be lower consumption of royalties associated with past fixed contracts and, correspondingly, that will result in variable license growth in future periods. We continue to expect our consumption run rate to normalize by the end of fiscal year 26, at which time new fixed contracts should roughly align with the level of consumption during the year. As we review our key performance indicators this quarter, our penetration of global auto production for the trailing 12 months declined slightly to 52% due primarily to weaker production volumes among our top customers. We shipped approximately 10.6 million cars with CERN's technology in the quarter, down 14% year over year, while IHS production for the same period declined 5%. Quarter over quarter, we were down 11%, while IHS production was also down 3%. The number of cars produced that use our connected services increased 16% on a trailing 12-month basis compared to the same metric a year ago, as some programs that were previously delayed started ramping in production. Total adjusted billings of $220.7 million adjusted to exclude professional services, prepaid billings, and prepaid consumption increased one percentage point for the trailing 12-month period this year compared to the previous year. Our five-year backlog metric is currently approximately $969 million. Now turning to our guidance. Currently, the street consensus for revenue for the full fiscal year 2025 is $234 million, and Q1 is $57 million. As we go through the guidance, please remember that any one quarter can be materially impacted by the level of fixed license revenue signed in the quarter, and in Q1, we are not forecasting any fixed license revenue. For Q1, we currently expect revenue to be in the range of $47 to $50 million. This absorbs headwinds of approximately $1 million related to the de-emphasis of professional service projects I mentioned a moment ago. We currently expect Q1 adjusted EBITDA to be in the range of negative nine to negative six million, and free cash flow to be in the range of negative four million to zero. This absorbs the impact of approximately $6 million in one-time costs associated with our restructuring. For fiscal year 25, we currently expect revenue to be in the range of $236 million to $247 million. This reserves headwinds of approximately $5 to $7 million related to the emphasis of professional service projects, as I mentioned. We currently expect adjusted EBITDA to be in the range of $15 million to $26 million, and expect free cash flow to be in the range of $20 to $30 million, including the cost associated with our restructuring. I'd like to provide some additional factors to help you in understanding our business and how the 2025 model is coming together. At the midpoint of guidance, we are currently planning for $20 million of new fixed licenses in fiscal year 2025. Had we planned for fixed licenses comparable to 2024, $30 million, fiscal year 25 midpoint revenue guidance would have reflected a 3% growth rate over 2024. We are also planning for very modest growth in our run rate of connected services line. As a reminder, our new products are all connected in nature. The way we recognize these new contracts in our financial statements is that when units are shipped, we book them into deferred revenue. Then typically over a period of 12 to 20 quarters, we amortize that revenue onto our income statement. And so as these products begin to gain traction, variable license and connected services billings will increasingly become an indicator of how our business is progressing. As this develops over time, I'll make sure to point out and direct your attention to our leading metrics. For 2025, we expect variable license and connected services billing to increase by high single digits. Our gross margins for fiscal year 25 are expected to be in the range of 67 to 69 percent. Now I'd like to address our convertible notes. As you may be aware, we have 87.5 million of convertible notes that have gone current and are due in June of 2025. We believe that given our current cash position and positive cash flow expectations for 2025, it is in the best interest of our shareholders to pay down a portion of these notes when due. However, we also believe that refinancing some of the debt could put us in a better position to execute our long-term strategic direction of the company while allowing us to retain cash reserve and be flexible as we move forward. As such, we are actively looking at alternatives for refinancing a portion of these notes and anticipate having more to report in our next earnings call. Overall, we are pleased with the solid results of Q4. As we begin fiscal year 25, we believe we are on the right track to continue to show improvement in our financial performance and to strengthen our balance sheet moving forward. I will now return it back to Brian to close our remarks.

Thanks, Tony. In closing, we're happy with and motivated by this quarter's results. We remain focused on execution, business process improvement, and cost reduction in advancing our generative AI roadmap. We take our commitments to the streets seriously, and we are committed to streamlining our reporting so that investors can understand the trends in the business. We believe in our ability to deliver on our fiscal 25 guidance and fueling in our growth for fiscal 26 and beyond. We look forward to continuing to share our progress. We'll now open it up for questions.

Thank you. As a reminder, if you'd like to ask a question, please press star 1 1. If your question has been answered and you'd like to remove yourself from the queue, please press star 1 1 again. Our first question comes from Jeff Van Ree with Craig Hallam Capital Group. Your line is open.

Hey, guys. Thanks. Thanks for taking my questions. Good morning. A few for me. I wanted to start on the AI side. You touched on the economics of AI being more compelling. Just curious on the margin because that was one of the questions coming in, just how the margins compare on AI-related deals. And then you also referenced pricing uplift, I mean, without being – Well, be as precise as you're willing, but give us a sense of magnitude of the pricing uplift related to AI.

I can start, and then Tony can add in some of the details. You know, in general, we don't really give out absolute pricing, but in general, we're seeing a price uplift. And most of the AI models, the generative AI models, actually have a relatively equal cost of development and operations as our current models. So the margins are improving with those applications. So we are seeing a margin uplift with those products. Now, it's early, as we said, and these are the first kind of deals and POCs that we've started with the product. but it's promising from that perspective. People are seeing the value in being able to just speak naturally, you know, hey, my seat is cold. Well, the thing realizes that you want the seat heat turned on. Hey, crack open the window. It goes in 10% increments and opens up your window, and it just knows how to interpret natural language much better, and people see that value, and you can build assistance, and they can build onto the product. So in general, we're seeing a a better margin, and more importantly, or as importantly, we're seeing a strong demand for the product and interest by our customers. Tony, anything else?

Yeah, I mean, a couple things on the margins. Yes, they're improving. Remember that these are connected services products. You'll see that the margin that we're anticipating next year is higher than our margin for 2024 overall. primarily when you take out the legacy revenue. And that's really a product mix for next year, more licenses and less professional services. But the connected service and these bookings that we're looking at now with higher margins really won't come into play until the latter half of 25 and into 26 that we'll start seeing connected service margin increase. So we'll really see that benefit in the 26th year and beyond.

Okay. And I guess just, Brian, then on that same topic as it relates to Connected, as you inherited the business, obviously Connected has been talked about for years. A lot of bookings have been pointed to, backlogs have been pointed to, but the revenue stream just hasn't lifted. And I heard your comments about, look, these contracts take time. Totally understood. I get the rev rec on it. But over the last several years, the lack of growth in that line suggests something deeper about the competitive landscape, share loss, functionality, maybe just a little deeper sense of what you think your competitive position is in connected and your right to win. And I get it, you just touched on AI, like going forward, you think that's going to be a part of it. But curious beyond that, how you would frame the connected opportunity and competitive position?

Hey, this is Tony, and I'll start first with a comment on growth, and then Brian can take the other second part of that question. But if you look at our, I mean, we've talked about it in the script, and we've mentioned it before in calls, that there's a little bit of noise within our P&L as we compare year over year. But if you look at the fourth quarter of last year and take out the Toyota legacy, non-cash legacy revenue from connected last year, a year ago quarter, we actually grew the connected business 12% year over year. So we see that growing in fiscal 25 as we move forward, and then growing beyond that with the new bookings that are happening, that happened in the fourth quarter of this year, third and fourth quarter of this year, and as we go into the fourth quarter. So that business is growing, and we anticipate it to be a growth area of the business.

Yeah, and Jeff, let me answer kind of the second part of Another part of your question, which was, what's our right or position to be in that business? And it's really around, one, our product is quite strong. It's designed and we understand the automotive space. So there's, for example, 23,000 different instructions you have to be able to understand and manage and put through those large language models. to operate the car, right, everything from windows and seats and, you know, charging ports and all kinds of very automotive-specific functions that we work with the OEMs to really introduce, and that partnership is very strong. Second is our willingness and our ability to customize and, you know, really create the experience that the OEM wants that, you know, is very different than most of our competitors, especially the big guys. They tend to come in with one answer, one structure, one product. It's connected all the time. We have the ability to be connected, to be local. We will customize around their feature set. Sometimes, for example, they want to go and look at any kind of a call out to an LLM model and say they want to, you know, not have it go to the public LLMs. They want to go to their own private LLM that they have, that for whatever business strategy they have, they want to use those models to guide the instruction set that comes back. We have the ability to structure that so that we can architect where the request goes to, whether it goes to the public search or whether it goes to a private search at the OEM. And our competition tends to only go to the public or where they're preferentially treated. So it's all of this customization, the number of languages we can deal with, that really gives us much more of a customized experience for the OEM. And that's really where we are strongest and where we perform and why they typically want us for their experience.

Understood. And one last brief one, if I could, Brian. As it relates to you coming in and taking the reins here, and I realize this is somewhat unfair because you just got in and you're getting your hands around what the business is and where we're headed. But if you look over the last handful of years, the pro forma royalty number, which adjusts for all the prepaids and everything else, has been relatively flattish. And clearly, some things have worked, many have not. But you're sizing up the business to Essentially, why do you think, if you look at the last five years as a company, not been able to grow? Is this fundamentally a product market fit? Is it a go-to-market sales function? Is it something else? Just your early takes on kind of the brief history lesson of what hasn't worked and what you think you can get working.

Well, I'm still kind of digging into the past, and I've been a little hesitant to think too much about the past because if you take a look at, as you said, where it came from, it was a very different kind of model and experience where they were really focused on driving bookings and just really trying to grow at any cost rather than really focusing on what are the products and how do we really differentiate ourselves relative to the competition. So as I look forward, the large language models and the whole AI application and how there's really two things that are changing. One, you're seeing large language models go into the end user experience, right? So we've talked a lot about that. What we haven't talked a lot about is how those models are going into actually how we create the product. And so there's our speed of how fast we can put a product into a customer's hands, into their product themselves, into their vehicle has shrunk now from like eight to 12 months down to four months of development work on our part to customize and focus our product to the customer. So those are the things that are really changing the business, right? That we get paid more for that. We can produce the large language models that make the end user experience much better, but also By driving those models into our own product and how we develop the product, it makes it quicker. It makes it faster. It makes it less expensive for us to develop them and to customize them around what the customer needs are. And those are the things that are really shifting now versus the old models, which were using the standard software where it was much harder to differentiate speed up the time to production and all for the customer. And so when I look at this, we've already seen price increasing and, you know, getting paid for these products. And we're seeing our costs go down over this time period as it's much quicker and simpler for us to develop the product. So that's what's really changing in my mind.

Got it. Great. Thanks for the thoughtful answers. I appreciate the detail.

Thank you. The next question comes from Colin Langen with Wells Fargo. Your line is open.

Oh, great. Thanks for taking my questions. Maybe just to kick it off, if I look at the KPIs, shipments were down actually double digits year over year and quarter over quarter. What is driving that? I think if I sort of scrub out some of the fixed contracts and the exit of some of the professional services, underlying growth still seems to be up maybe 5%-ish. What's driving the underlying growth if your shipments are actually underperforming the market?

So, yes, it's really, as we think about this, it's kind of more average PPU. If we strip out fixed out of our license year over year, we are down in the license business year over year, so that kind of falls in line with some of the volume decreases. But what's interesting is that connected is up. So one of the last questions is, again, where are we going in growth? I think that a couple things. One is that the license business will grow in 25 primarily because of that We have less of the fixed license consumption, 25, so we're shipping cars, but more of that will drop down, so there's growth there. And then the connected services business, the volumes are up with those cars that include our connected services, so there's a growth there. So as we think about overall volumes being down, it's really kind of if you average out the growth in connected and the higher PPU in connected, that provides the growth there in total dollars with volume down.

Got it. And trying to frame the last time you updated the five-year backlog, but I think it was something like 1.1 billion last time that you did the analysis. Is that right? And then, you know, that backlog is shrinking. When should we think about that as inflecting and, you know, that pressure? And I guess, Brian, from your perspective, I mean, it What are your priorities? Is it right now just get the cost in line and then focus on revenue? How do we think about that?

As we looked at our backlog, it's close to a billion dollars in backlog. You've got to remember a couple of things in backlog. It represents our current contracts that are in place, the prices that we have in those contracts with expected volumes through either a contract term or in certain cases where we have a long contract, it could be a particular program of a car and when we expect that that particular program will cease. So it doesn't really reflect the true relationships over time and it's kind of an arbitrary close of a program where we anticipate that the next program we will pick up. And then, so accordingly, it denigrates over time a little bit because as those dates hit, whether it's contract terms or program end dates. So, you know, I think it's still extremely healthy at close to a billion dollars. And if we look at our 25 numbers, you know, most of all of our revenue for 2025 is represented in backlog. So it's effectively baked as long as we hit the volume expectations that we have. But the next growth of that backlog will be in the next generation connected billings, bookings that we anticipate going forward.

Yeah, and those, I mean, just to add to Tony's and I'll answer your other question, Colin, about priorities is, you know, you got to remember that's trying to estimate out five years the volume of any car model and when car models are going to stop and start. So I look at that with kind of a bit of a grain of salt. It gives us insight into what our revenues and billings will be, but it's not a perfect number. So as long as it sits around that billion number, I'm okay. What's more important is we have to really look at you know, what are the actual deals that we're signing and, um, and what are the prices that we've signed up for? And that's really gives to me an insight. And then, you know, the volumes will be what they are to your question on priorities. When I look at 25, you know, we mentioned in the speech that 25 is really a return to profitability. And to me, that means execution. And as Tony mentioned in his talk, there are still some things we need to do to continue to cut costs out of the organization. Most of those plans and items have already been identified. And it's just a matter of finishing out the execution and continuing to hold those costs in line, not let things creep back in. It's finishing the generative AI work. Our first gen model brings Gen I to the end user. Our second gen model, which is targeted towards the end of our fiscal year, which is really kind of like the end of third quarter of the calendar year of next year, brings the generative AI large language models all the way through our product. And as I mentioned earlier, that really simplifies our work and reduces the workload that we have. critical that we finish that work. And then the third priority that I'm really starting to focus on with the organization, so right, first is execution, finish our products, get the Gen AI. Second one is get the Gen AI products across the board. And third is, you know, we have some usages outside of automotive. We're, you know, just launched with Garmin. Two models of Garmin watch. We've been working with LG on TVs. Voice and these products can go into other products, other usages. We're starting to go and ask ourselves, where can that go and beyond? Now, it's not going to really be a 25 impact, but 25 is where we really need to go and figure out the one or two spaces we want to move into beyond automotive as well to continue to grow this company. in voice activation.

Got it. That's very helpful. Thanks for taking my questions.

Thank you. Our next question comes from Nicholas Doyle with Needham. Your line is open.

Hey, guys. Thanks for taking my questions. The first one, professional services was up quarter over quarter. I know you mentioned it was down year over year. But, you know, that comes despite the cuts over the last couple quarters. And then you mentioned, you know, five to seven. I was just wondering if you could explain, you know, what's driving that kind of change quarter over quarter. And then you mentioned the five to seven million headwind in fiscal 25. Is that off the fiscal 24 number? Thanks.

So, yes. The, there is a reduction anticipated in PS, five to seven million in PS, in fiscal 25 over 24. So as we look at it year over year, it was down. We did have a slight uptick from Q3, but we anticipate that with some of the cost cutting that we've done and headcount reductions, there's really a deeper focus within TS that we really are looking at driving those teams to the relationships that drive most meaningful results to us. So we anticipate that that number will be down year over year. Um, and, but remember those, some of those cuts really were Q4. So, so we really, really didn't see a lot of that. We saw, you know, 1 million of that headwind in Q1, but, uh, you know, as we think about it again, year over year, but, um, looking at it going forward, it will be a more focused effort.

Okay. Just clarifying. So I just asking, I guess again, is it was up quarter over quarter and I guess we expected it to be flat to down. So any explanation on what drove the strength there this quarter?

You know, it's just – this is Brian, Nicholas. You know, it's just going to be a little bit lumpy from quarter to quarter. It's really, as Tony said, we're focusing more on, you know, where do we actually add value and where do we get paid for professional services? And so, you know, when we looked at the business, we said this thing should – down and we went ahead and let some people go and shrunk the organization in professional services to kind of right-size it to where we thought the quality business was now that said you know we've told them hey if there's good business and we can get paid for the work we'll do it and so you're going to see kind of a lumpiness and as you know projects come in and And, you know, somebody wants the professional services because they don't want to do the work or they cannot do the work themselves either way, and they're willing to pay us to go do it, we'll do it. And so you're just seeing a little bit of that lumpiness of, hey, there's some more work, you know, and some quarters, you know, it may be a little bit less than that quarter over quarter or year over year trend. But when we look at the long term, the full year guidance, We think we've right-sized the organization and right-sized the amount of work relative to professional services so that the margin and getting paid for what we do is right. Does that help answer why?

Like, I wouldn't worry about one quarter. Yes, yes, got it. Just a little lumpy, and I know, you know, splitting hairs looks like about a million-dollar change here. Yeah, no, I think it's a good question. Go ahead. Okay, thank you. Second question, I think the license average PPU jumped to the highest level since fiscal 22. Did those gen, those six gen AI rollouts this year or the past one or two quarters really drive that much of a change? Or just any detail on what drove the strength this quarter in the average PPU and thoughts in fiscal 25? Thanks. Yeah.

And again, it's hard, right? And we're trying to, Brian and I both have an effort as we go forward to try and simplify kind of how we describe the business and try to get to a P times Q model. But as we do disclose some of the shipments, it is kind of difficult. One is from a license standpoint, yes, that drops down. You'd have to take out the fixed, but then if you take out the fixed and then drop that down and look at our volumes, you can kind of see, you know, calculate an average PPU because those do get recorded in GAAP revenue on shipment. Connected is a little harder because, you know, we will bill for something. And that's one thing that we need to continue to highlight is as a leading metric is our billings, which were $80 million this quarter compared to GAAP revenue of 54.5. But those billings then are deferred and then amortized into revenue over a subscription period. So it's really hard to look at those connected volumes and try and do an average PPU because you really have some legacy stuff from deferred that's going in there and then the higher PPU for the new next generation product you really won't see into revenue until future periods. And then from a license standpoint, it's really trying to understand how much of a license or components of a license are being billed within that number? So do we have volumes? What are we shipping? And do those shipments have more of our license components? So effectively, an average higher PPU for those components or a weighted PPU, if you will, for the components that we're actually selling there. But the short answer is that in the license components, area is that we have higher PPUs because of effectively higher components within that license that are being billed.

Thank you.

Thank you. Again, to ask a question, please press star 1-1. Our next question comes from Mark Delaney with Goldman Sachs. Your line is open.

Hi, yes. Thank you for taking our questions. You have Amman Gupta on for Mark Delaney. First, I guess, Last quarter, you guys provided a framework for fiscal 25 of kind of a flat to low single-digit decline for revenue year-on-year, excluding the legacy business. And midpoint now is showing growth year-on-year. Can you kind of speak to maybe some of the puts and takes that drove that and what's driving some of that strength you're seeing?

Yes, certainly. I think we're fairly close. When we took out the legacy business, I think at that point we were looking at a framework of mid-guidance of 238, and right now our guidance is 236 to 247. So we are seeing some growth. It's as we look at a couple things. One is On the license side, looking at our volumes and making sure we right-size that backlog and the expectation of what will be shipped within the quarter. As we mentioned, professional services will be down, but in line with what we were kind of providing the framework, we said that it was going to be down. And then connected services actually being slightly up than what we were thinking about in the framework. But overall, I think it's actually very close to what we had guided in the framework last quarter.

Thank you for that, Claire. I appreciate it. And then maybe kind of a higher level one on the AI products and appreciate the context for the first gen versus second gen. Given that you have kind of this second gen product that's supposed to be a little simpler to make, how should we think about both AI kind of launches and pipeline going through the year? Are you kind of waiting to get more of that second gen product before you pursue kind of a higher level of AI wins? Or how should we think about that pipeline?

no um what's nice is that all of these products from for the most part chat pro through jexgen through next gen one through next gen two are backward compatible so we can upgrade people um to those products so we don't slow this down at all and i wouldn't want to do that um so if a customer comes in and they seen our our whether they want to look at Chat Pro or whether they want to look at the next Gen 1, whether you want to do Chat Pro and then skip Gen 1 and go to Gen 2, we are able to manage all of those with them. We show them the various products and where we're headed with them. And then we help guide them through that selection process, right? And there's a series of things we kind of go through with them as they're going through that. What are the features they want? What is the experience they want? Some of the customers just want a really good operational experience. You can do things in a natural language. Some others want a true assistant in the car. Renault is a good example of that. We just launched with them where they have their avatar called Renault and that really helps, it becomes like an assistant, and they have plans to move that assistant all the way through their product line and much further beyond even just the auto. In that case, we're working with them to go from what we can do today to looking out at Gen 2. So you're going to see it's going to be kind of like a continuum for people as they go through these products. and so it's going to be kind of seamless. You're not going to see break-offs, or we don't have to make a decision of, hey, stop selling CHAP Pro because we want everything Gen 1, or stop selling Gen 1 because we want everything Gen 2. We can seamlessly move between those, and we can upgrade people, even upgrade their cars with down-the-wire upgrades if they want to upgrade everybody's experience later on. So we have all of that ability in these products. Does that help you understand kind of the product portfolio?

Yeah, that was super helpful. Thank you very much.

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Brian for any closing remarks.

Okay, so I just want to thank everybody for attending the call this morning. I thought the questions were excellent, and I really appreciate the interest in our business. I hope you see from Tony and I's remarks that we're really excited about where the business is headed. For 2025, our priorities, as we said, you know, one, it's execution. Execution in order to achieve the numbers we talked about this morning, to return the company to profitability. You know, Tony mentioned that we have plans in place to work through the debt, and we think we'll have answers for you by the next quarter's update. And, you know, I think the organization overall, we've made through this transition, and we're all really excited about our next generation products. So that's the other real focus for 2025 is execution of those, and really getting our customers to see and feel the experience that we're able to generate. And so with that, I just want to thank everybody again for attending this morning, and we look forward to seeing you at the end of the next quarter and showing you the progress we've made so far. So thank you very much.

Thank you for your participation. This does conclude the program, and you may now disconnect. Everyone, have a great day.