Cerence Inc.

Welcome to CERNS' first quarter of fiscal year 2025 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. CERNS 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 estimates, 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 25, 2024. 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 Kurzanich, CEO of CERNS, and Tony Rodriguez, CFO of CERNS. Please note that slides with further context are available in the investor section of our website. Now on to the call. Brian?

Thank you, Jason. And good afternoon, everyone. And welcome to the Q1 2025 CERNS earnings call. And I'm really excited to speak with you today. While Tony will walk you through the details, I have the pleasure of sharing our great Q1 results with you first. Topline revenue of $50.9 million and adjusted EBITDA of $1.4 million, both exceeded the high end of our guidance, and we had strong free cash flow of $7.9 million. On our last call, I shared that our fiscal year 2025 goal is to return CERNs to profitability, a critical step to fuel the future growth. With our Q1 results, On a non-GAAP basis, we have moved toward profitability even earlier than we forecasted. I couldn't be more proud of what the team has accomplished and the great start this has given us for 2025. In addition, during Q1, we repurchased 27 million of our convertible notes due in June of 2025. And as we've discussed in the past, our plan is to extinguish this debt through some combination of repurchases and financing, and we will decide the best path forward taking into account shareholders' interests and with a view towards driving long-term value. As many of you know, but those who are new to the call may not, Sarence AI delivers AI-powered, multimodal, and conversational agent experience for automotive and beyond. We partner with the world's leading automakers and transportation OEMs to create AI-powered empowering them to deliver incredible user experiences to their drivers while also maintaining their unique brand and data ownership and keeping costs in line. In addition to our deep technical expertise and our exciting product roadmap, more on that in a moment, the world's leading automakers and tier one suppliers love to work with Sarence because we are a neutral and highly specialized supplier, living and breathing automotive and speaking the same language as our customers, unlike our competitors. With the ongoing challenges OEMs are facing, cost pressure, slowdown in EV and car sales, and an ever-changing geopolitical landscape, Terence AI is uniquely positioned as an AI innovation partner who can help automakers deliver a premium experience while also navigating the impacts of a complex and rapidly changing industry. This quarter, the team has been laser-focused on our three key deliverables for 2025. First, continuing our work to bring CERN's XUI, our next-gen product based on our calm family of language models, to market. XUI's agentic, multi-LLM architecture provides deep customization and enables compatibility with both new and existing infotainment systems. making it easier for automakers to deploy to both current and future vehicles. We reached several important milestones for XUI Gen 1 within the quarter, including delivering five proof of concepts and kicking off our first major customer program, further validating and solidifying our product and go-to-market strategy. And we've partnered with leading AI companies like NVIDIA and Microsoft, empowering us with tools and resources to deliver improved performance and cost efficiency to our customers and their drivers. These AI leaders are eager to work with us, given our position with global OEMs and installed base. You'll see more announcements in this space as we approach NVIDIA's GTC in March and the Shanghai Auto Show in April. The XUI Gen2 which we are demonstrating now and will be available to our customers by the end of 2025, will deliver a single conversational interface that works across both cloud and embedded applications to complete tasks based on user preferences, integrating all aspects of a user's interaction into a seamless conversational interface that extends beyond voice. Our future product vision is to enable the driver to get into the vehicle and put their phone down, using the in-car system to complete the tasks they would normally do in their phone. In this new agentic world, we can combine activities like navigation, phone calling, text messaging, and web search that even with your phone today would require multiple steps and switching between various apps. XUI brings the future of agentic and conversational eye to your vehicle and transforms the car into an assistant that saves you time and truly simplifies your life. The second key deliverable for 2025 is continuing to grow our business with new and existing customers. In this first quarter of fiscal 2025, we secured six new design wins across our current product line and two new wins for our generative AI solutions across large and global OEMs. We also saw a start of production for six major customer programs and two generative AI programs within the quarter, including a large trucking customer and a major cloud win back in China, and a renal avatar program that includes our Gen AI solution. The third key deliverable for 2025 is continuing our transformation and cost management. You've already seen the benefits of this work in our Q1 top and bottom line results. And as I previously stated, we believe we should always be looking at how we can be more efficient from both a cost and operational perspective. For fiscal year 2025, we are focused on simplifying and streamlining our organization and our structure to continue taking cost and spending out of CERNs. We can 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 work is underway as we've continued to evaluate our office space and legal entities, kicked off a process to streamline and improve our relatively complex customer contracts, and continue to evaluate every rehire and new hire as we move forward. We are looking forward to fiscal Q2 2025 We're issuing initial revenue guidance of $74 million to $77 million, with GAAP net income expected to be in the range of $1 to $5 million, and adjusted EBITDA in the range of $18 to $22 million. And Tony will provide further details on the second fiscal quarter in his remarks. This is my second earnings call as CEO of Serence AI, and I and the rest of the team are proud and encouraged by the first quarter results. Sarence AI is bringing conversational AI and true agentic capabilities to the vehicle now, not just in the future. And we have an exciting roadmap ahead. With that, I'll turn it over to Tony to go through the detail of our quarterly numbers, our guidance, and our restructuring activities. Tony?

Thank you, Brian. Today, I will be reviewing our QM results for fiscal year 2025. and providing some guidance for our second quarter. I will also comment on our progression toward full fiscal year 2025 guidance. Let's get into the Q1 operating statement. At the top, we achieved Q1 revenue of $50.9 million, which exceeded the high end of our guidance range of $47 to $50 million. Our revenue this quarter was aided by $2 million in connected royalty true-ups for one of our OEM customers. As a reminder, this is normal as our customers self-report royalty volumes that approximate their auto shipments with our technology in each quarter and periodically true up to actual. With this revenue achievement, our gross margin for the quarter of 65% also exceeded the high end of our guidance of 60%. Gross profit was also benefited from a greater mix of higher margin license and connected service revenue as compared to professional services revenue. While our professional services revenue was lower than anticipated during the quarter, it performed at a higher gross margin than anticipated. Moving down the operating statement, our non-GAAP operating expenses were $34.1 million for Q1, compared to $44.4 million from the same quarter in fiscal year 24. This decrease of $10.4 million, or 23%, represents a full quarter of savings from the restructuring year. We also delayed some planned R&D hiring until Q2. Additionally, the company received notice of acceptance of an international tax credit that allowed us to record $2.5 million in operating cost benefit. The tax credit benefit recognized this quarter related to 2021 through 2024 fiscal years and was anticipated in our full year guidance but later in the fiscal year. Our adjusted EBITDA of $1.4 million well exceeded our guidance of loss in the range of $6.6 to $9 million. This was driven by improved gross profit as well as decreased operating expenses from continued effort of managing our ongoing operating costs and the previously discussed international tax credit of $2.5 million. As compared to prior year, our Q1 revenue declined $87.4 million, but this was driven by $86.6 million of non-cash revenue recorded in last fiscal year associated with our legacy connected services contract that was decommissioned in Q1 of fiscal 2024. Our net loss for Q1 was $22.4 million compared to net income of $23.9 million for the same quarter in fiscal 24. Again, the decline driven by the decommissioned legacy contract. We ended the quarter with $110.5 million of cash and marketable securities, down $19.9 million compared to where we ended last fiscal year. The lower cash balances quarter related to our repurchase of $27.4 million in principal value of our 2025 convertible notes, offset by our positive free cash flow during the quarter of $7.9 million. Our cash flow in Q1 absorbed approximately $8.9 million of cash restructuring costs associated with the transformation efforts of Q4 last year. We believe the good start to the year positions us well to achieve our full-year cash flow expectations. During the quarter, we recorded restructuring and other costs of $11.1 million, which included a $10.2 million charge primarily related to our transformation initiatives, of which $3 million related to accelerated stock-based As we look at our revenue breakdown and operating metrics, variable license revenue of $22.7 million was up $1.9 million or 9.1% from the same quarter last year and slightly ahead of our expectations. As planned, there was no material fixed license revenue during the quarter. Q1 connected services revenue of $13.7 million was up $3.5 million, or 34%, from $10.2 million the same quarter last year when excluding the legacy revenue. We believe this reflects a positive trend of increased demand for our connected vehicles. As planned, our professional service revenue was down year over year. However, the work performed was more profitable than a year ago. As we review our key performance indicators this quarter, total adjusted billings, which are defined as our total billings adjusted to exclude professional services, prepaid billings, and prepaid consumption was $227 million, an increase of 3% for the trailing 12-month period this year compared to previous year. Total billings, including professional services for Q1, of $69 million were up 7% compared to $64.6 million for Q1 last year. As a reminder, when we look at our total licenses shift, pro forma royalties is an operating metric we use representing the total value of variable licenses shipped in a quarter, including the shipments from fixed licenses where revenue was previously recognized upon contract signing. We refer to shipments where revenue was recognized in prior periods as fixed license consumption. Our pro forma royalties were $36.7 million. which were higher by approximately $1.4 million as compared to Q1 last year and in line with our expectations. Consumption of previously fixed contracts totaled $14 million this quarter, lower than the same quarter last year by about 3% and lower than projected. Going forward, we anticipate Our penetration of global auto production for the trailing 12 months declined by 251 percent. We shipped approximately 11 million cars with Santa's technology in Q1, up 2.6 percent compared to last quarter, so down 10.5 percent year over year. Q1 worldwide IHS production declined 1.2 percent compared to the same quarter last year and was up 10.8 percent quarter over quarter. Excluding China, worldwide car production was only up 2.8% quarter over quarter and down 4.8% versus the same quarter last year. This is important to note as this shows that part of our worldwide penetration decline relates to the increase in China production within worldwide auto productions. And to date, we have not been significantly successful at selling to Chinese OEMs into the Chinese domestic market. Weakened production volumes among our top customers also contributed to our year-over-year total volume decline. That said, the number of cars produced that use our connected services increased 5.1% on a trailing 12-month basis compared to the same metric a year ago, and 5.6% compared to last quarter. This reflects the increased demand for connected vehicles. Now turning to our guidance. For Q2, we currently expect revenue to be in the range of $74 million to $77 million. This includes $20 million of projected fixed license revenue expected to be signed during the quarter. Additionally, our Q2 revenue guidance absorbs approximately $2 million of headwinds in professional services we saw in Q1. We are not projecting any additional fixed license revenue for the remainder of the year. With the level of fixed license revenue forecast in Q2, we expect gross margins to improve to between 74% and 76%. Net income to be in the range of $1 million to $5 million, and adjusted EBITDA to be in the range of $18 million to $22 million. When taken in the context of a full year guidance, this means that the implied second half guidance for adjusted EBITDA would be negative if you simply based your calculations off the midpoint of our range. To be clear, this is not our intention to signal any change in direction of the business. Rather, it is still early in the year, and as mentioned, Q1 was aided by a few timing-related factors With that said, we had a positive first quarter but are not yet prepared to officially revise our fiscal 25 revenue profitability and cash flow guidance. The strong start to the year positions us very well and gives us confidence that our full-year numbers are likely to come in towards the top end of the range of our When looking at our liquidity, as previously noted, we repurchased $27.4 million of outstanding 2025 convertible notes. As Brian mentioned, our plan is to extinguish the remaining 60 million of convertible notes due in June through some combination of payoff and financing. Between now and June, we will continue to evaluate potential capital structures that could position the company Overall, we are pleased with the solid results for Q1 and our continued financial performance. I will now turn it back to Brian to close our remarks.