Cerence Inc.

Hello, everyone, and welcome to CERNS' second quarter 2025 conference call. I'm Kate Hickman, VP of Corporate Communications and Investor Relations. I've been with the company for nearly eight years leading communications, and I'm excited to now be leading investor relations as well. I look forward to getting to know all of you. 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, anticipations, intentions, estimates, assumptions, beliefs, outlook, strategies, goals, objectives, targets, and plans, are forward-looking statements. Terrence 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 and expectations. As described in our SEC filings, including the Form 8K with the press release preceding today's call, our most recent Form 10Q, 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 Krasanich, CEO, and Tony Rodriguez, CFO. Please note that slides with further context are available in the investor section of our website. Before handing the call over to Brian, I would like to mention that we will be presenting at the TD Cowen Technology, Media, and Telecom Conference on May 29th and the Evercore ISI Global Automotive OEM Dealer and Supplier Conference on June 10th. Webcast details will be provided soon. Now, on to the call. Brian?

Thank you, Kate. Good afternoon, everyone, and welcome to the Q2 2025 CERN's earnings call. I'm really excited to speak with you today. Now, while Tony will walk you through the details, we're very pleased with the strong results the team delivered this quarter, exceeding the high end of our guidance with a revenue of $78 million and adjusted EBITDA of $29.5 million. Importantly, we generated strong free cash flow of $13.1 million, marking our fourth consecutive quarter of positive free cash flow. As a result, we are raising our full-year guidance for adjusted EBITDA and free cash flow, and Tony will provide further details on this. I'm proud of our team and what it has accomplished. Despite ongoing macro challenges and uncertainty facing the automotive industry, we're focused on the future and believe that we remain well-positioned to support our customers. Sarenge continues to be differentiated by our unique combination of technology innovation, our diverse and expansive customer base, and our deep automotive expertise. Our experienced management team and deep bench of talent are keenly focused on delivering to our customers and executing against our roadmap. As we anticipated and stated in our last earnings call, we did not see a meaningful impact from tariffs on this quarter's results. For Q3, we believe the impact will remain limited. However, we are seeing some pressure from our customers on pricing. and some changes in their program timelines as they work to understand the true impact that tariffs will have on their businesses. We're working cooperatively with our customers to find ways to optimize our partnership to best support them during this time, while also maintaining favorable conditions for CERNs. Based on what we can see today and on currently available information for fiscal year 2025, we continue to assume minimal impact from tariffs. However, it's important to note that the situation remains fluid and may evolve over the remainder of the year. We continue to recognize the importance of differentiation and diversification. And as I've mentioned, we've had some great wins outside of automotive. We're building on that foundation to ramp up on our non-automotive efforts. For example, We're working to expand our partnerships with our network of distributors. You may have seen our announcement with Code Factory earlier this week. Together, we're introducing Voice Topping, a new solution that will bring Serence conversational AI to self-service kiosks in a variety of settings. We believe that this solution will be particularly relevant for things like placing orders and getting information in restaurants, and hospitality, retail and self-checkout, healthcare, transportation, banking, and entertainment settings, enabling users to interact with kiosks using only their voice. We're continuing to identify new verticals where we think we have a solid value proposition and can win. And we believe we will see the impact of this work on our revenue and profitability in fiscal year 2026 and beyond. Another area in which we are strategically investing is IP protection. We intend to aggressively protect the time and effort Sarence has put into developing our innovative technology. And as you may know, we have ongoing lawsuits against Samsung for patent infringement. This week, we filed an action against Microsoft and Nuance for copyright infringement and breach of contract. As many of you know, these types of actions can take a long time to resolve and have risks, including loss of these actions. But as a company deeply rooted in innovation, we feel it's critical at this time that we take the steps to vigorously defend our IP. Of course, we also continue to make progress on three key deliverables planned for 2025 that are laid out in last quarter's call. First, we continue our work on XUI, our hybrid agentic AI assistant platform. We reached several important milestones for XUI within the quarter, including the product's market launch, which coincided with an appearance at NVIDIA GTC in partnership with our customers, JLR and Renault. And we continue to evolve and enhance XUI with further edge and multimodal capabilities. Our teams worked hard this quarter to showcase XUI in both English and Mandarin at the recent Auto Shanghai 2025. This included new multimodal features within our calm edge embedded small language model, developed in partnership with Nvidia and MediaTek. This means we feed the SLM with car sensor data, and camera-based video streams to create an experience that integrates context from both inside and outside the car, something no one else has done before. For example, XQI can explain or translate road signs, identify roadside buildings, and even offer details about something interesting on a billboard, which has the potential to open up new revenue streams for OEM. In the coming months, we plan to continue to expand XUI's features and capabilities, as well as increased language availability to serve automakers globally. We continue to see strong customer interest for XUI. We've signed several deals with top automakers, including JLR, and several more that we believe will close within the coming quarter. Additionally, We have a robust pipeline of ongoing customer interest with a steady stream of proof of concept programs. It's important to note that we can push out the cloud aspects of XUI over the air to existing programs that are already shipping. As OEMs navigate the complexity and ambiguity of the current market, we're well positioned to help them continue to deliver new features and capabilities within their existing user experiences without having to invest in a full build-out or rebuild of their human platforms. And we continue to build the pipeline for the hybrid cloud embedded aspects of XUI for automakers' future programs. The second key deliverable for 202 Fire is to continue growing our business with new and existing customers. Seven major customer programs started production this quarter, including the Mercedes-Benz Virtual Assistant within the fourth generation of MBUX. First introduced in a new electric CLA, Sarence's AI solutions serve as the core input and output mechanisms across 25 languages, enabling seamless interaction across the platform's agentic architecture. including Mercedes' new avatar. Additionally, emotion detection and embedded neural text-to-speech from Serence AI enabled MDUX to deliver more natural and empathetic interactions. The previously announced two-wheeler program with Kawasaki also started production, as well as several China-for-the-rest-of-the-world programs with Great Wall Motor and Lincoln Company, among others. In addition, our GenAI solutions went live with three customers, Hyundai, Kia, and PSA. The third key deliverable for 2025 is to continue our transformation and cost management. As you can see from our strong cash performance this quarter, we're seeing the real benefits from this work, and it's being delivered to our bottom line for our shareholders. In conclusion, we are encouraged by our second quarter results especially with regards to free cash flow and solid path we have established ahead of us. And with that, I'll turn the call over to Tony.

Thank you, Brian. Today, I will be reviewing our Q2 results for fiscal 2025 and providing some guidance for our third quarter and full fiscal year. Let's get into the Q2 operating statement. At the top, we achieved Q2 revenue of $78 million which exceeded the high ends of our guidance range of $74 to $77 million. As projected, the revenue this quarter included $21.5 million of fixed license revenue contracts. With Q2 behind us, we expect no material fixed license revenue to be signed during the remainder of the fiscal year. As compared to the prior year, Q2 revenue increased $10.2 million, primarily related to the year-over-year increase in fixed license revenue of $11.1 million. This was offset by a decrease in professional services revenue. Additionally, as compared to our expectations, revenue was negatively impacted this quarter by the Euro to dollar exchange rate. This fluctuation was neutral to profitability as it had a corresponding positive impact to our operating expenses for the quarter. And the Euro has rebounded to our forecasted rate for April. Our gross margin for the quarter of 77% also exceeded the high end of our guidance range of 74 to 76%, as our technology revenue constituted a larger percentage of the revenue mix than forecasted. Moving down the operating statement, our non-GAAP operating expenses were $34.1 million for Q2, compared to $50 million for the same quarter last year. This decrease of $15.9 million, or 32%, represents savings from the restructuring efforts conducted at the end of last year. As compared to our forecast, we also continued to delay some planned R&D hiring until Q3 and had lower translated operating costs in our European subsidiaries with the euro to dollar exchange rate for the quarter. Additionally, the company received notice of acceptance jurisdiction. These credits reflect our continuing effort to maximize the R&D benefits in our offshore locations. While we do not expect similar catch-up amounts going forward, ongoing R&D costs will reflect end-period credits we have applied for. Our adjusted EBITDA of $29.5 million exceeded the high end of our guidance range of $18 to $22 million and was $29.8 million better than the approximate $300,000 EBITDA loss for Q2 of last fiscal year. The improvement in non-GAAP operating expenses over prior year and expectations was driven by continued focus on managing operating costs and improving profitability. Our net income for Q2 was $21.7 million compared to a net loss of $278 million for the same quarter last year. In Q2 of last year, the company recorded a goodwill impairment charge of $252 million. This was a non-cash charge that only affected the GAAP results. Excluding the impairment charge, our net income still improved from last year by approximately $48 million this quarter. We ended the quarter with $122.8 million of cash and marketable securities, up $12.3 million compared to where we ended last quarter, derived from our positive free cash flow during the quarter of $13.1 million. As we look at our revenue breakdown and operating metrics, variable license revenue of $29.9 million was up $4.8 million, or 19%. As mentioned, fixed Likens revenue during the quarter was $21.5 million compared to $10.4 million for Q2 last fiscal year. Q2 connected services revenue was $12.6 million, down $1 million or 7% from $13.6 million for the same quarter last year. However, in Q2 of last year, the company recorded a $2.6 million revenue true-up. We believe this improvement in connected services revenue reflects a positive sign of increased demand for connected vehicles. As planned, our professional services revenue was down year over year by approximately $4.8 million, but down a bit more than expected. As our solutions become more standardized, they become more easily integrated and require less of our professional services to integrate. Additionally, some OEMs are bringing more of this integration in-house. 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 $224 million and flat for the trailing 12-month period this year compared to the previous year. Total billings, including professional services, for Q2 of $77.7 million were also comparable to Q2 of last fiscal year. As a reminder, when we look at total licenses shipped, pro forma royalties is an operating measure 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 the shipments where revenue was recognized prior period as fixed license consumption. Our pro forma royalties were $39.7 million, which were comparable to Q2 of last fiscal year. Consumption of our previous fixed license contracts totaled $9.7 million this quarter, lower than the same quarter last year by about 33% and in line with expectations. As discussed in previous calls, we anticipated a lower level of consumption given the lower level of fixed contracts than historical periods. Our penetration of global auto production for the trailing 12 months ending this quarter was 51%. Approximately 11.6 million cars with salient technology were shipped in Q2, flat year over year, and down 1.3% quarter over quarter. Q2 worldwide IHS production increased 1.3% year-over-year and was down 10.9% quarter-over-quarter. Excluding China, worldwide car production was down 3% versus the same quarter last year and down 1% quarter-over-quarter. This is important to note as it shows that a big part of the worldwide production decline quarter-over-quarter relates to the Chinese market, and not to the regions where we are more predominant. To date, we have not really sold to the Chinese OEMs for the China domestic market. The number of cars produced that use our connected services increased 10 percent on a trailing 12-month basis compared to the same metric a year ago. We believe this reflects increased demand for connected vehicles. So last quarter, we discussed the possibility of introducing a price per unit or PPU operating metric, providing insight into pricing. For our business, PPU represents the average technology price per vehicle shipped, including both embedded license fee and connected services subscription. Although PPU is not immediately recognized as revenue at the time of shipment, it reflects the average per vehicle value PPU is influenced by contract pricing, the take rate of technology features, and the adoption rate of connected services. For Q2, the trailing 12-month average PPU was $4.87, up from $4.51 for the same period last year. This increase was primarily driven by higher attachment rate of connected services. 29% of vehicles were connected this quarter, compared to 26% a year ago. We believe this growth in connected services reflects consumer demand for interactive technologies that allow users to control vehicle function and communicate externally through a unified interface. While we expect continued adoption of connected solutions, past performance does not guarantee future growth rate results. Our five-year backlog metric, which is currently approximately $960 million, which was consistent with where it was two quarters Now turning to our guidance. For Q3, we expect revenue to be in the range of $52 to $56 million, where no material fixed license revenue expected to be signed during the quarter. Additionally, our Q3 revenue guidance absorbs approximately $1 million of headwinds in our professional services we saw in Q2. With no fixed license revenue forecasted in Q3, we expect gross margins to to $13 million, and adjusted EBITDA to be in the range of $1 to $4 million. We are reiterating our revenue guidance for the full fiscal year to be in the range of $236 to $247 million. This absorbs headwinds of approximately $4 to $6 million related to professional services projects for the second half of the year, offset by higher than expected technology revenue. While we expect revenue to be consistent to previous guidance, We expect profitability and free cash flow to be better than originally projected. Subject to the macro risk we have discussed, we currently expect full-year adjusted EBITDA to be in the range of 28 to 34 million dollars and expect free cash flow to be in the range of 25 to 35 million dollars. When looking at our liquidity, we plan to use our cash on hand to repay the remaining $60.1 million of our 2025 convertible notes due in June. Following this, we expect to maintain a cash balance above $70 million for the rest of the fiscal year. While this supports our day-to-day operations, a higher balance, closer to say $100 million, would give us more flexibility to invest in growth and strategic priorities. We will continue to use cash from operations to get to our optimal position, and evaluate other capital structure options as needed. Overall, we are very pleased with the solid results in Q2 and our continued financial performance. I will now turn back to Brian to close our remarks.