Q2 2021 Cerence Inc Earnings Call
[music].
Yes.
Good day, and thank you for standing by and welcome to the Cerus Q2 to 2021 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 one on your telephone please be advised.
On today's conference is being recorded if you require any further assistance. Please press star Zero I would now like to hand, the conference over to your speaker today, Richard You're again, Ian Please go ahead.
Thank you for.
Welcome to <unk> second quarter fiscal year 2021 conference call.
Before we begin I would like to remind you that this call may involve certain forward looking statements. These statements are subject to risks and uncertainties as described in the press release preceding today's call <unk> makes no representations to update those statements. After the date hereof.
In addition, the company may refer to certain non-GAAP measures key performance indicators and pro forma financial information during this call.
Reported today's press release for further details of the definitions limitations and uses of those measures and reconciliations of the non-GAAP measures to the closest GAAP equivalents.
Joining me on today's call are Sanjay Dhawan, President and CEO severance and Mark Goldberg for CFO severance as a reminder, the only authorized spokespeople for the company as Sanjay Mark and me.
Before handing over the call for Sanjay I would like to announce several upcoming investor events, where all virtual events. So the exact timing of our participation is subject to change.
Conferences include the Craig Hallum, 18th annual institutional Investor Conference on June 2nd neither.
Needham <unk> company, who stepped in with virtual automotive technology conference on June eight.
<unk> 2021, global consumer technology and services corporates on June two please visit the events page in the investors section of the <unk> website for the most up to date information on all participation.
Now on to the call Sanjay.
Good morning, Thank you rich welcome to everyone on the call and thank you for joining us to discuss our second quarter fiscal 2021 earnings.
Always amazes me, how many companies called their quarterly reports earnings calls when they arent producing any earnings for certain this is truly an earnings call.
For our call.
Will force to review our strong financial performance in Q2, followed by a review of our first half bookings. This will be followed by a few comments on some notable events that took place during the quarter.
Next I'll update our key.
Performance indicators.
And the call over to Mark will review the detailed financial results.
In Q2.
98 7 billion.
We once again delivered record revenue deeper.
He presented 14% year over year gross.
Our performance was driven by strong growth in our lifetime.
Connected services product line.
Both up approximately 20% year over the year.
As you can see these are.
There was minimal effect on our revenue from the semiconductor shortage affecting the auto industry, Although our Q2 guidance does take into account for a modest impact.
While revenue growth is a key part of our story, we believe profit profitable growth is also important.
Our relentless focus on cost and if we should lead to a non-GAAP gross margin of 77%.
EBITDA for approximately 39 million for 40% margin and very strong non-GAAP EPS of <unk> 69.
Mark will share the details later in the call, but overall, we're incredibly pleased with our second quarter results and how business continues to excel.
As we have done in the past our frac our practices to report bookings at the halfway point of the.
Fiscal year end report backlog at the end of the fiscal year.
Our broker force to have bookings were $292 million.
Proximity black for the second half for fiscal 2020.
Last year.
We had a burst of multiple significant award debt fell within the first half of the fiscal year.
We expect to be expect that force to happen in the second half of this fiscal year. In fact, we are off to a very strong start in Q3 with for $100 million book.
Bookings already pool.
Overall, our pipeline continues to be strong and our win rates remain extremely high we had no competitive loss of note in the force path and we went back and imported multi Nashville customer that had chosen a competitor when the business was still part of nuance.
Additional force have booking highlights include strategic customer bids with on die and the prominent Japanese car companies.
It is important to note that bookings for our new application products were approximately $33 million.
This is a solid start for building Kingstone Beeching from support our 75 billion of applications revenue expectation and our target 2020 for Morgan.
We expect these bookings to deliver initial day with you before the end of calendar year.
You may have seen our press release last week announcing he named COVID-19 network is the partner ecosystem for part B application.
This further solidifies and space.
In the market and will connect drivers to see seamless payments through the P. 97, mobile commerce platform currently available to more than 30% of the video site right.
Across the U S.
Continuing the momentum in our newest offerings, we were awarded two important decisions in the tubular market with one of the most prestigious and fastest growing too.
And it can be company in China.
And the iconic domestic motorcycle Brian that you would all recognize.
We made further progress in the alumina market and expect from share more progress with you on our next earnings call.
Aside from these important development, we had several notable events and achievements in the quarter.
To electric vehicles.
The Honda.
Hi, Io day buy in the Daimler <unk> were launched in the quarter to rave reviews.
We're proud to be a key supplier for both of these amazing cars.
We announced new product capability to seamlessly work with Google Android automotive boy, allowing technology to more deeply coexist with all Google applications.
Sentences best in class conversational AI built on top of Android automotive away automakers getting I'll ensure their native digital system.
Seamlessly coexist with Google automotive services, including Google Assistant without compromising Brian ownership and while preserving their unique in car experience.
Next sentence was the progress.
Numerous project.
Project was awarded the corner Global Best in Class achievement in voice in conversational AI.
The awards were for company appear.
Developer of the year executive appear.
Best use of PPS.
<unk>.
Of the year and best automotive solution for our incredible work with Daimler on the newest BUX operating.
Et cetera.
Mission is to develop a technology, that's ex medians focused on providing a safe withdraw bill experience for the driver and their passengers. We do this better than anyone else because that's our sole focus.
Our engineers are constantly challenging themselves about all we can do better develop new capabilities and leverage more information generated by the car sensors and cameras to accomplish this mission.
It is why we have business with not only for long time established automakers, but also most of the new car companies around the world.
We appreciate the recognition of the work that you do.
And finally, we made investigating set of bromine.
A startup with deep automotive expedient and the platform using connected car data and augmented learning to maximize the value of connected vehicles.
Working together our companies plan to enable Oems to create new revenue streams based on.
I'd card data by creating new AI powered applications insights and services that improve the Eden Connex, Eden and enhance safety and security.
I also want to add a few comments on the all important China cloud market.
Indeed, indeed genius, China car market historically.
Least credit credit geography, but debt is starting to change dramatically.
Gary among our customers several of you startups, such as <unk> and deal, but we are also building our presence in some of the traditional Oems in China, such as grid, Great Wall Motors, Jerry GB and Wuling.
Ruling the automaker in China with the highest volume weighted so far is to create an AD campaign featuring settings.
But typically for Indonesia market.
Willing like most automakers understand the user experience inside the cottage, becoming with solar for the car and the pre Brett a key brand differentiator.
Luca.
The unique brand experience for cognex.
Moving on to our Kpis overall, they continue to indicate a positive outlook since.
Since all of the Kpis, except the adoption metrics are based on trailing 12 month basis, the impact of COVID-19 still skews the data.
Especially the keep the ISO channel.
Technology penetration and the number of connected cars shipped.
We would expect those kpis to normalize with our support.
On average billings per car, which increased 10% year over year continues to demonstrate our value add to our customers to increasing content per vehicle.
As conversational AI become the standard for connected car the adoption rate of using the technology will continue to rise dramatically. This.
As evident in our adoption rate.
The API.
Slide where both active users and the number of transactions out on a steep positive slope over the last two years when compared against the previous two years.
When technology is easier to use more people will use it and debt is what you see.
In this chart.
I expect to see this continue to rise as more and more cars on conversational AI compared to the old ways of interacting with the car.
In closing.
In much the same way I became we're incredibly pleased with our performance in the record results we delivered.
Net operating from a position of real strength with true with tremendous excitement and commitment from our customers on.
Robust product.
Innovation roadmap and a significant growth opportunity on the horizon.
Our long term vision is to play a key role not only in driver AI, but also Cabot and Brody.
We will rely on the vast experience of our team, but also look to inorganic opportunities to help us achieve our vision.
I am pleased with what we have been able to accomplish so far but I also believe we are still the early stages of our potential.
What sales will.
Fully achieved.
I would like to turn the call over to Mark to review the financial results of the quarter and our guidance for Q3 marks.
Thank you Sanjay I will first review another strong quarterly performance and then I'll provide guidance for our third quarter and an update to our full year guidance.
Once again, we achieved record revenue as results came in stronger than expected.
Revenue came in at $98 $7 million, which is almost $4 million above the high end of our guidance and is a 14% increase from the same period last year.
Our profitability metrics were also very strong and exceeded the high end of our guidance range. The.
For non-GAAP gross margin was 77% non-GAAP operating margin was 37, 6% adjusted EBITDA was $39 $3 million for 40% margin.
And non-GAAP earnings per share was <unk> 69.
Due to exchange rate fluctuations, we had a foreign exchange gain of approximately <unk> <unk> per share, which is accounted for in the other income line items.
During the quarter, we generated more than $16 million of CFO and our balance sheet remains strong with total cash and marketable securities at $137 million.
Now let's review.
A detailed breakdown of our revenues our record revenue was driven by two factors for.
First our total licensed product revenue was up 22% year over year.
Our variable license revenue was up 32% from the same quarter last year driven by continued strong recovery in auto production since the trough during the April may timeframe of last year due to COVID-19.
While difficult to quantify we believe our variable license revenue was partially impacted by the semiconductor shortage slowing down auto production during the quarter our.
Our variable license revenue is where you would see the direct impact from lower car production.
Second our total connected services revenue grew 18% from last year, but more importantly, our new connected services revenue, which excludes our legacy business expanded a strong 51% year over year due to a continually growing customer base adopting our new connected service on.
Offerings.
Now moving on to our guidance for Q3, our revenue guidance for the third quarter of $94 million to $97 million reflects year over year growth of 25% to 29% and takes into consideration.
Risks and uncertainties of the semiconductor device shortages that are impacting auto production.
Forecast from various firms about the time required to resolve the semiconductor manufacturing issues are changing frequently.
We are closely monitoring the situation and believe we have accounted for the impact on our guidance.
In mind, only about 35% to 40% of our business is directly impacted by auto production in any given quarter.
For the fiscal year, we have updated our expectations based on a stronger than expected first half on both the top and bottom line.
We now expect our full year revenue to be in the range of $380 million to $390 million, which is up from our original guidance of $360 million to $380 million.
And non-GAAP EPS to be in the range of $2 22 to $2 37.
Which is up from our original guidance for dollar.
81 $2 five.
Please refer to our earnings press release or the appendix section of this presentation for more details of our guidance as well as our GAAP to non-GAAP reconciliation tables.
So in summary, we had another strong quarter of excellent financial performance, while we remain cautious in the near term debt.
On the semiconductor shortages impacting the auto industry, we are continuing to benefit from the secular tailwind caused by the digital transformation of the auto industry.
Our long term prospects remain bright and our focus on innovation and growth while at the same time crafting a profitable business model will benefit the company.
And our shareholders well into the future.
This concludes our prepared remarks, and now we will open it up to <unk>.
Call for questions.
As a reminder, we have a question. Please press star one on your telephone keypads once again Thats Star one we'll pause for just a moment.
On your first question comes from the line of Chris Mcnally from Evercore.
Hey, Sanjay 18, thanks, so much.
So the first question is around the booking detail you gave for the new applications really appreciate that.
The $30 million and it sounds like there is some short lead times from from the prepared remarks could you just add some qualitative.
Data around.
<unk>.
Interest in light pay severance look and then anything else around kind of the overall demand for these these new areas.
Maybe RFP interest because clearly this is this is the added extra is on on the connected business.
Sure.
So that 30 billion debt you mentioned comes from too.
Two customers one of them, we announced which was zero debt works with number of Oems and the second one is a direct.
Contract with another.
European OEM.
And.
For the first one.
The standard space the main product for.
For the second one there are multiple products included in that bookings would be which is which is the one with the OEM directly.
On the in terms of the momentum since the.
Since the <unk>.
Since Q2 into Q3, we have.
One more OEM debt has.
Signed up with our for our apps products.
And that one day is for the.
Travel guide.
Product basically.
And that is included in the that we mentioned in our remarks debt there is.
Over $100 million of bookings.
And.
In Q3 debt has already happened, which is a very strong start and and that.
Debt is one more OEM with.
He's going to launch.
The travel program.
The pipeline remains strong.
I can.
There are probably in a half a dozen to 10 plus.
On a b slash.
For conversations going on with the number of Oems right now.
That's great and then lead into that.
Question around overall on bookings. So you gave a first half number you had such a big year.
Last year without.
Knowing the full patients on second half is sort of an internal target or goal to keep up that sort of absolute level of bookings $800 million.
Plus I know timing is always is.
It's hard to call because.
The last month.
Q4 will matter a lot, but just high level can we try to sustain that that high level of bookings for the year.
Yeah I think.
We do paint.
We will.
We don't guide our bookings number Chris as you know.
But of course, you know our internal goals definitely are to meet or beat last year's bookings number we do have the pipeline to achieve debt. So it's not just a pipe dream. It's there it is.
Supported by facts, and and a strong pipeline and a strong start to Q3 and are like I said in my prepared remarks in last year Q2 was it was it was a big first half was bigger.
The second half.
Year this fiscal year. It all appears that it will be reversed.
Second half will be a bigger book bookings half as compared to both staff and the tightening of debt as you all know, it's totally driven by Oems and their cycles and so on and so forth right. So we don't control that day.
It's big.
Really important decisions that Oems uptake, but to summarize pipeline.
Is there and we surely hope that that.
That will.
Meet or exceed last year's 800 million number.
Alright, Thats, great to hear and then if I could just squeeze in one real auto Turkey potential.
Potential on on new opportunities.
Thus far voice HII has really not been a focal part for active safety and we're seeing a huge push across the industry and politicians are getting volume about basically safety and level two plus driver monitoring in Dms.
High level question do you see a lot of opportunities for voice to be a part of aid us on going forward, particularly in things like heads up display and on interaction around driver monitoring.
Yes.
Yes.
Definitely seeing more and more interest to bring these technologies together right and it's not just for basic simple voice from channel and all that stuff right for your Dms system debt.
Debt comes from the voice AI platform, it's more deeper integration to create more safer in a dry wood experiences and thats the reason.
Chris we're really focused on.
Creating and expanding our platform beyond voice AI to bring vs.
<unk>.
Intuit.
The IBM.
Tightly together not just for the better.
Dry would experience that is also imported but more so from a from a CPE.
280 standpoint, great. So.
More to come on this but.
But yes, we're definitely seeing Oems is getting more and more interested tie the two together.
Thanks, so much team.
Thank you.
Your next question comes from Colin Langan from Wells Fargo.
Oh, great. Thanks for taking my question.
Just to start.
Any clarity on what your assumption is for the semi impact into Q3, because I mean, it looks pretty benign and your guidance on <unk>.
Your comments said that it's like 30% to 35% of your sales are impacted by auto production, but.
50% of license revenue, so haven't thought of that debt higher.
Any color there, what's the underlying assumption seems pretty awful headlines coming out of the auto companies.
For this quarter.
Yeah, so so collyn.
The 35% to 40% that really kind of focuses more on the variable portion of our license. So we do have the fixed portion of our license as well so low.
Those can be lumpy those can vary from from.
From one quarter to the next and so that's kind of how we get to that 35% to 40%.
In terms of <unk>.
Answering your first question on on.
Auto production.
We are getting a lot of the same information that you guys are getting in terms of.
What the what the Oems are saying things look like they're a little bit worse than expected. This is getting a little bit longer than people expect in terms of right sizing the supply chain and correcting it.
We also look very closely at IHS third party reported information and that that information I believe is down as well a couple of points I think when we initially went into the went into the year, we were thinking around 13% I think and now I think thats down around 11% 12%.
And so we factor all that in but offsetting some of that is the secular part of the story right, where we are seeing increasing increasing penetration of this technology.
And so that does help offset some of those short term downward issues as it relates to the semiconductor supply chain and we try our best to try to factor that in as well into our guidance, which does provide some degree an offset to some other short term issues.
Sure.
Got it.
Mentioned, a win and a true two wheeler for market.
Any color on the size of that market opportunity I guess I'm not as familiar versus light vehicle is that.
Any sort of framing of how big are the opportunity is on on how much momentum you might have there.
Let me on a couple of Mark Yeah, Let me start and about you can jump in.
So the.
The win.
The one we talked about two wins one in China one in.
What in the U S.
The one in China, we can mention the name now.
It's a company called CF model.
As one of the largest.
Two Wheeler company in China.
The U S. One we cannot mention the name yet and.
But it's a name like I said in my remarks, you know all of you will recognize right.
So.
The.
The.
We will we are working on.
For <unk> this from a Tam standpoint in the upcoming.
Analyst meeting.
We will provide more clarification for the Pam assumptions and so on and so forth, but needless to say.
On the.
Almost between $60 billion to $80 billion.
Two wheelers are shipped slightly.
About the same but slightly lower than the.
The automotive market.
Huge space in itself, although quite different in terms of its requirements and all that stuff right, but safety.
It's driving.
On the need for voice to be more integrated or two on <unk> two wheelers.
We had announced earlier one.
Shallow means that with EMI that would be my company is our first win.
With this announcement today, we're adding a couple of more Oems and then our sales team is working with.
Many many.
Almost all of the other Oems to kind of going to look at basically what.
To showcase our products.
And get design wins into those opportunities as well so debt.
On the scope for now and like I said, the exact kind of Tam.
<unk> done all that stuff, we will share in our.
But the CRM on this conference.
Mark anything else you want to add.
No I think you've covered everything the only the only thing I would highlight is also in terms of the Tam.
<unk> portion of that volume is in Asia, where there is just more of the two wheelers being sold in that part of the world.
And so that's why we are focusing we're focusing globally of course, but we are.
Really focused on the Asian market for two wheelers.
Yes, yes.
Yes, I think Jack.
Japanese Oems.
Almost 50% of the volume of the World.
In two wheelers, so that's a very important geography for us.
Chinese Oems already important Indian Oems are really important and clearly we are focused on European men and.
U S Oems as well.
Got it alright, thanks for taking my question.
Your next question comes from the line of Daniel Ives from Web.
Cash.
Yeah. Thanks can you hit on with electric vehicles.
Especially what were seeing from China, and I know you can talk about model wind, but can you just maybe talk about activity there.
Mark.
For the for the EV market.
In China, you're asking Dan yes.
Yeah. So so.
The market is clearly.
A key market for for growth today, it really doesn't drive much.
Much business for us today, just because the volumes are not there but.
In terms of.
Growth opportunities, we are clearly very focused our sales organization is clearly focused on winning those accounts because we do see many of these companies.
Gaining significant traction.
In the foreseeable future and so for.
From our perspective, it's something that we simply.
We're not going on it we're not going to ignore that part of the market just because the volumes are low because we do think that's going to be a significant secular trend.
And so we are.
Our focused on winning debt winning business and those with those customers and we've already have evidence of some of that so.
So clearly, yes, it's not big market today, but it will be in the future.
Thanks.
Your next question comes from Joseph Spak from RBC capital.
Yeah.
Thank you.
Everyone how are you.
Great. Thank you guys.
So one of the things I like to look at is the variable revenue growth in licenses compared to production because that is sort of the the part that's that's right more tied to production and then.
You had some good outperformance here again this quarter, despite really that regional mix hurting you because you mentioned, you're making more progress on China, but you are still underweight that region and that's been the bigger part of the growth. So I guess pay that sort of supports Honda on your comment about the good progress on China, but what I'm curious about.
Is that dynamic obviously phillips.
For quarter, right, where where the outgrowth.
For the industry volume growth is going to be much more weighted towards North America and Europe, even if it's maybe a little bit lower than we thought a couple of months ago.
So I'm curious given that dynamic how should your performance hold up relative to production because if your growth is coming more from from China. It would seem like you might.
It's a constant gross coming incrementally from China would seem like just the sheer math of it might make it a little bit more difficult because this coming quarter.
I think.
Go ahead Sanjay no my fleets after you would yes.
I was just going to say one other things that I am seeing.
Into this quarter is.
Some new new Sop.
So business that we've won historically now those are starting to hit hit volume.
Production and so that.
It has been factored into some of our guidance, which I think.
Should should play out nicely for us so that's one.
Aspect debt.
I did have factored into our guidance because of some sop that are hitting.
And so on general if you want to add anything else no. What I was going to say was debt.
Joseph.
China is.
For us to improve further our penetration.
For North America, and Europe, we have good penetration.
It's.
Is the increase the Florida adoption in heads.
The revenue per car and so on.
That's kind of the picture.
The China, we have a very strong competitive their quarter by flight Tech as we have talked about debt before.
And we we have a laser focus on how we are going to be to increase our penetration in China for the right. We have very good penetration.
We go head to head with our flight day, China for China market.
But.
There is still lot of room left for us to win back and so on.
We are absolutely, making progress no questions and then for the rest of the world like I said, we have good penetration.
Need to improve.
The revenue per car and the big opportunity in the rest of the world in Europe.
In the Americas.
Cloud services due to increase in cloud.
So that's the expansion strategy.
No.
We have taken into account.
Number of these puts and takes for our guidance and overall as you saw we increased our yearly guidance from <unk>.
360, <unk> 80 billion originally to $3 $80 million to $390 million.
Which is almost 15 to 18 for some growth from last year.
Yes, no. Thanks.
Thanks for that Sandra.
Just while we're on China.
On something I missed something.
I'm sure you're well aware of.
That's been a bigger topic over recent years as.
Export controls with China, and AI and since Youre, making a lot more progress. There can you just remind us of like where does that IP actually lie like how much is shared between the regions.
What if any sort of protections.
Do you have if you know relations between the countries around AI.
Chop here.
Yes.
Mark do you want to handle that.
Yes. So we do have we do have a significant presence of employees in.
And in China.
It's around 300 people.
There is there is IP that gets that gets developed there, but the vast majority of our IP is outside that part of the world.
One thing to keep in mind is a lot of a lot of the Oems global Oems are shipping into that region and so a lot of our contracts are structured.
Where where their home bases and so.
I don't I don't foresee any real issues there.
A lot of a lot of the.
VIP is is based outside of China. So I don't see any significant issues debt that we would anticipate.
Okay.
And maybe just one housekeeping on the past Mark you said.
The prepay line items for the year I think it would be flat to down and I know it can be really choppy on its difficult to know in advance, but given that year to date, it's up.
No.
Mid teens like for it seemed like it'd have to be down mid teens for that to still hold is that still a valid assumption for the euro did sign anything change there.
Yes, I think I think last quarter, we were out around 10 ish or so in this quarter. So we were kind of kind of a little bit below the run rate this quarter we were.
Above the run rate really driven by one customer that.
We had on.
But for over 50% of the entire fixed amount so that kind of drove us.
Towards the towards the higher portion so.
I think I think for the balance of the year, just because of what happened this quarter, we're probably now going to be.
Flat to up from from the prior year that would be my my rough guess right now, but it's difficult to give guidance on that on that line item, but last year, we did about 54.
About $54 million in total.
And for the full for the first six months, we're at about 27 ish call. It.
So that kind of feels like we're sort of on that same run rate of that is last year and you're right. We did say, we would probably be flat to down this year I think now its probably going to be at the at the flat level.
And possibly up it's difficult to predict.
Understood. Thanks for thanks for that thanks for the color sure.
Thank you. Your next question comes from Ravi Gill from Needham <unk> Company.
Yes, Thank you and congrats on all the great momentum on a tough environment Mark on the gross margin upside I was wondering if you could perhaps talk about some of the puts and takes there.
Professional services.
Business was down quarter over quarter, which has a lower margin so the.
Might've benefited from a favorable mix shift.
Licensing and connected.
But you also are kind of guiding gross margins kind of in this 70, 677% range going forward.
Is this.
On the true gross margin profile of the company that you want to manage to any thoughts on on whats happening on the margin side.
Yes, I think I think this this quarter on particular like you said the pro services was down. So there was it was a mix shift.
Towards more more of the higher revenue license business.
Really contributed to the better margins for <unk>.
For the quarter Pro services was down and so therefore, the margins were down.
We're hiring resources that are not billable yet so.
That's declined our utilization rates to some degree there.
And so and then you've got the connected services business that continues to really outperform.
We we were a year ago, we were probably 10 points lower now we're in the we're now solidly in the mid 70% non-GAAP gross gross margins for the connected business and I expect that to continue.
And so I think that.
That's going to that's going to take hold.
And.
And stick with the business for pro services.
I think I think for the full year, we'll probably still be in that mid teens to high teens target that we've talked about previously.
This quarter it was in the single digits on a non-GAAP basis.
Mainly because the revenue was down and like I said, we've been hiring recently and those those resources are still going through some training, which does affect that utilization rates.
But all in all life license gross margins, it's going to be it's going to stay on that historical low.
97% 98.
Cent range I think for connected we've seen a nice <unk>.
Greece and trend over the past year and Thats in the mid mid Seventy's actually.
77% in particular for for this past quarter and pro services I think we're still good with the target, which is the mid teens to high teens for the full year.
Okay. That's super helpful. In terms of the the annual revenue guidance Mark.
The upside.
So you mentioned that the prepaid revenue.
<unk> is going to come in may be flat.
To up slightly versus versus down so that's contributing some of the upside.
But wanted to talk a little bit about.
What youre seeing on the on the new connected revenue.
It was $12 million this quarter up.
1% year over year, it looks like it's on track to be doing about $50 to $51 million for the year, So that's versus $34 million last year or so.
Strong potentially very strong annual growth for for new revenue new connected revenue.
Thoughts about that also thoughts about how to think about the <unk>.
Legacy connected revenue as we kind of progress throughout the year.
Yes, so I think the legacy connected it's going to stay at this level.
Mid around $15 million.
Yes.
So so I would be I would be modeling that out flat.
And then and then once you get into next fiscal year.
Fiscal year 'twenty two right. That's one that's when we would expect to start seeing.
Declines in net legacy connected revenue.
And then for the for the new connected.
Year over year.
Projected to show nice gains we showed.
51%.
This this quarter.
I think.
I think for the balance of the year, we should we should see a little bit more growth as well.
And that on that line item, but I think some of the upside is really going to be driven by some of the some of the variable the variable is even even with some of the.
Pressure from from the semi shortages.
We are seeing the increasing penetration and we are seeing some some new sop hitting in the second half year, which we are factoring into our models.
Yes, and just to follow up on that and then I'll step back in the queue.
You did talk about the variable on.
Revenue being tied to auto production. However, it is growing above the rate of auto production.
And so.
Are you seeing kind of obviously you must be seeing an uptick in.
And the attach rate for for your embedded licensing.
And the hedging on the vehicle.
Throwing out outpacing.
<unk> is being shipped off the lot.
Maybe you can just talk a little bit about that versus let's say last year and then just going back on the new connected revenue.
What are you seeing there in terms of the drivers throughout the year.
Yeah. So I think I think we are seeing.
Some pretty good attach rates.
We continue to have good good win rates.
As Sanjay had mentioned on the call we didn't see any anything any losses that were notable.
And I think I think in terms of the new connected we do have the the investment in the one cloud.
Architecture that we just.
Released and I think that's going to help us be more competitive in that space as well.
So all in all I think we are.
Seeing we're seeing good <unk>.
Good momentum on on a lot of these fronts.
Thank you.
Your next question comes from the line of Martin <unk> from Goldman Sachs.
Yes, good morning, and thanks very much for taking the question.
You spoke about some of the progress the company has made with it for products and the ability to work with Android automotive and I think we would have some prior discussions on this with <unk>.
For it and Google as one example, starting to work together more closely but maybe you can talk a little bit more qualitatively. What you may be seeing now that you've made some progress with the capability of <unk> with with Android ecosystem, what other Oems may be seen and maybe what that leads you to think in terms of your thesis around being able to coexist with big Tech.
So mark the thesis.
We believe in the thesis our cash.
Tumors most importantly.
Believe in the thesis.
And it's a thesis debt.
We built based on customer feedback right.
And I think we are.
<unk> always said that debt is a.
The consumers of the drivers walk is a seamless experience from their life digital life outside the car through the digital like inside the car and a core part of the pieces that no single Big Tech company can provide the full bridge to the complete digital.
<unk> for consumer because the consumer digital life income.
<unk>.
Multiple different big Tech.
And.
And finally, the reason OEM, believing this thesis is because.
They want to own the brand experience you can't.
Source for core brand Expedience, and voice and voice AI is going on.
Bigger part of the core brand experience.
On the thesis is.
We believe in that thesis.
We are working with we disciplined big Tech companies.
Including on the Google platform.
Android automotive and so on I think these will be highlighted.
In our early is because we we at least are.
Great.
The GAAP coexisting.
On Android automotive.
As a product.
In Q2, and so we wanted to basically make sure that we highlight debt, but the pieces.
We're making progress on debt.
That's helpful. Thanks.
For my second question, Microsoft is planning to acquire a year for former parent company nuance and I realize there's a field of use restriction around mobility can you remind investors when that expire and then whats your current thought process.
Transaction.
It's completed do you think over time that there's going to be.
Increased competition and does it change at all how you think about trying to go to market. Thank you.
No were firstly wed be happy for that.
On the ones in the one shareholders on our ex colleagues for this partnership with Microsoft.
So it makes a lot of sense and.
Yeah.
So really clever on Microsoft acquired blood. So what are you happy to hear that announcement. It once again get up you know.
Strongly outlined the importance of the technology debt, both nuance and tenants are working on.
Our.
We will look to use agreement with nuance is for five years from the date of spin that basically means.
Getting close to ending the second year now so there are three more years left on do onto the screen the user agreement and under this agreement.
<unk> has two stayed within transportation and mobility with the technology and no. One has stayed within healthcare and enterprise.
And just so that the two companies do compete and step on each other for five years and the <unk>.
It can be it is almost all work. So there are three more years to go.
In terms of understanding.
Microsoft acquisition of new ones, we don't expect any more competition for certain because.
The acquisition is purely driven.
And was focused around healthcare.
Thank you.
Thank you your next.
Question comes from the line of David Kelley from Jefferies.
Hi, good morning, everyone and thanks for taking my questions, maybe a first one for.
For Sanjay realizing the Kpis are skewed a bit by a unique last 12 months here, but you did see another step up in average contract duration, you've ramped from I believe five years to six announced $6 five in the last year plus or so can you talk about some of the drivers of that and then maybe.
How are you on thinking about the longer term opportunity as the market continues to shift to cloud connectivity.
Yeah, So David debt.
You said it totally right thats purely driven by more cloud contracts.
Cloud contracts are in low for longer duration, and as a result kind of moves debt.
Debt Kpis.
We're definitely seeing.
Our strong.
Progress.
Progress on the cloud and the connected services side.
Including in the in the bookings that you mentioned, including in the.
The current quarter 100 gross bookings.
Bookings that debt you mentioned cloud is playing more and more important role.
And we're we're very comfortable with our with our offering there because we have revamped our.
One cloud.
So it's dry.
One dark day.
Initiative, which we launched at the.
To drive to that though and we also strengthened our connected services portfolio.
We also added apps. So the core platform is the new version.
Is out there.
Is the need robust.
King do well on accuracy, and we could see and so on.
On a.
Really rich.
Rich connected services portfolio, which is both across multiple different big Tech as I mentioned earlier and the third piece is the apps.
So.
We continue to do.
I do think that we will continue to see more profit that could yet.
Okay, great. Thank you that's helpful. And then maybe one for Mark Mark I was hoping you could give us a sense from the cost action benefits in the quarter and I believe you are lapping about $12 million on temporary cost reductions into the back half of this year.
Assuming some of that is embedded into the second half margin outlook, but could you also talk about some of the puts and takes as we think about the margin guide go forward.
Yes. So we are we are adding back those expenses and we were essentially right on plan for from what we said we would be doing and we said that we'd be we'd be adding a couple of million dollars.
Per quarter.
This quarter I believe we've got modeled in about another $3 million of.
Operating expenses.
And a large component of that is going to be hitting the R&D line.
And then and then once we get into Q4.
I think thats, probably about another 2 million to $3 million and so that's been factored in but but basically what we said we were going to do in terms of.
Feathering back in these expenses that we cut last year.
We're pretty much we're very very close to being right on our on our plan for <unk> for the first six months and so that debt that plans on change we're going to continue to add those those expenses back.
We're seeing the projects to support those ex <unk>.
Investments.
And we do watch it carefully so.
Happens where.
Either projects get pushed out.
What have you we would make adjustments accordingly, but.
Things are things are playing out as we expected.
Okay really helpful. Thank you Bob.
Thank you. Our next question comes from Jeffrey <unk> from Greg column.
On the Rfps, just wonder if you could expand a little bit I'm kind of curious how the finalists in terms of the rfps over the last six to 12 months have changed it sounds like your win rates have remained extremely high but I'm just wondering about the variance and who you who you believe was your final list in those key deals and then.
Also as you again as you kind of look in the rearview mirror and you look at the pace of Rfps in the aggression within those rfps for connected services to be met your expectations any surprises on the kinds of services that the customers are looking forward and those some of those rfps.
So the.
Audit fees in terms of.
Competition.
Similar landscape that we have shared with you and the investors previously.
There is the companies like flight takes one pound.
Sensory and others that debt.
True.
And then in.
Many of these.
Discussions.
How.
The Big Big Tech coexistence will work.
What kind of.
<unk>.
The experience for our play or.
For Google.
Meetings or Amazon Alexa like eating and all that stuff basically comes in the multiple big day coexisting.
Is there.
I'm, referring to for example that our two main other things going on right now from speak.
And when I when I looked at kind of what the Oems are are are warranted in those.
<unk>.
And the experiences that they wanted to be aggressive.
What I just said is what they are what they are asking for.
So.
So yes, it's really very simple landscape in terms of what.
What other new things that we're thinking about I briefly touched it in response to Chris's question earlier.
As you know.
More and more discussion about kind of combining.
Voice AI.
Yes.
<unk> debt, we are seeing more and more we'll see it I wont get up you know.
Safety.
Functions.
Mhm.
Fair enough and then as it relates to renewals I think you may have had a few on the connected side, but just curious when youll start to get glimpses as you're lapping some of those deals to see what renewals look like on on.
On connected.
Mark.
Yeah. So I think it's still a little ways, a little ways out, but you did we did have one in particular, but.
I think I think you probably won't be hitting those until.
'twenty two.
Calendar 'twenty, two and 'twenty three and I think that's when we'll start to see more of those coming up for for the renewals. So we still don't have the data points that we were looking for in terms of being able to give specific guidance on economics, and so forth, but but I think I think.
As time goes on we.
We will be gathering more of those data points.
Got it fair enough great quarter guys. Thanks.
Thank you your index.
Thank you. Your next question comes from Michael Philatelic from Brian Brian Capital.
Thanks for taking my question.
Just a quick one on the billings Kpis saw increased 10% again.
<unk> for car and I'm, just kind of curious.
What sort of drove what's driving that is it a mix impact.
Oems focusing on more sort of higher end models trying to focus on more profitable models does that help you in some sense or is there any sort of pricing leverage youre getting on maybe new features so maybe just a bit of detail around billings growth.
Yeah, So I think I think the.
A big driver for that obviously.
Well its two things one is we are getting more content per vehicle and so more bells and whistles allow us to price accordingly.
In this business you don't get price increases with the same products you've got a you've got to basically continue to outperform on new product introductions and that that would provide the offset to any sort of pricing pressure.
The other the other element to keep in mind is in that billings for cars as more and more cars get connected that creates.
That layering effect or a compounding effect to that to that metric. So.
We would we would like to see that continue because when more and more cars get connected then we're not only selling the license but were selling the connected component as well so that that creates the other compounding effect. So those are the two elements.
Sure that makes sense and just one follow up here on the gross profit margins in connected.
What's really driving that sort of step change that we've seen over the last year or two in the gross profit margins for that business and.
What do we think about sort of the.
Where does it plateau in terms of this business in terms of gross margins.
Where does this top out do you think.
Yes, so so I think I think you've got two pieces right the first pieces.
We really have the team focused post spin from nuance on this.
This.
This line item and to try to.
Get get the best deals that we possibly can with with some of our contracts and so those were those were.
Those were renegotiated and then and then of course, you are going to get some economies of scale as this business ramps. So those those are the two key drivers.
Personally I think I think we're probably getting getting up to that level in terms of plateauing.
I think it's going to be being at the mid to like.
75% to 77% range I think it is going to be bit of a challenge.
Get another 10 points for example, we saw the big improvement last year and it far exceeded all of our expectations.
And so I think for for modeling purposes, I think we're probably close to that debt point, where things are starting to level off.
Understood. Thanks, so much.
Okay.
Okay. This concludes our Q&A session.
Well. Thank you everyone for joining us on the call. This morning, and we look forward to engaging with you with upcoming virtual events.
Thank you and have a good day.
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