Q3 2021 Cerence Inc Earnings Call
[music].
Good day, Thank you for standing by and welcome to the series of Q3, 2021earnings 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.
Just a question during the session you you would need to press star 1 on your telephone.
Please be advised that today's conference is being recorded if you require any further assistance of press Star Zero I would now like the hand, the call over to your host.
Rich Youre and again please go ahead.
Prince call before we begin and 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 and severance makes no representation 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. 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 equivalents.
Joining me on today's call of Sanjay Dhawan, President and CEO of severance and Mark Kellenberger CFO of <unk> as a reminder of the only authorized spokespeople for the company of Sanjay Mark and Bill.
Before handing the call over to Sanjay I would like to win on several upcoming investor events. They are all virtual event. So the exact timing of our participation is subject to change the <unk>.
<unk> include the Raymond James 2021 diversified industrial conference on August 24th.
The <unk> transportation and mobility conference on September 9 the RBC global industrials and stuff.
On September 10th and the Jefferies Software Conference on September 14th and the Evercore Auto Tech form on September 21, please visit the events page and the investors section of the <unk> website from most up to date information on our participation now once of the call Sanjay.
Thank you great job welcome to everyone on the call and thank you for joining the <unk> to discuss our third quarter fiscal 2021 and.
Actual results.
But our call all of course to review our strong financial performance in Q3, followed by a review of some notable events that took place during the quarter net.
Next I'll update our key performance indicators, and then and the call over to Mark to review the detailed financial results.
Once again, we delivered a strong financial performance.
This is especially the key when considering the headwinds to our license business due to the semiconductor shortage.
Our revenue came in at the high end of the range.
Was aided by strong year over year of growth in our beautiful licensed product line being up 74% year over year.
The business model continue to deliver better than expected performance with non-GAAP gross margin of 79, 1% and adjusted EBITDA at $38.7 million or 40%.
The result was.
The result was non-GAAP EPS of.
<unk> and cash flow from operations of $24.1 million.
When when combining our EBITDA to date results with our guidance for Q4, our full year forecast is expected to come in at the high end of the range Mark will provide details in few minutes.
During the <unk> comments. He will also be updating all of you on our midterm 2024 model.
The motor with force published in February of 2020.
And our first analyst day, we had hope to hold our second analyst day in early September as a live event in New York City, but unfortunately, the REIT and Delta Mediant of COVID-19 has led us to believe that even until later in the calendar year. We did however, it was important to update you on.
And the 2024 model given the positive updates can be on digital model.
Much has happened since reported introduced a bit of a model, especially in regard to new product development and adoption.
Our decision to enter adjacent market and a better understanding of how subscription renewals may play out.
We have also been able to make sustainable improvements in some of our.
Gross margin.
The result is the midterm model with the significantly higher revenue target and improved margin expectations.
You will hear the details shortly but as the management team, we're really pleased to be able to communicate these update the.
Updated model assumptions.
1 of the areas that will help us achieve our midterm target is and the new applications and connected services.
Some of these applications and connected services, we have discussed before such as debt.
A highlight to guide and others still to come.
We.
Include in this category the touch product.
Browse and the extent.
What was especially encouraging was the momentum we saw during the third quarter related to bookings for these new products. In addition to the.
The more of the $30 million and bookings to be referenced on our last conference call.
The bookings momentum was partly the visa Viva and able to increase our revenue expectations for 2024 target model.
We also had several notable events and achievements and this quarter.
During the quarter over 16 different car models more of them from more than 15 different OEM Street start up production or ESOP.
The 60 different car models was the record for the company and.
Sophie usually follows.
3 years after a design win and represents a critical milestone because it is at that point when the license and connected services begin to generate revenue for the company the.
The range of cars hitting S&P in the quarter was also.
Impressive and included high and luxury cars from such companies the J of our BMW and Mercedes.
Some of the hottest new cars on the market from Oems and that includes Ford Toyota GM, Volkswagen Renault and still anchors.
All of the major geographic regions, where he presented including about a dozen and Sop east for cars in China.
We announced an agreement with Philips ex the leading audio Entertainment company in North America that will provide their customers the ability to use their voice to change the channel.
And if the inconvenience or why using your voice and the card is important and this is especially true when you have to look at the console and changing of Campbell.
With this technology it will not only make it safer.
Environment for the driver, but also through our AI. The system will learn your favorite channels and suggest others you may like as well.
But the important agreement was truck during the quarter with Heartland. This competitive bid will combine sentences.
The leading conversational AI technology with Harman and ignite platform.
Heartland of leading tier 1 supplier to automakers will integrate AI powered powered voice recognition technology into the ignite platform. So they can offer and hence we secured access to the platform's extensive capabilities, providing and intuitive and powerful experience to the drivers.
We also entered into collaborations with Visteon and of the leading tier 1 supplier to the auto industry and this case however.
And the collaboration will combine.
For <unk> conversational AI, including global language support the Beast.
And Android based.
Smart core technology platform. The solution has been selected by a leading motorcycle manufacturer and will launch in 2024.5 range of 12 inch display debt offers connected apps and over the of software download capabilities.
This is an important collaborations as we seek to expand our presence and the tubular market and is an example of our successful ability to do so.
There were 2 other events of work.
The thing during the quarter first we were notified of by the addition to the S&P 400 mid cap index, we were pleased to hear of our.
And our inclusion and the index as of.
And we took it and the recognition of the hard work of the entire team to consistently deliver strong growth and profitability.
Laser focused we are laser focused on continuing the path of building the company through the most trusted copilot and in a car on.
Also pleased to see debt, our chief information Officer of Bridget Collins was recognized for all of our fantastic efforts on behalf of citizens.
<unk> was named 2021, Boston and CIO of the year.
And the in the corporate category.
By the CIA.
Oh peers as.
I've said in the press release announcing the recognition Bridget has been and integral part of my team from day, 1 and is the perfect example of the level of talent and the <unk> leadership team.
Moving on to our Kpis and expected several of the keep your eyes of turn to a more positive trend as the quarter. Most affected by the introduction of a reduction and cars produced due to Covid fell out of the 12 month trailing period.
Specifically the percentage of cars shipped with tenants technology increased to 52% and the change in the number of cloud connected cars shipped turn to a positive 12% from what had been the negative number.
Our average billings per carton increase the healthy 13% year over year the.
Main contributor to this growth is the increasing percentage of cloud connected cars.
The largest increase in the number of the monthly active users is indicative of the automakers.
<unk> 2 market infotainment systems that are more capable and easier to use the <unk>.
<unk> already got off of it.
For sure some automakers on and a better position than others to compete for the driver's mind shift, but the momentum is clearly building.
Growing adoption of the well implemented and OEM branded human machine interface in the car.
Our multi faceted growth strategy to deliver sustainable growth continues to play out it starts with the strong core of leading conversational AI technology for the car and extends to new application images and markets. We continue to push the innovation.
And what our customers so that they can offer their customers. The safest most enjoyable experience inside the car, which also represents a seamless transition of their digital life from outside the car the insight and the car.
You May have heard me say this before but I think it is worth repeating I drive decided steam to adhere to treat the 3 priorities.
As of pick company, we must continue to innovate since the spin out into the into an independent company I'm very proud of the number of new products and technologies sentences broke the market second innovation is only an idea and let you execute and turn that into a product that you can deliver to your customer on time and the.
The quality.
And third to focus on cost when designing the products because ultimately we had and our business to make money for our shareholders I think our financial performance as the good indication of the emphasis we put on the cost efficiency.
These are the guiding principles, we will continue to rely on as the company continues to grow.
Yeah.
The previous slide identified how we have expanded the business by developing new products and entering adjacent markets.
The long term vision for the company is much larger than debt. Our goal is to be the central AI brain of the car essentially becoming the drivers of trusted copilot.
We see the next big opportunity is the combined vision with voice.
And believe this has application not only drive driver monitoring, but all of its on the road in cabin monitoring as well.
This is an area you will hear more from us in the future and.
I'd like to the out on the call over tomorrow. So he can review with you the details of the quarter, our Q4 guidance and also positive update to our victim of 2020 for Marvell.
Thank you Sanjay I'll first review another strong performance for our fiscal Q3, and then I'll provide guidance for our fourth quarter <unk>.
All of those comments with an update to our 2024 and midterm target model.
We delivered another strong quarter on both the top and bottom lines revenue came in at $96.8 million, which is at the higher end of our guidance of $94 million to $97 million and has a 29% increase from the same period last year.
Our key profitability metrics were also very strong and exceeded the high end of our guidance range. The non-GAAP gross margin was 79.
And 1%, mainly driven by favorable product mix, our non-GAAP operating margin was 37, 7%.
Adjusted EBITDA was $38.7 million or 40% margin and our non-GAAP earnings per share of <unk> 60 to <unk> exceeded the high end of our guidance by 5.
During the quarter, we generated more than $24 million of CFO and our balance sheet remains strong with total cash and marketable securities of approximately $157 million.
Now, let's review of detailed breakdown of our revenue our strong revenue growth compared to last year was driven by 2 factors first our total license revenue was up 54% year over year, our variable license revenue was up 74% from the same quarter last year driven by continued recut.
<unk> and auto production.
You may recall that our Q3 from last year represents of the trough revenue quarter due to the impact of COVID-19 on auto production chart of shutdowns.
We believe our variable license revenue during the quarter was impacted by the semiconductor shortages slowing down auto production, although we cannot exactly quantify how much of the semi shortage impacted our business. Our variable license revenue is where you would see the most direct impact from lower auto production.
Second our connected services revenue grew 19% from last year, but more importantly, our new connected services revenue, which excludes our legacy business.
Spanned at a strong 46% year over year due to a continually growing customer base adopting our new connected service offerings.
Professional service revenue was down 5% year over year simply due to the timing of project completion schedules, which affects revenue recognition.
Moving on to our guidance for Q4.
Our revenue guidance of 97 to 101 reflects year over year growth of 6% to 11%.
And it takes into consideration of the current risks and uncertainties of the semiconductor device shortages that are continuing to impact auto production longer than we had expected.
We are closely monitoring the situation and believe we have accounted for the impact on our guidance keep in mind that only about a third of our business is directly impacted by auto production and any given quarter, which shows up and our variable license revenue.
We expect to generate between $36 million and $39 million of adjusted EBITDA and between 55 to 61.
Per share on a non-GAAP basis.
For the fiscal year, we have updated our full year expectations based on our Q4 guidance as you can see we are now forecasting materially higher revenue profit margins and EPS estimates versus our original guidance that we communicated to you back in November of last year although.
We did not contemplate the semi shortages and our and our original guidance.
We are still delivering better than expected results. Despite this unexpected event, which reaffirms that the digital transformation of the auto industry is alive and well.
We were planning to hold an analyst day event in early September and New York City and during that event update you on the 'twenty 'twenty 4 midterm target model that we first presented in February of last year or about 18 months ago.
We were hoping that international travel restrictions would of been lifted by now but they remain in effect due to the increase of COVID-19 cases, resulting from the Delta variant.
Because we prefer to hold the live event and half of our key executives from from around the world participate we decided to delay the event to later in the fall.
We don't have a specific date, but we will continue to monitor developments related to the virus and keep you posted.
So rather than waiting for that event, we decided to provide you with an update to our mid term target model today.
<unk> categorized our changes in 2 buckets growth and profitability.
First I'll cover growth and.
According to IHS the forecast the penetration rates have increased for edge AI and connected AI products and services that are getting designed into automobiles. However, this is being offset by lower auto production IHS forecast post COVID-19.
And we've added new revenue streams to our mid term model, including connected renewals and new service offerings, such as entertainment extend connect and browse.
Additionally, since our last analyst day, we've announced plans to enter to adjacent markets 2 wheelers and elevators and these markets are now reflected and our midterm target model.
Second I'll cover profitability, we've updated our margin assumptions based on sustainable improvements that we've made to our business over the past 18 months.
First our connected margin assumption has increased from 65% to 77% driven by our successful 1 cloud architecture project and negotiating more favorable contracts with some of our third party providers.
Secondly, we are seeing good sustainable progress on improving our professional services delivery model and increasing our utilization rates both of which have enabled us to increase our margin assumption from 10% to 35%.
And thirdly, we expect the economies of scale and our SG&A functions has our business continues to grow.
As you can see these changes are expected to drive some fairly significant revenue improvements first on the top line. We've increased the original target from $600 million to 700 million. This is due to several factors.
Factors, including agenda of greater contribution from new applications and services and.
And estimated $65 million and contribution from new adjacent markets, including elevators, and 2 wheelers and a stronger contribution from professional services.
We have seen initial bookings during this fiscal year for some of our new applications and services, which gives us confidence and being able to achieve these targets, but we expect the revenue contribution from them to be more back end loaded, meaning they're not going to be linear and theyre going to follow more of a non linear.
Kirk.
Keep keep in mind. This top line growth takes into account the lower forecasted auto production in 2024 according to IHS.
But is the offset by increase in penetration of connected cars and so all in all we are pleased to be able to raise our revenue target by $100 million.
From a non-GAAP gross margin perspective, we increased it by 100 basis points to 76%, we see sustained margin improvement and our delivery of connected services and professional services more than offsetting the lower margins expected from some of the new mobility markets, which are expected to have an element of hardware.
And the overall solution.
For non-GAAP operating margin, we are now modeling, 36% compared to the previous 33% due to gross margin improvements and SG&A economies of scale on higher revenue.
All of this leads to a significantly higher adjusted EBITDA of $260 million or $50 million higher than our original model and incremental $100 million and revenue.
Or a 50% drop through rate.
So in summary, we had another quarter of excellent financial performance, while we remain cautious and the near term due to 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 remained strong.
On.
And as demonstrated in our updated target model 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 we will now take your questions.
And at this time, if you would like to ask a question press the star 1 on your telephone keypad.
Wanted to ask a question.
And your first question comes from the line of the Joseph Spak with RBC capital markets.
Yes.
Thanks, so much everyone.
I wanted to dive in.
First of all of it to the the updated and <unk>.
For forecast so.
And if I look at.
On the segment that is.
The hold on I guess to volumes and the license segment and I like and what IHS offers.
Looking for and early 2021 and your first sort of of that it looks like it's.
And maybe 4% lower global production volume. So so just order of magnitude or since you're keeping that flat are you, saying the the take rates is sort of making up that call. It $10 million to $15 million does that set the right interpretation.
Yes that is debt is correct.
We are seeing the lower IHS production forecast like Youre seeing.
But we are seeing updates from IHS, which is showing some increase in penetration rates or what you are calling that the take rates and so.
I think generally speaking we're comfortable with those 2 offsetting and keeping the keeping the numbers where they are.
Okay, and then just on the margin component of this sort of connected services I know you raised that from 6.5% I think you've even hinted before that pack and settling around that mid 70 level, but you're kind of already of there. So I guess I'm curious as to sort of why there isn't sort of further upside there.
And then the new mobility markets are just a little bit surprised that that was and.
It's a smaller dollar amount, but I'm surprised that slower margin because I thought you were just sort of leveraging the tech you are using the other markets. Maybe you could just explain that a little bit.
Yes, so so I think I think in terms of.
You know the.
The new mobility markets I'll cover that first.
There is an element of hardware, which which generally is going to be a lower margin component.
There will be obviously leveraging of the of existing technologies, but when you combine it with the with a hardware component for a total solution.
We are.
Factoring in.
And that blended.
Ponant and so that's why we think coming.
Coming out of the gate, where we want to model of 45% for those margins and similar to what we did when we first launched our analysts model 18 months ago.
And we try to be.
Somewhat conservative just because we are entering new areas and we don't want to.
Put ourselves out there too aggressively but.
Things if things change over time as and this market starts to develop further then we can certainly.
I'll have some room to potentially increase those margin assumptions.
And relative to <unk>.
And I'm, sorry, if I could just quickly follow up on.
And maybe.
I didn't.
The property I understand on the new and new mobility of markets, what what hardware like I thought thats like the motorcycle segments of you are providing the whole box with the voice or any of the Vista.
And the thing with Visteon, but I thought you were just providing the voice component or yes, I think I think what we and.
Sanjay can cover a little bit too, but I think more of its on the elevator side, where.
And there would be.
We're on top of all the right.
So yes, so so so Joe the India and.
And the 2 Wheeler speeds.
That is really no hardware, we're working with the tier ones like the Pea on Bosch and others, who will provide you know of hardware.
The so called head unit strength and lot of our software also runs on the phone of the rider so.
So that is.
The 3 no hardware competent there the hardware component of that Mark has mentioned and gives on the elevator site, because elevators and have a long life and.
A large installed base of elevators or ship with no kind of capability of running edge AI.
There is a.
A piece of.
Hardware.
We have built debt retrofit and existing elevator with edge AI.
<unk> and that is what mark is referring to our core business model, though just to be very very clear is software stack in the elevator business as well, although we were sort of force to kind of.
Put this piece of hardware out there at a slightly lower margin, but really the.
The product that we are leveraging and shipping is the core AI product that you referenced to which is common across auto and so on.
Okay. Thank you and sorry, Marc I cut you off on the on the day, yes and on commercial.
The connected the connected margins.
When we first introduced the analyst day model 18 months ago, we had 65% margin assumption.
And we kind of blew through that and we're running now.
The low seventy's the high 70 so.
Were there we feel like we can sustain that even even into the future.
We will have some a little bit of pressure as the as the legacy connected.
The revenue declines over time, so that puts a little bit of pressure on the blended margins but.
But like we've done in the past, we tend to be a little bit.
Conservative with these assumptions and it's always better to be able to.
And improve them over time, but right now we're comfortable with the 77%.
Thanks, very much guidance.
Your next question comes from the line of the Luke junk with Baird.
And.
Yeah. Good morning, Thanks for taking the questions.
First wanted to ask on the 2 Wheeler markets. Obviously, you highlighted the relationship with Visteon and that market and and had a couple of questions related to that 1 if you could speak to the nature of that relationship a little bit more effectively does this give you a couple of bites on the Apple and the market and then overall do you feel like overall commercial momentum and the <unk>.
The market is getting closer to the tipping point here, obviously, you're now including it and your 'twenty from motto, which is encouraging.
Yes.
Sure.
Luke.
We are delighted to have this relationship with the risk.
On.
Definitely the.
And you'll have.
Great.
Penetration into the tubular market as well as the safe Darko.
And of where our model is to be the the.
On the AI platform of choice and not just for cards, but also for 2 wheelers and other modes of transportation and what we are trying to do very systematically is to basically connect.
And the reach out to those other adjacencies as well and 2 Wheeler is a really important 1 because of.
The CP.
And the writer, but can be the writer and.
The the safety is so important and you can't touch the phone and then our guidance when you want to kind of communicate without the riders and so on and so forth. So bringing these features out.
Clearly important and.
The conversational AI plays a very important role.
And so we're working both either directly with the Oems or also indirectly through the tier 1 channels across the different markets, where right now engaged in China, India. We are heavily engaged in Japan, who controls about 50% of the.
The 2 Wheeler market, we are engaged with.
<unk>.
Tier ones and and <unk>.
Oems in Europe, and also in the United States, but we're definitely very happy to announce this relationship that we put the joint press release out earlier and the.
A few weeks back and we're certainly looking forward to for the traction.
That's great color. Thank you for that second question I wanted to ask about the 24 revenue models, specifically the <unk>.
And that you are now adding connected renewal.
Model and I know you're waiting on that and it was thought that this would be of possibility down the road and I'm wondering is there any data that you can share behind that decision and just in general what's informing your view there specifically on the connected renewal.
Yes, So I think I think we have 1 or 2 data points since our last analyst day, where we've had.
And the rules.
So that's.
And that's encouraging to see that our customers are looking to extend those those cars beyond their original.
Multiple year subscription period.
I think also what we're seeing is even with some of our new.
Our new connected.
Subscriptions those are those are trending to be longer and periods. So that that gives us the indication of our customers know that there is value and that and that they're willing to commit for longer upfront periods of time and so and then also looking at some of our internal schedule as to when some of the <unk>.
The contract periods of our ending.
And we felt like there was there is there should be some upside we havent disclosed exactly what that upside is built into the model, but we are now factoring some of that into <unk>.
Fiscal year 'twenty core based upon.
A couple of data points that we've already seen and and the fact that some of our newer contracts are actually extending beyond what with some of the the previous contracts work.
Great. Thank you both for that color on go ahead of me.
Your next question comes from the line of Mark Delaney with Goldman Sachs.
Yes, hi, good morning, and thanks very much for taking the questions I was hoping to start with a question about your expectations for the percentage of vehicles. The have cerus technology and how you expect that to evolve the number of star of production.
Vehicles that you talked about.
For this most recent quarter I would think of as a good positive indicator.
And as those new programs ramp up and volume and.
Give you guys and good visibility into how many vehicles may have a center of technology on them going forward and I think that's probably a pretty important input as well into the 2024 model. So maybe talk about how you see that evolving and and if you could also touch on your expectations and the 24 model about what the.
That type of penetration rate may look like.
Yeah.
Yeah. So.
Yes penetration rates I think they're going to the continue they're going to continue to grow over over time.
We looked at some of the IHS data for 4 of penetration rates in particular, there on the connected side and those those have grown.
From from from 18 months ago, and believe it was around 60% penetration rate for connected cars.
18 months ago, and now it's now it's and the high 60% range and so.
And <unk>.
We've tried to factor that debt into our analysis.
However, offsetting some of that is the fact that IHS is lowering the total volume forecast for 2024 post COVID-19 and so when we see the puts and the takes.
Between those 2.
We decided to hold that.
Net debt.
Revenue stream flat for the core portion of the business.
So that's kind of how we sort of articulated and built out the model.
Okay. That's helpful.
And maybe you could also talk a little bit more on your degree of visibility into the 24, our model and you've given some helpful commentary already on the margin side, but maybe on the $700 million of revenue you're on.
On the 1 hand, right and you're signing contracts that are multiple years and lengths and even for cars on and production yet you're probably getting to the point where you are.
And already having weiner and pretty.
Advanced discussions for 24 of them.
The types of launches for 3 years out so.
I can tell you of some sort of potential good visibility, but <unk> also.
You have a.
The content per vehicle.
The consideration that feeding into it and some of these newer markets. So.
You talked about having some maybe conservatism on on margins is that sort of logic.
Holding as well from the revenue side of the equation are as or more and is already on that piece of it.
Yeah, I think I think.
The long, it's a long sales cycle and the auto right. So.
We've got.
We've got a cycle of 2 to 3 years. So it gives us pretty good pretty good outlook and I think for fiscal year 'twenty, we had of substantially strong bookings year, if you will.
Recall it was over $800 million, the legal with a 35% to be exact which was significantly higher than the prior.
Fiscal fiscal year.
And we've given you an update already for the 6 months ending.
March for this year, which is also.
Shaping up to be another very good year for us so that debt I think all of those bookings, which is the leading indicator.
It gives us gives us more and more confidence and.
And more visibility into 2024 and beyond and so it really comes down to.
Lot of that bookings momentum I think the Sop.
Debt that we just had a record for this this past quarter is also an indication of those bookings over time translating into into real revenue and getting ramped into production. So.
Net.
And those that Sop.
I think more evidenced debt.
It's bookings first and then ultimately as you execute well you get.
And you get ramped into volume production I think the Sop.
Even though we had a record.
Quarter those will those are just starting to ramp so youll start to see those benefits and how.
Years right.
Once those those new those new products and those new cars hit their hit their hit their stride. If you will so it's not like a step function change, where S&P and 1.1 quarter and and and you flip the light switch. It does take time for those to ramp into volume production and by 2024 of lot of those from.
Probably be right and they're in the middle up there of their prime for production.
Thank you.
Your next question is from the line of Colin Langan with Wells Fargo.
Hello, and thanks for taking my question.
Just following up on that I mean, how should we think about how these sort of new markets or kind of ramp I mean.
You know in terms of the new mobility is that kind of is that if anything hit yet and we're gonna start seeing something actually start to contribute next year.
Same thing with I assume theres, some SaaS or any out there.
And within connected services.
How quickly is that ramping and.
And then how much of of your targets is already kind of in the backlog that you've won.
And how much has to be won and.
And I guess I'm, taking the question wrong, sorry, and.
And any color on the 2 Wheeler market in terms of how large it could be and how many vehicles might actually need your services.
Yes, so Sanjay you want to start that 1 or you want me to.
No I can I can separately you start debt so.
And of both.
Sure.
The tubular market and also for connected services and apps.
The Viva have revenue in the current fiscal year.
We were initially saying that we will have the revenue by.
The current calendar year, which is Q1 of the next.
The next fiscal year, but I am confident to say now that we will have the revenue.
But in both.
The new mobility market and.
So and new connected apps and services in.
The current bill.
The year.
So that's good.
Secondly in terms of.
The how much of the back how much.
Of the revenue is already and the backlog.
I don't have that breakdown.
Your question was somewhat 2024 model, but when we come back and the visa.
The fresh our backlog.
At the end of the year startup of the next fiscal year.
So in November October November when we come back in our next conference call will be with the fresh our backlog.
And 2.2 discrete and of that point, we tried to give some more color about that building debt, but needless to say, we're feeling confident about it that's the reason the number.
Numbers in the.
And the.
Got it.
Mark will update basically.
Was there anything else.
Yeah, Paul and I think the yes in terms of.
And the ramp for some of these new products.
Some of these will be on the same sort of.
The design cycle.
As some of our core products and so that's why I think.
As I mentioned in my prepared remarks, it's going to be non linear in terms of.
And how we how we think the revenue will be ramping up into those fiscal 2024 target.
The revenue assumptions, so that I think that was the other question that you had with the right.
And how backend loaded is it and I think it tends to be a little bit more back end loaded for some of these newer products because some of some.
Some of these products will be following a similar design cycle and ramp up.
And our core business.
Right right Mark and the.
I think just 1 more thing to add debt I've missed was I think all of them.
And you would ask and with the Tam and whats the available market for these products and up.
So we struggled a little bit we were thinking of including the <unk>.
Tam analysis in this.
The back for all of your reference, but the Tam numbers that we have our management Tam numbers and.
And what we are doing right now is getting the third party to independently.
Do the Tam analysis not.
And who doesn't have.
The management the information just to kind of validate and you know and give you a more independent view of the Tam Rob the band the management the only view of Tam. So we decided the mark and I decided not to include that in this and this.
It relieves the of the target model, but certainly in the future we hope to kind of share with you the Tam analysis as well.
Kind of and just I guess, 1 quick follow up on your 2024 pretty big jump and professional services margins.
What is the key drivers of that interest.
Yes.
It's really twofold.
1.1 we're focused on improving the utilization rates of those resources it is and as people driven.
And so that's 1 component of the other component is too.
<unk>.
Shift the mix of onshore and offshore resources.
And so as we as we change that mix, that's improving some of our our overall labor costs.
Okay. Thank you very much for taking my questions.
Your next question comes from the line of Rajeev, <unk> with Needham and company.
Yes. Thank you for taking my question I appreciate the updated fiscal year 'twenty 4 targets.
A couple of questions on that target. So I'm wondering how you plan to recognize revenue for the new applications and services as well as the new mobility markets.
Any clarity there in terms of the revenue recognition.
Yes, a lot of.
Of those are gonna be transaction based so clearly we will be recognizing revenue as we as we as we see those transactions occurring.
And and so it's going to follow that type of revenue model and some may be subscription base.
And there are there are some of that debt are going to have that of subscription element and those will those were more or less I guess track.
But to what we do with our connected.
Subscriptions, which would be and amortization schedule based on over over the life of that period the subscription period.
Got it and all of the fiscal year 'twenty 4 target.
So the with the new connected number of staying basically flat from the original guidance and likewise with the edge business.
And I get it in terms of overall units might be coming down.
345% based on IHS.
But I would think though that the ASP would be increasing.
And over the course of the on the.
Of course of those years.
And that would offset any kind of unit degradation as well as the attach rate for cloud connected increase and so I'm just a bit surprised that number.
And would be would be flat.
And even if there is kind of a small unit.
The correction. So maybe you can just click kind of clarify that in terms of.
And your thought process of keeping those numbers and the same.
Yes, so I think on on the connected piece.
We had ASP expansion already factored into the original 2024 target model that we.
Originally put out 18 months ago, and so we're still we're still factoring in those ASP expansion.
And in this model.
The other the other thing to keep in mind is.
Unlike the variable of licenses, which are which are recognized in the quarter.
And there is and amortization schedule and so because of Covid.
And there are fewer cars shifts right over the past year and so that's going to have.
The lingering effects.
On those amortization schedules and so you got to keep that in mind as well.
However, a lot of that is offset by the fact that the penetration rates or the take rates for connected cars is increasing and so we kind of looked at all of those factors and.
But some judgment and said you know what and I think it all and all its going to be about flat because of all of us all of it.
All of the different changes that are happening.
I see and.
And from the cash flow from operations, you increase that by 50 million and you talked about paying off some debt.
Wondering how youre thinking about the capital structure in light of the new updated target.
Yes.
Yes, I think I think the capital structure, and our and our high level of plans are still.
The same which is the first priority is the key funding the organic investments, which we believe.
Our fully funded.
The next priority is to see if there is other external ways that we can grow tolerate our strategy and our plans through inorganic investments.
If you recall earlier this year.
And the investments small investments and <unk>.
Investment and cerebrum ex data analytics company.
And we would expect to do more of those activities.
And as those opportunities arise and then the last piece is to pay down the debt I think I think.
And those priorities are still the same and I hope.
And we haven't changed those priorities and so first.
Grow the business and investing organically second inorganic and then.
And if theres any excess cash and accelerate the paydown of the debt and.
Oh.
Whether whether we had the.
We increased the EBITDA and the <unk> the CFO.
But the underlying priorities are unchanged.
I appreciate it thank you.
Your next question comes from the line of Michael.
The lethal with Bergen.
Yeah.
Hi, there thanks for taking my question.
And just just thinking into the connected services business.
The $50.24 of our outlook again.
And again, a little price is flat, but maybe you could provide a little more detail if possible around maybe of your renewal rate assumption or what percentage of sort of the revenue base. The day you expect the rolling off of the initial contract by fiscal year of 24.
And then maybe just any details around what your ASP assumptions would be on those renewals and that would maybe help provide some context.
Yes, I think it's still a little premature to give those level of specifics because we just have very limited data points on unfortunately and.
And I don't like to extrapolate 1 or 2 data points.
How do we think quality is theyre going to unfold each each deal is going to be somewhat different.
And have their own.
Uniqueness, if you will so I think it's a bit premature to give those types of specifics.
But on a high level, you're thinking about it the right way right I mean, I think I think when it comes to renewables, there's only and that theres going to be the percentage of cars, it's not going to be 100%.
I think I think in terms of renewal durations those those would probably be.
Still multiple years, but probably not.
Not that as long as the original contract period because of those cars are just naturally older now and so I think those are those are a couple of influencing factors.
And then and then I think.
What im seeing is good news as of the fact that more and more of these cars are getting connected and more users are actually using the technology and so I think because of that.
Theres going to be there's going to be more and more opportunities for us to engage and these renewals because the and consumers ultimately the 1 that's going to be driving the demand for price and so I think.
As the technology becomes more user friendly.
Giving us and the art.
The customer and opportunity to extend those those cars beyond the original contract period.
Got it understood and then just 1 other question and sort of stepping away from the fifth year of 24 outlook.
1 of the notable advantages I think that you guys have talked about before with sort of your competitor the Google gas system right.
And its ability to offer sort of the ecosystem the plug and play system.
And with its own with services and whatever.
And so Sanjay maybe you could provide a little more detail around what your strategy is Darren the strategy is the build out of sort of a similar ecosystem, whether that sterns building on it.
Internally or working with other parties and sort of help compete against that ecosystem model that Google offers.
So we're trying to be sort of neutral to weighted different ecosystems, because we're we know of.
Very focused on supporting Google or Amazon or.
Apples and they're equal ecosystems, the big Tech ecosystems that we know up here.
Or.
In the custom ecosystem debt may be kind of coming coming on board.
The company put example harm of ignite ecosystem.
1 such example that I referenced to in my in my remarks, but again, we're not just stopping to that we're also.
Working closely with the Chinese ecosystems as well right. So.
And the way we're trying to approach the is.
We're not trying to build a competing big tech.
Ecosystem.
Instead, we're trying to be compatible with.
The the big Tech ecosystems, which are which are out there and also support any custom ones debt debt the.
And the Oems may want to support.
Understood. Thanks, a lot.
Your next question comes from the line of David Kelley with Jefferies.
Hi, Good morning, guys just of shorter term and then the longer term question, maybe starting with the Q4 guide.
Specifically the sequential sales target I think being flat to modestly higher here, we're all hearing about the ongoing variability and production schedules.
And understand and clearly you're less exposed to the cycle and this would primarily be of variable license discussion, but just wondering if you could talk about kind of what youre seeing heading into the fourth quarter and visibility to the top line.
Yes so.
A lot of it really comes down to short term the SME shortages right that's sort of the influencing.
A portion of our of our model and as you rightfully said that kind of translate.
Translates into our variable.
License revenue line and so.
I think I think when we first started.
<unk> seen about the semi shortages of 6 plus months ago.
I think all of US thought it was going to be of first half of event for the calendar year.
That's not that has not turned out to be the case and it's now spilling into the second half and there's talks about being of calendar 'twenty 2 event as well so it just it.
And it's just been it's been it's taken longer for for the auto industry to sort of correct. The semi shortage, that's fairly pervasive throughout the industry and and so we try to factor that into our guidance as best as we can.
For Q4.
And I've seen reports where.
The auto production is expected to be actually I think down a little bit.
Quarter over quarter for calendar Q3, which would be our fiscal Q4. So we tried to we tried to dial that and as best as we can we use a lot of the IHS forecast, but we also tried to sort of get a sense for what our customers are telling us.
Short term as well and so that basically.
What we're trying to model.
The the pro services I think.
That's been flat the last 2 quarters I think based upon some of our completion dates you probably start to see the pro services ramping up sequentially and.
And so that's that's kind of how we built up the model for Q4.
Okay, Great that's really helpful and maybe sticking with <unk>.
Pro services, the 24 revenue target fairly meaningful raise there for that business, we tend to view it as an indicator for future business for Sarah and true development relationships with the Oems. So we're just hoping maybe you could give us a bit of color on what's driving that raise and how you think about.
Professional services opportunity.
Yes, so so I can start and Sanjay may want to.
Jumping and as well, but I think I think what we what we see today is we've had a very good growth and our pro services since we've.
And we originally set the target I think originally when we set the target 18 months ago of $85 million that was that was on the conservative side quite quite frankly and.
And based upon our performance since then.
It's been it's been good good revenue growth for us and so we're being I would say.
Basically less conservative on on that front and the we're also looking to <unk>.
<unk> beyond what we just do traditionally with our pro services right. We want to we want to still leverage these valuable resources, but.
Add more and more.
Value to our customers.
In the car and do do some do some more work in the in the car, but beyond what.
We have traditionally done too so I think that's going to help us and to grow that top line as well.
Okay perfect. Thanks for taking my questions.
Your next question comes from the line of GFR and Danny.
With the Craig Hallum.
[laughter] great. Thanks, Thanks for taking my questions Hey, guys.
Just a couple from me.
Maybe start with the bookings and I realize you give the update mid year and into fiscal <unk>.
And there had been some aspirations debt debt it was.
Reasonable to think you could possibly hit the target or hit the bookings you delivered and 'twenty, even though it was a huge.
Year, you still feel the same still feel like that's a reasonable aspiration and.
And again, while you don't quantitatively comment on it or outline it for the quarter can you give maybe a little bit of qualitative about the value of bookings and the quarter.
Yes.
And that aspiration is the.
There.
And we're feeling good about it due to achieving that aspiration and the.
We'll come back with detailed and the Q4.
Mhm.
Yes.
On the on the on the bookings are sort of new business from.
I mean I'd be interested if you took maybe you're the last major win over the last couple of major wins anything you'd observe there around sales cycles bake offs, who are the final list sort of.
Deciding factors as to why you got the win maybe just a little real time color on what the competitive environment.
And.
So the competitive environment is similar the the Mitch.
The <unk> players like downtown flight deck.
Turning to the and others basically show up on the bake offs and.
And then in the bigger the architecture discussions kind of you know the coexistence with and.
The Big Tech data shows up and the architecture of discussions so that the debt element has not changed.
I think we're seeing.
Quite positive reactions from customers about the kind of broadened portfolio, especially of our cloud.
We are seeing some cloud wins cloud only wins against previously.
And.
Losses debt since.
And they had.
Loss.
And so thats positive as well.
And the overall kind of I think good positive reaction.
Of the portfolio.
And so on and I think the other.
The positive.
The feedback that we're getting from the customers as debt.
No.
Delivering.
The the the Sop.
And running.
And our Rps.
Programs, where there is nothing and bread is something that I'm extremely proud of because of our of our employees and of RPX team colleagues and not and the colleagues because the.
Debt.
The results and to obviously getting the product done and <unk>.
And <unk>, but also create the amaze.
Amazing amount of goodwill with our customers as well, so and as I reported to the board and our <unk>.
The meeting yesterday last week, we have no debt programs and we're really really working hard to make sure that.
And we deliver to the schedule and the quality of desktop Oems and expect us to deliver these programs.
Yeah. That's helpful. Thanks, guys really impressive execution tough market. So thanks again appreciate it.
And there are no other questions at this time.
Well. Thank you all for joining us on today's call and we look forward to engaging with you at upcoming investor conferences or.
And any other form and hopefully sooner rather than later, we'll be able to meet in person and again. Thank you again for joining us this morning, and kind of a great day.
This concludes today's conference call you may now disconnect.
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