Q1 2022 Cerence Inc Earnings Call
Good day and welcome to the <unk> first quarter 2022 earnings call. At this time, all participants are in listen only mode.
After the speaker's presentation, there will be a question and answer session.
I ask a question. During this session you will need to press Star then one on your Touchstone telephone.
And then he wants to acquire assistance during the conference. Please press Star then zero reached an operator.
As a reminder, this call is being recorded.
I would like to turn the call over to Richard Gagnon Senior Vice President Investor Relations you may begin.
Thank you Michelle welcome to <unk> first quarter fiscal year 'twenty two 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 the call.
Please refer to today's press release for further details of the definitions limitations and uses of those measures and reconciliations of non-GAAP measures to the closest GAAP equivalent.
Joining me on today's call are Stefan Workman CEO search.
Joan Berger CFO search.
As a reminder, the only authorized spokespeople for the company are Stephane, Mark and me.
We hope before handing the call over to Stefan I would like to announce several upcoming investor events. The exact timing of our participation is subject to change. So please go to the events section of our IR website for the latest information.
The conferences include the virtual second annual Cowen mobility disruption summit on March 2nd.
The virtual barely broke industrial technologies conference 2022 on March 3rd.
And the Raymond James 40, <unk> annual institutional investors conference in Orlando, Florida on March seven.
Now onto the call Stephane.
Thank you rich welcome to everyone on the call and thank you for joining us to discuss our first quarter fiscal 'twenty two earnings I am delighted to be here, it's been an incredibly busy and energizing a few months.
In addition to advancing our strategy.
Okay.
S and launching new products and partnerships I've spend a lot of time gathering feedback and exchanging ideas with customers partners employees and investors and analysts.
Including many of you on this call. It is important and valuable to see the company was a fresh perspective and to get grounded both in our current realities and future opportunities.
Recognize that <unk> has seen changes in our leadership since we lost convened and we made important decisions to advance our strategic priorities and position the business to drive long term sustainable growth.
Both factors.
Led us to lower guidance for the fiscal year. The reasons for this I will address later on the call.
As I've told our employees our industry is evolving at a rapid pace and focus and speed are needed for success.
This applies to <unk> and everyone else.
Think about the mobility industry and specifically for the automotive industry over the next five to 10 years.
<unk> 'twenty two will be an important year as electrification of the car reached commercial scale at the end of last year.
Cost powered by electricity are becoming more and more mainstream around the globe.
Example, in China over 15% of new car sold would be electric vehicles.
This tipping point has and will continue to accelerate the complete digitization of the car.
Taxation will create new opportunities and challenges in response global automakers will accelerate the deployment of new innovation and adapt to changing consumer demands and regulatory developments.
<unk>.
But at the end of this decade, we believe the Cal will be fully and commercially the redefined as a mobility solution.
Powered by two key platforms that work seamlessly together.
Out enormous driving.
And the digital cockpit and cabin.
A fully digital cockpit and cabin will transform the experience for both drivers and passengers can occur.
It will make possible much more than a driver simply speaking commands.
We'll make possible convenient enjoyable and safe experiences for drivers and passengers, especially at our vehicles bridge our digital lives.
It will create not just an enhanced driving experience, but also include the apps content and services, we use daily on our phones in our homes and at work.
These new capabilities will certainly occur inside the vehicle, where surgeons today already access for experiences.
They will also increasingly factor in elements outside of vehicles, such as the interactions with other costs.
Both sticky infrastructure pedestrians and more <unk>.
Together sales will lead the way in cabin driver and throw Ti to keeps the driver informed passengers entertained and cars on the road soon.
Already the user experience inside the car is becoming increasingly important to new car by us and no company enhancement that experienced better than <unk>.
To date, our product and innovation already in approximately 50% of all new cars.
And we plan to expand more of it in the digital cockpit platform for future costs.
As the market accelerates, we are well positioned to work with both incumbent car makers as well as new electric vehicle makers.
To thrive in this what we are focusing on things our customers really value.
And that we can uniquely deliver we will continue to lead the dynamic field of conversational AI delivering important innovations and leading technology for our customers.
And we have already made significant progress.
We have a strong competitive position in the market great technology.
Benchmark for the industry and the global delivery team, helping our customers create unique experiences.
And we have incredible employees.
I deeply appreciate the dedication and resilience.
The remarkable adaptability and commitment to supporting our customers and each other is key to our continued success.
Currently proud of how they continue to rise to the challenge.
Together, we are well positioned to drive sustainable long term growth going forward, we will ensure intense focus on innovation and execution to drive that kind of growth and the resulting value creation.
Mark will provide additional detail, but I want to say a few words about the quarter itself.
We had a strong start to the fiscal year, including recording our second largest booking quarter in the history of the company.
This is a great overall indicator of the strength of our position in the markets, we serve and the spectrum of products, we have in our portfolio.
Most profitability metrics in Q1 were above the guidance that we gave last quarter.
Profitability was better than expected, mainly due to a favorable mix and lower expenses, resulting from slower than anticipated hiring.
Overall today's results demonstrate the breath and underlying strength of the business.
The past two months has not only been a period of change at <unk>, but also a period of setting a stronger foundation for long term sustainable growth et cetera.
The semiconductor shortage and its impact on our customers continues to be a headwind to our growth and the industry at large.
Still varying reports on how quickly the issue will be resolved, but clearly it is a struggle for our customers.
We are continuing to reports of production Capex.
Our customers due to both the semiconductor shortage and the recent price of the <unk> <unk> of COVID-19.
Even those with the most optimistic views don't get the semiconductor shortage issue to be resolved until the back half of the calendar year.
Continue to focus on to fundamentals.
Delivering great innovation to our customers and pivoting the company towards the future.
Expect concerns our commitment to both innovation to long term success and value creation.
Accountability to our partners customers and shareholders.
And with that I will turn the call over to Mark to review the financial results of the quarter. Following Mark's comments I will provide guidance for Q2 and update the full fiscal year guidance I will provide some additional commentary and then we will take your questions Mark.
Thank you Stephane, Let me first review our financial performance for fiscal Q1 revenue for the quarter came in at $94 $4 million, which is slightly above the midpoint of our guidance of 91% to $96 million.
Year over year growth was approximately 1% quarter over quarter revenue, which was down approximately 4%.
Which was primarily driven by $5 million reduction.
Fixed license revenue from last quarter.
Profitability metrics remained strong and exceeded the high end up our guidance non-GAAP gross margin was 77, 5%, mainly driven by favorable product mix.
non-GAAP operating margin was 36, 8% adjust.
Adjusted EBITDA was $36 9 million or.
39, 1% margin and non-GAAP earnings per share was <unk> 59.
Exceeding the high end of our guidance by six.
During the quarter, we generated approximately $5 million of CFO .
Also Q1 in the quarter.
In which our year end employee bonuses are paid which used approximately $5 million of operating cash.
Our balance sheet remains strong with total cash cash equivalents in marketable securities of approximately $153 million in.
And debt of approximately $291 billion.
Now, let's review the detailed breakdown of our revenue.
Our variable license revenue was up approximately 4% from last quarter, but down 40% from the same period last year.
We are starting to experience the impacts.
Of the larger than planned fixed license deals that we did last year and the year before which is now creating a significant headwind to our variable license revenue growth.
The reason is because those fixed licenses need to be consumed and netted out against the gross number of licenses consumed by customers each quarter.
As a reminder, our fixed license revenue is a combination of prepaid contracts and minimum volume commitment contracts from our backlog and need to be consumed by customers in the future.
The increased consumption of these fixed license contract that we did in FY 'twenty.
2021 is dampening our variable license revenue growth and is creating the headwind for this year and next year as our customers consume those licenses.
Exacerbating this headwind is our goal to reduce the amount of fixed license deals this year, creating a further challenge to the total license revenue growth.
During the quarter, we had an exciting win with a new customer in the fitness industry.
They made a commitment to paying us <unk> as well as a minimum volume we recognized $5 $2 million in revenue.
We're pleased that we were able to leverage our valuable technology and develop a new vector for growth. So that we can expand into non automotive markets.
Another example of this is in Q4 of last year, we recognized $5 2 million in revenue related to a technology license deal with a big Tech giant.
Since these two contracts are non automotive related we wanted to break them out from our automotive business for an easier comparison.
Our new connected services revenue grew approximately 23% year over year. However, Q1 revenue includes approximately $900000 for an on premise deal.
Excluding this deal our revenue growth was approximately 14% from the same period last year and up about 1% from last quarter. After adjusting for the $1 $7 million accounting correction that we had in Q4.
I want to highlight that we have several older connected programs that are now winding down this fiscal year, which is offsetting a significant portion of our progress in growing our newer accounts, which is the reason for the expected slowdown in new connected revenue this year. However.
However, I would like to highlight the API and our press release, which tracks the change in the number of <unk> connected car shipped on a trailing 12 month basis over the prior year.
This shows the 11% growth versus auto production growth of 2% for the same period and demonstrates our expansion of sense connected cars on the road.
As previously disclosed our legacy connected revenue will decline in Q2 from $16 million in Q1 to $8 million in Q2.
And it is expected to remain at this $8 million per quarter level for the rest of the fiscal year.
Our professional services revenue was down from last quarter and from last year due to the normal ebbs and flows of projects starts and completions, but remains.
An important enabler for future license revenue growth and is expected to grow this year.
I'd like to hand, the call back to Stephane for for <unk>.
Further comments about the fiscal year and Q2 guidance.
Thank you Mark.
Before continuing I want to note that in addition to our earnings today, we announced that Mark will be retiring from <unk> to spend more time with Cisco Molly.
Mark will remain with certain until March 11, 2002, after which he will remain with strength in advisory role through mid November 2002 to ensure continuity of the business and an orderly transition to a new CFO .
I would like to offer my sincere thanks to Mark.
Yes of service and leadership to <unk>.
It has been a great colleague I'm, sorry to see him go and wish him the very best in the future.
We have retained a leading international execute a search firm to identify a new CFO .
Mitch Cohen.
With significant scale, serving as the CFO and interim executed to a wide range of companies will join this week and will serve in a temporary road, providing oversight of the finance organization.
Since becoming CEO I have been working closely with the leadership team to solidify our plans for the business in the years ahead.
With approximately $2 billion in total backlog entering this fiscal year <unk> remains fundamentally solid with a strong pipeline of opportunities.
Our goals are clear.
Get more out of the significant resources, we have available.
Drive more innovation that delights, our customers and deliver conversational AI automotive and mobility.
All areas, where I know, we can succeed over the long term.
We have strong conviction that we are leading with this dynamic field and creating value for our customers.
I want to make sure that we remain focused on the markets customers and products that will deliver long term sustainable growth.
That everything we do reinforces our vision of leadership in AI for mobility.
That we lean into the opportunities at hand.
That same conviction drove our decision to update our fiscal year 'twenty two guidance.
I would like to emphasize some key factors that we considered.
First.
Our focus on sustained long term growth arises from a careful study of the business as well as the rapid evolving factors in the auto industry.
Our automotive production such as start of production ramp up of new models and future production forecasting.
This also includes but is not limited to semiconductor April the beauty and the.
Unknown and ongoing impact of COVID-19.
A critical factor remains the ongoing supply chain challenges driven by the semiconductor shortage amongst other things.
The automotive sector has a complex supply chain.
The semiconductor shortage continues to be crucial factor in the current unpredictability of auto production. Additionally.
Additionally, since November the rise of Omicron variant of COVID-19 has affected our OEM and tier one customers interrupting the production and delivery of new vehicles due to factory shutdowns and labor shortages.
Such as the one recently announced in Japan.
And industry wide recovery remains unclear for the rest of our fiscal year.
As a result of further reviews and analysis and recent developments in the industry, we updated our forecast accordingly.
Second.
Since being appointed CEO I have reviewed each business units plan forecast and assumptions.
Clearly the business that did not previously report to me.
After my assessment I believe the conversion from bookings to revenue will take longer than expected for these new products.
These new products and markets remain attractive revenue streams and will contribute to our growth. We now believe it will take longer than originally expected to recognize revenue.
And third.
Our November guidance assumed a number of onetime technology license opportunities in fiscal 'twenty two.
Also attractive opportunities remain.
These may not all be realized during our fiscal year as previously expected.
So with that as background, we are reducing our full year revenue guidance by approximately 9% from the midpoint of the original guidance of $412 5 million.
And now expect FY 'twenty to revenue in the range of $3 $65 million to $385 million.
As of year over year decline of 1% to 6% from last year's revenue of $387 million.
Regarding profitability since we exceeded most of our profit metrics in Q1, we are comfortable with the spending that we had planned for the balance of the fiscal year with the new revenue guidance. Adjusted EBITDA margin is now expected to be in the range of 33% to 36%.
Sure.
And earnings per share between $1 80.
And $2 16 on a non-GAAP basis.
For fiscal Q2, we expect revenue in the range of $82 million to $86 million.
I would like to walk you through the bridge from Q1 revenue of $94 million to our Q2 guidance.
First we need to remove the revenue from the fitness deal.
Approximately 5 million since we don't expect any additional contribution from this marketing for the balance of the fiscal year.
Then we need to account for the sequential decline of <unk> 8 million due to the legacy connected revenue, which gets you to approximately $82 million.
We have also taken into account the latest IHS forecast, which expect a slight decline sequentially as well as the current risks and uncertainties of the semiconductor shortages affecting our production.
For profitability in Q2, we expect to generate between 26% to 30% of adjusted EBITDA margin and earnings per share between <unk> 31, and <unk> 83 on the <unk>.
non-GAAP basis.
<unk> team and are refining our long term strategy and vision for <unk>, including a business model that fits our targets in the years ahead.
We anticipate sharing this at our next analyst day.
In the meantime, we are withdrawing the fiscal 'twenty four target model previously provided.
We are defining a new vision and strategy for growth and profitability over the next five years.
We have been on an ambitious journey since our spin two plus years ago.
We must remain dedicated to the fundamentals of innovation and customer satisfaction.
Leaning into the practices that test generating so much of <unk> success over the last 25 years will deliver long term sustainable growth we envision.
We are the leaders in our industry and it tends to stay that way by developing cutting edge offerings, such as our newly announced sales copilot and with proactively.
And digital capabilities.
We will also continue our expansion into new markets.
Such as two wheelers buildings fitness and other segments, where we have had already.
Early success and expect to benefit from accelerated growth.
And as a reminder.
We are halfway through our feet of use restriction that will expire 10 quarters from now.
This will allow us to significantly increase our addressable market and we intend to state planning for that now so that we're ready to move quickly when the agreements.
In closing before I turn the call over for Q&A.
I'd like to reiterate several important points.
We have a compelling competitive position and strong business fundamentals as.
As highlighted by our performance in the most recent quarter.
We have a valuable opportunity to lead innovation and growth for conversational AI in automotive and mobility.
And we remain intensely focused on long term sustainable growth to realize that opportunity.
We will now take your questions.
Yes.
As a reminder to ask a question. Please press Star then one if your question has been answered and you'd like to move yourself Mchugh plus the pound key.
Our first question comes from David Kelley with Jefferies. Your line is open.
Hi, good morning, and thanks for taking my questions, maybe starting with.
With the guidance cut.
Can you give us a sense of the magnitude of the macro headwinds youre seeing now IHS cuts.
Some of the recent shut downs versus the.
The timing of the bookings being pushed out.
Good morning, David and thank you for your question.
You know when looking at the recent development, especially on the right of Omicron.
In November late November .
That actually wasn't sustainment conductor shortage right.
And you also know that we have zero tolerance and each ikea.
And it's really led to further supply chain disruptions and shutdowns.
Since the beginning of the year, we have heard from a variety of customers.
About unexpected delays in their production schedules to give you some idea of big large Asia OEM has been affected.
European Oems indicated massive massive cuts in their production and one of our customer in China, leading EV maker projected a delay of up to nine months and we see this also with other Oems in Europe .
Okay got it thank you and regarding just the bookings timing and the push out there.
I was hoping for a little bit more more color on what youre seeing.
Is there any.
Expectation of bookings cut here or is this solely just a timing issue.
The <unk> revenue.
Yes.
David it's mainly.
Conversion issue right.
Bookings are still great.
What we can already share.
What Mark also mentioned we had a.
Our second largest booking quarter in our history goes the <unk> fundamentals are really very.
Very strong.
And this has nothing to do with the outlook I think we have really.
Strong basis Youre right.
And bookings are still fine.
And this was also analyzed by a couple of deals in fitness as Mark mentioned try also.
In the tubular side and in China. We made also three important design wins.
Okay. Thank you appreciate you taking my probably be one more we had in Q1 our largest booking.
Of about one point of $149 million right that was for a specific OEM, but was a regional expansion and it shows also.
The strength of our business and our product.
Okay got it thank you.
Our next question comes from Ross <unk>.
And the company your line is open.
Yes, thanks for taking my question.
Mark just wanted to get some more clarity on the change in the new connected revenue kind of moving from $12 million I believe you said $8 million for the remainder of the year.
There are a lot of moving pieces that we're new at least new to me hearing hearing you versus say the previous quarters.
Maybe you can just kind of elaborate on on the.
The timing of those and the one time issues that you don't expect.
And just the breakout.
The impact of the fit.
Variable revenue impacting your variable revenue that was new to me in terms of that correlation between those two components.
Yes, so I'll start with.
Licenses first so so fixed licenses.
R R.
Combination of minimum commitment deals.
And in which the customer contractually commits to a certain volume or prepay.
Prepaid deals where they.
Bye.
A number of licenses upfront.
So as as those licenses get consumed.
And then clearly.
That's not going to be we will get royalty reports, but those.
<unk>.
Those need to be netted against the inventory of what they've already purchased and so that's the that's the correlation or interplay between these.
These contracts.
These fixed volume contracts and the variable licenses and so.
As we've mentioned in the past if we go out side of our historical range, which has been typically in the low $40 million to mid $50 million range or were these fixed license amounts each each year. You go if you go on the high end of that range or even outside like we did last year.
Does.
Dampen the growth in.
In the future.
Until those licenses get consumed.
On the flip side, if you go below those ranges those historical range has been that that actually.
Limits your short term growth.
But but it does help with longer term growth and so it's really a question of.
How many licenses had been purchased under the fixed contract and where is that in relation to.
Your historical ranges and so thats what were seeing.
Happening this year and actually going into next year because.
For the last two years, we've been at the high end.
Above the high end up our historical range. So that's the interplay between the two and that's why it gets creating the.
The headwind for.
For our license regarding connected services.
The legacy contract as we talked about previously that is winding down.
We have about.
$23 million reduction to that legacy amortization schedule this year alone.
In Q in Q1.
Date at $16 million for the quarter.
Which was which was similar to what we had in Q4 of last year, but now youre going to see the step function down starting in fiscal Q2, and so that's going to drop to $8 million per quarter. So based.
Basically cut in half and it's going to stay at $8 million per quarter.
For the balance of this year.
And so that's that's the drive for the for the legacy.
What percentage of your fixed contracts were minimum shortages.
Commitments relative to prepay and then this is the kind of the first time I've been hearing about six commitment of minimum commitments versus prepaid.
Yeah, we've been we've had those.
We disclose those in each quarter.
And so this this past quarter.
We had.
The $20 million of fixed commitments that was all.
Minimum commitment deals.
Got it so.
You did <unk> 20 million.
Commitments all of them were amendments not there weren't no prepays.
In this quarter, none this quarter, okay alright. Thanks.
Sure.
Our next question comes from Joseph Spak with RBC. Your line is open.
Thank you.
I guess I'm still trying to maybe process some of the recent information but.
Mark maybe you could just better help us here because.
I understand that sort of the push and pull between the variable and.
And in fixed.
It looks like if you were to sort of just say, okay, well variable should have been down in line with what.
What production wise.
Production was down 13% on that variable component is down 40% year over year, so would rather than like $10 million higher. So do you have like based on your audits how.
Many licenses or sort of dollars have you effectively pulled ahead here that's going to weigh on the next it seems like two years.
Yes, I mean, I think if you look at your year over year for the variable.
The the way I look at it.
How much how much increase in consumption occurred from last year to this year.
And.
We're estimating that to be approximately $6 million year over year. So if you if you sort of adjust for four.
That incremental $6 million of consumption.
It still gets you not at the 13% per IHS, it's more.
I.
I think it's around down 24% year over year.
If you look at the quarter over quarter.
The increase in net consumption was approximately $5 million.
So if you adjust for that we were slightly ahead.
IHS.
And so that's the way that's the.
The way to think about it and.
And it kind of goes back to our earlier comment which is once you're going outside those historical ranges youre going to see more consumption.
As those as those licenses get consumed by our customers.
So that's what's driving some of the effects.
This year.
Right.
Well sure.
So just to understand the potential impact over the balances here and it sounds like in the next year whats. The cumulative dollar amount that you think you've basically pre bank relative to what's been produced.
I think for this year relative to last year, it's probably going to be an incremental consumption.
<unk> 30 $30 million or low <unk>.
Okay.
I don't have an answer.
Okay.
That's helpful and then I guess the second question is.
Okay.
The onetime license sales that you were expecting.
I guess, that's the first time I've heard of that.
Element what was the magnitude of that and it sounds like you are reevaluating the midterm guidance, but just broadly how much sort of one time deals were sort of.
Assumed in sort of the mid term goals as well.
Yes, we haven't broken that down specifically in terms of the three factors that contributed.
Contributed.
So the drop in the guidance and so step I'm not sure if you wanted to.
Answer that question with any more details or not.
So so.
Joe Good morning.
What I can say.
Q4.
Our structured and.
And a deal with a big Tech giant.
Then in our planning.
Cleaning of the fiscal year, we made some assumptions about the so called.
Technology or onetime technology deals.
But it seems that we see now.
Fewer opportunities.
Based on the fact that maybe some some of those opportunities.
Could be pushed out to next fiscal year.
Okay.
<unk>. Thank you.
The idea behind this Joe is that I mean.
I think we are still restricted.
Quicker to the Mou for the field of use but we have also some technology like for example text to speech swipe handwriting.
Attractive for the big picture lines and others.
And that was actually as a starting point in Q4, but et cetera.
It seems that it would take a bit longer than originally.
As anticipated.
Our next question comes from Colin Langan with Wells Fargo. Your line is open.
Oh, great. Thanks for taking my questions.
I know you just withdrew the 'twenty 'twenty four targets.
Can you maybe just provide broad strokes.
Got it and sort of better or worse.
Over the last quarter I mean, how should we think about the near term factors today, all translated to the long term.
So as said I think.
Our fundamentals are actually great.
It also with strong bookings in Q1, and we will speak more about it.
By the end of next quarter.
I think currently.
<unk> had.
The headwind is coming from semi conductor shortage.
And also from the.
Gross growth.
Actually right.
This actually is a key driver here.
I think I'm pretty sure that this will be fixed over the last over the next couple of quarters I cannot exactly tell you by when.
There are some optimistic fuel within the next two to three quarters. There are also some pessimistic views that if it goes.
The end of calendar year 'twenty three.
Looking into this we have also added some.
Some of our.
Strong relationships with the Oems, we are getting so hear updates from Oems and trying to align our.
Our model for.
Yes for the next few years.
You know us.
Just started in this role since the somewhat more or less two.
Two months ago and manual role.
I am guessing excellent support.
From the business leader.
But I think it will take a bit more time before sharing our new vision our strategy and then also our long term model.
Mark do you want to add something to it.
No I think thats accurate.
Correct.
And just to follow up on the reasons for the cut.
Because I'm a little confused because IHS actually has gotten better since your last update and I think it was flat now it's up 2%.
So why is that a negative factor and then also on the fixed and variable issue.
Shouldn't that have been kind of anticipated in the original guidance.
This should have been kind of known about when you originally guided.
So yes.
For Ireland.
Go ahead market.
Yes.
Take the.
Okay.
Fixed the fixed yes, we we knew about that.
When we were given guidance.
<unk> in November .
Since then there have been some changes to the mix, which which made it a little bit worse, but that obviously was not.
The driving factors and I'll, let you.
Stefan answered the year.
Part of the question.
Hum.
So also when looking at.
IHS right so in de Novo starting our fiscal year in October .
And then it's more or less zero game, it's flat.
But what we're also hearing from our customers right.
Semiconductor shortage varies from company to company.
As well as the level of impact here right in some cases.
Yes.
Chip and not delivered.
For example, with our solution right or something is missing here, but the car is delivered and this has of course.
<unk>.
Our revenue projection right and what I mean.
And also as we did.
Intensive search share risk with some of our key Oems and what I mentioned at the beginning is that we see already that some some large Oems we acknowledge that they are far behind.
<unk>.
Okay, alright, thanks for taking my questions.
Our next question comes from Jeff Van <unk> with Craig Hallum. Your line is open.
Great. Thanks, several questions I guess just on connected have there been any notable renewals that have come up for renewal just wondering if if if you are in fact closed and if those are all of those that have been available to close and then secondly, just obviously big numbers on the bookings side, particularly the very large contract, but could you talk to overall win rates in the quarter.
So for US let me take those renewals right.
As Marc also mentioned.
Yes.
Earlier right so.
We see that for all of our solutions.
The expected renewals are lower than expected.
Because I mean that has to do with the automotive deployment cycle right and cannot going back five years from now the focus is more on innovation.
Our new solutions and by this I expect much more renewals right and then we have also a new.
New way on innovations right, where we can add more for Cynthia.
Yes.
And then the win rates.
Win rates on the win rate side, I think we're doing pretty good assets right.
Total we have no one.
For two wheelers.
The huge brand across the globe, so globally and I'm very proud about this achievement.
We are seeing also we are seeing also our strong position in the core business and automotive also.
Especially across the globe.
And.
Also proven by the biggest booking deal ever of about $149 million.
Okay last one for me then I guess a lot of moving parts here and it's still just trying to wrap my head around it but the second of the key factors the bookings that will take longer than expected for new products to convert to revenues just touch on that again can you give me an example, or two maybe you already did it but.
So it would be helpful. Please note right. So we are doing a book in steel Rod and trying to put you on the street in two to three years from now on the core business.
On the on the new mobility segments right like like for example, <unk> had also.
Elevator or two Wheeler thrive, we see also that actually.
A nice opportunity for us in terms of growth and revenue contribution right, but there are also some some learning curves on the OEM side as well for two wheelers and elevators and therefore <unk>.
Correct.
With the business leaders here.
Slower conversion booking conversion.
Booking conversion to revenue.
This field.
And can you put any finer point on that if it's two to three years on the auto side what are your elevators, two wheelers from bookings conversion.
It depends a bit so in building elevator.
It's hard to say, because it's new to our business front.
But I think this market is still a bit slower than the traditional automotive segment I see also in automotive.
Actually the huge demand for accelerating deployments.
I'm not sure what will happen to the inflation rate.
State this might affect so.
The elevator opportunity here and we did also a very conservative approach here, we didn't book actually is a bookings here.
$2 billion to be on the safe side.
For for two wheelers.
Thank you.
It's in the same range, maybe a bit faster than automotive, but also here two Wheeler manufacturers are also suffering on the supply chain.
Okay, Great I'll leave it there thank you.
Our next question comes from Chris Mcnally with Evercore ISI. Your line is open.
Yes.
Thank you just a quick clarification I feel like the fix minimum.
Contracts has not been full.
Fully addressed so to be clear is that not one of the issues for the guide down currently meaning it is not one of the three.
Conditions.
Listen I just wanted to make sure that was clear the $30 million that mark referenced.
I think I would say that thats part of the equation. So we had also assumed that we have a faster let's say.
Less impact from the silicon.
Semiconductor shortage right and then it goes hand in hand.
Typically.
The consumption.
Four to six quarters and now based on the on the chip shortage, we expect it will take a bit longer.
Sure.
Okay. So maybe that's one of the reasons why I guess, we're all confused because upper 0.1, IHS really have to revise and if anything it's been stable for the last couple of months, but you're saying the mix is affecting the fixed contra.
Contract execution.
Okay, and then the second point.
New products, just again to be clear is this new applications and services.
Effectively in both connected and edge or is this only in new mobility market that youre expecting.
Longer conversion from bookings to revenue.
So it's actually both and I'm talking about.
Connected cloud to new applications. So the assumption was that we can also.
Spring and our solution faster.
World right on already S&P cough.
This seems to take a bit longer now that most of the.
Oems want to have our latest and greatest technology on the new.
Platforms.
And because they put more much more intention intention to new platforms.
And then on the adjacent market.
That's actually what we observe.
Underlies the Vista team et cetera.
See here.
No.
The revenue conversion.
Okay.
If I just.
Market.
And so so far.
If I could just be critical for secondly, if it's both the edge and the connected that was the businesses that you ran.
There being no talk yes.
Yes, so sorry.
Maybe it wasn't clear enough here right I didn't spoke about etch is just related to.
Connected apps right.
For example to give you a perfect example, right.
We had a deal last year with civil was about severance pay that's fully cloud based right and you know that <unk> for example.
<unk> restructured that business and we've put this.
This booking out of our backlog.
Yes.
And so the implication being that the OEM.
For example.
Platform that you are on has been has been moved.
Yes for example, and for yes.
New apps.
Yes.
Okay.
And so that obviously has implications more than.
22% or 23 basis, because either you know when meaning is that you said the booking wasn't loss I think that's what people are going to.
Take the SaaS and so I'm not sure how bookings could not be affected.
You're taking out something that was previously going to be converted to revenue.
Yes, so I mean that was a specific case.
Ryan.
Completely restructured this business. This business has gone and therefore, we took the hit our sales right.
The book from our bookings pipeline.
Okay. So that's that's all.
That's pretty specific.
Yes, Chris there are still over $100 million.
Bookings, even after the Zeebo adjustment so.
It is.
The strong part of the business.
No I understand.
Can you just talk to us.
What is referring to is that what customers are doing is rather than.
Putting these applications.
As available basis, many of the maturing to wait until they introduced their next generation infotainment system and going growing the technology together.
Part of the dynamic that we're dealing with.
Okay.
Just to be clear that we're going to get this question a lot what youre, saying is that rather than going on like a mid cycle conversion, where it could have been in the middle of about six year product cycle for some of the products. It's being moved to the next platform, which can be five or six but to be clear you may have not lost that booking but it could be moved.
Multiple years.
Correct that's correct.
Okay.
The third one on one time technology license.
Opportunities.
Division was that going to be is that going to be within edge and that they've got moves for fiscal 'twenty, two and again I'm just trying to be critical as this was obviously.
At yearend.
Yes, no that's.
Actually it's both edge and cloud.
And you know that for example.
We have and that we still under the agreement was that we have some restrictions.
But our focus is clearly on mobility transportation right.
Michael Kors is actually doing everything else they cannot go into the account and mobility and transportation.
We have some opportunities for example, telling our unique technologies, such as TTS, and we own TTS or handwriting.
Two others outside of mobility.
Okay.
I'll follow up offline.
Our next question comes from Luke junk with Baird. Your line is open.
Hi, good morning, Thanks for taking my questions a couple philosophical questions for Stefan I'm wondering if you could expand on your philosophy going forward around booking fixed license revenue relative to marks comments in the prepared remarks as to what a normal range in terms of revenue there would be where should that track going forward and.
Yes.
Question, mainly.
Mhm.
Okay.
Let me first let me start and then turn it over to Mark.
So so first of all.
I think you know.
Traditionally we had a range of $40 million to $50 million in terms of fixed licenses right.
That Oems are coming to us and trying to negotiate a better deal right.
That's normal or typical in the automotive industry.
Now over the last two years or actually last year, it was a bit higher than originally.
As.
Expected.
This gives us also some headwinds now.
And we need to complete this was more more running royalties, which is always tough.
And August for the consumption of such a fixed license deals it takes us as said earlier, 4% to 6%.
Quarters.
Yes.
Just just to add to that I think.
I think the objective would be to sort of get back into the.
Historical range.
And.
And so it's going to take some time to to do that but.
I don't think we can necessarily eliminate.
<unk>.
These programs.
But.
Clearly I think last year in particular and even the year before when we were at the high end of historical range and last year, we were we were well above that.
The goal would be to sort of.
Over time get that back into the historical ranges.
Okay and then.
Second question I had not necessarily in terms of topline but.
Consequent to the top line and that you're getting.
Profitability made the comments in your prepared remarks definitely you were comfortable with the spending level in the business right now for the rest of the year and I'm just hoping you could expand on your approach to the expense base as you reset the expectation for revenue from here specifically around areas like R&D how.
How aggressive do you think the company should be pushing.
Yeah.
I mean.
With respect to the updated guidance.
We've put a lot of attention also to cost control.
Especially on R&D.
And professional services on the other hand, I have to say that most of the R&D work is related to features committed to our Oems right and for US innovation is key.
Key to success.
Maybe as you have seen or heard I mean, we went to Vegas presented our latest technology and application and the feedback was really awesome ride that was great right.
The sofa.
That we have actually outstanding solutions very competitive right from etch to hybrid cloud solutions, we introduced <unk>, our new <unk> assistant.
Assistant.
Which has been also sold two two a couple of customers what we presented for the first time proactive AI.
<unk>.
A digital twin.
So a new product water was also well received.
Oems.
And also we had a deal and already in Q1 for the digital twin.
And then also.
Pending everything.
Around connected services presented for example, oaky.
And as a cloud solution and I think that seems very attractive to the market and one of the executed from a leading OEM said okay.
He wants to have everything in this new comp.
Very encouraging and promising to us.
I'll leave it there thank you.
Our next question comes from Michael Phillips as well.
Timber capital your line is open.
Alright, Thanks for taking my questions just the first one.
Just again on sort of reinvestment that opex and R&D.
Step down in the margin profile in the guidance I'm wondering if you have sort of lower expectations for margins. I know you are kind of pulling that 50 or 24 model but.
I mean do you still think sort of high end of the 30% range is achievable long term or do you think that you need to reinvest more to keep your product's competitive relative to some of your.
Bigger tech competitors.
Okay.
Thanks for your question.
I think we have a really competitive platform.
But the feedback from from.
More or less all Oems across the globe, including China Alright.
I think.
We have actually also a focus on R&D.
<unk>.
R&D is essential also to the long term.
The success of the company.
Nevertheless, I believe we will adjust.
Our outlook, our new target model, including.
The the margin within the next analyst day, depending a bit on the new.
On the hiring.
The new CFO .
Okay understood and I know again Youll address is probably at the analyst day for fiscal year 'twenty four model, but you mentioned elevators, that's an area that I know, it's quite interesting. It seems like because there is a hardware component to it would be margin dilutive. So do you still see that as sort of an attractive Avenue for <unk> to go in.
For the company to go in or.
Are you are you potentially rethinking some of the those new end markets.
I'm still unpacking and exploring.
<unk>.
I was not responsible for Brian .
This could be an area, where we need to think carefully about the long term future right.
But nevertheless, currently it's an opportunity for us.
We had high expectations also to see a fall.
Foster book.
Bookings to revenue conversion, but it seems a bit slowing down at all.
One but.
Some time.
Just two two months.
New role here.
And you will get a quick update during our next analyst.
Dave.
Okay understood I'll leave it there thanks.
Thank you.
Our next question comes from Mark Delaney with Goldman Sachs. Your line is open.
Yes, hi, Thank you for taking the questions I have two if I could maybe first can you help us think about what a more normalized.
Right.
Growth in billings per car is I think historical billings per car growth would've been overstated because of <unk>.
Use of prepaid licenses.
Now as your Oems are consuming the licenses is understated.
So what's the what's a better number to think about on a normalized basis to drive sustainable going from partner brands.
So the billings per car that debt has been adjusted for these prepaid deal. So that's that has an influence those numbers.
If you saw this quarter.
Billings per car growth was actually zero.
Trailing 12 month basis versus the prior year.
And we looked into that and it looks like there was actually one one contract in particular on the connected side, where the billings are coming down it's for an older program, which had a pretty high ASP.
And.
That because thats now starting to trend downward.
What's happened to to that billings per car.
And then once once that sort of levels off then.
We would expect to see.
<unk>.
That downward trend to be alleviated.
Okay and my second question I don't typically guide bookings at least not specifically, but can you talk about bookings for fiscal 2002 more qualitatively do you think it can be up year over year versus last year.
Yes.
On the bookings side.
21 was a bit lower.
The year before.
Key reason you had in <unk>.
<unk>.
And year 'twenty two.
Bookings event.
Driven by me.
On the automotive call yeah.
And that was maybe one of the key reason right.
<unk>.
One deal also in 'twenty one.
<unk> moved to 'twenty two.
But other than that I am still very optimistic and excited about bookings that shows exactly half of our future right.
And also.
The position in the market and also the value of our product et cetera. So I'm very excited about this.
Okay. Thank you.
Okay.
There are no further questions I'd like to turn the call back over to Richard for any closing remarks.
Alright, Thank you to everyone for joining us on the call. This morning, we look forward to.
Future discussions have a great day. Thank you.
Thank you.
This concludes the program you may now disconnect everyone have a great day.
Yeah.
Okay.
Yes.
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