Q2 2022 Cerence Inc Earnings Call

May 10, 2022

Good day and thank you for standing by welcome to the <unk> Q2, 2022 earnings Conference 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.

Ask a question during the session you will need to press star one on your telephone keypad. Please be advised that today's conference is being recorded.

You require assistance during the conference. Please press Star then zero.

I would now like to turn the conference over to your Speaker today, Richard <unk> Senior Vice President of Investor Relations. Please go ahead.

Yeah.

Thank you Christie welcome to <unk> second quarter fiscal year 2022 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 representation to update those statements after today.

In addition, the company may refer to certain non-GAAP measures key performance indicators and pro forma financial information. During this call. Please refer to today's press release for further details of the definitions limitations and uses of those measures and reconciliations of non-GAAP measures to the closest GAAP equivalent.

Joining me on today's call are Stefan <unk> CEO of salaries, and Tom Bogan CFO of salaries as a reminder, the only authorized spokespeople for the company are Stephane, Tom and myself.

Before handling the call over to Stefan I would like to announce several upcoming investor events.

Exact timing of our participation is subject to change. So please go to the events section of our IR website for the latest information.

Conferences include the virtual 19th annual Craig Hallum Institutional Investor Conference on June one.

The <unk> 2022 global consumer Technology <unk> services Conference on June 6th in New York.

And the sixth annual Needham virtual automotive Tech conference on June seven years now.

Now onto the call Stephane.

Thank you rich welcome everyone and thank you for joining us to discuss our second quarter earnings.

As you saw in our release. This morning, we delivered solid results for the quarter against a backdrop of continuing disruptions in our production.

We either met or at the high end of the range for most key financial metrics in the quarter.

In addition to the quarterly matrix, we delivered very strong bookings in the first half of the year up 53% from the same period in the prior year.

We see a strong pipeline of potential bookings for the second half of the year, including February competitive takeaway opportunities.

I'm, especially pleased with our performance since every day, we see news about the market conditions, playing a major role in our industry.

Semiconductor shortages factory entities shutdowns due to COVID-19, and the <unk>.

Impact from the growth in the Ukraine, all continue to contribute to challenges in auto production, we are carefully managing the business through these headwinds and despite the challenges we.

We remain confident in our full year guidance.

Before we dig into our performance and outlook I want to welcome our new executed focuses first.

First I am pleased to welcome Jennifer Salinas to <unk> as our new General Counsel, we are fortunate to have Jennifer on the 17.

She is an experienced and progressive public company vehicle leader, who most recently served as general counsel of the infrastructure solutions group and global head of litigation at Noble.

In just six weeks Jennifer has proven to be a tremendous addition to the team second I'm excited to welcome to embolden as our new CFO with the departure of Mark more than year.

I've known Tom for years, and I'm confident that he will be instrumental to our operations and in helping us execute Tom has a proven track record of driving change and significant experience, leading finance and the software and automotive industries.

Any of you recall, Tom from his time at nuance, where he was CFO and then let its business transformation office.

Of note our business extremely well.

First and its role leading the successful spin from nuance and then for the last two and a half years as a very active director on our board. It's my pleasure to welcome Tom and operational role and have them join US today, you will hear from him in a moment, but before I turn it over I will share a few highlights and.

<unk>.

At the beginning of the call I mentioned, our strong first half bookings performance.

At $448 million, our first half bookings were up 53% compared to the same period last year.

For additional perspective on the achievement.

Bookings for our entire fiscal year 2021 $590 million.

Our continued success in accounts in markets is due to our strong competitive position in the automotive industry and our capability to reach beyond traditional automotive markets.

Regarding our competitive position, 80% of our first half bookings were with existing customers, including a significant expansion with a marquee North American OEM for its current and next gen platforms.

<unk> also includes.

We previously announced a significant contract the largest in our history with a large European OEM that cause us to help with the expansion program underway in greater China.

Aside from traditional automotive we have also seen exploration in newer areas of note we secured several important wins with CB car companies.

Signing five new contracts, including four in China, the world's hottest EV market. These Chinese EV makers turned to <unk> to create a unique AI experience as they expand our out of China into other regions. We are the only supplier with the portfolio and language coverage to support the aggressive plans and.

The level of the experience they want in their vehicles.

Another Prime example of our expansion of our growing success in trucking.

Major European heavy truck supply a recently signed on for our selling assistant offering.

This new contract represents the fourth customer in this space our <unk> product continues to attract new two liter customers. This offering combines our core AI innovation with new capabilities, such as the group wide function transforming the two river experience as ridership growth worldwide.

We added four new customers, including some of the top two reader manufacturers and finally as we mentioned on our last conference call. We won a new fitness customer, which falls under our new mobility market opportunities.

Collectively these wins and bookings are strong sign for the business with new connected services now comprising more than 40% of our backlog as a reminder, at the end of fiscal 'twenty. One we reported backlog of approximately $2 1 billion.

And after such a solid first half of the fiscal year I am pleased that the pipeline for the second half remains robust.

With our strength in the second quarter and attractive pipeline. We are now focused on the second half and several key priorities first we are deeply focused on accelerating design wins and new bookings momentum across the markets, we serve by leveraging our strong pipeline.

These are the single biggest contributor to our future and we plan to capitalize on every opportunity.

Second we remain intensely committed to delighting, our customers by continuing to deliver high quality products and implementations on schedule and on budget.

We are intently focused on bringing several of key customer programs, two successful launches, which will position us for future success.

And part of this we expect a significant increase in professional services revenue for the second half of the year, which is another leading indicator for future business potential.

Third we are prioritizing and allocating funds to innovation in areas of our business that generate the highest return rate of return and finally, we will continue advancing our strategy and operational plans in a manner that best positions. The company to achieve long term sustainable growth and with that I will now turn the call.

Over to Tom to review the financial results of the quarter Tom Please.

Thank you Stephane as Stefan mentioned I know the business and the company extremely well from the role I played in separating the business from nuance and most recently serving on <unk> board since the spend.

I know firsthand the exciting opportunities ahead for the company and look forward to working with Stefan and the team to maximize the future growth potential of silence I look forward to meeting all of you.

I will now review our performance for the quarter and then I'll provide guidance for our third quarter and we view our full year guidance.

Revenue came in at $86 3 million slightly above the high end of our guidance due to a stronger than expected contribution from professional services.

Profitability metrics performed well as.

As most of the key profitability metrics came in at the midpoint of guidance.

non-GAAP gross margin was 74, 7%.

non-GAAP operating margin was 25, 2%.

Adjusted EBITDA was $24 million.

Or 27, 9% margin.

And non-GAAP earnings per share of <unk>.

33.

During the quarter, we generated approximately $2 million of cash flow from operations.

And our balance sheet remains strong with total cash and marketable securities of approximately $146 million.

Now, let's review a detailed breakdown of our revenue.

We have added some additional insight into the breakout of Opex licenses.

Separating the prepay fixed contacts from the minimum commitment contracts.

As previously communicated revenue recognition for each is the same.

The full value of the contract is taking at the time of signing and delivery.

The difference between the two types of contracts is mainly the timing of cash collection.

For our prepaid contracts the cash is typically paid upfront.

And for a minimum commitment contract the cash per license is paid at the time of auto production.

Our variable license revenue was down 46% from the same quarter last year.

Due to the combined effects of lower auto production and consumption of <unk> license contracts.

Connected services revenue was down 8% from last year, driven primarily by the drop off of revenue from our legacy contract, which was expected and previously communicated.

As well as lower auto production.

Our new connected services revenue was down because of expiring contracts for older technology, and therefore not candidates for renewal.

For the full fiscal year. These expiring contracts create about a $5 million headwind to connected services growth we.

We don't expect this to negatively affect growth next fiscal year.

Finally, our professional services revenue was up 25% year over year, and 6% quarter over quarter.

Growth in professional services is a key indicator of future license and connected services revenue as.

As the pro services team, the individuals' directly interfacing with customers to customize and implement.

<unk> technology, and our customers' next generation platforms.

Moving into our guidance for Q3.

Third quarter guidance detailed on this slide takes into consideration.

The costs and uncertainties of the semiconductor device shortages factory shutdowns and the effects of the Ukraine War that are affecting <unk> auto production.

However, as we have seen in the past.

The impact from these events on our business can shift quickly.

Collectively our Q3 guidance represent continuing positive trends in the business over Q2.

Okay.

We are affirming guidance for the full fiscal year.

So in summary, we had another quarter of good financial performance, while we remain cautious in the Nanchang due to the factors impacting the auto industry as outlined above our long term prospects remain upbeat.

Our focus is on innovation and growth while at the same time driving a profitable business model that will benefit the company and our shareholders well into the future.

This concludes our prepared remarks and now we will open the call for questions. Thank you.

And as a reminder to ask a question you will need to press star one on your telephone keypad to withdraw your question press the pound key please standby, while we compile the Q&A roster.

And your first question comes from David Kelley in Jefferies.

Hey, good morning, guys.

Thanks for taking my questions.

Maybe wanted to dig into the revenue drivers for the quarter, a bit and maybe starting with the connected services.

Specifically the subscription pullback clearly it's been a tough tough.

Tough couple of years for underlying auto production. So we think about the compounding impact there, but at the same time, there has been a mix shift to premium and luxury and we've seen kind of ongoing vehicle technology adoption. So.

Can you talk about maybe what youre seeing in the connected services subscription business.

The drivers of that decline year over year.

Let me first of all let me just make sure we all understand the financials and then I think Stephane can talk a little bit about the business parameters.

So we have provided a little further.

Breakout of connected services, so I think historically have separated.

New connected services from the legacy contract that we had talked about previously so I think probably people understand.

The trends in the legacy whether.

With respect to the new connected services.

We split out the.

Sure.

The two elements.

One of the factors affecting that is that we have these.

All the contracts that are signed.

<unk> pre spend some of them went through acquisitions that nuance that at creating this $5 million headwind.

For FY 'twenty, two and as I noted, we don't expect that to continue into the into next year.

Sure.

Okay.

Thanks, Tom and good morning, David.

So let me also add a few more words to connected services.

You have heard we had a fantastic first half.

<unk>.

And we had also signed was one of the European Oems launches contract in our history, there's already two connected.

As Jeff mentioned also.

New connected services, comprising now more than 40% of the total backlog at the end of last year, we had $2 1 billion. So we are well positioned also.

For our new connected services, we see a lot of traction also in our new products with respect to connected services right.

But overall I think it depends heavily also on the recovery obviously auto production.

And yes, we.

We are well positioned here, especially on connected.

Okay got it that's helpful. And then you noted the ongoing consumption. The fixed license contracts can you give us a bit more color on the impact of that headwind in the quarter and maybe how youre thinking about the ongoing impacts here into the back half of the year.

Yes, Let me go first and then I'll also ask Tom for his view.

I think its longstanding practice in our business.

And when looking back.

Over the last couple of years. So the range for fixed licenses has been was in 15% to 20% of the total revenue over the last couple of years now.

Now we saw for the first half of the fiscal year tick up.

225%.

And based on recent customer regret we expect that the trend will continue for the second half of the year.

<unk>.

In some regions and also for some of our customer is a common practice.

We prefer.

These types of contracts and we all know that some of the Prestea supplier.

Tremendous pressure for the benefit to them as cost savings, especially given that raising material costs.

The benefits to US are one we are winning in a highly competitive environment too we are cementing our relationships with our customers right and three we have huge upsell potential during the course of a specific program.

For example, this was also reflected in our strong first half bookings.

Yes.

So I have been involved with the auto and mobility business, which was a.

Very large division with a nuance since 2008.

And this has been a buying pattern and our contracting pattern.

As Stephane noted, particularly some regional customers.

But also some customers that have been doing this practice for a very long time, and I think a lot of the.

The factors contributed from what I can see that tick up that.

That stephane talked about from about 15 to 20 to up to 25.

All of the auto manufacturers.

Under pressure to manage cost, particularly in this environment. They all have very strong purchasing organizations.

I would note that the discounts that we provide.

A minimum commitments.

Is is quite smaller than the discounts we provide on the pre K Prepays now of course, it does have a different cash flow impact.

But.

I would point out the discounts are.

Lower than.

The prepaid.

Okay perfect. That's helpful. I will pass it along thank you.

And your next question comes from Rajiv Gill from Needham.

Yes, thanks for taking my questions.

A follow up on the fixed contracts.

Thank.

In the past it seemed like that customers were entering fixed pay contracts because they are getting more price price discounts because they wanted to drive down the cost.

And then I just wanted to clarify so the.

You are expecting.

Fixed contract.

To kind of maintain that higher level at 25% of sales for the second half of the fiscal year. So that would be indicative that the customers are continuing to kind of enter into these type of contracts in order to benefit from the price discounts that customer behavior seems to be continuing is that a fair assessment.

That's all we're saying in the pipeline.

Sure.

From some of as I said customers that we have seen prefer this contractual.

And I think our sales team has done a good job of maybe trying to minimize the discounts there.

We are in a strong capital position. So we do get that cash over time so.

So you mentioned that there was again the trends and the difference between the fixed contract versus the prepay.

Contract.

There was a.

Yes.

And the discount.

Maybe you could kind of elaborate a little bit of that.

Because.

Because I mean I think the.

The challenge will be.

How much of a discount are you offering.

Customers to get these contracts and if this is kind of more indicative of a longer term trend and does that impact the gross margins in the pricing as you go forward.

Just to be clear and we've broken this out on.

On the information provided.

We broke out this time, which is know as the two types of contracts that are both under fixed contracts.

That prepays.

Which as a cash more upfront.

And then on the minimum commitments, where the cash is as the autos.

<unk>.

<unk> pads.

<unk> had a higher guest count.

The minimum commitments.

Significantly lower discount it still benefits.

The customers.

And as we said with.

<unk> ticked up a little as a overall percentage of revenue we expect that to continue in the second half.

And then of course, we'll be assessing that as we develop our long range plan.

Over the next couple of months few months.

I see Okay, and then and then on the connected services.

A portion of the business. The legacy is dropping to $8 million. So is that kind of the range, we should be kind of forecasting on a go forward basis and then the.

You mentioned that despite the $5 million headwind and overall connected that you still expect to grow.

And sorry, the new connected revenue.

Can you just kind of talk about what's.

What's driving that growth above and beyond that $5 million headwind.

Yes, So let me thanks, Joe it clear on the elements of the connected services. So as you pointed out there is that legacy contract.

Amortization schedule. So it's highly predictable it has 11 quarters left it's a contract that goes back to 2013.

And that will run out.

And a new subscription.

Connected services.

A 5 million dollar headwinds.

Based on these are very old technology contracts.

Some of them came through acquisitions done when auto was part of nuance.

Those technologies.

Renewable.

The customers may have moved on to a different.

<unk> technology.

Platform, but of course that wouldn't be classified as a renewal.

That.

That $5 million headwind will not exist in 2023.

Alright, because all of the <unk>.

Contracts will be on the new technology.

Yes, correct.

Stefan talk about the Pwc also saw some strong revenue growth vectors here Rod also with respect to new products.

And then program expansion of its original expansion Rod just referring again to the biggest deal in our history.

That was for China.

Various flavors for connected services.

So overall I think our new applications, our new products.

Also showed at CES.

<unk> are now taking offline and we see a good traction here and this keeps us confident that we will see also a growth in new connected services.

And just last question and I'll step back in the queue connected services was $26. Seven so you mentioned thats going to ramp in the second half can you give us kind of a sense of kind of what you're thinking about in terms of magnitude. Thank you.

Well, we don't guide specifically on the elements of the revenue alright.

And your next question is from Luke junk of Baird.

Good morning, and thank you for taking the questions I wanted to start with the guidance. So Christian maintaining the full year guidance, but wondering if you are gaining mentioned the range to any extent or maybe more importantly, if I look at the implied guidance for the fourth quarter.

At the midpoint it does imply a fairly significant ramp and I just wanted to better understand what is going on specifically later in the year.

Our fundamental standpoint sharing that assumption. Thank you.

So.

We had strong bookings.

As we noted in the first half.

We have the strong PFS, which.

Well equate to implementations of programs.

It will help to drive revenue.

Through the strong bookings, we will also see higher professional services.

So it's all of those elements that we believe will.

Allow us to achieve the guidance that we put out and maybe one additional comment so Thomas absolute right, we see a strong you'll see we.

Predicting a strong professional services performance for the second half of the fiscal year.

And equally important what you also mentioned in the last earnings call and rock that we are working on some specialty deals.

Okay. Thank you for that and then switching gears I wanted to ask.

A little bigger picture question for you Stephan is the announcement of the for tubular awards. During the first half can you just reset us on where that opportunity stands bigger picture for the company. Thank you.

For the to beat US, yes, so so I think as we launched.

This program on a half year ago right. So we see a lot of traction here on the tubular side.

Especially in Asia Pacific.

We won <unk> answer.

Top two Wheeler manufacturer.

So.

On a broader picture you know I mean.

Also the <unk> is a very attractive market to us roughly 50% to 60 million to be lost on a yearly basis right.

We are leveraging the core AI stick.

And adding on an application level new features on it.

What we just described in the call here. So overall, that's an important market for us right.

And you see a lot of potential for us in the future and it's all the hybrid solution, meaning etch and connected cloud services.

Okay, Great I appreciate the responses I'll go ahead and leave it there. Thank you.

You have a question from Jeff Van <unk> of Craig Hallum.

Sure I've got a couple.

First on the prepaid I think the original guide last quarter given was 60 for the year. Obviously your 45, so far but now youre guiding to 75% to 100 I get the explanation of the two different models. My question is whats changed since the last guide until now.

So.

The biggest change is actually that we are seeing a lot of.

Inquiries from customers over the last.

Couple of weeks, especially.

From the Asia region.

Okay.

Can you talk to connected systems, and particularly usage of connected you mentioned the legacy connected has got some headwinds.

And aren't going to renew but you've got some more modern connected systems out there and I'm sure you're watching the usage very closely.

<unk> patients have you got about absolute levels of usage and trends and usage.

So when comparing the usage and a car arrived and we are doing this with our analytics tools and also with some of the Oems Rod you can compare the user count for example.

Amazon Echo solution right same number of transaction, we see a tremendous growth in monthly active users. So overall.

It's picking up right.

On the other hand of course, we saw also.

Sharp decline when in China.

When China some cities are shut down.

But overall, it's trending into the right direction.

Okay, and then just backing up a little bit to very high level in terms of the revolving door on the leadership front.

I mean at this point, we've got to CEO , <unk>, <unk> CFO and five months.

What are the learnings here I mean is the due diligence process broken and how do you avoid that kind of turnover in the future.

I think we are working closely with the board here.

<unk>.

And my view is not broken.

So, but I mean, when referring to the CFO .

I think.

Let me explain in a different way right. So mark Allen brokerage retirement in March.

Was planned and markets and also bring in <unk>.

<unk> enrolled until November of this calendar year, and then we had a short term interim financial consultants during the CFO search.

And then after an extensive search we identified mark month and year.

But unfortunately it wasn't a good fit.

And I'm really excited and feel strongly that Tom is a natural fit for the CFO position Rod He brings an experience.

I'm working with them for more than 14 years now Rod he was quite active as a board member and you could also here from the core now he knows everything he is well connected he knows the automotive to the mobility space Rod He is quite familiar with Smith with software right.

And its strong when he was running at and once the chief transformation office Rod. He was fully responsible from the spin of <unk> from nuance Rod.

And EBIT.

Everything together, including G&A and the policies.

Okay. Thanks for that I mean, I'm certainly familiar with Tom have known them for a long time. So no disagreements there I just think when you get this many turns the explanation sort of start to fade in relevance and it seems to point to process issues I will leave it there one other one other brief question in terms of the bookings.

Mentioned pretty strong connected bookings I'm, just curious what you've learned on <unk>.

Implementations, where you are coexisting right to cognitive arbitration argument.

What are you seeing in win rates and connected what are you seeing win rates when you coexist and then what.

Is that leading to in pricing in particular, when you are coexisting.

So I think I think we are.

Uniquely positioned here.

For three reasons one.

I think the Oems on most of the Oems they want their own branded experience.

Two.

Most of the Oems want to own the data for potential data monetization after <unk>, Ryan and we provide an OEM.

<unk> platform with global multi assistant capabilities front and Thats it.

The big advantage of our solution.

We have all the tools from from simple wake words to vary.

Interesting new technologies like just talk and we are supporting to the Oems and then the Oems they owned the business flow.

And the business metrics.

Okay I'll leave it there thank you.

And your next question is from Mark Delaney of Goldman Sachs.

Yes.

Thank you very much for taking the questions.

First.

I was hoping to understand the revenue trajectory in terms of revenue per vehicle increase and revenue for being part of the company's long term opportunity you had a couple of <unk>.

Program do you book that you spoke about it. So maybe you can give us a sense about what kind of revenue per vehicle youre expecting when you look at a couple of these big new programs, you've won and how those compare to what revenue per vehicle wise with those customers on the prior contracts.

So we see some uptick in our.

Our price per unit, so because we are adding more and more new applications to it just think about Kara.

Think about <unk> being about copilot thing about our new surgeons.

Assistant right, which is actually.

Our unique solution also not just for <unk>, but also for trucks run what we mentioned.

And the more we can add online of course.

And we're going to increase also the unit price.

And on the connected side right, we are adding more new applications to Ed It take some time, but we also discussed last earnings call rights, so bookings to ship.

Conversion.

But as a long term game here rod.

Also here, we are well positioned so overall I'm very confident with our future.

Okay.

That's helpful directional color. My second question is on consumption of these upfront.

License deals that are that are being struck I think the company had talked about consumption of fixed license licenses sold in prior years, we're going to be in the mid $70 million range. This year, maybe you could talk about what you expect consulting to be at this point has there been a change to that.

But more broadly when you think about the fixed licenses you've sold ahead of auto production in prior years as well as your updated expectation for these licenses you're going to sell this year before out of production when does that get consumed. Thank you.

Well, we don't we don't guide on the consumption levels.

But as I said this is a long standing practice.

Yes.

Does that all flow to it.

And we continue to.

To make the assessment and the tradeoffs on these particular deals.

Okay. Thank you very much.

And as a reminder, if you would like to ask a question. Please press Star then the number one on your telephone keypad.

And Im showing no further questions at this time I would like to turn the call back over to the speakers for any further comments.

Thank you Christie and thank you for everyone joining us on our call. This morning, and we hope to see you or meeting with you at one of the upcoming conferences. Thank you and have a good day.

And this concludes today's conference call. Thank you for participating you may now disconnect.

[music].

Good day and thank you for standing by welcome to the Cerus Q2, 2022 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone keypad. Please be advised.

Today's conference is being recorded.

You require assistance during the conference. Please press Star then zero.

I would now like to turn the conference over to your Speaker today, Richard Damian Senior Vice President of Investor Relations. Please go ahead.

Yes.

Thank you Christie welcome to <unk> second quarter fiscal year 2022 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 representation as to update those statements after today.

Joining me on today's call are Stefan <unk> CEO of salaries in Tom <unk> CFO of service as a reminder, the only authorized spokespeople for the company are Stephane, Tom and myself.

Before.

Turning 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 19th annual Craig Hallum Institutional Investor Conference on June one.

The Baird 2022, global consumer Technology and services Conference on June 6th in New York and the sixth annual Needham Virtual Automotive Tech conference on June settlement.

Now onto the call stubborn.

Thank you rich.

Everyone and thank you for joining us to discuss our second quarter earnings.

As you saw in our release. This morning, we delivered solid results for the quarter against a backdrop of continuing disruption in our production.

We either met or at the high end of the range for most key financial metrics in the quarter.

In addition to the quarterly matrix, we delivered very strong bookings in the first half of the year up 53% from the same period in the prior year.

We see a strong pipeline of potential bookings for the second half of the year, including February competitive takeaway opportunities.

I'm, especially pleased with our performance since everyday we see news about the market conditions, playing a major role in our industry semiconductor shortages factory and city shutdowns due to COVID-19, and the impact from the <unk> in the Ukraine, all continue to contribute to challenges in auto production.

We are carefully managing the business through these headwinds and despite the challenges we remain confident in our full year guidance.

Before we dig into our performance and outlook I want to welcome our new executed officers.

First I am pleased to welcome Jennifer Salinas to serve as our new General Counsel, we are fortunate to have Jennifer under 17.

He is an experienced and progressive public company legal leader, who most recently served as general counsel of the infrastructure solutions group and global head of litigation <unk>.

In just six weeks Jennifer has proven to be a tremendous addition to the team second I'm excited to welcome to embolden as our new CFO with the departure of Mark more than year.

I've known Tom for years, and I'm confident that he will be instrumental to our operation and in helping US execute Tom has a proven track record of driving change and significant experience, leading finance and the software and automotive industries.

Many of you recall, Tom from his time at nuance, where he was CFO and then let its business transformation office.

Our business extremely well first and its role leading the successful spin from nuance and then for the last two and a half years as a very active director on our board it's <unk>.

My pleasure to welcome Tom and operational role and have them join US today, you will hear from him in a moment, but before I turn it over I will share a few highlights and observations.

At the beginning of the call I mentioned, our strong first half bookings performance at $448 million, our first half bookings were up 53% compared to the same period last year.

For additional perspective on the achievement.

Bookings for our entire fiscal year 2021 $590 million.

Our continued success in accounts and markets is due to our strong competitive position in the automotive industry and our capability to reach beyond traditional automotive markets.

Also includes.

We previously announced a significant contract the largest in our history with a large European OEM that caused us to help with the expansion program underway in greater China.

Aside from traditional automotive we have also seen exploration in newer areas of note we secured several important wins with EV car companies.

Signing five new contracts, including four in China, the world's hottest EV market.

As Chinese EV makers turned to <unk> to create a unique AI experience as they expand our out of China into other regions.

Only supplier with the portfolio and language coverage to support the aggressive plans and deliver the experience they want in their vehicles.

Another Prime example of our expansion of our growing success in trucking.

A major European heavy truck supplier recently signed on for our selling assistant offering.

This new contract represents the first customer in this space our sense right product continues to attract new two Wheeler customers. This offering combines our core AI innovation with new capabilities, such as a group wide function transforming the two river experience as ridership growth worldwide.

And after such a solid first half of the fiscal year I am pleased that the pipeline for the second half remains robust.

Are the single biggest contributor to our future and we plan to capitalize on every opportunity.

Second we remain intensely committed to delighting, our customers by continuing to deliver high quality products and implementations on schedule and on budget.

We are intently focused on bringing several key customer programs, two successful launches, which will position us for future success.

And part of this we expect a significant increase in professional services revenue for the second half of the year, which is another leading indicator for future business potential.

We are prioritizing and allocating funds to innovation in areas of our business that generate the highest return rates of return and finally, we will continue advancing our strategy and operational plans in a manner that best positions. The company to achieve long term sustainable growth and with that I will now turn the call.

Over to Tom to review the financial results of the quarter Tom Please.

I know firsthand the exciting opportunities ahead for the company and look forward to working with Stefan and the team to maximize the future growth potential of silence.

I look forward to meeting all of you.

I will now review our performance for the quarter and then I'll provide guidance for our third quarter and we view our full year guidance.

Revenue came in at $86 3 million slightly above the high end of our guidance due to a stronger than expected contribution from professional services.

Our profitability metrics performed well.

As most of the key profitability metrics came in at the midpoint of guidance.

non-GAAP gross margin was 74, 7%.

non-GAAP operating margin was 25, 2%.

Adjusted EBITDA was $24 million or 27, 9% margin.

non-GAAP earnings per share of 33.

During the quarter, we generated approximately $2 million of cash flow from operations.

And on our balance sheet remains strong with total cash and marketable securities of approximately $146 million.

Now, let's review a detailed breakdown of our revenue.

We have added some additional insight into the breakout of Opex licenses.

Separating the prepay fixed current tax from the minimal commitment contracts.

As previously communicated revenue recognition for each is the same.

The full value of the contract is taking at the time of signing and delivery.

The difference between the two types of contracts is mainly the timing of cash collection.

For our prepaid contracts the cash is typically paid upfront and for a minimum commitment contract. The cash per license is paid at the time of auto production.

Our variable license, rather, though was down 46% from the same quarter last year.

Due to the combined effects of lower auto production and consumption of <unk> license contracts.

Connected services revenue was down 8% from last year, driven primarily by the drop off of revenue from our legacy contract, which was expected and previously communicated.

As well as lower auto production.

Our new connected services revenue was down because of expiring contracts for older technology, and therefore not candidates for renewal.

For the full fiscal year. These expiring contracts create about a $5 million headwind to connected services growth.

We don't expect this to negatively affect growth next fiscal year.

Finally, our professional services revenue was up 25% year over year, and 6% quarter over quarter.

Growth in professional services is a key indicator of future license and connected services revenue as.

As the pro services team the individuals directly interfacing with customers to customize and implement.

<unk> technology, and our customers' next generation platforms.

Moving into our guidance for Q3.

Third quarter guidance detailed on this slide takes.

<unk> takes into consideration.

The costs and uncertainties of the semiconductor device shortages.

Factory shutdowns and the effects of the Ukraine, who are that are affecting acting auto production.

However, as we have seen in the past.

The impact from these events on our business can shift quickly.

Collectively our Q3 guidance represent continuing positive trends in the business over Q2.

Okay.

We are affirming guidance for the full fiscal year.

So in summary, we had another quarter of good financial performance, while we remain cautious in the near term due to the factors impacting the auto industry as outlined above our long term prospects remain upbeat.

Our focus is on innovation and growth while at the same time driving a profitable business model that will benefit the company and our shareholders well into the future.

This concludes our prepared remarks and now we will open the call for questions. Thank you.

And as a reminder to ask a question you will need to press star one on your telephone keypad to withdraw your question press the pound key please standby, while we compile the Q&A roster.

And your first question comes from David Kelley in Jefferies.

Hey, good morning, guys and.

Thanks for taking my questions maybe.

Maybe wanted to dig into the revenue drivers for the quarter, a bit and maybe starting with the connected services.

Specifically the subscription pullback clearly it's been a tough couple of years for underlying auto production. So we think about the compounding impact there, but it is.

The same time, there has been a mix shift to premium and luxury.

And kind of ongoing vehicle technology adoption so.

Can you talk about maybe what you are seeing in the connected services subscription business.

Divers of that decline year over year.

First of all let me just make sure we all understand the financials and then I think Stephane can talk a little bit about the business parameters.

So we have provided a little further.

Breakout of connected services, so I think historically have separated.

New connected services from the legacy contract that we had talked about previously so I think probably people understand.

The trends in the legacy.

With respect to the new connected services.

We split out.

<unk>.

The two elements.

One of the factors affecting that is that we have these.

All the contracts that are.

<unk> pre spend.

Some of them were through acquisitions that nuance.

Creating this $5 million headwind.

For FY 'twenty, two and as I noted, we don't expect that to continue into next year.

Sure.

Okay.

Thanks, Tom and good morning, David.

So let me also add a few more words to connected services.

You have heard we had a fantastic first half.

<unk>.

And we had also signed was one of the European Oems launches contract in our history is all related to connected.

As Jeff mentioned also.

New connected services, comprising now more than 40% of the total backlog at the end of last year, we had $2 1 billion. So we are well positioned also.

For our new connected services, we see a lot of traction also in our new products with respect to connected services right.

But overall I think it depends heavily also on the recovery obviously auto production.

And we are well positioned.

Physician tier, especially on connected.

Okay got it that's helpful. And then you noted the ongoing consumption the fixed license contracts can you give us a bit more color on the impact of.

That headwind in the quarter and maybe how you are thinking about the ongoing impacts here into the back half of the year.

Yes, let me go first and then.

Also as Tom for his view.

I think its long standing practice in our business.

And when looking back.

Over the last couple of years. So the range for fixed licenses has been within 15% to 20% of the total revenue over the last couple of years now.

Now we saw for the first half of the fiscal year tick up of 225%.

And based on recent customer request, we expect that the trend will continue for the second half of the year.

Now.

In some regions and also for some of our customer is a common practice.

We prefer.

These types of contracts and we all know that some of the Prestea supplier.

Tremendous pressure on the benefit to them as cost savings, especially given that raising material costs.

For example, this was also reflected in our strong first half bookings.

Yes.

So I have been involved with the auto and mobility business, which was a.

Very large division within nuance since 2008.

And this has been a buying pattern and our contracting pattern, whereas Stefan noted, particularly some regional customers.

But also some customers that have been doing this practice for a very long time, and I think a lot of the the.

The factors contributed from what I can say to that.

That tick up that.

That stephane talked about from about 15 to 20 to up to 25.

All of the auto manufacturers.

Under pressure to manage cost, particularly in this environment. They all have very strong purchasing organizations.

I would note that the discounts that we provide.

A minimum commitments.

Is is quite smaller than the discounts we provide on the prepaid prepays now of course, it does have a different cash flow impact.

But.

I would point out the discounts are.

Lower than on the prepaid.

Okay perfect. That's helpful. I'll pass it along thank you.

And your next question comes from Andrew Gill from Needham.

Yes, thanks for taking my questions.

A follow up on under fixed contracts.

<unk>.

In the past it seemed like that customers were entering fixed pay contracts because they are getting more price price discounts because they wanted to drive down the cost.

And then I just want to clarify so the.

You are expecting.

Fixed contracts.

To kind of maintain that higher level at 25% of sales for the second half of.

For the fiscal year, so that would be indicative that the customers are continuing to kind of enter into these type of contracts in order to benefit from the price discounts that kind of behavior seems to be continuing is that a fair assessment.

Yes, that's all we're saying in the pipeline.

<unk>.

From some of that as I said customers that we have seen prefer that's contractual.

And I think our sales team has done a good job of maybe trying to minimize the discounts there.

We are in a strong capital position. So we do get that cash over time so.

So you mentioned that there was again the trends and the difference between the fixed contract versus the prepay con.

Contract.

There was a.

A change in the discount.

Maybe you could kind of elaborate a little bit on that.

Because.

Because I mean, I think the challenge will be.

How much of a discount are you offering.

Customers you get these contracts and if this is kind of more indicative of a longer term trend and does that impact the gross margins in the pricing as you go forward.

Yes, just to be clear and we've broken this out on.

On the information provided.

We broke out this time, which is no.

The two types of contracts that are both under fixed contracts that.

<unk> prepaid.

As a cash more upfront.

And then I'll, let minimum commitments, where the cash is as the autos.

<unk>.

<unk> pads have historically had a higher guest count.

The minimum commitments.

Early significantly lower discount it still benefits.

The customers.

<unk>.

And as we said.

We have ticked up a little as a overall percentage of revenue we expect that to continue in the second half.

And then of course, we'll be assessing that as we develop our long range plan.

Over the next couple of months few months.

I see Okay, and then and then on the connected services.

A proportion of the business the legacy dropping to $8 million. So is that kind of the range, we should be kind of forecasting on a go forward basis and then the.

You mentioned that despite the $5 million headwind and overall connected that you still expect to grow.

And sorry, the new connected revenue.

Can you just kind of talk about what's.

What's driving that growth above and beyond that $5 million headwind.

Yes, So let me ask thanks sure we're clear on the elements of the connected services. So as you pointed out there is that legacy contract. It's an amortization schedule. So it's highly predictable. It has 11 quarters left it's a contract that goes back to 2013.

And that will run out.

Ill.

And a new subscription.

Connected services.

A 5 million dollar headwinds.

Based on these are very old technology contracts.

Some of them came through acquisitions done when auto was part of nuance.

Those technologies.

Not renewable.

Customers may have moved on to a different.

Science technology.

Platform, but of course that wouldn't be classified as a renewal.

That.

That $5 million headwind will not exist in 2023.

Alright, because all the <unk>.

Contracts will be on the new technology.

Yes, correct.

Stefan talk about Pwc also saw some strong revenue growth vectors here Rod also with respect to new products.

And then program expansion of its original expansion Ryan just referring again to the biggest deal in our history.

That was for China.

Various flavors for connected services.

So overall I think our new applications, our new products. We're also showed at CES.

<unk> are now taking off right and we see a good traction here and this keeps us confident that we will see also a growth in new connected services.

And just last question and I'll step back in the queue connected services was $23. Seven so you mentioned thats going to ramp in the second half can you give us kind of a sense of kind of what youre thinking about in terms of magnitude. Thank you.

Well, we don't guide specifically on the elements of the revenue correct.

And your next question is from Luke junk of Baird.

Good morning, and thank you for taking my questions just wanted to start with the guidance. So Chris you maintain that full year guidance, but I'm wondering if you are guiding within the range to any extent or maybe more importantly, if I look at the implied guidance for the fourth quarter.

At the midpoint it does imply a fairly significant ramp and I just wanted to better understand what is going on specifically later in the year.

Our fundamental standpoint sharing that assumption. Thank you.

So.

We had strong bookings.

As we noted in the first half.

We have the.

Strong PFS, which.

<unk> equate to implementations of programs.

Will help to drive revenue.

Through the strong bookings, we will also see higher professional services.

So it's all of those elements that we believe will.

Allow us to achieve the guidance that we've that we've put out and maybe one additional comment so Tom is absolutely right, we see a strong.

We predicted a strong professional services performance for the second half of the fiscal year.

And equally important what you also mentioned in the last earnings call and rock that we are working on some specialty deals.

Okay. Thank you for that and then switching gears I wanted to ask.

Little bigger picture question for you Stephan it's the announcement of the for tubular awards. During the first half can you just reset us on where that opportunity stands bigger picture for the company. Thank you.

For the two wheelers, yes, so so I think as we launched.

This program on a half year ago right. So we see a lot of traction here on the tubular side.

Especially in Asia Pacific.

We won't answer one offs.

Two wheeler manufacturer.

So.

On a broader picture you know I mean.

Also the two Wheeler is a very attractive market to us roughly 50 to 60 million to be lost on a yearly basis right.

We are leveraging the core AI stick.

And adding on an application level new features on it.

What we just described in the call here. So overall, that's an important market for us right.

And we see a lot of potential for us in the future and it's all a hybrid solution, meaning etch and connected cloud services.

Okay, Great I appreciate the responses I'll go ahead and leave it there. Thank you.

And do you have a question from Jeff Van <unk> of Craig Hallum.

Sure I've got a couple.

First on the prepaid I think the original guide last quarter given was 60 for the year. Obviously your 45, so far but now youre guiding to $75 to 100 I get the explanation of the two different models of my question is whats changed since the last guide until now.

So.

The biggest change is actually that we are seeing a lot of.

Inquiries from customers over the last.

Couple of weeks right, especially.

From the Asia region.

Okay.

Can you talk to connected systems, and particularly usage of connected you mentioned the legacy connected has got some headwinds.

And aren't going to renew but <unk> got some more modern connected systems out there and I'm sure you're watching the usage very closely.

What observations have you got about absolute levels of usage and trends and usage.

So when comparing the usage in a car right and we're doing this with our analytics tools and also with some of the Oems Rod you can compare the use in the car for example.

Amazon Echo solution, while at the same number of transaction, we see a tremendous growth in monthly active users. So overall.

Picking up right.

On the other hand of course, we saw also.

Short decline one in China.

When China. Some cities are shut down for Covid, but overall, it's trending into the right direction.

Okay and then just.

Backing up a little bit to very high level in terms of the revolving door on the leadership front.

I mean at this point, we've got two Ceos and <unk> CFO five months what are the learnings here I mean is the due diligence process broken and how do you avoid that kind of turnover in the future.

I think we are working closely with the board here I think.

<unk>.

Process and my view is not broken.

So, but I mean, when we're referring to the CFO .

I think let me explain the different way right. So mark Kellenberger retirement in March.

Was planned and markets and also bringing in.

Consultant role until November of this calendar year, and then we had a short term interim financial consultant during the CFO search right.

And then after an extensive search we identified Mark Montanye.

But unfortunately it wasn't a good fit.

And I'm really excited and feel strongly that Tom is a natural fit for the CFO position Rod He brings an experience.

Im working with them for more than 14 years now right.

It's quite active as a board member and you could also here from the core now he knows everything he is well connected he knows the automotive the mobility space right. He is quite similar risk business software right.

And then strong when he was running at and once the Chief transformation office right. He was fully responsible from the spin of severance from nuance right.

And EBIT.

Everything together, including G&A and the policies.

Okay, yes, thanks for that I mean, I'm, certainly familiar with Tom I've known him for a long time. So no disagreements there I just think when you get this many turns the explanation sort of start to fade in relevance and it seems to point to process issues I will leave it there one other one other brief question in terms of the bookings.

Mentioned pretty strong connected bookings I'm, just curious what you've learned on <unk>.

Implementations, where you are coexisting right to cognitive arbitration argument.

What are you seeing in win rates and connected what are you seeing in win rates. When you co exist and then what is that leading to in pricing in particular when you are coexisting.

So I think I think we are uniquely positioned.

Physician tier.

For three reasons one.

I think the Oems on most of the Oems they want their own branded experience.

Two.

Most of the Oems want to own the data for potential data monetization afterwards, Ryan and we provide an OEM frankly.

Frankly platform with global multi assistant capabilities right.

Advantage of our solution.

We have all the tools from from simple wake words, two very interesting new technologies like just talk and we are supporting with the Oems and then the Oems they owned the business flow.

And the business logic.

Okay I'll leave it there thank you.

And your next question is from Mark Delaney of Goldman Sachs.

Yes.

Thank you very much for taking the question.

First.

I was hoping to understand the revenue trajectory in terms of revenue per vehicle increase in revenue per vehicle.

The company's long term opportunity you had a couple of <unk>.

Program that you booked that you spoke about it. So maybe you can give us a sense about what kind of revenue per vehicle youre expecting and when you look at a couple of these big new programs, you've won and how those compare to what revenue per vehicle wise with those customers on the prior contracts.

Yes, so we see some uptick in our.

Our price per unit, so because we are adding more and more new applications to it just thinking about <unk> think about <unk> think about copilot bring about our new Stearns.

Assistant right, which is actually.

Our unique solution also and not just for <unk>, but also for trucks right, what we mentioned.

And the more we can add online of course, and we're going to increase also the unit price.

And on the connected science warrant, we are adding more new applications to it. It takes some time, but we also discussed last earnings call rights, so bookings to ship.

Conversion.

But it is a long term game here rod.

Also here, we are well positioned so overall I'm very confident with our future.

Okay.

That's helpful color.

Second question is on consumption of these upfront.

License deals that are that are being struck I think the company had talked about our consumption of fixed license licenses sold in prior years was going to be in the mid $70 million range. This year, maybe you could talk about what you expect consulting to be at this point has there been a change to that.

But more broadly when you think about the fixed licenses you've sold ahead of auto production in prior years as well as your updated expectation for these licenses are going to sell this year before out of production.

When does that get consumed thank you.

While we don't guide on the consumption levels.

But as I said this is a long standing practice.

Yes.

Does that all flow to it.

And we continue to.

To make the assessment and the trade offs on these particular deals.

Okay. Thank you very much.

And as a reminder, if you would like to ask a question. Please press Star then the number one on your telephone keypad.

And Im showing no further questions at this time I would like to turn the call back over to the speakers for any further comments.

Thank you Christie and thank you for everyone joining us on our call. This morning, and we hope to see you or meeting with you at one of the upcoming conferences. Thank you and have a good day.

And this concludes today's conference call. Thank you for participating you may now disconnect.

Q2 2022 Cerence Inc Earnings Call

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