Q3 2022 Cerence Inc Earnings Call
Okay.
Good day and thank you for standing by welcome to the seventh Q3 2022 earnings Conference call.
At this time all participants are in a listen only mode.
The speaker's presentation.
<unk> and answer session to ask a question during that session you will need to press star one one on your phone. Please be advised that today's conference is being recorded and I would now like to handle conference over to your speaker today, Mr. Richard Gagnon Senior Vice President of Investor Relations.
Danielle. Please go ahead.
Thank you Chris welcome to <unk> third quarter fiscal year 'twenty Two conference call 2022 conference call before we begin I would like to remind you that this call may involve certain forward looking statements.
Makes no representation as to update those statements after today.
Mix of subject to the risks and uncertainties as described in our SEC filings, including the form 8-K with the press release preceding today's call. Our Form 10-Q filed on May 10, 2022, and our Form 10-K filed on November 23 2021.
In addition, the company may refer to certain non-GAAP measures key performance indicators and pro forma financial information. During this call. Please refer to today's press release for further details of the definitions limitations and uses of those measures and reconciliations of non-GAAP measures to the closest GAAP equivalent.
The press release is available via our IR section of our website.
Joining me on today's call are Stefan <unk>, CEO of severance and Tom <unk> CFO of <unk>.
As a reminder, the only authorized spokespeople people for the company are Stephane Tom.
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 Raymond James 2022 diversified Industrials conference on August 23rd in New York. The Evercore second annual TMT Conference on September 7th in New York, The RBC Capital Global Industrials Conference on September 13th in Las Vegas, and the Goldman Sachs 2022 commuter copier.
Technology Conference on September 14th with San Francisco.
Now onto the call Stephane.
Thank you rich.
Welcome everyone and thank you for joining us to discuss our third quarter earnings.
I am pleased to report our third quarter broad areas of important progress and success across customers and product innovation.
Working with our customers.
Delivered 43 as a piece in the quarter.
Our team secured important design wins and nominations, including a strategic win back from Big Tech.
Our R&D and professional services organization launched new <unk> cloud services with three Oems.
Additionally, we gathered with nearly 150, researchers and developers at our first <unk> technology conference truly out the roadmap for our next groundbreaking offerings.
Overall, our core business performed well, including a record quarter for professional services.
However, despite the positive momentum.
Handful of items that adversely affected our Q3 revenue performance.
Revenue at $89 million came in slightly below the bottom of our guidance range, yet adjusted EBITDA and non-GAAP EPS were in line given our continued focus on efficiencies.
Working against us as the quarter progressed slower than expected revenue from certain new products and markets continued FX headwinds and pressure on car production, which was down 6% from last quarter. According to IHS.
As with many companies and peers, we expect some of these trends to continue which affects how we look at Q4 and importantly, our long term planning and goals of sustainable growth.
We will come back to these in a moment, but first let me share a few more details on the quarter.
We believe that business is in a strong position to deliver long term growth even if in the short term the market is struggling with supply chain issues. The continued strength in our core auto business is due to a number of important milestone that I briefly mentioned in my opening.
We delivered 43 agile piece in the quarter. These vehicles from customers such as Toyota Atlanta's Hyundai fraught and mosquitoes are now hitting the road and are expected to contribute to revenue over the next several years.
We continued our streak in two important design wins in nominations that drug is secure.
Of choice among Oems.
Right.
This win is an important strategic accounts that represents one of the competition.
Bin bags, we have targeted in recent quarters, we delivered a record quarter for professional services. We believe our success here is a leading indicator for future growth in license and connected services revenue.
We officially launched our new <unk> cloud services that significantly enhance the user experience and set new performance benchmarks for accuracy latency access to innovation.
We are initially provided these new cloud services for you.
I'd.
Gili.
Each of these efforts and milestones are additional important layers to the foundation of our business.
Product and delivery excellence, great customer relationships.
<unk> innovation road map, a strong pipeline of opportunities and healthy backlog.
We are confident in the business, our competitive position and long term prospects.
As you know however, our industry and many others around the world face a number of headwinds from lingering ship shortages and supply chain issues to currency risks inflation and recession fears.
It is not clear when this economic and industry wide challenges will subside.
We continually assess the situation through multiple endpoints, including discussions with our customers IHS data and closely monitoring.
Production levels.
With macro conditions outside of our influence we are intently focused on what we can control with the emphasis on innovation delivering on customer commitments and tightly managing costs.
We believe that as the industry returns to growth our focus on these areas will serve us well over the long term.
In the meantime, we must manage through these challenges and ensure we are positioned for the future in recent months the leadership team and I have employed all aspects of the business as we built our long term plan, which will.
Present and discuss with you later this year one critical task has been to address fixed contracts fixed contracts have always been a part of our business and will continue to be but as we discussed last quarter. We have been assessing the right balance of fixed contracts for the business as part of our long term planning process.
We have discussed how elevated levels of fixed contracts and the corresponding consumption rates adversely affected profitability in our core auto business.
The current macroeconomic concerns and uncertainties have driven customers to seek higher discounts and concessions that are typically included in these contracts.
Because of these factors and listening to your feedback Tom and I decided now is the time to take a decisive step to improve the visibility into the strength of the core business in.
In order to enhance predictability into our future revenue, we have decided to sign zero fixed contracts into four and starting in fiscal 'twenty. Three we will keep the annual contribution of fixed contracts within the historical range of approximately $40 million per year.
This of course has an immediate impact on Q4 guidance, which Tom will walk you through in a moment.
We believe this action is in the best long term interest of the company and our shareholders for these reasons one this.
This shift will provide enhanced clarity into our revenue stream.
It will provide predictable consistent results that are comparable from period to period and greater visibility into our underlying business.
It will help mitigate recent economic pressures on the business.
While there will be a transition period as this change is implemented we believe longer term it will enhance our earnings growth potential and provide greater visibility and clarity into our strong underlying business.
We will share in greater detail the long term benefits of this change at our analyst day on November 29 in New York City.
Until then and as we complete our fiscal year and look ahead to fiscal 2023, we are focused on three key areas first.
Deliver a strong fiscal year bookings second deliver excellence in all our product and customer facing programs third ensure efficient performance oriented operations and cost structures.
These will play a crucial role in our long term strategy and multi year plan that you will share with you at our Investor day in November and with that I will now turn the call over to Tom to review the financial results of the quarter and talk more about guidance.
Thank you Stefan I'll come back to guidance and fixed contracts in a moment, but first I want to share more on our Q3 results.
Q3 revenue came in at $89 million slightly below the low end of our guidance due to a combination of the absence of expected one time specialty deals and the strength of the U S dollar compared to other currencies.
Our key profitability metrics perform well.
non-GAAP gross margin was 73, 7%.
non-GAAP operating margin was 29%.
Adjusted EBITDA was $28 5 million or 32% margin.
And non-GAAP earnings per share were 43 coming.
Coming in right at the midpoint of our guidance.
During the quarter cash flow from operations was approximately negative $3 9 million.
Our balance sheet remains strong with total cash and market ops marketable securities of approximately $136 million.
To provide more detail on our revenue level the core business.
Largely as expected.
Variable license revenue was down 30% from the same quarter last year.
Pro forma royalties or down 3%, while consumption of ex LIFO.
73% during the same period.
Connected services revenue was down 34% from last year as expected.
This decline was the result of several previously disclosed factors.
Such as the declining revenue associated with the legacy contract and expiring contracts for older technology.
As previously discussed these expiring contracts create about a 5 million dollar headwind to connected services growth for the full fiscal year.
Finally <unk>.
Professional services revenue was up 36% year over year, and 9% quarter over quarter.
Growth in professional services is a key indicator of future license and connected services revenue.
As the pro services team includes the individuals who directly interface with customers to customize and implement <unk> technology on next generation ODM platforms.
Now I'd like to spend a few minutes talking about fixed contracts.
On our Q2 conference call I spoke about how we will be assessing our long term strategy relative to fixed contracts.
Following that analysis and hearing from investors and analysts concerns about a higher level of fixed contracts.
That's why I noted, we made a strategic decision to not do any tax contract deals in Q4.
Strictly limit the amount will do on an annual basis moving forward.
We believe this will better serve the long term interest of the company at Boswell enhanced visibility into our core business revenue.
We will demonstrate more consistent underlying results.
And more effectively protect our economics related to these type deals.
While there will be a transitional period associated with this strategic shift.
This decision will enhance the predictability of earnings in the long run and be more representative of our strong underlying business.
This impacts our Q4 guidance.
Before reviewing guidance I want to provide some additional details on our license revenue to help you understand the strength of the underlying business at what led us to our decision regarding fixed contracts.
The table shows the pro forma royalties on a quarterly basis.
The amount of Concept's Samsung from fixed contracts.
Net license or variable revenue, which is the number we report in our quarterly revenue.
Importantly, pro forma royalty revenue remained solid.
Aligning to our strength in customer credit penetration, even with the impact of macroeconomic factors over the last few quarters.
Pro forma royalty license revenue is a strong indicator of the deployment of our technologies on current auto production.
You can see the impact from the elevated levels of fixed contracts and the resulting growth in consumption of <unk>.
FX contracts, which supported our decision.
<unk> contracts are managed back to more historical levels.
We believe that in FY 'twenty, five new fixed contracts will be approximately equal to the level of consumption.
Because of our decision to limit fixed contracts to approximately $40 million moving forward.
We expect FY 'twenty Wei will represent a transition year, followed by strong growth in FY 'twenty four for the license business.
Further we believe our strong growth opportunities in the future will be more visible after this transitional period.
Tech contracts have been a part of the business for as far back as 2008, when I first joined.
We are committed to not go above that historical level moving forward.
We are confident that we can work with our customers that use this mechanism to reduce their cost and agree to a solution that supports them. While at the same time protecting the long term growth and margin of the company.
Importantly, we do not expect that this shift 10 contracts will meaningfully impact our customer relationships.
As demand for our solutions remains strong and let's move mainly shifts the timing of revenue recognition.
Now turning to revenue guidance for Q4 and subsequently the fiscal year.
The decision not to do any fixed contracts in Q4 has led US to guide Q4 revenue to be in the range of $52 million to $58 million.
And $320 million to $328 million for the full year.
The guidance for Q4 assumes.
Now FX contracts.
Slower than expected revenue contribution from adjacent markets.
No specialty deals.
And ongoing currency volatility.
All of this transitional period in Q4 and fiscal 2023.
Management team will focus on capitalizing on our solid demand for our solutions and generating strong consistent.
Pro forma royalty license revenue.
We will also focus on pursuing operational excellence and gaining efficiencies across our business.
We are aware of the short term impact of this decision.
But firmly believe that this will return the business to more predictable long term growth.
At our analyst day later this year, we will share with you the multiyear plan that will show the positive impact. This decision is expected to have on our long term growth and profitability.
Aligned with our plans for the rest of the business.
This concludes our prepared remarks, and now we will open the call for questions.
Thank you.
As a reminder to ask a question you will need to press star one one on your phone.
Please standby as we compile the Q&A roster.
One moment.
Our first question will come from Luke junk of Baird. Your line is open.
Good morning, Thanks for taking my question I wanted to start with the fixed contracts and just a clarification in terms of the strategy going forward and what I'm wondering is relative to your new $40 million annual target for those fixed contracts does that have any implications for the mix of prepay and minimum commitment.
<unk> going forward as well thank you.
Okay.
Uh huh.
Okay.
We don't know exactly whether the $40 million, depending on the discussions and negotiations with the customers whether they'll be minimum commitment deals whether they will be.
Prepaid.
Well provide through the reporting that we have been doing.
How that plays out NHS, but the capital base of the total of both of them.
And then we'll just have to determine.
Which is the better contracting both for the customer and for us from an economic standpoint.
Okay got that and then my follow up question could you just remind us of the average contract duration I guess im thinking relative to the pro forma royalties that you showed on slide 10, and then the consumption of fixed licenses in other words, how much pressure is there going to be.
The variable license growth near term from the elevated level of fixed contracts that were booked saying fiscal 'twenty three if we can kandi cabinet mechanical headwind based on what you've booked for the last few years and what you've shown in terms of that headwind in the current year as well. Thank you.
So hopefully the additional disclosure that we provided around the pro forma royalty revenue.
Shall we see the trends around.
The.
The revenue that that would come in through the auto production each quarter.
The average length of our contracts is about seven seven years with respect to.
The consumption of fixed contracts, we do provide the breakout of the.
<unk>.
Fixed contracts that we've done today between prepaid and minimum commitments and now we've also provided.
Information around.
The dynamics of each of those.
As we said the fixed that prepaid normally six quarters.
Have a higher discount rate they have cash upfront.
A minimum commitment deals are longer more like four to five years.
With a much smaller desk out.
And of course cash as the consumption is used up each quarter.
I think other important thing that I tried to put in the commentary was we.
We do believe as we kind of model this out.
And that is slightly dependent upon how customers consume that was prepaid minimum commitments that is variable, but we expect that by fiscal 'twenty five.
The $40 million.
Fixed contracts will approximate that consumption of previous fixed contract deals.
Up until that time, so that should give you a good.
A good way to kind of see how the models work.
Play out.
Okay. Thank you for that Tom I will go ahead and I'll leave it there.
Thank you.
Thank you.
One moment please for our next question.
Our next question will come from Joseph Spak of RBC capital markets. Your line is open.
Thanks, so much everyone.
So if we go all the way back to fiscal 'twenty.
This company and I realize there is a different management team, but you spoke about lowering the fixed managing its about $40 million.
It only went higher and the answer was always there was it was it was way more difficult to get customers to change.
And even last quarter Stefan I mean, you you said in your prepared remarks customers prefer these contracts for cost savings.
And it was good for you because you are winning in a highly competitive environment in cementing relationships and there is an upsell opportunity. So the question is what with this change which I appreciate you Sir listing too.
Investors and feedback, but what do you think this does for your future relationship with customers your future share opportunity.
If you really do take this hard line stance because based on what you said prior it would seem like this is not exactly what your customers want.
So.
Good morning, Joe Thanks for joining us. So let me go first and then I'll also ask Tom for his view he knows the business now for for many years also from the early data at nuance.
You know I think based on the headwinds we are seeing right also.
Currency weakness, especially when looking at Asia Pacific's right.
Our partners and customers they have really high.
Requests for discounts here right and personally I was involved with two of them ride to already at the end of Q3 or beginning of Q3 and also now we are.
Still a great relationship I was very clear on what we can do on what we can.
And.
I was also very clear with our sales team and the purchasing guy on their side.
I'm going back to them, we still have a great relationship with those customers, but I think we need to make this position now Bryan it's better for our business.
Better for you were listening to you and to shareholders right.
And I mean, thats, the right step for <unk>, and especially also for our long term planning and we would share. The MRP plan with you also in our November Investor Day here. So that's my view I'm really engaged but nevertheless at the end, it's all about innovation right driving new products showing.
Them delivery excellence and product excellence right and this is a key focus of our team of sales now.
So just a little bit.
So we we spent a lot of time is where China develop our MIP.
But the level is then.
We couldn't really go to zero because of some of the things you talked about Joe.
And so Stefan and I.
Based on his personal experience with some of these customers. We also spent some time, whereas that had a sales to drive season is bandwidth us for many years.
And I understand the customized diamond dynamics and gesture.
Point out as we've always said this is this is a certain group of customers. This is in our across our entire customer base.
We all came to a consensus that the approximately $40 million level.
We would be able to balance.
Both the customer relationships the customer satisfaction the deal economics.
On a go forward basis.
Okay, maybe to follow up on that it sounds like maybe a little bit more color on how you got comfortable with US 40 million level whatever that is.
Customer directed or sorry, sorry to it because I mean, my understanding and correct me if I'm wrong is but you have said in the past you've got about call. It $4 of vehicles. So aren't you still pre selling about $10 million into year at that 40 million fixed.
Well again, it depends on the customer and mix that is associated with either a pre pay or.
Amanda Mott commitment.
But yes, I mean, we were still would be adding about $40 million a year.
Sure.
But again that that number we spent a lot of time trying to understand that right level on a go forward basis, and as I said by FY 'twenty five.
Kind of balance out the amount of contracts and consumption level against those contracts.
Okay.
<unk> got some flexibility we needed to.
To provide our sales team.
Customers with some flexibility.
To continue contracting this way, which as I said is we've been doing this since I.
I joined <unk> in 2008.
But we do believe we can manage it to those more historical levels and again. Some of this was impacted by the macroeconomic factors in the last couple of years in the auto industry.
And people and customers just getting more.
More into China drive their cost structure down as they had volume issues and production, which as you know a lot of these customers is very strong procurement teams.
But we're really confident that we can manage it to that to that level.
These are conversations with our customers. They know that we have to balance our economics too.
And.
We've managed to this level historically.
When the business was part of nuance.
<unk>.
We did see this.
Uptick during these macroeconomic times than we think kind of going.
While we looked at this quarter and then going into 'twenty three we believe we can manage to that level.
Okay.
Thank you I'll pass it along.
Thank you.
Moment, please for our next question.
Yeah.
Our next question will come from Mark Delaney of Goldman Sachs. Your line is open.
Yes. Good morning, Thank you very much for taking the questions.
Have two as well if I could.
First sticking on the topic of <unk>.
Contracts could you clarify how much inventory you expect to have.
Of these six contracts sitting at your customers as you exit this year and maybe break guys, Rob and the amount of inventory exiting this fiscal year until that fiscal 'twenty five timeframe. When you think selling and you say it will be about equal.
No.
We're not providing the actual full number but you have all the data to kind of figure that out because you have.
That is stark.
Contracts that we've done in fixed contracts that we have done you have the breakout between prepaid and.
And minimum commitments and then you have this goal is kind of guidepost in FY 'twenty five as to why don't we think there'll be approximately.
Equal.
Okay.
You mentioned seeing a customer is looking for more discounting and as hoping you could elaborate a bit more on that.
Darren actually booking new business, that's reflecting some increased price pressure or are you walking away from some of those requests.
They're part of some of the changes we are hearing about and why we should be expecting revenue to be lower.
The near to intermediate term.
Now I'll Stephane was talking specifically about fixed price contracts.
Remember these are associated with our technology, that's already in production with our customers.
And so these are deals that are in process and what they do is then they come back to us and say hey.
We have.
We have cost pressures that we need to deal with and so wed like to.
<unk> are doing a minimum commitment to get a slightly larger discount against what we're paying on a running royalty basis and what we saw.
Particularly in Q3.
There's a lot of these contracts are in USD.
And where is the strength of the U S dollar.
Those customers are trying to SaaS.
What the currency impact is on that and then if they're in Korea, or Japan or wherever they're taking the currency risk.
Against that prepaid at that minimum come out and so that's why they come back and they say well I need to hire desk out to protect that.
The uncertainty around the currency and we're just not willing to go above a certain level.
IRI Rois on all of these deals.
Because.
You're pulling their revenue, but they are also has cash flow and locations.
On the prepaid you get the cash much earlier.
And so if you start to give too high a level of discount those rois don't look very good.
And let me also say a few words towards a business here right. So I think indeed also in Q3, we had a strong quarter.
We got in various elimination that does occur.
The globe, no we need to convert them to bookings right.
We.
<unk> also.
Mark key North American OEM for our <unk> solution right.
See a continuous friction here for trucks.
EV makers CRB signed another one.
So far RV in the RV space, We signed also a deal for two wheelers here. So we are doing pretty pretty well in the core business Youre right.
I think our the customers the Oems Theyre really acknowledge our superiority in terms of currency latency also bring in new innovation use case is much much faster in the past right.
When looking at connected services right. So I mean, there's always a topic of renewal, but also here we signed a big contract in terms of statement of work. So for professional services for upgrading cloud for an expansion with one of the big Oems.
Okay.
Understood. Thank you.
Thank you.
One moment please for our next question.
Our next question will come from Colin Langan of Wells Fargo. Your line is open.
Oh, great. Thanks for taking my questions.
Just going through the guidance for Q4 revenue this quarter was $89 million fixed contracts were 23, so if I don't do any fixed contracts and at 66.
Production is supposed to actually recover sequentially.
Sequentially.
So what is actually getting worse that kind of gets us to sub 60.
For Q4.
Okay.
Part of it clearly is.
Yes.
Sumption alright.
And of course.
And FX impact.
Pat.
Got it.
A bigger impact.
Slightly towards the end of last quarter, but certainly in Q4.
And then.
As I said, we haven't included any one time deals.
And the.
And the guidance for Q4.
Okay.
I'm sure I'm going to increase from the $19 million that you had in Q3 and there weren't that many one time deals in Q3 anyway right.
But it is a drag effect, though.
Fixed contracts that you've done previously.
Yeah.
So the consumption will be greater than $19 million.
Hey, good here.
We don't guide specifically on consumption.
Okay.
We're thinking about going into 'twenty, three you've Jon I think $69 million of fixed year to date service checkout with that 40 rural.
I mean, how should we think about the drag into next year, because I'm kind of trying to figure out this consumption additional track.
Is it.
Kind of be in other.
2000, 30 million step down I mean, any color you could provide in terms of the overhang.
As you kind of Institute this policy into next year.
Lots of <unk> as I said with the additional disclosure that we did this quarter you should be able to.
Make some assumptions and model out.
Sure.
The pro forma royalties.
The consumption utilizing the fixed contracts and disclosure around prepaid and minimum commitment deals.
And then as I said this kind of guidepost that says by 2025 thereabout, they're about equal.
Okay, and just lastly, if I go to slide 10, alright.
Pro forma royalties that you provided.
I mean year to date, you're down like 13% light vehicle production down five.
And I thought you were gaining market share.
Why are you underperforming light vehicle production year to date.
Even pro forma.
Yes.
It's driven by a lot by the Max.
Production of each of the Oems.
So in a quarter on quarter, Ken It can vary slightly.
But I think if you look at kind of a pro forma royalty against IHS production.
Got it.
It's a pretty consistent and in some cases a growing number.
Yes.
And also in my discussions with some of the Oems right. It's clear that they are also producing and delivering cost.
But they're in some cases not fully equipped with <unk> chipsets, where needed and we are looking for.
Okay, alright, thanks for taking my questions.
Thank you.
One moment for our next question.
Okay.
Our next question will come from Nicholas Doyle of Needham <unk> Company. Your line is open.
Hey, This is Mike Doyle on for Rajeev, Gail and thanks for taking my question.
I'll just ask.
What has the customer reaction been so far to your policy change I mean, you talked about a little bit.
I would imagine that that $40 million.
<unk> would get filled up pretty quick.
Any commentary around that.
Well first of all we have.
Now, let's look at our earnings call.
Call today.
But this is a internal.
Company policy, it's not going to be widely communicated to our customers.
Our customers here and that's why we've provided some flexibility here with the 40 million Gulf forward, Paul what number.
And as Stephane alluded to.
We're in a position where we're not going to do any in Q4.
Again because of.
Some of the.
Currency and other factors that are causing customers to ask for.
Discounts and concessions that we just can't accept.
And that just becomes a business conversation between those customers and us and as Stephane pointed out we have very very strong relationships that go back many years with these customers and they understand business economic and business conditions.
As we've always said these are Ed.
Discussion.
And a negotiation between the customers.
And and severance.
Okay that makes sense I just didn't know if you.
You're saying you haven't even communicated that yet what the concerns I just didn't know if there is kind of for us.
Yes.
Okay. So with one specific customer we had already various discussion about this topic right and finally, they accepted our view.
Okay.
And then just for my second question you had mentioned the big win back with the Big Tech customer.
Can you elaborate there on kind of how you got that or anything more about that deal.
Yes.
No.
A couple of aspects to consider a REIT. So so first of all right. We have no ariva sharp focus on our core business.
Meaning.
Excellent delivery excellence and driving innovation.
And you know it.
S in general.
We have shown for the first time, our new so called one assistant with one cloud underlying one six yes.
It's really compared to the state of our big improvement drawing to an ambitious new stick we are setting a new de facto standard for the industry.
And we had various meetings starting also with a proof of concept. So we built a prototype together versus specific.
It was shown to the senior management up two board members and the CEO and really excited about this performance.
Yes.
A couple of days ago, we got into the official nomination letter.
Thank you.
Thank you.
And again to ask a question. Please press star one one on your phone.
One moment for our next question.
Our next question will come from Gavin Kennedy of Jefferies. Your line is open.
Hi team. This is Gavin Kennedy on for David Kelly.
Switching gears, a little bit on slide nine you mentioned that connected services declined in the quarter, given declining legacy contract renewals revenue and expiring contracts.
Can you just remind us about the how we should think about the cadence going into <unk> and then into fiscal year 'twenty three for connected services.
As we have said.
One of the biggest drivers.
Toyota legacy deal and.
We've shown you that Barry it's.
It's just an amortization schedule. So we know exactly what the impact of that is and we've disclosed that and we've talked about these older.
Contracts based on all of the technologies that are that are kind of winding down we've talked about kind of the $5 million impact on that.
Clearly the other thing that's happened is.
During the pandemic with slow our production units, we've lost a bit of the.
The size of the curve of the amortization schedule of connected services.
But we see we see that improving.
As these headwinds.
Get towards the end of their implications and then as Stefan said, we continue to win.
A lot of deals, which you can talk about so on a go forward basis, we see strength in our in our connected revenues maybe let me also add a few remarks here right. So when looking at our analytics portal, we see that the number of transactions are now back to pre Covid time, that's a good indicator.
As I also mentioned during last earnings call I said, 40% of our backlog is for connected services.
And also that two of our three largest deals in the company's history are related to connected services right and they will hit the roads mid of next calendar year right.
And as Tom already alluded to right. Most of the deals. We have signed recently have this hybrid component, meaning edge cloud connected services.
And we will see also some upgrades of some older versions in the market over the next.
A couple of quarters.
Great. Thanks, and then maybe as a follow up.
Amid the change in the fixed contracts as well as the ongoing macro volatility.
Any thoughts on potential cost cutting measures or how we should think about margins going forward with near term revenue pressure.
Yes.
I mean, you know already.
Jim.
Recently, we thought that was an exercise here also internally.
We call it convergence right. So in the past you know.
We had for opioids, we consolidate the <unk> and we have now across all <unk> with the same technology stack.
That said, it's a so called one assistant one cloud.
One core technologies, that's one important aspect here convergence.
So increase productivity and reduce costs in general, especially when it comes to the one cloud solution.
Secondly, Thomas driving two programs.
Maybe Tom you want to yes.
We are driving to projects and Q4 are one way kind of colored NAND eye to eye innovation to implementation and Thats looking at our R&D resources, and our professional services resources and product management.
Playing upon what Stefan just said around some of the technology convergence that we have.
It is also aligned to.
Our strategy exercise and we did.
Which was just completed by <unk>.
How do we operationalize that plan as we finalize our FY 'twenty three budget and above our plan.
Yes.
And we're using an external.
Partner to help us with the III project.
Affirm that I used quite successfully.
So we have a lot of experience with them and we understand their methodologies.
Allergy and process.
And then we're internally running a project to look across all of the other functions within <unk>.
Within the company with an eye towards continuous improvement continuously to drive efficiency and productivity both of those projects will be completed.
In Q4.
And.
We will have an implementation plan for FY 'twenty, three going forward and they will certainly.
Advise are our operating plans our budgets in our multiyear plan.
Going forward.
Okay. Thanks, Tim.
Thank you.
Our next question.
And our next question will come from Jeff Van <unk> of Craig Hallum. Your line is open.
Great. Thanks for taking my question. So I've got several first I just want to circle back to the guide down so on the quarter, we're looking like $43 5 million give or take below consensus for Q3.
You're telling us you're going to zero out the fixed number of 23 give or take.
Just can you give me as close as you can to break down the remainder of the shortfall I know you've addressed it in sort of tangential ways, but can you put a little precision on that.
We don't specifically guide by.
Line of revenue, but as we talked about.
It's the <unk>.
Zero fixed contracts.
The change in consumption.
We've pushed out.
Out of the guidance there is still opportunities, but they are very unpredictable around specialty deals.
Those are kind of one time.
Activities.
We have.
We've got a lot of wins, but we are seeing a slower bookings to revenue conversion for some of our adjacent markets.
And a couple of areas and then of course the FX is.
As a piece of that.
Did bookings and win rates meet your expectations, how did it perform in the quarter.
Well, we don't report bookings.
Except for twice a year, so we'll be updating that in.
At the end of the year for the second half and for the full year.
We are confident in meeting our internal targets on on bookings.
And.
Well, we put out at the at the end of Q4 spot pricing.
Indication again.
We've had a lot of elimination.
Youre right.
Let me just say, what I said before right.
We see fracturing program before EBITDA emergency vehicle detection.
Final contract.
Market in North America.
Okay.
In Q3.
On the Adjacencies right, we see more demand here from trucks.
RV now recreational vehicles right to relaunch.
<unk> is a bit slower in production as originally anticipated.
But other than that I think.
Good for twinning trickier overall also in China.
Just mentioned also in the openings that.
First three customers of our new <unk> cloud services solution.
Annie's Oems right followed by Vietnamese.
That means one in some European Oems right. So that's clearly.
It isn't the bunker trust.
And so a very high.
Innovation roadmap Ryan we are thinking about exterior speed shrunk immersive entertainment with our hour.
Solutions for sound effects right, we brought in Arlington, our new cloud safety aspects for example.
<unk> driver behavior right.
<unk>.
Colocation tracking right, including Geo fencing right. These are new things, we have added two new cloud and we have also signed the contract in this area.
Last quarter.
So overall as Tom said, we are on track for and totally targets.
Okay.
One last if I could the other license revenue slash.
Specialty deals I think you had a big one in the September quarter and December quarter, and then if I recall I thought in the March quarter on the reset of guidance you've de risked it and said these are too unpredictable and we're taking them out just to be clear I mean, how material what were you expecting there because I thought that was already de risked.
There was stellar.
As I think.
Some deals that we thought we had an opportunity.
But those have in advance as quickly as we thought.
Okay I'll leave it there thank you.
Thank you.
As there are no further questions Andy Q.
I would now like to turn the conference back to Richard <unk> for closing remarks.
Thank you, Chris and thank you for everyone for joining the call. This morning, we look forward to speaking with you in the near future. Thank you.
This concludes today's conference call. Thank you all for participating you may now disconnect and have a pleasant day.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Okay.
Yeah.