Cerence Inc. Q2 2023 Earnings Call
Yeah.
Good morning, and thank you for standing by and welcome to the <unk> second quarter 2023 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
To ask a question during the session you will need to press star one one on your telephone you will then hear an automated message advising you that your hand is raised to withdraw your question simply press Star one again.
As a reminder, today's conference is being recorded.
And I would now like to hand, the conference over to your speaker today, Rich, you're gaining senior Vice President of Investor Relations Rich. Please go ahead.
Thank you Eric welcome to <unk> second quarter fiscal year 2023 conference call before we begin I would like to remind you that this call may involve certain forward looking statements any statements that are not statements of historical fact, including statements related to our expectations estimates assume.
<unk> goals targets and plans should be considered to be forward looking statements starts makes no representation to up to update those statements. After today.
These statements are subject to the risks.
Uncertainties, which may cause actual results to differ materially from such statements 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 nine 2023, and our Form 10-K filed on November 29 2022.
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 in the IR section of our website join.
Joining me on today's call are Stefan <unk> CEO of <unk>, and Tom Bogan CFO of service as a reminder, the only authorized spokespeople for the company are Stephane, Tom and me.
Before handing the call over to Stefan I would like to mention that we have several investor conferences in the next few weeks. Please refer to the upcoming events section of our IR website for specific dates and conference information.
Now onto the call Stephane.
Thank you rich and welcome everyone and thank you for joining us to discuss our second quarter earnings.
We delivered solid results with revenue of just over 68 million coming in above the high end of our guidance in.
In addition, our strong focus on operational excellence contributed to most profitability metrics.
Roaming better than expected.
This includes generating free cash flow of over $5 million in the quarter. Our core auto business continues to perform well with our global auto penetration rising to 53% that means that 53% of total new global light vehicle production includes some level of technology from <unk>.
Tom will provide the details of our performance in a few minutes.
We continue to maintain a strong competitive position position against both niche players and consumer Tech.
Bookings for the first half of the year included multiple strategic wins with a solid pipeline of identified opportunities. We expect a strong second half of bookings.
Cross currents remain in the macroeconomic environment, while semiconductor shortages for the auto industry are incrementally better.
The uncertain effects of rising interest rates and a slowing global economy on auto demands remain in place offsetting any likelihood for a near term significant ramp of production.
Our fiscal year IHS is forecasting 4% growth.
Okay.
This is slightly better than our original assumption of 3%. Accordingly, we have raised the low end of the range for our full fiscal year revenue guidance from 275 million to $280 million.
While it is a recent event and not part of our Q2 results I am excited to announce it but our shot as our new Chief Technology Officer.
Part will lead <unk> global technology and platform organization responsible for providing leadership for our technology vision building innovative user experiences and extra rating our roadmap.
<unk> impressive carrier and technology dealership includes senior technology engineering and product development roads at Motorola.
<unk> and de Novo.
He brings a wealth of experience having shape some of the most exciting technological developments of the past decade, including industry first innovations like the original drive smartphone <unk> Trust Android tablet the first mobile AI voice assistant.
The Trust Android smartwatch.
But it has deep expertise across AI.
<unk> software and mobile technologies that will be immensely valuable not just for our automotive and transportation customers, but also as we look to potential expansion opportunities outside of transportation.
I am very excited to have <unk> as part of our execute the leadership team to help us achieve our destination next innovation goes working closely with new Chung, our chief product officer.
I am very confident that <unk> will be a critical leader as you continue to spearhead the industry and applying AI in innovative ways towards the transportation market.
Moving onto bookings, which for the first half 263 million. This is up 11% from the second half of fiscal 'twenty. Two Additionally, while the timing of when bookings occur is always difficult to predict the pipeline of sales opportunity joining fees for the second half look.
Strong in the first half we had seven very important strategic wins, including three <unk> two from customer Tech companies.
And one from a niche competitor.
In Q2, a key win back was for connected services for a global luxury brand for the North America region.
This win further validates the competitive strength of our solutions building off the success with this customer and other regions.
An added benefit because we are already delivering these cloud based capabilities for this customer and other regions. The implementation of our solution for North America, it's shorter.
They will be switching over to our solution in North America later this calendar year.
One of the other strategic wins during the first half was the largest carmaker in China to support its global expansion.
We will provide <unk> assistant capabilities and more than a dozen languages.
Consistent with other China Oems turning to certain solutions as they look to expand that business globally, demonstrating our unique leadership.
And the broad portfolio of languages, we support.
The other strategic wins were in Europe , India, and the U S.
These strategic wins reinforced the strong competitive position, we hold and the continued superiority of our technology and solutions with AI at the core of our product innovation, we remain sharply focused on leveraging new technology to bring innovative new products to the transportation and Iot markets.
One such example is recent enhancements we made to <unk> cartilage are valuable products for automakers and the driver that enables real time credible intelligence about all aspects of the car. Most recently, we have leveraged <unk> developed in our rate.
Of AI and large language model to enhance cartilage, demonstrating our continued ability to leverage the latest in AI innovation to further improve the <unk> experience.
With this enhanced version drivers can ask questions about the cost features vehicles status and more.
Our knowledge leverage data from the cloud center combined with user manual data to provide specific tailored answers because the responses are source purely from OEM provided data and tailored to the specific car. The driver can be confident the results are accurate.
<unk> current launch is becoming very popular with Oems with a strong pipeline for the enhanced version.
During the quarter. We also released our newest version of <unk> assistant.
The foundational technology for the immersive companion experience.
This latest version includes new features like just talk emotional TTS <unk> capabilities.
<unk> Apple music integration.
Just talk it's just added songs instead of pressing a button on the steering wheel are seeing highest clearance to drive us peaks simply what they want to do and the code would understand if it is a request for the assistant to respond to but whether the person was talking to another person in the car no more need for.
Weak upfront just talk to your car like you would to another individual.
Truly groundbreaking technology. This technology is currently being integrated into numerous cedars bends platform shipping this summer in the E class.
The first two two beta customers started production into two was our <unk> product and we expect two more in Q3.
At its core <unk>, our assistant technology, but enhanced to provide unique features for the tubular market.
These features include applying our audio AI technologies, and new ways to account for the open cabin noise environment of a two wheeler.
As you would expect the margin environment creates some unique challenges for natural language understanding, but our team has done an amazing job achieving the <unk> eleventh's needed for achieving an enjoyable user experience.
During Q2, we continued to enhance several key AI technologies, including our neural network based emotional Texas Beach product using our emotion detection technology. The assistant can address the emotional states of the driver for example, if a driver is experiencing road rage assist.
Can respond in a common voice using the appropriate pitch and inflection. Accordingly. This is similar for other situations, including fear surprise orthotics.
It is truly amazing to hear how our technology can deliver broadband responses based on the drivers of emotional state.
We also continued to refine and expand coverage for our emergency vehicle detection technology.
There are upwards of 1500 unique emergency vehicles selling through our global it and we believe we offer the most extensive and accurate coverage in fact, one of our customers compared our <unk> solution to Argos and our AI based technology came out on top.
The other significant advancement, we made in the quarter, both with our voice biometrics capability.
We have developed an updated version of this technology much like fingerprinting is useful identification our voice biometric product can identify unique human characteristics and persons voice that can be used for digitally and identifying a person to provide access to our systems devices our data.
In an era, where voice is an increasingly popular enabler of many different types of transactions being able to accurately recognize who is placing an order or making a request is vitally important.
On the innovation front I'm really excited about what our engineering teams have done to elevate our product offering.
And I'm equally excited about the new innovations, we will be bringing to market under the leadership of <unk> and <unk>.
Before I hand, the call over to Tom to review, our two tumor size and Q3 guidance in detail I would like to summarize our priorities I've set for the company for the full fiscal year.
It is all about operational excellence, which covers all aspects of our business from meeting and exceeding our customers' expectations securing a strong second half of bookings managing the business model and meeting our full year guidance.
The team at <unk> is well aligned and excited about delivering on these goals.
I will now turn it over to Tom.
Thank you Stefan I'll come back to guidance for Q3 in a moment.
But first I want to share more on our Q2 results.
Okay.
With our strong Q2 results, we are providing another positive data point and our goal to consistently deliver on our commitments.
Q2 revenue came in at $68 4 million above the high end of our guidance.
Due to a combination of better than expected strength in our core business with higher than anticipated contributions from license connected services and professional services.
<unk> contracts and consumption of existing fixed contracts in the quarter.
With expectations.
Based on the higher revenue, we exceeded most of our key profitability metrics, we guided for the quarter.
non-GAAP gross margin was 65, 3%.
non-GAAP operating margin was negative.
1%.
Adjusted EBITDA was $2 5 million or three 6% margin.
And non-GAAP loss per share was <unk>.
With the exception of non-GAAP operating margin and adjusted EBITDA.
Metrics came in above the high end of our guidance, including a 3.8 million reserve for bad debt with that specific EV customer.
So all of the metrics.
non-GAAP operating margin and adjusted EBITDA were at the midpoint of the range.
During the quarter, we returned to positive cash flow as expected.
Cash flow from operations was approximately $6 6 million.
Our balance sheet remains strong with total cash and marketable securities of approximately $123 million.
There is a breakdown of revenue for the quarter.
Variable license revenue was up 30% from the same quarter last year, and essentially flat quarter over quarter.
The increase compared to last year were due to lower consumption of fixed licenses.
Lola improving auto production and increasing penetration.
New connected services revenue was down 5% from the same quarter last year and up 6% from last quarter.
The year over year decline was the result of several previously disclosed factors such as lower production of connected cars over the last three fiscal years due to semiconductor shortages.
And expiring contracts for all of the technology.
From a legacy contract.
Finally, our professional services revenue was down 10% year over year and down 6% quarter over quarter.
Professional services will vary based on the progress on completion of customer projects as the pro services team and clients. The individuals we directly interface with customers to customize and implement sciences technology on next generation OEM platforms.
We don't see professional services revenue growth driver for the company, but instead it acts as an enabler for future licenses and connected revenue.
Moving on to the details in our license business.
Overall, the license business remains strong and is indicating slow improvement from the issues that have plagued auto production over the last few years.
Pro forma royalties were up 7% year over year, and 2% quarter over quarter due to increased auto production and penetration of our technology.
As far as the third quarter in a row of pro forma royalty growth.
We signed fixed contracts in the quarter were at $4 $6 million.
All as prepay contracts.
This was in line with our estimates going into the quarter of approximately $5 million.
We continue to manage fixed contracts to an approximate $4 million level for the full year.
We initially had expected to execute on approximately $15 million of fixed contracts in Q3.
We now expect no fixed contracts in Q3, and then the range of 5 million to $15 million in Q4, as we continue to negotiate these opportunities.
Full year FX contracts are now expected to be in the range of 29% to $39 million.
Consumption of fixed licenses declined 13% compared to the same period last year.
The majority of our Kpis continue to indicate strengthen the business.
Penetration of global auto production for the trailing 12 months increased to 53% from 52% last quarter.
This means over half of global auto production include some level of <unk> technology.
Of the total of 11 8 million cars with <unk> technology, those that use our connected services increased 27% quarter over quarter.
We also saw a large increase in monthly active users, 29% year over year, indicating increasing popularity among consumers of our technology.
The billing as per <unk> declined, 9%, including a negative FX impact of three percentage points.
Okay.
Now turning to revenue guidance for Q3 and the fiscal year.
One factor that will have an impact on our quarterly revenue is the value of a fed cut fixed contracts in the second half of the fiscal year.
As I mentioned earlier, we expect fixed contracts of approximately <unk> <unk>.
Q3, and $5 million to $15 million in Q4.
Taking that into consideration, we are guiding revenue from $58 million to $62 million for Q3.
With the first half behind us and taking into account the expected contribution range from fixed contracts in the second half we are raising the low end of our fiscal year guidance from $275 million to $280 million.
You can see on this slide the revenue guidance and the effect of the associated financial metrics.
Overall, the business continues to perform as we outlined at the beginning of the fiscal year and we remain focused on innovation.
Operational excellence and strong bookings in the second half to achieve our long term goals.
This concludes our prepared remarks, and now we will open the call for questions.
Thank you gentlemen at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw your question simply press Star one again.
Alright, standby, while we compare compile the Q&A our officer.
And our first question comes from Jeff Van <unk> with Craig Hallum Capital Group, Jeff. Your line is open. Please go ahead.
Great. Thanks for taking the questions guys, a real nice quarter it looks like.
<unk> is tracking well and connected units a bunch of things for <unk>.
In terms of the billings per car TTM, I think thats decelerated last couple of quarters, it only metric or one of very few going the wrong way, what's going on with the billing.
<unk> per unit.
Thanks, Jeff.
It's a little better.
In our mix.
And how the Oems are at <unk>.
Each quarter. We also noted that there was an FX impact this quarter.
And some of that is also.
<unk>.
The implementation of new project or projects and programs, which.
As we've talked about previously some of the new ones do carry a higher <unk>.
Those are really driven and dictated by the OEM. So some of that is how quickly theyre getting those.
Programs enter production and therefore.
The billings on the royalty reporting.
Flowing through the financials job out of it is mix a bit of it is FX and then a bit of it is.
A slight delays in some of the newer programs.
How do you think about that number maybe over the next steel a little longer duration over the next year or two.
Well, it's critical I mean, as we talked about at Investor day, and as we continue to drive stronger bookings, particularly with some of the new innovation in the technologies that.
That Stefan and talked about.
They'll have.
We still have expectations growing PPE is on both the embedded and the connected side of the house.
Okay.
Great and then just one other.
Obviously.
At the November Investor Day, you talked about the sort of projections or target models for the out years not formal guidance, but gave us a sense of a pretty dramatic EBITDA growth in FY 'twenty four.
But you said it hinged on startup production in particularly.
Both on the two Wheeler side as well as you were just talking about some of these price uplifts come into new contracts that have yet to go to start of production. So I guess the question is start to production both on the key automotive platforms as well as the two wheelers just talk about how those are tracking.
Well, we continue to drive those implementations with the core Oems I mean, well, we're not updating any of the future year periods. At this site, we'll do that at the end of the fiscal year.
And then as Stephane talked about we continue to have.
<unk> win backs and program wins kind of as reflected in the bookings.
So let me address things good morning, Jeff here good morning, guys.
I think we're making we're making good progress here with all Oems.
Also with this leading Chinese OEM right, but also with European and North American Oems.
On the two Wheeler side, we have in total now seven wins.
Great here.
Two two readers went live in Q2, we are expecting another big S&P in India, one of the top three to Reno manufacturer and then a legendary brand will go live in Q3 in North America.
Okay, Alright, great and last one then just you commented several times about the strength of the pipeline and what it's looking like at this point, maybe just expand a little bit any particular geographies products kind of coexist environments. What do you. What are you noticing that pipeline other than obviously it sounds like the magnitude is got you pretty excited.
So I think you know we have just launched.
Just talk that was also presented by all our colonial CEO of Mercedes.
This is a novel feature as you can imagine.
We see a great appetite for our new power knowledge with generative AI and we have also.
Created the very cost sensitive approach here, we all know that Cherokee produced quite expensive, but we're doing that also for a couple of years now broken with Swatch language models here.
We see also new appetite here for EBITDA emergency vehicle detection.
We are progressing.
From my point of view, an excellent way with our new surgeons assistance from aren't we.
We had also various strategic design wins again Big picture. So we are on track in my view.
Great. Thanks, so much.
Okay standby for our next caller.
And the next question comes from Colin Langan from Wells Fargo. Colin Your line is open. Please go ahead.
Oh, great. Thanks for taking my questions.
Just wanted to follow up on the bookings.
I think you reported 263 million the full year last year was I think 648, so if I annualize the first half pace. It does seem like a step down from what you were doing full year last year.
Any reason for moderation or some of these contracts getting sort of pushed into the second half.
How should we think about that.
Hey, good morning, calling in thanks for the question here so.
The bookings are lumpy and difficult to predict the.
The timing here.
I think when comparing.
This first half of 'twenty three versus the second half of 'twenty two.
C.
Growth of 11%.
Which is not bad at all.
We have a very strong bookings pipeline.
<unk> identified solid opportunities for the second half.
<unk>.
We are quite confident that we will also.
Brokerage opportunities in really strong bookings.
Okay. I mean is the thought that bookings this year will still grow or as last year, just a tough comp because it's so high we don't provide guidance on bookings here, but.
But also here we are on track what we also said at the earnings day.
I would just add that I would just add that bookings is the estimated value of the length of the entire contract and.
The length of those contracts can vary quite widely by Oems.
Sometimes theyre five years seven years, we've seen 10 year contracts.
So some of that Lumpiness.
We can still be winning significant amount of platforms and as we've talked about we've had a number of win backs we haven't had.
Many losses at all.
And Thats why at the end of last year, we tried to move to this kind of five year backlog model, which we will update along with our guidance at the end of the year, which I think is a good.
Indicator of kind of the medium.
<unk>.
To the to the visible revenue over the next 2345 years.
But I think as Stephane alluded to you know.
There was growth.
About the second half of last year and this first year and we have a strong pipeline for the second half.
Got it that's helpful color.
Just a quick question that you raise sales guidance and gross margin guidance slightly why EBIT and operating income are still unchanged is there sort of SG&A inflation or is it just sort of rounding.
Well we did.
We have to take a $3 8 million bad debt reserve against the specific.
<unk> customer.
We believe that customers also having issues with other with other vendors.
And that goes into G&A.
We made up some of that in the bottom line because we had some some FX impact we had some better interest.
Income.
And a couple of other factors so that's why.
You see a little bit of a shortfall we are still in the middle of the guidance level, but then we kind of made it up in Hawaii.
The other activities.
Got it alright, thanks for taking my questions.
Okay.
Standby for our next caller.
And the next question comes from Mark Delaney with Goldman Sachs. Mark. Your line is open. Please go ahead.
Yes. Thank you very much for taking the questions you mentioned a handful of win backs that were achieved in the quarter and you spoke on some of the technology capabilities that led to it but could you elaborate a little bit more on the pricing behind some of these win backs and did you have to price more aggressively perhaps in order to bring customers back to sorensen.
How does that feed into the <unk> commentary you previously articulated of that trending higher in the coming years.
Okay.
Morning, Mark.
I think it's all about a rock solid technology.
You can imagine right most of the Oems doing on a continuous braising basis evaluation and benchmarking.
And in Q2 that was actually where we beat.
Some niche play out here right now we are again back into.
To North America for connected services.
Nothing to do with the pricing scheme is auto both our expertise with AI.
It was a very improved.
Flowers the Istick what I also said in some of the lost earnings.
And we are bringing on some more and more our vertical expertise.
Yes.
No.
The order book performance of uranium.
Okay. So when you kind of look at these win backs overall that is still consistent with the view of increasing TPU.
Yes, yes, okay. Okay.
Okay and then thank you that's helpful. And then just my other one was around the revenue cadence <unk>. Tom you mentioned some movement around when some of these fixed contracts will be signed if I heard correctly, what was going to go into the fiscal third quarters now fiscal <unk>. What why is that moving around is there anything you guys are trying to do around getting.
Better margins and I was just sort of normal timing or anything else you can share on that or the reason for the step down in the third quarter, but then comes back and Jorge Thanks.
As I talked about we have a pretty.
We have pretty good visibility to the pipeline for fixed contracts as we have stated consistently this is a small group of tier one customers.
And so we we kind of know when.
That would be up for doing either.
New fixed contract is around expires or other activities and as we look at that pipeline further rest of the year.
We fail that we had a couple of these opportunities will be in a better position to negotiate those we really do want to control the discount levels on days.
And I think Stephane and I, it's much more important.
To do that because as we've talked about.
These are already won deals so are already achieving revenues on is the customer may be under our current <unk> contract.
Firing.
So I think it's important.
So really line up with the sales organization lineup with.
Well, even the customers in some respects around the timing of those and electron appropriate.
Win win.
Discount levels are low so that gives them some of the cost reductions that theyre looking for but also.
<unk> provides.
<unk> provides the effective cash flow, but not too high a discount.
That affects the consumption level on a go forward basis. So that's the only real reason.
Thank you.
Alright, please standby.
Our next question comes from Rajiv Gill with Needham Rajeev. Your line is open. Please go ahead.
Nick Doyle entourage ago.
Just wanted to ask again about the win backs I guess there are two this quarter and one last quarter.
So that was the fact your long term targets is it incremental or already included in the model you provided at analyst Day, and then if you could just talk a little bit more about how you on those back and if theres any difference.
Between winning back from the niche player versus the kind of big Tech partner. Thanks.
I'll handle the first part and then Stephane can talk about the akzo and back just from a financial modeling standpoint.
We have.
Bookings expectations to drive the medium and long term goals and sometimes they come from extensions and some times they come from new platforms and models in some cases, they come from wind back so.
All of these factors help us to to drive towards the longer term models, which will rollout and in November .
And I have been looking at sea.
Technical staff of our solution right.
<unk> were driven actually by our new <unk> assistant.
We could convince that this new solution is easy to integrate we could also show on Oem's platform the.
The benefits in terms of user experience in terms of accuracy and also in terms of fast response time behavior right and we.
We addressed all the vertical needs for the Oems with full flexibility for customization on top of our student assistant and also offering the so called coexistence.
Thanks, and then for my follow up.
What are your assumptions for the auto Saar in 2020 four and was the entirety of the raise really driven by that kind of.
This increase.
Thanks.
I assume you meant 23.
So yes, we had originally.
Model than about 3%, which at the time was significantly less.
Jeff So I think they're at like seven they are.
Moved up to four so as we looked at our royalty reporting I think we are back in line with them at about 4% and IRI raises Israeli.
Some portion of that plus as you saw we've increased the penetration.
By a point over the trailing 12 months. So it's a combination of those factors.
Thanks.
Alright.
Sure.
Okay.
Thank you all for joining us this morning.
We will be in touch and hopefully see you on some of the upcoming conferences and investor events. Thank you and have a good day.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Okay.
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