Q4 2023 Cerence Inc Earnings Call

Okay.

Speaker 1: Good day, and welcome to the Stearns Q4 2023 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. As a reminder, this call may be recorded. I would now like to turn the call over to Rich Gherganian, Senior Vice President of Investor Relations. You may begin.

Good day and welcome to the <unk> Q4, 2023 earnings call. At this time all participants are in a listen only mode. Later, we will conduct a question answer session and instructions will be given at that time.

As a reminder, this call maybe recorded.

Now I'd like to turn the call over to Richard Gagnon Senior Vice President of Investor Relations you may begin.

Speaker 2: Welcome to services fourth quarter and full fiscal year 2023 conference call.

Thank you.

Welcome to services fourth quarter and full fiscal year 2023 conference call.

Speaker 2: 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, assumptions, strategy, goals, targets, and plans should be considered to be forward-looking statements. So let's make no representations to update those statements after today.

Before we begin I would like to remind you that this call may involve certain forward looking statements. It makes.

Statements that are not statements of historical facts, including statements related to our expectations estimates assumptions strategy goals targets and plans should be considered to be forward looking statements search makes no representation as to update those statements after today.

Speaker 2: These statements are subject to risks and uncertainties which may cause actual results to differ materially from such statements, as described in our SEC filings, including the Form 8K with the press release preceding today's call, and our Form 10-Q filed on August 8, 2023, and our most recent Form 10-K .

These statements are subject to risks and uncertainties, which may cause actual results to differ materially from such statements.

Described in our SEC filings, including the form 8-K with the press release preceding today's call in our Form 10-Q filed on August eight 2023, and our most recent Form 10-K.

Speaker 2: 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.

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

Speaker 2: and reconciliations of non- GAAP measures to the closest gap equivalent.

Speaker 2: The press release is available in the IR section of the website.

The press release is available in the IR section of the website joining.

Speaker 2: Joining me on today's call are Stefan Ortmann, CEO of Cerns, Tom Bolton, CFO of Cerns, and Neal Sharns, our Chief Product Officer.

Joining me on today's call are stuff aren't orphans your old search so on both the CFO search and Bill <unk>, our chief product Officer.

As a reminder, the only authorized spokespeople to the company or Stephane.

Speaker 2: Before handing the call over to Stephan, I would like to mention that we will be present at the Wells Fargo Seventh Annual TMT Conference tomorrow, November 28th, the UBS Industrial Summit on November 29th, and the Raymond James TMT and Consumer Conference on December 5th. Now onto the call, Stephan.

Before handing the call over to Stefan I would like to mention that we'll be present at the Wells Fargo Seventh annual TMT Conference Tomorrow November 28, the UBS Industrials summit on November 29th and Raymond James TMT Consumer Conference on December <unk> tests now once of the call Stephane.

Speaker 3: Thank you, Rich. Welcome, everyone, and thank you for joining us to discuss CERN's fourth quarter, full fiscal year results, guidance for fiscal 24, and the update to our multi-year target.

Thank you rich and welcome everyone and thank you for joining us to discuss <unk> fourth quarter full fiscal year <unk> guide.

Guidance for fiscal 'twenty, four and the updates to our multiyear targets before I review the highlights of the fourth quarter and fiscal year, Let me start by saying how excited I am about the future of <unk>.

Speaker 3: Before I review the highlights of the fourth quarter and fiscal year, let me start by saying how excited I am about the future of CERN. We remain well positioned to benefit from the execution of our strategy to build an immersive cabin experience, and these efforts are only enhanced by the rapid advancement and application of AI within our leading-edge solution.

We remain well positioned to benefit from the execution of our strategy to Burton immersive cabin experience and these efforts are only enhanced by the rapid advancement and application of AI with our leading edge solutions.

Speaker 3: We continue to build out innovative new capabilities based on advanced automotive, great large language models and generative AI. We are already seeing a high level of interest and traction across our OEMs regarding these initiatives.

We continue to build out innovative new capabilities based on advanced automotive grade large language models and genotypic AI.

We are already seeing a high level of interest and traction across our Oems regarding these initiatives.

Speaker 3: We have had some incredibly strong additions to the leadership team over the last year. You met Iqbal Arshad on our last earnings call, who joined us in May as our chief technology officer. And most recently, Christian Menz, joining our team from Amazon as our chief revenue officer.

We have had some incredibly strong additions to the leadership team over the last year Youll met.

But our last earnings call, who joined US as our Chief Technology Officer, and most recently, Chris Young mens joining our team from Amazon as our Chief revenue Officer.

Speaker 3: Iqbal and Christian work in close collaboration with Nils Schanz, our chief product officer. You will hear from

<unk> and Christiane work in close collaboration with knee Chung, our Chief product Officer, you will hear from him in a few minutes.

Speaker 3: We now have an extremely strong management team to guide the company forward, especially as generative AI and large language models accelerate transformation across transportation and beyond.

We now have an extremely strong management team to guide the company forward, especially as north of AI and logic language extra rig transformation across transportation and beyond.

Speaker 3: No company is better positioned, prepared, or trusted than CERN to guide and support automakers and mobility OEMs as they navigate the best path to providing their customers with an immersive, intuitive, in-cabin experience.

No company is better positioned prepared but trust had been suren to guide and support our toolmakers and mobility Oems as they navigate the best path to providing their customers with an immersive intuitive in cabin experience.

Speaker 3: Building off of our Destination Next strategy that we shared last year's Investor's Day, we are deeply focused on leveraging our state-of-the-art AI technology in two ways. First, enhancing our current software platform with products that enable OEMs to quickly, easily, and cost-efficiently deploy new AI-driven applications to their drivers via over-the-air apps.

Building off of our destination next strategy that we shared last year's Investor Day, we are deeply focused on leveraging our state of the technology in two ways first.

Enhancing our current software platform with products that enable Oems to quickly easily and cost efficiently deploy new AI driven applications to drive us buyout over the air update.

Speaker 3: and second, by creating a unique user experience with cutting-edge automotive certified large language models. You will hear more from me

And second by creating a unique user experience with cutting edge out automotive certified natural language models.

You will hear more from Neal on that in a moment.

Speaker 3: Due to the significant shift in our industry, we see further opportunities to position ourselves for growth. Therefore, we have slightly pivoted our strategy over the short term to capitalize on these exciting industry trends.

Due to the significant shift in our industry, we see further opportunities to position ourselves for growth. Therefore, we have slightly pivoted our strategy over the short term to capitalize on these exciting industry trends.

Speaker 3: While this opportunistic evolution of our strategy had an impact on targeted revenue for some of the outer years in our multi-year plan, our long-term performance targets remain unchanged. We believe that our focus moving forward will help us to accelerate the realization of our vision and to deliver on our performance targets of achieving double-digit revenue growth and approximately 30% adjusted EBITDA margins starting in fiscal 2021.

While this opportunistic evolution of our strategy had an impact on targeted revenue for some of the outer years and our multi year plan. Our long term performance targets remain unchanged. We believe that our focus moving forward will help us to accelerate the realization of our vision and to deliver on our performance targets are achieved.

Double digit revenue growth and approximately 30% adjusted EBITDA margin starting in fiscal 'twenty six.

Speaker 3: With that, I would like to point out some of the highlights from Q4 and the full fiscal year.

With that I would like to point out some of the highlights from Q4 and the full fiscal year <unk>.

Speaker 3: In Q4, we delivered solid results with revenue of approximately $81 million, well above the high end of our guidance. Our core auto business delivered strong results, with our global auto penetration staying strong at 54% on a trailing 12-month basis, which is a testament to our 60% growth.

In Q4, we delivered solid results with revenue of approximately $81 million was above the high end of our guidance.

Our core auto business delivered strong results with our global out the penetration stays strong at 54% on a trailing 12 month basis.

Which is a testament to our significant value at.

Speaker 3: Our innovation and strong capabilities continue to translate into significant new business. We secured several strategic wins during the quarter, including three in automotive and another in the two-wheelers.

Our innovation and strong capabilities continue to translate into significant new business, we secured several strategic wins during the quarter, including three in automotive and another in the two Wheeler space.

Speaker 3: One of the automotive things was to support the global expansion of a major Chinese OEM, a continuing trend that we have benefited from given the extensive language needs required at OEMs and the new market.

One of the automotive fence was to support the global expansion of a major Chinese OEM.

Continuing trend that we have benefited from them given the extensive language needs required at Oems enter new markets.

Speaker 3: You may recall that on our Q3 conference call, our CTO Iqbal Ashat shared with you our strategy for incorporating the latest developments.

You may recall that on our Q3 conference call our CTO <unk> shared with you our strategy for incorporating the latest developments.

Speaker 3: in generative AI and large language models into our current product offering.

In general.

Large language models into our current product offerings.

Speaker 3: This has been extremely well-received by our customers, leading us to deliver more than 15 proof-of-concept programs globally during Q4. On today's call, Nils, our Chief Product Officer, will provide some insight on how innovation in our current product line-up is expected to serve as the foundation for our future product vision and strategy. We have already shared our plans.

This has been extremely well received by our customers leading us to deliver more than 15 proof of concept programs globally during Q4.

Today's call is our chief product officer will provide some insight on how innovation in our current product line up is <unk>.

Expected to serve as the foundation for our future product vision and strategy.

We have already shared our plans with select customers.

Speaker 3: And I'm very excited by the extremely promising feedback. I hope you will be able to visit our booth at CES to witness the new product in action.

I'm very excited by the extremely promising.

Promising feedback.

Hope you will be able to visit our booth at CES to witness a new product in action.

Speaker 3: Moving on to review the full fiscal year, I'm very pleased to say that we delivered on our commitments for FY23, including revenue and all key profitability metrics we provided last November . Importantly, we remain committed to a strong focus on operational excellence.

Moving on to review the full fiscal year I am very pleased to say that we delivered on our commitments for FY 'twenty, three including revenue and our key profitability metrics. We provided last November.

Ultimately, we remain committed to a strong focus on operational excellence.

Speaker 3: In FY23, we had 14 strategic wins. These wins come from across the globe and included five competitive win backs from both, niche and consumer tech competitors.

In FY 'twenty, three we had 14 strategic wins these.

These wins come from across the Globe and included five competitive win backs from both Mitch and consumer Tech competitors.

Speaker 3: Our core product sales assistant had nine design wins during the year, including the first win for a Chinese OEM's domestic program.

Our core products assistant at nine design wins during the year, including the first win for a Chinese Oems domestic program for.

Speaker 3: For one of these customers, we were able to achieve start of production in just four months. Overall, we hit start of production for more than 17 platforms that utilize our latest solution.

For one of these customers we were able to achieve start of production in just four months.

RV hit start of production for more than 17 platforms that utilize.

Our latest solutions.

Speaker 3: We also continue to make good progress in adjacent transportation markets, bringing two more two-wheeler customers during the year for a total of nine.

We also continue to make good progress in adjacent transportation markets, we need to more to meet our customers during the year for a total of nine.

Speaker 3: including some of the most recognizable names in the market. It's important to note that we have won every two wheeler opportunity that we have pitched against both small and consumer tech competitors. We had our first start of production with five previously won two wheeler customers and expect those revenues to begin ramping in fiscal year 24.

Including some of the most recognizable names in the market. It's important to note that we have won every to be the opportunity that we have pitched against both smart and consumer tech competitors.

We had our first start of production was five previously want to meet our customers and expect those revenues to begin ramping in fiscal year 2004.

Speaker 3: We have also started to build a pipeline for our non-transportation business, also known as AIoT, with six design wins, two in North America and four in Asia-Pacific.

We have also started to build a pipeline for our non transportation business auto.

One is Iot with six design wins, two in North America, and four in Asia Pacific.

Speaker 3: You may recall we are currently limited to what technologies we can market outside of transportation because of the field of use restriction we have with NUANCE. Now, Michael.

You May recall, we are currently limited to what technologies, we could market outside of transportation because of the field of use restriction, we helped with new ones No Microsoft.

Speaker 3: We are in the last year of this agreement and come next October we will be able to freely take our scalable AI technology stack to any market where we think we can provide value.

We are in the last year of this agreement and come next October we will be able to freely take our scalable technology stack to any market, where everything we can provide value.

Speaker 3: As we previously discussed, we entered FY23 knowing that from a revenue and profitability perspective, it was going to be a transition year.

As we previously discussed we entered FY2023 knowing that from a revenue and profitability perspective, it was going to be a transition year.

Speaker 3: Overall, as a team, we are very pleased with our progress and as we look forward, we are very excited about our expected near and long-term future success.

Overall as a team we are very pleased with our progress and as we look forward. We are very excited about our expected near and long term future success.

Speaker 3: Before Tom reveals the financial details of our performance, we wanted to share how we are approaching the market from a product perspective.

Before Tom reviews, the financial details of our performance we wanted to share how we are watching the market from a product perspective.

Speaker 3: especially in light of the market dynamics and demand for AI-driven solutions.

Especially in light of the market dynamics and demand for AI driven solutions.

Speaker 3: At its core, there are three pillars that are key to our strategy.

At its core there are three pillars that are key to our strategy.

Speaker 3: The first is providing our customers with a tailor-made solution. Second, the immersive in-cabin experience will continue to grow in importance in the buying decision of the consumer. Therefore, creating a unique branded experience is a key focus for our OEM.

<unk> is providing our customers with a tailor made solution second the immersive in cabin experience will continue to grow in importance and the buying decision of the consumer.

Therefore, creating a unique branded experience is a key focus for our Oems.

Speaker 3: The third pillar is advancing natural human-like interaction. People will use a system if it is easy, intuitive, and responsive.

The third pillar is advancing natural human interaction people will use our system EV intuitive and responsive.

Speaker 3: Our deep vertical expertise in the automotive industry and extensive set of data in combination with large language models and generative AI technologies are the cornerstone of our OAM branded offering.

Our deep vertical expertise in the automotive industry and extensive set of data in combination with large language models and generative.

<unk> are the cornerstones of our OEM branded offering.

Speaker 3: With that, I'm pleased to turn it over to Neal Shantz, our Chief Product Officer and former Head of User Experience for Mercedes, to share a bit more about our product plans and technology vision. Neal, please.

With that I'm pleased to turn it over to Neal <unk>, our chief product officer, and former head of user experience, where mosquitoes to share a bit more about our product trends and technology Vichy needs piece.

Thank you Stefan.

Speaker 4: The recent advancements in generative AI and large language models have opened up a whole new world of opportunities.

The reason advancement and generate if AI and last language model have opened up a whole new world of opportunity.

Speaker 4: Cerens has a distinct role to play in the application of these technologies, using our unique deep understanding of automotive and transportation specific requirements and dynamics to ensure added value for the end user.

<unk> has a distinct role to play in the application of these technologies using our unique deep understanding of automotive and transportation specific requirements and dynamics to ensure added value for the end user.

Speaker 4: We are incorporating the extensive vertical expertise we have in the automotive industry and combining it with the latest innovations in AI for a two-step approach.

We are incorporating the extensive vertical expertise we have in the automotive industry and combining it with the latest innovation in AI and through a two step approach.

Speaker 4: First, by enhancing existing products, and second, by creating an entirely new architecture that we believe will result in a completely unique solution for the industry, capable of delivering crown-breaking performance.

First by enhancing existing products and second by creating an entirely new architecture that we believe will result in a completely unique solution for the industry capable of delivering crown breaking user experience.

Speaker 4: Our path forward is defined by a product roadmap based on a multi-layered generative AI strategy. There are several key considerations.

Our path forward is defined by a product roadmap based on our multilayer generated AI strategy.

Several key considerations guiding this strategy.

Speaker 4: First, focus on automotive-specific tasks and applications. We are fine-tuned LLM.

First focus on automotive specific tasks and applications, we have fine tuned LLM.

Speaker 4: Second, deliver an optimal balance of user experience, cost, and performance through a thoughtful combination of third-party LLMs, Theron's proprietary LLMs, and traditional AI models.

Second delivering optimal balance of user experience cost and performance through a thoughtful combination of third party LLM severance proprietary LMS and traditional AI models.

Speaker 4: And third, provide transparency and full control over the user experience so OEMs can safely, accurately, and reliably serve their customers.

And third provide transparency and full control over the user experience the Oems can safely accurately and reliably serve their customers.

Speaker 4: We have upgraded our product portfolio with LLM Technologies, developing free products and integrating them with our first customers.

We have upgraded our product portfolio with LLM technologies, developing free product and integrating them with our first customers.

Speaker 4: Saren's Car Knowledge leveraged AI to transform the intimidating 500-page manual that usually sits in your cloth compartment into user-friendly, voice-activated information.

<unk> knowledge leverage AI to transform the intimidating 500 page manual that usually fits in your class compartment into user friendly voice activated information.

Speaker 4: Our solution provides information retrieval in real time, contextual information based on trustworthy OEM data, and information specified down to the model and even the VIM.

Our solution provides information retrieval and real time contextual information based on trust royalty OEM data and information specified down to the model and even the Vin.

Speaker 4: Car knowledge can be leveraged via voice for the in-car assistant or on a companion app or even in social media or any web application.

Candidates can be leveraged via voice for the in car systems.

And our companion app or even in social media or any web application.

Speaker 4: CERN's assistance with NLU Plus brings the power of LLMs to our turnkey hybrid solution.

Terence assistant with Niu platform brings the power of LMS to our turnkey hybrid solution.

Speaker 4: This next generation version of Serens Assistant is optimized to provide users with more natural, intuitive, and accurate interactions while minimizing costs.

This next generation version of parents assistant is optimized to provide users with more natural intuitive and accurate interactions while minimizing costs.

Speaker 4: Serum Assistant now easily handles complex queries and multi-step tasks within a single request.

Sir emphasis now easily handle complex queries and multistep tasks within the within a single request.

Speaker 4: Serum's chat browse expands the system's ability to answer general interest questions.

Service Jetblue expand the system's ability to enter general interest question.

Speaker 4: It is a predefined and flexible Q&A solution that includes no-code infrastructure for customization that enables OEMs to create brand personality.

It is a predefined and flexible Q&A solution that includes no quote infrastructure for customization that enables Oems to create brand personality.

Speaker 4: Serum's Chat Pro leverages a multitude of sources, including Chat GPT, to provide accurate and relevant responses nearly every query imaginable.

Darren Jetblue leveraged a multitude of sources, including <unk> to provide accurate and relevant responses nearly every query imaginable.

Speaker 4: These free cloud-based products can be quickly deployed as upgrades to existing platforms already in production, delivering added value to drivers and supporting our strategy to increase connected services growth.

These free cloud based products can be quickly deployed at upgrades to existing platform already in production delay.

Delivering added value to drivers and supporting our strategy to increase connected services growth.

Speaker 4: In fact, one of our customers is going live in calendar quarter one.

In fact, one of our customers going live in calendar quarter one.

Speaker 4: It's important to note that these products can also be applied to our strategic adjacent markets, two-wheelers and trucks. We also see use cases from

It is important to note that these products can also be applied to our strategic adjacent market two wheelers and trucks.

We also see use cases for non transportation applications.

Speaker 4: For example, using our car knowledge product for appliances or industrial IoT.

For example, using our cardiology product for appliances or industrial Iot.

Speaker 4: The same concept of building an intelligent blueprint to the device that can be assessed by the user at any time still applies.

The same concept of building an intelligent blueprint to the device that can be assessed by the user at anytime still apply.

Speaker 4: As for where we are heading in the future, we are uniquely positioned to capitalize on the prevalence of generative AI and LLM.

As for where we are heading in the future. We are uniquely positioned to capitalize on the prevalence of generated AI and <unk>.

Speaker 4: Our product roadmap is fully focused on developing generative AI-powered products based on an automotive-grade large language model, the first in the industry.

Our product roadmap is fully focused on developing generated AI power products based on an automotive grade lapsed language model.

The first in the industry.

Speaker 4: Our R&D and product teams are currently building this automotive-grade LLM, which will be presented at CS in collaboration with a major European OEM and is based on our unmatched automotive data set.

Our R&D and product teams are currently building this automotive create Atlanta, which will be presented at <unk> and collaborations with a major European OEM and is based on our unmatched automotive dataset.

Speaker 4: Unlike others who have simply plugged Chat GPT into an existing system, we know that in order for OEMs to maintain their branded experience and for end users to gain value from the integration, a more thoughtful approach is needed.

Unlike others, who have simply <unk> into an existing system.

We know that in order for Oems to maintain their branded experience and for end users to gain value from the integration a more thoughtful approach if needed.

Speaker 4: The limitations of the technology need to be acknowledged and addressed.

The limitations of the technology needs to be acknowledged and addressed.

Speaker 4: A serious issue is the lack of response reliability. Responses can sound highly plausible, yet be completely incorrect, otherwise known as hallucinations.

Yeah.

A serious issue is the lack of response reliability responses.

Responses can found highly plausible yet be completely incorrect otherwise known as hallucination.

Speaker 4: Responses can be self-contradicting, non-transparent, or offer unreliable data source attribution.

Responses can be self contradicting nontransparent offer unreliable data attribution.

Speaker 4: We address this by fine-tuning large language models on curated data sources.

We addressed this by fine tuning Lodge language models on greater data sources.

Speaker 4: For example, Khan Knowledge uses accurate OEM data for precise information.

For example car knowledge with accurate OEM data for precise information.

Speaker 4: The large size of LLMs result in high operating costs due to substantial computational power needed.

The large size of Llm's reside and high operating cost due to substantial computational power needed.

Speaker 4: Public LLMs may not be cost effective for certain tasks compared to traditional search or NLU-based chat.

Public LLM may not be cost effective for certain time compared to traditional search or niu based chip.

Speaker 4: Our approach to this issue is to apply a mixed strategy using third-party and proprietary LLMs, improving cost-effectiveness and control.

Our approach to this issue is to apply a mixed strategy using third party and proprietary alanon improve improving cost effectiveness and control.

Speaker 4: We leverage LLMs to support the development of smaller deep learning models, improving cost and time to market.

We leveraged <unk> to support the development of smaller deep learning models, improving cost and time to market.

Speaker 4: Another concern is that the system's response time can be slow due to the latency of LLMs, which is not within the user or already.

Another concern is that the system's response time can be slower due to the latency of LMS.

Which if not within the user or Oems control.

Speaker 4: The SERUMS approach is a seamless integration of deep learning models of various types and sizes optimized for

The <unk> brought to the seamless integration of deep learning models of various types and sizes.

Optimized for specific use cases.

Speaker 4: We optimize efficiency, reliability, and scope across all SARINs domains, ensuring latency remains within our benchmark.

We optimize efficiency.

Reliability.

And scope across all severance domain, ensuring latency remains within our benchmarks.

Speaker 4: Another challenge is that constant cloud access in cars isn't guaranteed, making embedded solutions crucial.

Another challenge if that constant cloud access and card isn't guaranteed making embedded solutions crucial.

Speaker 4: Performance and cost optimization will be key for embedded applications of LLMs and generated AI.

Foreman and cost optimization will be key for embedded applications of LMS and generated by AI.

Speaker 4: To address this, we are focused on developing optimized LLMs for use on embedded platforms, leveraging our automotive and embedded expertise as a competitive advantage.

To address this we are focused on developing optimized llm's for use on embedded platform, leveraging our automotive and embedded expertise as a competitive advantage.

Speaker 4: So what sets Serens apart from the competition as the essential innovation partner when it comes to generative AI and LLM?

So what sets <unk> apart from the competition at the essential innovation partner when it comes to generate of AI and elements.

Speaker 4: We have the unique expertise to leverage these technologies with a specific lens for automotive and transportation user experience.

We have the unique expertise to leverage these technologies with a specific land for automotive and transportation is experiencing.

Speaker 4: prioritizing safety, and producing up-to-date, correct, and trusted information.

Prioritizing safety and producing up to date, correct and trusted information.

Speaker 4: Generative AI and LLMs are among Serum's core competencies.

Generated AI and Llm's are amongst <unk> core competencies.

Speaker 4: We have been applying deep neural network-based AI technology, including generative AI, to our products for years.

We have been applying deep neural network based AI technology, including generated AI to our products for years.

Speaker 4: In addition, the CERN's technology stack implements AI on both the cloud and atom.

In addition, third.

The <unk> technology stack implement AI on both our cloud and edge with.

Speaker 4: We leverage OEM and Therans data to make sure every end user always gets the most accurate response.

We leverage OEM and <unk> data to make sure every end user always gets the most accurate response.

Speaker 4: And finally, we can arbitrate as to whether a command is best processed by our conventional AI stack with our LLM technology or by an external LLM service, ensuring full functionality at minimum cost.

And finally.

We can all be trade at to lever a command the best process by our conventional AI stake with our LLM technology or by an external LLM service, ensuring full functionality at minimum cost.

Speaker 4: The engineering and product teams here at Zarens are well aligned. We are excited about how the right application of GenAI and LLM technologies will transform the user experience in the car and the central role we can play in making that happen.

The engineering and product teams here at <unk> are well aligned we are excited about how the right application of <unk> and <unk> technologies will transform the user experience in the car and the central role, we can play in making that happen.

Speaker 4: I will now turn it over to Stefan for a few comments on fiscal year 2024 priorities before Tom goes into the financial details of the year and our multi-year target.

I will now turn it over to Stephane for a few comments on fiscal year 2024 priorities before Tom goes into the financial details of the year and our multiyear targets.

Speaker 3: Thanks, Nils, for sharing CERN's AI product strategy. Looking ahead to fiscal year 24, we have a series of key objectives for the company. First and foremost, it's.

Thanks, Neil for sharing severance AI product strategy looking ahead to fiscal year 'twenty four we have a series of key objectives for the company.

First and foremost is to delight our customers.

Speaker 3: We do this by delivering high-value-added, customer-driven solutions on time and with exceptional quality. Under the leadership of Niels, we have made great progress and expect that to continue into the future.

We do this by delivering high value added customer driven solutions on time and with exceptional quality under the leadership of news, we have made great progress and expect that to continue into the future.

Speaker 3: From an R&D perspective, it is absolutely critical that we continue to innovate and make strategic investments in our technology by architecting a software platform that incorporates the latest advances in generative AI and large language

From an R&D perspective, it is absolutely critical that we continue to innovate and make strategic investments in our technology by Architected a software platform that incorporates the latest advances in generative AI and large language models.

Speaker 3: We have the unique opportunity to capitalize on our vertical software expertise and extensive OEM specific data.

We have the unique opportunity to capitalize on our vertical software expertise and extensive OEM specific datasets.

Speaker 3: We are in the process of transforming our strategy into real solutions.

We are in the process of transforming our strategy integrated solutions driving growth and connected services billings, we will preview the solutions at CES and expect to deliver to customers in calendar year 'twenty four.

Speaker 3: driving growth in connected services buildings. We will preview these solutions at CES and expect to deliver to customers in calendar year 24.

Speaker 3: We also expect to make additional progress in the adjacent transportation market and beyond. And, of course, we will continue to have a strong focus on operational excellence, allowing us to potentially meet or exceed our financial goals for the year.

We also expect to make additional progress in the adjacent transportation market and beyond and of course, we will continue to have a strong focus on operational excellence, allowing us to potentially meet or exceed our financial goals for the year.

Speaker 3: With that, I would like to hand the call over to Tom. Tom?

With that I would like to hand, the call over to Tom Tom.

Thank you Stefan.

Speaker 5: When I joined Stefan's leadership team approximately a year and a half ago, we together set an objective to meet and, if possible, exceed any financial guidance we provide to the investor.

When I joined Stefan its leadership team approximately a year and a half ago. We together set an objective to meet and if possible exceed any financial guidance, we provide to the investment community.

Speaker 5: The fourth quarter of fiscal 2023 was the fifth quarter in a row of achieving that objective.

The fourth quarter of fiscal 2023 was the fifth quarter in a row of achieving that objective and given the exciting opportunities available to us we expect positive momentum to continue into fiscal year 2024.

Speaker 5: And giving the exciting opportunities available to us, we expect positive momentum to continue into fiscal year 2024.

Speaker 5: In a few minutes, I will provide our guidance for Q1 FY24 and the full year. I'll then present our multi-year target.

In a few minutes I will provide our guidance for Q1, FY 'twenty four and the full year.

I will then present, our multiyear targets.

Speaker 5: First, I want to share more details on our strong finish to FY23 and Q4 and our performance for the full fiscal year.

First I want to share more details on our strong finish to FY2023 in Q4, and our performance for the full fiscal year.

Speaker 5: Our Q4 results showed continued momentum in the business with strong revenue, margins, adjusted EBITDA, and CFFO.

Our Q4 results saw continued momentum in the business with strong revenue margins adjusted EBITDA and.

<unk>.

Speaker 5: Q4 revenue came in nearly $5 million above the high end of our guide.

Q4 revenue came in nearly $5 million above the high end of our guidance, mainly due to a onetime true up with one of our customers. It is not unusual for a customer to allocation update their royalty reporting and provide us with adjustments. It is important to note that even without this true up.

Speaker 5: mainly due to a one-time true-up with one of our customers.

Speaker 5: It is not unusual for a customer to, on occasion, update their royalty reporting and provide us with adjustments.

Speaker 5: It is important to note that even without this true-up, we still would have been above the high end of the Revenue Guide.

We still would have been above the high end of the revenue guidance.

Speaker 5: Revenue for Q4 included a fixed contract of $12.8 million, as communicated during our Q3 conference call.

Revenue for Q4 included a fixed contract of $12 8 million as communicated during our Q3 conference call.

Speaker 5: The excellent results in the quarter were driven by our core transportation business. As revenue came in above the high end of the range.

The excellent results in the quarter were driven by our core transportation business.

As revenue came in above the high end of the range combined with our focus on operational excellence, we exceeded the key financial metrics of adjusted EBITDA and CFO <unk> <unk>.

Speaker 5: we exceeded the key financial metrics of adjusted EBITDA and CFFO.

Speaker 5: non-GAAP gross margin was 72.9%. non-GAAP operating margin was 17.8%.

non-GAAP gross margin was 72, 9%.

non-GAAP operating margin was 17, 8%.

Speaker 5: Adjusted EBITDA was $16.6 million, or 20.7% margin. And non-GAAP income per share was $0.09.

Adjusted EBITDA was $16 6 million electronic 0.7% margin.

And non-GAAP income per share was <unk> <unk>.

Speaker 5: During the quarter, we had positive cash flow as expected.

During the quarter, we had positive cash flow as expected.

Speaker 5: Cash flow from operations was approximately $11.3 million.

Cash flow from operations was approximately $11 3 million.

Speaker 5: Our balance sheet remains strong, with total cash and marketable securities of approximately $121 million. When you look back at the guide...

Our balance sheet remains strong with total cash and marketable securities of approximately $121 million.

When you look back at the guidance, we provided last November.

Speaker 5: We exceeded every financial metric we provided, gap and non-gap.

We exceeded every financial metric, we provided GAAP and non-GAAP revenue.

Revenue was $294 million 4 million above the high end of the range, even though fixed contracts for the year came in at $36 5 million approximately $3 5 million lower than expected.

Here's a breakdown of revenue for the quarter.

So our revenue drivers remain strong.

Speaker 5: Variable license revenue was up 59% from the same quarter last year, and up 17% quarter over quarter, due to a lower than expected level of fixed contract consumption, and a one-time true up by a customer in the fourth quarter.

Variable license revenue was up 59% from the same quarter last year and up 17% quarter over quarter.

Due to our lower than expected level of fixed contract consumption and a onetime true up by a customer in the fourth quarter.

Speaker 5: Our penetration of global auto production remained at 54% on a trailing 12-month basis as we continue to maintain a strong position in the market.

Penetration of global auto production remained at 54% on a trailing 12 month basis as we continue to maintain a strong position in the market.

New connected services revenue was up 13% from the same quarter last year.

Up 6% from the prior quarter.

Speaker 5: We expect a ramp in new connected services in FY24 and beyond, as several key programs that have been delayed by customers go into production.

We expect a ramp in new connected services in FY 'twenty, four and beyond as several key programs that have been delayed by customers go into production.

Speaker 5: We continue to see a solid pipeline of opportunity for connected services.

We continue to see a solid pipeline of opportunity for connected services.

Speaker 5: Finally, our professional services revenue was down 12% year over year, while up 8% quarter over quarter.

Finally professional services revenue was down 12% year over year, while up 8% quarter over quarter.

Speaker 5: As we have stated previously, professional services will vary based on the progress or completion of customer projects.

As we have stated previously professional services will vary based on the progress or completion of customer projects.

Speaker 5: We do not project professional services as a revenue growth driver for the company, but instead view it as an enabler for future license and connected revenue.

We do not project to professional services as a revenue growth driver for the company, but instead view it as an enabler for future license and connected revenue.

Speaker 5: Additionally, our newer products and solutions include improved implementation and integration features, which lowers the utilization of professional services. Moving on to the details of our licensed business.

Additionally, our newer products and solutions include improved implementation and integration features which lowers the utilization of professional services.

Moving on to the details of our licensed business.

Overall, the licensed business remains strong.

Speaker 5: Proforma royalties were up 10% year over year and 3% quarter over quarter due to increased auto production and penetration of our advantage technology.

Pro forma royalties were up 10% year over year, and 3% quarter over quarter due to increased auto production and penetration of our advantage technology.

Speaker 5: As a reminder, pro forma royalties represent the value of variable licenses shipped during the quarter and those consumed as part of a fixed contract.

As a reminder, pro forma royalties represent the value of variable licenses shipped during the quarter and those consumed as part of our fixed contracts.

We continue to proactively manage down the contribution from fixed contracts.

The fixed contract deal we signed in Q4, whereas the approximately $12 8 million. We concluded the year with $36 5 million in total fixed contracts.

$3 5 million below our commitment of a maximum of $40 million.

You can see consumption in fiscal 'twenty three was down from the previous year and we expect further improvement in FY 'twenty four.

After consultation with our sales leaders, we have decided to lower the maximum annual amount of fixed contracts from $40 million to approximately $20 million starting in fiscal 'twenty four.

The utilization of fixed contracts and our business continues to decrease and we believe this new level provides us with enough flexibility to accommodate a small amount of customers. While we continue to transition away from these types of contracts.

This will further accelerate the decline in consumption over the next few years.

I'll still providing the ability.

Sure.

Yes.

Additionally, as this migration continues we expect enhanced clarity and visibility into our underlying revenue generation trends, which we view positively.

We expect the inventory balance of fixed contracts at the end of fiscal 2824 to be approximately $40 million.

Down from approximately $80 million at the end of fiscal 2023.

We currently estimate the balance of fixed contracts to be normalized as of fiscal yearend 2025.

The balance at the end of each year assumes the addition of $20 million of new fixed contracts less expected six quarter consumption.

Our kpis continue to indicate strength in the business.

As stated earlier, our penetration of global auto production for the trailing 12 months stayed steady at 54%. This means over half of global auto production include some level of embedded <unk> technology.

$11 7 million cars with science technology was shipped in the quarter.

This is up 4% year over year outperforming macro trends and reflects the improving production environment and a continuing strong competitive position.

Cars produce that use our connected services increased 16% year over year, reflecting the trend of cars being increasingly connected and the growth in our ability to successfully provide our customers with innovative cloud based solutions.

For fiscal year 2023, total billings grew 6% compared to the previous year, excluding professional services and prepaid contracts.

We believe that this metric provides investors with insight into our core underlying business and revenue trends.

As a result, we have decided moving forward to provide total adjusting billing growth on a trailing 12 month basis over the previous trailing 12 months.

We will no longer provide a billings per car API as we believe that there are many factors that can impact this metric as constituted.

As we have discussed the billings per car metric is influenced by expansion in emerging markets, where typically customers start out with a small number of solutions with low price per unit per car, thereby impacting the average billings per car across our entire customer base we have.

Very pleased with the 6% year over year growth in total adjusted billings and the belief that this is a positive indicator of our potential future revenue growth.

We have also made the decision to replace the average contract period, <unk> API with growth in deferred revenue.

We believe that deferred revenue provides a more reliable view of our future revenue potential.

Potential rather than relying on a metric based on bookings and subject to the same issues as the billings per car comments I made a moment ago.

We also saw a large increase in monthly active users, 30% year over year, indicating increasing popularity among users of our technologies.

During the quarter, we were informed by our legacy connected services customer Toyota.

They were electing to terminate the service offering effective December 31 2023.

As previously communicated prior to this change <unk> would have recorded revenue associated with this contract of approximately $8 $4 million per quarter through Q1 fiscal 2026, meaning the end of calendar year 2025 is that contract was.

While I'm done.

As you May recall, there is no cash flow associated with this contract as Darren has been amortizing the revenue of our connected services program acquired by nuance and 20 <unk>.

In fact, most of the costs associated with this service was collected by nuance prior to a split into a separate company.

The effect of this change is to accelerate any deferred revenue associated with this contract into Q1 of fiscal 2004 and.

We have provided additional detail relating to the revenue impact by fiscal period through 2026 to provide further visibility.

Therefore, our guidance for the first quarter includes approximately $73 6 million in revenue associated with this change.

Following Q1 there'll be no more legacy revenue to report.

Which results in a cleaner view of the business going forward.

Now turning to revenue guidance for Q1 and fiscal year.

As previously mentioned another significant change in our revenue and our revenue profile is appropriately manage the decision to move the limit of fixed contracts to a maximum of $20 million per year, starting in fiscal 'twenty four.

Given our experience. We believe this is an appropriate level and balanced approach to managing fixed contracts at this time.

We do not expect any fixed contracts in Q1 and.

And the best estimate we can provide at this time would be to spread the $20 million relatively evenly throughout the balance of the fiscal year with the caveat the actual execution of fixed contracts can vary quarter to quarter.

In cooperating the impacts related to the termination of the legacy services and the reduction of fixed contracts. We are guiding our Q1 revenue to be.

$132 million to $136 million.

For the full fiscal year, we expect revenue to between 355 million to $375 million.

Note that excluding these two adjustments and the higher estimated consumption of two FY2023 fixed contracts.

<unk> would have been in the range of $340 million to $360 million.

You can see on this slide the revenue guidance and effect of the associated financial metrics.

There are several considerations to keep in mind as we review our multiyear targets.

First and foremost is that we remain committed to our mid term goal of delivering double digit revenue growth and approximately 30% adjusted EBITDA margins.

With the legacy contract in the Rearview mirror. After Q1, we expect to see improved adjusted EBITDA to <unk> performance since the legacy contractor.

No longer generated cash.

In addition, with our expected growth in connected services, we expect cash generation to increase as billings for the full subscription period takes place at the start of the period and the revenue has been amortized.

While we believe new connected services revenue growth will lag to some degree due to the amortization effect. The expected increase in billings would lead to significant growth in cash flow and deferred revenue.

As mentioned earlier the reduction in annual fixed contracts from $40 million per year to $20 million per year is expected to yield two benefits.

First fewer fixed contracts means there is no additional discount from the original contracted price.

Fewer fixed contracts ultimately will lead to lower consumption of existing inventory.

And therefore increase our quarterly reported variable revenue.

Since our Investor Day last November janitor, AI and large language models have become the main focus of our future innovation that can enhance the realization about vision of an immersive cabin experience.

These technologies are not new to <unk>, we do see the opportunity to greatly enhance the user experience for our end users by accelerating the application.

And in cooperation of the latest developments in this area.

As a result, we have shifted our investment strategy.

Focusing on the <unk>.

Focusing on the organic software Adjacencies in the car we discussed last November to investing in the development of our marketing market leading software platform.

Integrate the latest in January with AI.

We believe we are in a prime position to capitalize on our innovative capabilities and favorable trends within AI.

We will now Opportunistically look for partnerships for these adjacencies rather than solely developing them organically.

With that as the backdrop and the expectation of low single digit production growth as forecasted by IHS. Let me now provide you with additional insights into our plans.

We continuously look for ways to provide further insight into the drivers of our core business.

One of the projects we instituted this past fiscal year was to create a process to support the semi annual reporting a five year backlog.

That project's strengthened our insight of the revenue conversion cycle.

Our improved insight along with the evolution of our destination next strategy resulted in the updates to our multiyear revenue targets.

Especially for FY 'twenty and beyond.

Moving forward, we will not be reporting bookings only five year backlog semi annually.

<unk> 2023, total bookings were $455 million.

We believe five year backlog.

Our license in the auto connected revenue visibility and deferred revenue growth are better indicators of revenue growth in the short medium and long term.

Total bookings, which are very lumpy and consisting consists of deals of varying lengths.

Not a reliable indicator of short and intermediate term revenue conversion on a comparative basis. As a result, we will report five year backlog and visibility on a semiannual basis moving forward.

Overall, our five year backlog increased by approximately $140 million up 13% from the end of fiscal 'twenty, two a strong $1 2 billion.

You can see license revenue backlog grew 31% and connected backlog grew 5% mainly due to the influence of the legacy contract.

Professional services backlog was down $2 million or 2%.

As a reminder, we expect professional services to be flat to down.

Professional services serves as an enabler of our licenses and connected services, but it is not relied upon as a growth driver for the business.

What is important is the better visibility that we believe our backlog provides into the long term growth of the company.

This slide provides additional insight to the current visibility that we have to our future business.

Top left you see a table depicting the various stages of it.

<unk> contribution to backlog.

And production means this is an active program already in production and currently generating revenue.

Contribution to revenue in this category is mainly driven by auto production levels.

Pending SLP is defined as a program under contract with US that is still in development that we expect to start production during the year.

The last category is the additional contribution we will need to generate from new contracts.

The same logic applies to the table in the upper right.

This reflects our visibility into our new connected services.

The table at the bottom reflects our view of the.

The approximate expected contribution from backlog for each year.

As you can see in the table provided we continue to have a high degree of visibility into our expected revenues, including.

Approximately 88% to 93% visibility in 2024.

And approximately 79% to 84% in 2025.

As you would expect the fiscal year, we are providing guidance for is at a higher percentage.

Then he is further out but nonetheless, the nature of our business, while not purely classified as recurring provides very good visibility because of the typical four to five year lifecycle of a new infotainment program.

This chart reflects the percentage of revenue defined as repeatable.

We define as repeatable all product revenue, excluding fixed contracts and pro services.

You can see a very high percentage of our revenue is repeatable with 76% in FY 'twenty, four and growing to 77% by FY 'twenty seven.

Again this provides us with confidence in our strong revenue generation capacity and the high quality of our revenue stream.

Yes.

We are expecting strong growth in our connected services business because of the revenue is amortized over this timeframe.

Revenue growth lags, both increases in billings and deferred revenue.

To provide further insight into that dynamic this chart shows the <unk>.

Expected progression of our connected services business.

We have stripped out any deferred revenue associated with the Toyota legacy contract.

You can see strong expected growth in connected billings, which translates to cash generation.

Claude by fast growing deferred revenue.

Additionally, you can see the effect of the compounding of cars on the road using our connected services as each year progresses.

Putting it altogether this table represents our updated multiyear targets.

We are reiterating our goal from a year ago and in the midterm, we would be on a path of double digit revenue growth and approximately 30% adjusted EBITDA margins.

You can also see the strong growth in cash flow from operations is expected to be delivered if we achieve these targets.

We have provided increased detail and disclosure to provide further insight into our business and the drivers supporting our belief and our strong future performance.

As a reminder, there were several changes incorporated into these targets.

As we have previously noted approximately $10 million of consumption moved from FY2023 to FY 'twenty four due to the projected consumption timeframe on to FY 'twenty, three prepaid deals versus our target assumptions.

In FY 'twenty five approximately $34 million.

And in FY, 'twenty, six approximately $9 million of revenue.

Reduced due to the acceleration of Toyota deferred revenue due to their decision to decommission their solution earlier than planned.

On the table you can see a total revenue line at the top of the chart. This line reflects the expected revenue.

Sure.

The third and fourth lines remove any total any Toyota legacy revenue from the Es represented.

So you can clearly see the anticipated judging of growth without the influence of the legacy revenue.

The estimates also reflect a reduction of fixed contracts from approximately $40 million to $20 million per year, starting in FY 'twenty four.

As a reminder, moving forward, we expect to only offer prepaid fixed contracts.

The revenue presented has been adjusted to reflect our strategic pivot from Dawn core automotive technology plays that we feel would be better served through partnerships.

We currently see an exciting opportunity to capitalize on our strong capabilities and favorable trends with NII.

As a result, we are focusing our investments and our new software platform utilizing the latest in generative AI and large language models.

I encourage all of you to visit our booth at CES. This January to learn more and it is really exciting what Nielsen are developing for our customers and the early feedback is quite encouraging.

And finally as I mentioned earlier, our project to report five year backlog on a semi annual basis led us to a deeper analysis of revenue from deals one that are in production and scheduled.

Production and also provided us with an improved assessment of new deals required and the revenue conversion cycle within the target revenue period.

The results of this analysis are also reflected in this table.

In summary, we are truly excited about the direction of severance under the current leadership team.

We believe our investments in the latest technologies will allow parents to remain the leader in the AI powered immersive cabin experience in the transportation space.

This concludes our prepared remarks, and now we will open up the call for questions.

Thank you if you'd like to ask a question. Please press star one one.

If your question has been answered and you'd like to remove yourself from the queue. Please press star one again.

Our first question comes from Luke junk with Baird. Your line is open.

Morning, Thanks for taking the questions.

For starters, just hoping you can help build the bridge from the prior fiscal 'twenty four indication to what you're formally guiding for fiscal 2024 now.

Some pieces of this are pretty straightforward in terms of the legacy contract piece plus the reduced target for fixed contracts, maybe if you just focus on the other moving parts in the quarter that we're seeing in the updated numbers. Thank you.

Rich you want to take that.

Sure. So if you look at fiscal 'twenty four.

Again, the guidance was $3 55 to $3 75.

The consumption shift if remember we've talked about how there was but two fixed contracts in fiscal year 'twenty three the one in Q1 that has an eight quarter consumption period and the one in Q4 had a four quarter consumption period, which differs from our six quarter consumption model that was going to push about $10 million of consumption.

<unk> into fiscal 'twenty four.

So that's one factor the second factor is the reduction of $20 million of pre fixed contracts from the <unk> 40 down to 'twenty. So when we originally provided.

Target for 'twenty four it was using.

$40 million prepay or fixed contract that's 'twenty.

And then the adjustment for the third piece is the adjustment for the <unk>. So again those are the three pieces that if you take the guidance that we gave today, which was <unk> 55 to $3 75 for fiscal 'twenty four would have would have been.

Those factors weren't in place $3 40 to $3 60.

Got it and then thanks for that rich.

Bigger picture question, just you mentioned the proof of concept programs that you have going on right now with generative.

Large language models, just wondering how close we should think two booking those programs are or just differently as you make this pivot how you're measuring yourself.

Relative to customer reception and ultimately getting bookings on this new software platform.

Good morning, It's Stefan here, let me take a tours and then everyone has global news.

So what we discuss more so over the last couple of quarters.

Have great. It now a software platform.

Highly differentiated and AI.

It's going far beyond.

And automatically integrated strategic AI with slight language models in combination with automotive data that we have access to all of the sensitive data in card data right and also advancing the complete solution also called assumes assistant platform.

With proactive.

As I mentioned also we had last quarter 15.

<unk> of concept programs across the Globe North America Europe.

China Asia Pacific in General.

The feedback.

It's very very good.

Also as needs mentioned.

On the other right.

See also a big announcement at CES with one of the largest carmaker.

We are moving into this direction.

Sure.

And you would see also of course bookings over the next couple of months here for sure.

You mentioned also that we will go live in the first quarter of Mexico, and the year with our first solution here.

And you know I think we are extremely well positioned to your right across the globe with large Oems, but also with innovative Oems.

Any additional comments from your side.

Yes, maybe just one U F well summarized but what I would add is that basically with the product I introduced to you. We can upgrade really existing platforms in the field. So we do this via cloud updates only or in some cases also via over the air updates.

And this allows us basically to.

To go live here and deploy these programs are to deploy these products in the next weeks.

As mentioned, we will go live in calendar quarter, one which was customers here.

And if I can just sneak one more in.

The mid term indication maybe a question for Tom just how we should think about R&D at a high level as you pivot away from Adjacencies in the car to.

I am learning models and what was.

What a partnership in that respect might look like as well.

Yes sure.

So we continue to invest.

Heavily in R&D.

We assess that every year.

With a ballot.

And the team.

We drive some efficiencies and savings and then then we invest that.

If you look at some of our mid term targets of where we're trying to hit the 30 plus percent EBITDA.

R&D will continue to be.

Relative.

Relatively consistent a little bit of leverage.

From a percent of revenue standpoint, but as we have talked about previously sales and marketing and G&A I think we have a fair amount of leverage in those two areas.

And we will continue to generate strong gross margins through the license and connected services business.

And one additional comments Ron it's the beauty of our new software based platform that we can also utilize.

Our data and platform for our non transportation segment.

Got it I'll leave it there thank you.

Yes.

Thank you. Our next question comes from Colin Langan with Wells Fargo. Your line is open.

Oh, great. Thanks for taking my questions.

Just a follow up on the first question if we look at.

The guidance of $3 40 to $3 60 ex special items. It would still be below the 385 sort of I guess, you called out a target at the Investor day last year.

And then if I go out to 2006, the midpoint of your sort of targets for 2006 is now 375 versus last year with 550 <unk> substantially lower.

What is driving that sort of near term long term.

Lower outlook, yes.

Can you maybe take a it <unk> come in you will comment works, yes. So.

We have made a strategic move compared to last year's Investor Day, where we said okay. We are focus on also on other organic opportunities.

We strongly believe focusing on AI.

And last language models will have higher return of investment.

In the future.

For FY 'twenty, four we have big opportunities with respect to AI.

But not in the outer years right.

And then we have to Toyota case, and then also what's what's rich mentioned right. We reduced also the prepayments from $40 million to $20 million for the upcoming years.

Tom Please.

Yes Steph.

I think you've covered it well so.

It really is those those three drivers right a refocus.

And really alignment to our.

Opportunities that we feel.

As <unk> talked about and Stephane.

And therefore are a little bit lower revenues from some of those adjacency technologies that we think are better served.

Through partnerships.

And then of course the.

Effective.

The legacy pull in and.

What we think is the right thing for the business, which is the lower prepaid amounts.

Okay.

Any examples of what you're targeting now.

The market opportunities that are letting cutoff to partners I guess.

Well I think if you remember in the Investor presentation, there were some.

Adjacent activities.

In.

Supplying some data and information that's that's not core to the to the three product strategies.

<unk> laid out.

And I think we're just.

Refocusing our investments on the core or anything you can add to that.

No exactly I mean, we have presented back in the time couple couple of initiatives that we wanted to expand for instance in the biometric field.

And then we have shifted now some of these programs small to that unearned based architecture and really <unk>.

Creating our portfolio, which generates if AI give us the full focus.

Got it.

Just lastly.

With the new change on fixed contracts down to <unk>.

<unk>.

When should we think of that sort of consumption versus revenue stabilizing.

Well like a 2026.

Framework of those kind of even out.

Colin that's correct.

Oh, Okay, alright, thanks, alright, thanks for taking my questions.

Okay.

Thank you.

Our next question comes from Quinn Bolton with Needham Your line is open.

Hey, guys. Thanks for letting me ask a question first I just wanted to clarify the decline.

In the connected backlog is that due entirely to the Toyota legacy coming out of that figure.

Yeah, that's mostly as you can see from some of the other metrics that we provided.

Connected services.

Across the billings.

It has been growing.

Right well, even the new connected services have been growing the last few quarters.

And then as we stated I think.

If you look at our deferred revenue.

Historically and on a go forward basis, it's the best indicator of.

The future revenue growth, which lags a little bit due to the amortization schedule.

But connected services I think has been performing quite well and we think it's going to be a big growth driver going forward.

Got it and then second question I had is I think last quarter, you talked about the <unk>.

Some of the SLP is delaying some of the kind of higher.

Rice offerings kind of wondering if you've mentioned a couple of times connected services.

<unk> seen a delayed effect because of the amortization I mean can you can you give us sort of your outlook just how youre looking at pricing per vehicle as you move into fiscal 'twenty, four and perhaps beyond.

Okay. Please.

Please go ahead.

So we're continuing to see good <unk> growth.

Across some of those delayed <unk> been factored into the 24 guidance update.

Updating.

I'll tell you our plan there.

But.

On a total basis it is an average across.

Our high penetration across all the Oems who are in some Oems they start with.

A couple of our solutions.

Sure <unk>.

It's a bit of why we think moving to.

It's a total billings growth is a better indicator of us continuing to.

<unk>.

<unk> be the preferred supplier.

In the market and the growth in.

In billings and revenue that will come from that so.

The products that.

That <unk> talked about all carry a pretty high btu.

Across them.

So maybe what we can say here is X.

Three three factors. So first of all we have high visibility into our Oems Echo piece alright.

Special Thanks also to news because he is also driving professional services across the globe.

Secondly.

Our new programs, we see indeed.

Across.

And cloud.

And thirdly, what needs also mentioned as snow we have opportunities for Upselling.

Meaning bringing new innovations.

As a pet counts, meaning cost on the road.

Yes, yes, no excuse me my my sort.

Secondly, perhaps third question was just you talked a lot about the new software offerings around <unk> in general going with AI, the first of which goes into production and.

In the calendar first quarter can you talk how does that affect <unk> I would assume that that probably comes in at a pretty good <unk> as you deliver those software's, but I'm wondering if you might be able to provide sort of any any additional color on how youre thinking about pricing the new AI and LLM offerings. Thank you.

We cannot share everything yeah for sure understood, but you will see a big announcement during CES.

One obviously launches carmakers worldwide.

Addressing already S&P cost, but also new programs.

Our new <unk> based architecture needs any additional commentary.

No exactly.

We will not share, let's say pricing details here, but basically we see a lot of demand.

From all our Oems from all our customers supporting them with exactly the product 9% debt. So it's really about not just plugging into GBT, we clearly hear from customers that this is not sufficient instead, they need our infrastructure and our layer in between to support them managing the cost ensuring best performance.

And really provide safe and reliable information.

They provide to the end user.

Sure.

Got it thank you.

Thank you. Our next question comes from Mark Delaney with Goldman Sachs. Your line is open.

Yes, good morning, and thanks for taking my questions first I was hoping to better understand the dynamics of Toyota is theyre still selling to Toyota just under a different program going forward or will they not be a meaningful customer after our fiscal <unk> with the acceleration of the deferred revenue so.

We have the preferreds.

Partner after a year ago.

Toyota in North America, Europe, and Japan for Mueller co.

As a reminder, the <unk>.

Program what Tom.

Referred to.

It goes back to.

2011.

<unk>.

Comparable compared now it was a new technologies or applications in the car. It was getting more competitive and there was also a low traffic after almost 10 years.

I came to this decision right.

So, but still we are working with Toyota.

Model year 'twenty.

<unk> 24 and other opportunities.

Okay, and so the new multiyear outlook would assume perhaps maybe.

Sales under under these.

Newer contract types, and perhaps maybe even some higher would you be shipping more under the newer programs if they're if they're shifting.

It's more of a newer programs right based on allison's consistent with all the latest and greatest technology.

Okay.

My other question was just on the consumption of fixed contracts. Tommy you mentioned, it's slowing down and I think guidance for this coming fiscal year implies maybe $60 million of consumption. So maybe there's been I understand that the reason that the consumption of the licensees is.

Starting to decline.

Yes, well it's a.

A combination of the decision we made starting in Q4 of 'twenty two we didnt do any fixed.

Fixed contracts and then this year, we limited it to $40 million.

And then on a go forward basis, starting this year to $20 million. So.

We're adding.

A lot less.

To be consumed in the future and then we're burning off the higher levels back in you know kind of.

21, and 'twenty two from both fixed contracts and the minimum commitments deals.

Just to remind you we're not doing any further minimum commitment deals.

Understood I'll turn it over.

Thank you. Our next question comes from Jeff Van <unk> with Craig Hallum. Your line is open.

Great. Thanks for taking the questions maybe a couple of mills, if I could start with you on the <unk> It sounds like Youre, obviously going with a hybrid architecture.

Expand a little bit further on what are the some examples of cost effective versus non cost effective where you might use external versus not.

Yes sure sure. So basically what we are trying to do is.

Really keeping the motor Paramount is optimal.

Are we really fine tune the applications to the needs of the Oems.

And then you should know that let's say the context window in automotive is a bit much smaller which allows us to really manage the cost and have only a viable cost structure.

On your point of cloud and <unk>.

In car systems embedded so we clearly see and Thats still the solutions.

The Oems ask us for.

Should also cover.

Embedded so thats clearly the need and they are we can we can support with our new solution.

Where we fine tune based on our automotive specific data and customize it really to the ultra use cases.

40, Oems so basically what it means is that we can decide to be able with the OEM.

Which queries are forwarded to FERC party, LLM and which can basically.

Be covered by our conventional AI stake or our appropriate.

Proprietary LLM, we have built.

Okay.

And then Tom on the Toyota adjustments.

Forgive me if I missed it Q1 did you breakout the impact EBITDA impact of Toyota.

No, but it's.

This is a very small deferred revenue component to it.

Most of that.

Pull in of revenue is profit.

Yes.

Got it fair enough and then maybe lastly on <unk>.

Connected just curious on what process improvements you've made with respect to gathering analyzing incorporating your learnings from usage on.

Connected obviously you get some very valuable data I think you had some efforts to try to improve the ability to capture that and gain insights.

What might have changed there.

Maybe from a.

Just the clarity on that.

Technology side now from process wise, So you get the insights on usage in the past I've asked a lot of questions about what features functions capabilities are really getting consumed it sounds like there were a lot of steps and initiatives internally to get more precise understanding exactly what people want and we're using.

Curious if those initiatives have been implemented and what kind of insights you have on connected usage. So what we see here.

<unk> is the following so when comparing year over year, we see.

Year over year growth of about 16% when looking at monthly active user it's up by 30% or even more year over year right.

<unk> executed our solution is extremely adapted.

<unk> customers and finally also our customers right.

Neil and team we're looking together.

Ams how to improve.

Adoption here.

So first.

We have also the business platform, where we can also adapt and adjust the <unk>.

Specifics.

It's creating more personalized information for the draw.

Drivers.

Uh huh.

Passengers so overall.

Making great progress.

I think also related.

<unk> innovation partner of most of your Oems.

In close collaboration with the Oems.

Okay, great. Thank you.

Thank you. Our next question comes from Chris Mcnally with Evercore ISI. Your line is open.

Thanks, so much and I appreciate all the all the numbers so.

Wanted to step back and follow up a little bit to Collyns question.

If we.

We understand pulling out that transportation adjacencies and non transportation.

We looked at the old multiyear plan and I guess, the core auto number for 2026 was $458 million within the 515 so.

That would be sort of the basis for translating into your 2027 number which is closer to $400 million.

Can we do that work so I guess some of it fixed going from 40 to 20.

Is it fair to say that there is also some backlog to revenue conversion.

Even within core auto.

I know I don't think its so much the.

Backlog conversion, although I think one of the things that we've done.

This year as we've continued to strengthen our insights into kind of all of our deals and how they rollout.

That's why we provided.

<unk> ability chart.

<unk>.

<unk>.

Embedded and connected.

On the auto side.

And trying to break out the deals that are in production.

The deals that will be paid.

But we've already won.

The business and then what contribution we need from from new bookings and new deals over the next couple of years, depending on what what periods Youre looking at.

And then as we said I think.

Besides the.

The prepay on the two idle again, depending on which year youre looking at.

Most of it is reflective of the focus strategy on the technology Road map and the product offerings that Neil has talked about.

Okay.

Because I think the one that we wanted to the one side.

On slide 24, the connected services ramping and I. Thank you I. Appreciate you provide this ex Toyota, but if I look at the endpoint.

2027.

$80 million roughly down from under $50 million today.

I think there was an expectation of a bigger hockey stick on the connected versus sort of that.

5%, 6% sort of CAGR can you walk through.

Connected at one point I think there was at 130 <unk> hundred $40 million guide on connected in the out years cleanup Toyota.

The trajectory of those of those logic is a lot of the billings that you are receiving now for connected outside of the forecast window, meaning coming even later than 2020.

Yes, it's a bit of that but it's also as I said I think it's.

Better visibility into how these programs are ramping.

Some of the Oems have changed how they're rolling this stuff out it's not that we've lost deals. It's just how they're rolling some of these bigger programs out across their model lines.

And.

No.

We have really high confidence in this multiyear target number.

We'll have a lot to deliver but.

And I think.

We're really confident about the ability to get this kind of 10%.

<unk> overall growth.

Sierra is presented.

Okay I appreciate it.

Thank you. Our next question comes from Jeff Osborne with TV Cowen Your line is open.

Hey, Good morning, Tom I was wondering if you could flesh out the EBITDA impact of Toyota.

Went through a lot on the revenue line, but between the moving pieces, what's the flow through in particular in fiscal 'twenty five impact looks pretty.

Substantial is there other variables that perhaps some of that thank you.

I think as I said.

Jeff.

You can pretty much assume that.

Most of the revenue is it.

High 90%.

<unk> gross margin and that's why you see some of the impact from some of the previous models to today, but we still end up with.

Pretty strong mid seven days overall gross margins on the business.

It was.

A few million dollars of deferred cost associated with that that will all get accelerated into into Q1, along with the revenue but that was.

A very very kind of high margin.

Business and again with no cash.

Because the cash was collected pre.

Previously and of course the expenses.

We're more on a deferred basis, so the cash associated with those came previously too.

Got it and just two other quick ones with the move from $40 million to $20 million on the license side is there any risk to the Oems accepting that or have you already had conversations.

If you recall.

Prepaid contracts every time with Oems they are done with a small group of customers predominantly in Japan and Korea.

And they're also done on.

Programs that are in production right and so they really used as a as a cost savings initiatives for those for those tier tier ones.

And you know what.

Just from a business standpoint, we just think it's the right thing.

For severance to try to continue to.

Minimise the discounts that we have to give associated with those and as we've talked about what's happened over the year or is that more and more.

The decision, making process is driven by the Oems They may ask us to contract through the tier ones.

But the driver of our business. These days is almost exclusively with the with the Oems. So we think there is minimal risk to continuing to try to limit the amount of the debt.

That being said you know, it's kind of a weaning off process. So.

As we said last year.

We didn't go to zero this year, we're trying to take it down by.

Half.

And we'll see how it goes in in future years.

Got it and my last one is just the delay to Sop, a VW and others have you guys quantified what the impact was to fiscal 'twenty three results with our new guidance for 'twenty four.

No.

No not specifically for each for each.

OEM.

Their way of doing that in aggregate or is that not a substantial number.

I think it's just.

It's.

There's a whole number of factors.

<unk>.

Against the numbers that we presented last November to the numbers that we presented now.

And it's all of the all of the updates associated with.

The bookings that we achieved in FY2023 the new production schedules.

Associated with all of the Oems.

The opportunities that we need to go drive which.

From a visibility standpoint.

Yeah.

A relatively small amount of new deals and new.

That we need to achieve.

These plans.

And then that's why we have committed to kind of update the five year backlog.

And the visibility twice a year to provide.

Better insights into how we're going to achieve these numbers going forward.

Makes sense I appreciate it.

Thank you there are no further questions I'd like to turn the call back over to Richard Gagnon for closing remarks.

Thank you Michelle.

Well. Thank you all for joining us on today's call are apologizing for going a little bit late but we have a lot of information to cover and we hope to see and talk with you soon at various upcoming conferences and meetings.

Especially at CES.

Good day.

Thank you. This does conclude the program and you may now disconnect everyone have a great day.

Okay.

Okay.

[music].

Okay.

Okay.

Okay.

Sure.