Q3 2024 Cerence Inc Earnings Call

Operator: Huffman, Mark DeLaney, Daniel Tempesta, Richard Yerganian, Nicholas Doyle, Nathaniel Bolton, Nils Schanz, Vineet Chhangani, Antonio Rodriquez, Stefan Ortmanns, Jeffrey Rhee, Nils Schanz, Nicholas Doyle, Nathaniel Bolton, Cerence Huffman, Nathaniel Bolton, Nicholas Doyle, Nathaniel Bolton, Nicholas Doyle, Nathaniel Bolton, Nathaniel Bolton, Huffman, Mark DeLaney, Daniel Tempesta, Richard Yerganian, Nicholas Doyle, Nathaniel Bolton, Christopher McNally, Daniel Tempesta, Richard Yerganian, Antonio Rodriquez, Stefan Ortmanns, Nicholas Doyle, Nathaniel Bolton, Nathaniel Bolton, Nicholas Doyle, Nathaniel Bolton, Nathaniel Bolton, Nathaniel Bolton, Nathaniel Bolton, Huffman, Mark DeLaney, Daniel Tempesta, Richard Yerganian, Nicholas Doyle, Nathaniel Bolton, Nils Schanz, Vineet Chhangani, Antonio Rodriquez, Stefan Ortmanns, Jeffrey Rhee, Nils Schanz, Nicholas Doyle, Nathaniel Bolton, Cerence Huffman, Nathaniel Bolton, Nicholas Doyle, Nathaniel Bolton, Nils Schanz, Vineet Chhangani, Nathaniel Bolton, Nicholas Doyle, Nathaniel Bolton, Nathaniel Bolton, Nicholas Doyle, Nathaniel Bolton, Nicholas Doyle, Nathaniel Bolton, Nicholas Doyle, Nathaniel Bolton, Strauss, and Michael T. Good day and thank you for standing by. Welcome to the Cerence third quarter 2024 earnings call.

Good day.

And thank you for standing by.

Operator: 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 1-1 on your telephone. You will then receive an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again.

Welcome to the Cerence third quarter.

2024 earnings call

Speaker Change: 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 1 1 on your telephone.

you will then he an automated message advising your hand is raised to withdraw your question please press star bor one again

Richard Yerganian: Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Richard Yerganian, Senior Vice President, Investor Relations. Richard, please go ahead.

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Richard Yerganian, Senior Vice President, Investor Relations. Richard, please go ahead.

Richard Yerganian: Thank you, Felicia. Welcome to CERN's third quarter of fiscal year 24 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, assumptions, beliefs, outlook, strategy, goals, objectives, targets, and plans should be considered to be forward-looking statements. CERN makes no representations to update those statements after today.

Richard Yerganian: B statements are subject to risk 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. Our form 10K followed on November 29, 2023 in our most recent form 10Q. 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, as well as reconciliations of non-GAAP measures to the closest GAAP equivalent.

Richard Yerganian: Thank you, Felicia. Welcome to CERN's third quarter of fiscal year 24 conference call. Before we begin, I would like to remind you that this call may involve certain forward-looking statements.

Speaker Change: Any statements that are not statements of historical fact, including statements related to our expectations, estimates, assumptions, beliefs, outlook, strategy, goals, objectives, targets, and plans, should be considered to be forward-looking statements.

Speaker Change: Cerence makes no representations to update those statements after today.

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.

Speaker Change: Our Form 10-K filed on November 29, 2023 in our most recent Form 10-Q.

Speaker Change: in addition the company may refer to certain non-gaap measures

Speaker Change: 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.

Richard Yerganian: The press release is available in the IR section of our website. Joining me on today's call are Stefan Ortmanns, CEO of Cerence, and Antonio Rodriquez, Interim CFO of CERN. As a reminder, the only authorized spokespeople for the company are Stefan, Tony, and me. Now answer the call, Stefan.

Rich: Joining me on today's call are Stefan Ortmanns, CEO of Cerence, and Tony Rodriguez, Interim CFO of CERN. As a reminder, the only authorized spokespeople for the company are Stefan, Tony, and me. Now on to the call, Stefan.

Speaker Change: The press release is available in the IR section of our website. Joining me on today's call are Stefan Ortmanns, CEO of CERENCE, and Tony Rodriguez, Interim CFO of CERENCE.

Speaker Change: As a reminder, the only authorized spokespeople for the company are Stefan, Tony, and me. Now answer the call, Stefan.

Stefan Ortmanns: Thank you, Rich, and good morning, everyone. To begin, I would like to briefly comment on our third quarter results. Our financial performance was as expected, with revenue in the middle of our guidance. However, due to the decline in our stock price, we performed a goodwill assessment following completion of the quarter that resulted in a goodwill impairment charge of approximately $357 million, negatively impacting our GAAP profitability.

Stefan Ortmanns: Thank you, Rich, and good morning, everyone. To begin, I would like to briefly comment on our third quarter results. Due to the decline in our stock price, we performed a goodwill assessment following completion of the quarter that resulted in a goodwill impairment charge of approximately $357 million, negatively impacting our GAAP profitability.

Stefan Ortmanns: thank you rich and good morning everyone to begin i would like to briefly comment on our third quarter results our financial performance was as expected this revenue in the middle of our guidance

Speaker Change: due to a decline in our stop price we performed a goodful assessment following completion of the quarter that's reidited in a good will impairment charge of approximately three hundredand fifty seven million dollars negatively impacting our gaap profitability

Stefan Ortmanns: With the exception of cross-margin, which was within the range, all other non-GAF profitability metrics were above the guidance we provided in our last call. Additionally, we had a strong quarter for cash flow from operations, which came in at $12.9 million. We remain substantially on track to achieve the full year guidance we provided in our last conference call, and Tony will provide the details later in the call. We recognize that some of you may be listening to our call for the first time and thought it would be helpful to provide a high-level overview of Cerence and our business.

Speaker Change: With the exception of cross-margin, which was within the range, all other non-GAP profitability metrics were above the guidance we provided in our last call. Additionally, we had a strong quarter for cash flow from operations, which came in at $12.9 million.

Stefan Ortmanns: We remain substantially on track to achieve the full year guidance we provided in our last conference call. And Tony will provide the details later in the call.

Tony: We recognize that some of you may be listening to our call for the first time and thought it would be helpful to provide a high-level overview of Cerence and our business.

Stefan Ortmanns: Cerence creates AI and voice power for user experiences across the transportation industry, primarily for automobiles. We were among the first to bring voice interaction to cars. And today, we count nearly all the world's leading OEMs and Tier 1 suppliers as our customers and partners. Furthermore, more than half of cars that are off the production line globally include Cerence solutions. So chances are that many of you have interfaced with Cerence as the company behind the audio and voice technology in your car, whether it be Mercedes-Benz, Volkswagen, Stellantis, Toyota, or many others.

Stefan Ortmanns: Cerence creates AI and voice-powered user experiences across the transportation industry, primarily for automobiles. We were among the first to bring voice interaction to cars. And today, we count nearly all the world's leading OEMs and Tier 1 suppliers as our customers and partners. In fact, we recently surpassed half a billion cars shipped with our technology. That is an intuitive, seamless interaction in which they can complete virtually any task, all without compromising safety. We believe there are three key differentiators that distinguish our offering. First,

Tony: seon cres ai and voysed power to user experiences across the transportation industry primarily for automobiles

Tony: We were among the first to bring voice interaction to cars, and today we count nearly all the world's leading OEMs and Tier 1 suppliers as our customers and partners.

Tony: think

Tony: more than half of c that' al of the production line globally includes ser solutions

Speaker Change: so as our that many of you have interfaced with cers as the company behind the audio and voice technology in your cars

Speaker Change: whether it be Mercedes Benz, Volkswagen, Stellantis, Toyota, or many others.

Stefan Ortmanns: In fact, we recently surpassed half a billion cars shipped with our technology. As the automotive industry faces an incredible transformation, we believe CERENCE is well-positioned to partner with automakers to deliver what drivers want and need from the in-car experience. That is an intuitive, seamless interaction in which they can complete virtually any task, all without compromising safety. We believe there are three key differentiators that distinguish our offering. First,

Tony: in fact we recently surpassed half a billion cars shipped with our technology

Tony: As the automotive industry faces an incredible transformation, we believe SELMS is well positioned to partner with automakers to deliver what drivers want and need from the in-car experience.

Tony: that is an intuitive seamless interaction in which they can complete virtually any taskks or without comprising safety

Tony: We believe there are three key differentiators that distinguish our offering. First,

Stefan Ortmanns: We have a lengthy history and deep customer relationships, giving us a critical understanding of the unique dynamics in the automotive industry. We have extensive experience in both production and development systems. And we work closely with our customer as an innovation partner, helping to define and design the next generation infotainment system. Second, we have a strong IP position, approximately 700 patents, and automotive-specific data supporting an end-to-end solution that improves all aspects of the in-car user experience. From the moment a driver begins speaking, all the way through to task completion.

Tony: We have a lengthy history and deep customer relationships, giving us critical understanding of the unique dynamics in the automotive industry.

Stefan Ortmanns: We have extensive experience in both production and development systems, and we work closely with our customers as an innovation partner helping to define and design their next generation infotainment system. Second, we have a strong IP position, approximately 700 patents, and automotive-specific data supporting an end-to-end solution that improves all aspects of the in-car user experience, from the moment a driver begins speaking, all the way through to task completion. Additionally, our global footprint spans more than 70 languages to support OEMs worldwide. Think about it.

Tony: We have extensive experience in both in production and in development systems.

Tony: and we work closely with our customer as an innovation partner has been to define and design their next generation and fortainment system

Tony: Second, we have a strong IP position, approximately 700 patents.

Tony: and automotive specific data supporting end-to-end solution that improves all aspects of the income user experience

Stefan Ortmanns: Additionally, our global footprint spans more than 70 languages to support OEMs worldwide. Third, we are deeply customer-centric, empowering our OEM customers with flexible and customizable solutions that put their brands at the forefront, so they can not only differentiate themselves from their competitors but also maintain ownership of their data. Think about it.

Tony: from the moment a driver begins speaking all the way through to task completion

Tony: Additionally, our global footprint spans more than 70 languages to support OEMs worldwide.

Tony: Third, we are deeply customer-centric, empowering our OEM customers with flexible and customizable solutions that put their brands at the forefront.

Tony: So they can not only differentiate themselves from their competitors, but also maintain ownership of their data.

Stefan Ortmanns: The infotainment system is a car brand's main interface with its customers on a daily basis. They don't want to just hand that rent equity over to a partner who doesn't have their interest as its top priority. Plus, we believe that OEMs want to maintain their ability to monetize the valuable data generated from their systems, rather than handing it off to a third party. Our solutions address all of these considerations. As we look to the future as a preferred supplier of voice and AI in the car, we are moving quickly to advanced generative AI and large-language model-powered innovation that we believe will be central to the automotive user experience of the future. I will provide more details on that in a few minutes.

Stefan Ortmanns: The infotainment system is a car brand's main interface with its customers on a daily basis. They don't want to just hand that rent equity over to a partner who doesn't have their interest as its top priority. Our solutions address all of these considerations. First, pressure for faster development cycles that consistently deliver a fresh user experience. Second, increasing software development requirements and the push for AI, all while balancing costs. And lastly, growing pressure from an evolving regulatory landscape. These factors are driving automakers and their suppliers to assess their strategies and investments, and that includes CEREN.

Tony: Think about it.

Tony: The infotainment system is a car brand's main interface with their customers on a daily basis.

Tony: they don't want to just hand that brenand equity over to a partner who doesn't have that interest as its top priority

Tony: Plus, we believe that OEMs want to maintain their ability to monetize the valuable data generated from their systems, rather than handing it off to a third party.

Tony: Our solutions address all of these considerations.

Tony: As we look to the future as a preferred supplier of voice and AI in the car, we are moving quickly to advanced generative AI and large-language model-powered innovation that we believe will be central to the automotive user experience of the future.

Stefan Ortmanns: Given our relationships with nearly all the world's leading OEMs, we have deep insight into the many challenges we are facing today. First, pressure for faster development cycles that consistently deliver a fresh user experience. Second, increasing software development requirements and the push on AI, all-wide balancing costs, and lastly, growing pressure from the involving regulatory landscape. These factors are driving automakers and their suppliers to assess their strategies and investments, and that includes CEREN.

Tony: I will provide more detail on that in a few minutes.

Speaker Change: given our relationships with nearly all the ro leadeding oyams we have deep insight into the many challenges how to make us are phasing today

Speaker Change: First, pressure for faster development cycle.

Speaker Change: that consistently deliver a fresh user experience. Second, increasing software development requirements and the push on AI, all while balancing costs. And lastly, growing pressure from an evolving regulatory landscape.

Speaker Change: These factors are driving automakers and their suppliers to assess their strategies and investment, and that includes CERENCE.

Stefan Ortmanns: As such, we are undergoing a business transformation intended to position Cerence to meet the current and future needs of our culture. On our last conference call, we also shared that given our lower revenue run rate profile, we would be undertaking cost reduction actions that we expect to position us to consistently deliver positive adjusted EBITDA and positive cash flow. Along these lines, our objective is to realign our cost structure to create a more efficient organization while also focusing our resources on the product areas we expect to reap the most rewards, driving faster growth and improved profitability.

Speaker Change: as such we are undergoing a business transformation tended to position ants to meet the current and future needs of our customers

Speaker Change: On our last conference call, we also shared that given our lower revenue run rate profile, we would be undertaking cost reduction actions.

Speaker Change: that we expect to position us to consistently deliver positive adjusted EBITDA and positive cash flows.

Speaker Change: along these lines our objective is to realign our cost structure to create a more efficient organization while also focusing our resources on the product areas we expect to reap the most rewards driving faster growth and improve profitability

Stefan Ortmanns: We have partnered with a specialized program to support us through our transformation efforts, which are well underway. As one of our first steps, we recently unified our product and core technology teams, which we believe will help to accelerate innovation and drive efficiency, meet customer demands and elevate our pain points, as well as deliver on our A.I. rope.

Speaker Change: we have partnered with a specializedpronem to support us through our transformation efforts which are well underway

Speaker Change: as one of our first steps we recently unified our product and core technology teams

Speaker Change: which we believe will help to accelerate innovation and to drive efficiency to meet customer demands and elevate pain points, as well as deliver on our AI roadmap.

Stefan Ortmanns: We expect to begin the next steps in our cost reduction efforts within the month. Our initial expectations are to achieve net annualized cost savings on a run rate basis of approximately 35 to 40 million dollars, which will be predominantly realized in fiscal year 25. Next quarter, we will provide fiscal year 25 guidance and give more specifics on regular savings in the PNL. The gross savings are expected to be higher, allowing us to re-invest in the resources that are required to bring innovative new solutions to the market, including advancing our negative AI roadmap and next generation platform. We expect that some of the expense reductions will have an impact on certain revenue streams, primarily those that are less profitable.

Stefan Ortmanns: We expect to begin the next steps in our cost reduction efforts within the month. Our initial expectations are to achieve net annualized cost savings on a run rate basis of approximately 35 to 40 million dollars, which will be predominantly realized in fiscal year 25. Next quarter, we will provide fiscal year 25 guidance and give more specifics on where those savings fall in the P&L. The gross savings are expected to be higher, allowing us to reinvest in the resources that are required to bring innovative new solutions to the market, including advancing our generative AI roadmap and next-generation platform.

Speaker Change: we expect to begin the next steps in our cost reduction efforts within demands our initial expectations are to achieve net analyzed cost savings on a run rate basis of approximately thirty-five to forty million dollars

Speaker Change: which will be predominantly realized in fiscal year 25. Next quarter, we will provide fiscal year 25 guidance and give more specifics on where those savings fall in the P&L.

Speaker Change: The gross savings are expected to be higher, allowing us to reinvest in the resources that are required to bring innovative new solutions to the market, including advancing our generative AI roadmap and next-generation platform.

Stefan Ortmanns: We are carefully managing these actions to mitigate the impact and focus our investments in the areas that we expect will drive our future growth and support OEMs as they continue to prioritize software and AI innovation. Tony will discuss this more in his remarks, and he will provide specifics along with official fiscal year 25 guidance on our next call. From a product and technology perspective,

Speaker Change: We expect that some of the expense reductions will have an impact on certain revenue streams.

Speaker Change: primarily those that are less profitable we are carefully managing these actions to mitigate the impact and focus our investments in the areas that we expect will drive our future growth and support oems as they continue to prvour software and the i innovation

Speaker Change: Tony will discuss this more in his remarks, and he will provide specifics along with official fiscal year 25 guidance on our next call.

Stefan Ortmanns: From a product and technology perspective, we have three main areas of focus. First, we will advance our core technology stack as a foundation for everything we do, bringing in advanced capabilities and new features. We expect another four Gen-AI customer programs to go live before the end of the calendar year. Also, based on a small sample size and short time frame, we are seeing a positive increase in price per unit for these offerings and an increase in user adoption and usage.

Stefan Ortmanns: We have three main areas of focus. First, we advance our core technology stack as a foundation for everything we do. We continue to innovate across input, output, conversational AI, audio AI, and other solutions like emergency vehicle detection to bring in advanced capabilities and new features. Our turnkey offering, Cerence Assistant, provides a strong foundation for our new generative AI solutions. Second, we continue to capitalize on the traction we generated at CES in January for our generative AI-powered solutions that enable OEMs to leverage AI for customization and cost efficiency.

Tony: From a product and technology perspective, we have three main areas of focus. First, advance our core technology stack as a foundation for everything we do.

Speaker Change: we continue to innovate across input output conversation ai ouri and other solutions like emergency vehicle detection

Speaker Change: bring in advanced capabilities and new features. Our turnkey offering, CERN's Assistant, provides a strong foundation for our new generative AI solutions.

Speaker Change: Second, we continue to capitalize on the traction we generated at CES in January for our generative AI-powered solutions that enables OEMs to leverage AI with customization and cost efficiency.

Stefan Ortmanns: We have made fast progress with eight OEM design wins since January, and several global OEMs, including Volkswagen, Audi, Seat, and Skoda, are already going live with these solutions, not only in new cars but also those already on the road. We expect another four Gen-AI customer programs to go live before the end of the calendar year. Also, based on a small sample size and short time frame, we are seeing a positive increase in price per unit for these offerings and an increase in user adoption and usage.

Speaker Change: we have made fast progress with om designwins in january and several global oems including fogs wen ali seatt and scoa already going live with these solutions not only a new castars but also those already on the road

Speaker Change: we expect another four genhi customer programs to boiz before the end of the calendar year

Speaker Change: Although, based on a small sample size and short time frame, we are seeing a positive increase in price per unit for these offerings, and an increase in user adaption and usage.

Stefan Ortmanns: Lastly, as OEMs are moving quickly and looking to Cerence as a trusted partner to help them efficiently bring AI into their cars, we are laying a strong foundation and developing an eager customer base that we have the potential to convert to our next generation AI computing platform down the line. This new platform leverages CERN's proprietary automotive large language model, enabling a single conversation interface to work across applications to complete tasks based on user preference.

Speaker Change: lastly as oems are moving quickly and looking to cers as a trusted partner to have them efficiently bring ai into their cars we are laying a strong foundation and developing an eager customer base that we have the potential to convert to our next generation a i comclputing platform down the line

Speaker Change: this new platform leverages servs proparator of the motive large language model enabling a single conversation interface to work across application to complete taskks based on us the preferences

Stefan Ortmanns: To give you a real world example, imagine getting into your car after a busy work day. You asked the intelligent assistant to summarize the text-present messages you received throughout the day. It filters out a few less important messages and highlights one from your spouse that says, "We are low on groceries. Should we go out to dinner tonight?"

Speaker Change: give you a reward example imagineing getting into your curt after a busy were update

Speaker Change: you ask the incar assistant to summarize the next the text presentcent mesenggers you receive throughout the d it filled us out a few less important messages and highlights one from your spals that says we are low under roscerories should be go out to dinner tonight

Stefan Ortmanns: You are the assistant to find you a French restaurant without a seat and with an open reservation. Confirm the details, then send a text message back to your spouse, filling them in on the plan. The assistant confirms that there is a charging station near the restaurant, that you have enough battery to get there, and then starts the navigation. This is all done in a single interaction, rather than multiple steps that require switching back and forth between applications, and you can speak naturally and comfortably to the system just as you would to another human.

Stefan Ortmanns: You asked the assistant to find you a French restaurant with outdoor seating and an open reservation. Confirm the details, then send a text message back to your spouse, filling them in on the plan. And you can speak naturally and comfortably to the system, just as you would to another human. This new platform is in development, and we're working closely with several customers on their specific needs. I would now like to hand the call off to Tony to review our Q3 results and outlook for Q4.

Speaker Change: You ask the assistant to find you a French restaurant with outdoor seating and an open reservation. Confirm the details, then send a text message back to your spouse filling them in on the plans.

Speaker Change: The assistant confirms that there is a charging station near the restaurant, that you have enough battery to get there, and then starts the navigation.

Speaker Change: This is all done in a single interaction rather than multiple steps that require switching back and forth between applications.

Speaker Change: And you can speak naturally and comfortably to the system just as you would to another human.

Stefan Ortmanns: This new platform is in development, and we're working closely with several customers on their specific needs. We do not expect our transformation plans to slow this program down. In fact, our plan is to take some of the cost savings to reinvest them to scale and accelerate our Gen AI roadmap. In summary, we believe that our product strategy will further strengthen our ability to serve customers and lead to a healthy pipeline of business opportunities.

Speaker Change: This new platform is in development, and we are working closely with several customers on their specific needs.

Speaker Change: We do not expect our transformation plans to slow this program down. In fact, our plan is to take some of the gross savings, cost savings to reinvest them to scale and accelerate our Gen AI roadmap.

Speaker Change: in summary we believe that our products strategy will shows us strengthen our ability to serve customers and lead to a healthy pipeline of business opportunities

Stefan Ortmanns: I would like to now hand the call off to Tony to review our last three results and outlook for Q4. Tony joined us in early June as our interim CFO, as we continue our search for a permanent CFO. Tony brings over 25 years of experience as a financial leader, managing all aspects of finance and accounting for both public and private global companies. After Tony's comments, I will be back for a few closing remarks, and then we will take your questions. Tony said:

Stefan Ortmanns: I would like to now hand the call off to Tony to review our Q3 results and Outlook for Q4.

Tony: tony joined us in early june as our interim cfo as we continue our search for a permanencecy of all

Stefan Ortmanns: Tony brings over 25 years of experience as a financial leader, managing all aspects of finance and accounting for both public and private global companies. After Tony's comments, I will be back for a few closing remarks, and then we will take your questions. Tony?

Tony Rodriguez: Phan. I will now talk through our Q3 results, Q4 and full year guidance. At $12.5 million, our Q3 adjusted EBITDA for the quarter was $9.7 million higher than a year ago and above the higher end of the guidance range. This quarter's revenue and profitability benefited from increased fixed license revenue as compared to the prior year. Our cash flow from operations for the quarter was $12.9 million, and our balance sheet at the end of the quarter included total cash and marketable securities of $126 million. As Sumanda and Stefan mentioned a few minutes ago, our gap results were negatively affected by a $357 million goodwill impairment.

Antonio Rodriquez: I will now talk through our Q3 results, Q4 and full year guidance, and continue the revenue framework discussion for fiscal year 25 that was introduced last quarter. For Q3, our revenue was $70.5 million, landing in the middle of our range of guidance of $66 to $72 million. This represents an increase of $8.8 billion, or 14%, over last year's Q3 revenue of $61.7 million. At $12.5 million, our adjusted EBITDA for the quarter was $9.7 million higher than a year ago and above the higher end of the guidance range.

Tony: Thank you, Stefan. I will now talk through our Q3 results, Q4 and full year guidance, and continue the revenue framework discussion for fiscal year 25 that was introduced last quarter.

Tony: For Q3, our revenue was $70.5 million, landing in the middle of our range of guidance of $66 to $72 million.

Speaker Change: This represents an increase of $8.8 billion, or 14%, over last year's Q3 revenue of $61.7 million.

Speaker Change: at twelve point five million dollars our q three adjusted ebitda of the quarter was nine point seven million dollars higher than a year ago and above the higher end of the guidance range

Antonio Rodriquez: This quarter's revenue and profitability benefited from increased fixed license revenue as compared to the prior year. Our cash flow from operations for the quarter was $12.9 million, and our balance sheet at the end of the quarter included total cash and marketable securities of $126 million. As Stefan mentioned a few minutes ago, our gap results were negatively affected by a $357 million goodwill impairment.

Tony: This quarter's revenue and profitability benefited from increased fixed license revenue as compared to prior year.

Tony Rodriguez: Our cash flow from operations for the quarter was $12.9 million, and our balance sheet at the end of the quarter included total cash and marketable securities of $126 million.

Tawanda: As Tawanda, Stefan mentioned a few minutes ago, our gap results were negatively affected by a $357 million goodwill impairment.

Antonio Rodriquez: This is a non-cash impairment charge that only affects our gap results. (Inaudible) Turning to our detailed revenue breakdown, variable license revenue was $23.1 million, down $2.7 million or 10% from the same year and the same quarter last year. Sixth License revenue came in at $20 million for the quarter, compared to Q3 last year where we had no fixed license revenue. This brings our fiscal year-to-date 24 fixed license revenue total to approximately $30.4 million.

This is a non-cash impairment charge that only affects our GAP results.

Tony Rodriguez: Turning to our detailed revenue breakdown, variable license revenue was $23.1 million, down $2.7 million, or 10% from the same quarter last year. Connected services revenue was $10.9 million. This was slightly higher than last year's connected services revenue of $10.2 million. As a reminder, our professional services are not a revenue growth driver for us in themselves but rather an enabler of both licensed and connected services revenue. We expect professional services revenue to be flat to down year over year going forward.

Tony Rodriguez: Turning to our detailed revenue breakdown, variable license revenue was $23.1 million, down $2.7 million, or 10% from the same year, same quarter last year.

Tony Rodriguez: Fixed license revenue came in at $20 million for the quarter compared to a Q3 last year where we had no fixed license revenue.

Tony Rodriguez: This brings our fiscal year-to-date 24 fixed license revenue total to approximately $30.4 million, and we do not expect additional fixed license revenue in Q4.

Antonio Rodriquez: And we do not expect additional fixed license revenue in Q4. Connected services revenue was $10.9 million. This was slightly higher than last year's connected services revenue of $10.2 million, when excluding $8.4 million of revenue from the legacy contract that we will discuss again in a little more detail later. Our professional services revenue was down 4% year over year.

Operator: Good day, and thank you for standing by.

Tony Rodriguez: connected services revenue was ten point nine million dollars this was slightly higher than last year's connected services revenue of we ten point two million dollars when excluding eight point four million dollars of revenue from the legacy contract that we will discuss again in a little more detail later

Operator: Welcome to the Serent Third Quarter 2024 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 11 on your telephone. You will then hand automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded.

Antonio Rodriquez: As a reminder, our professional services are not a revenue growth driver for us in themselves, but rather an enabler of both licensed and connected services revenue. We expect professional services revenue to be flat to down year over year going forward. Moving on with more detail on our license business.

Tony Rodriguez: Our professional services revenue was down 4% year over year.

Tony Rodriguez: As a reminder, our professional services are not a revenue growth driver for us in itself, but rather an enabler of both licensed and connected services revenue.

Tony Rodriguez: we expect revenue as professional services revenue to be flat to down year-over-year going forward

Operator: I would now like to hand the conference over to your first speaker today.

Tony Rodriguez: Moving on with more detail on our license business, as a reminder, pro forma royalties is an operating measure representing the total value of variable licenses shipped in a quarter, as it includes the consumption of previously recognized fixed license contracts.

Richard Yerganian: Richard Yerganian, Senior Vice President, Investor Relations. Richard, please go ahead. Thank you, Felicia.

Antonio Rodriquez: As a reminder, pro forma royalties is an operating measure representing the total value of variable licenses shipped in a quarter, as it includes the consumption of previously recognized fixed license contracts. Our pro forma royalties were $39.6 million, which were flat to Q2, but down as compared to Q3 of last year due to a lower volume of licensing royalties. Consumption of our previously recognized fixed license contracts totaled $16.5 million this quarter, which was lower than the same quarter of last year by 12%.

Tony Rodriguez: Moving on with more detail on our license business.

Tony Rodriguez: As a reminder, pro forma royalties is an operating measure representing the total value of variable licenses shipped in a quarter, as it includes the consumption of previously recognized fixed license contracts.

Richard Yerganian: Welcome to Serent's third quarter of fiscal year 24 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, assumptions, release, outlook, strategy, goals, objective, targets and plans should be considered to be forward-looking statements. Serence makes no representations to update those statements after today. These statements are subject to risk-in uncertainties which may cause actual results to differ materially from such statements, as described in our SEC violence, including the form 8K with the press release preceding today's call.

Tony Rodriguez: Our pro forma royalties were $39.6 million, which were flat to Q2, but down as compared to Q3 of last year due to lower volume of licensing royalties.

Tony Rodriguez: Consumption of our previously recognized fixed license contracts totaled $16.5 million this quarter, lower than the same quarter of last year by 12%.

Antonio Rodriquez: Because the annual value of fixed contracts has been trending down, over time, this will result in smaller consumption of royalties associated with past fixed contracts. As consumption levels decline, we expect that should correspondingly result in variable license revenue growth in future periods, as royalties will accrue directly to the revenue line as production occurs. We continue to expect consumption run rates to normalize by the end of fiscal year 26, at which time new fixed contracts should roughly align with the level of consumption during the year.

Tony Rodriguez: Because the annual value of fixed contracts has been trending down, over time, this will result in smaller consumption of royalties associated with past fixed contracts. As consumption levels decline, we expect that should correspondingly result in variable license revenue growth in future periods, as royalties will accrue directly to the revenue line as production occurs. We continue to expect consumption run rates to normalize by the end of fiscal year 26, at which time new fixed contracts should roughly align with the level of consumption during the year. Adjusted total billings increased 3% for the trailing 12-month period this year compared to the previous year.

Speaker Change: because because of the annual value of fixedconacts has been trending down over over time this will result in smaller consumption of royalties associated with past-fixed contracts

Richard Yerganian: Our form 10K filed on November 29, 2023 in our most recent form 10Q. In addition, the company may refer to certain non-GAP measures. Keep performance indicators in pro-former 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-GAP measures to the closest GAP equivalent.

Tony Rodriguez: as consumption what was decline we expect that should correspondent result in variable license revenue growth in future periods as royalties will accrue directly to the revenue line as production occurs

Tony Rodriguez: we continue to expect consumption run rates too normalized by the end of fiscal year twenty-six at which time new fixed contract should roughly align with the level of consumption during the year

Operator: The press release is available in the IR section of our website.

Antonio Rodriquez: As we review our key performance indicators this quarter, our penetration of global auto production for the trailing 12 months declined slightly to 53% due to weaker production volumes among our top customers. We shipped 11.7 million cars with Cerence technology in the quarter, down 6.2% year over year, while IHS production for the same period declined 0.5%. Quarter over quarter, we were up 3%. Well, IHS production was also up 3%. The number of carts produced that use our connected services increased 19% on a trailing 12-month basis compared to the same metric a year ago, as some programs that were previously delayed started ramping production. Adjusted total billings increased 3% for the trailing 12-month period this year compared to the previous year.

Richard Yerganian: Joining me on today's call are Stefan Rutman's CEO of Serence in Tony Rodriguez in terms of CFO of Serence. As a reminder, the only authorized spokespeople for the company are Stefan, Tony and me. Now, answer the call. Stefan?

Tony Rodriguez: As we review our key performance indicators this quarter, our penetration of global auto production for the trailing 12 months declined slightly to 53% due to weaker production volumes among our top customers.

Stefan Ortmanns: Thank you, Rich, and good morning, everyone. To begin, I would like to briefly comment on our third quarter results. Our financial performance was as expected with revenue in the middle of our guidance.

Speaker Change: we shipped eleven point seven million cars with ants's technology in the quarter down six point two percent year-over-year while is production for the same period declined z five percent

Stefan Ortmanns: Due to the decline in our stock price, we performed a goodwill assessment following completion of the quarter that resulted in a goodwill impairment charge of approximately $357 million, negatively impacting our GAP profitability. With the exception of cross margin, which was within the range, all other non-GAP profitability metrics were above the guidance we provided in our last call. Additionally, we had a strong quarter for cash flow from operations which came in at $12.9 million. We remain substantially on track to achieve the full-year guidance we provided in our last conference call, and Tony will provide the details later in the call.

Speaker Change: quarter over quarter and we were up three percent while is production was also up three percent

Tony Rodriguez: The number of carts produced that use our connected services increased 19% on a trailing 12-month basis compared to the same metric a year ago, as some programs that were previously delayed started ramping production.

Tony Rodriguez: Adjusted total billings increased 3% for the trailing 12-month period this year compared to the previous year.

Tony Rodriguez: As a reminder, we provide updates on our five-year backlog on our second and fourth quarter earnings calls. Now, before I review our outlook for the fourth quarter and fiscal year, I'd like to address our outstanding convertible notes. As you may be aware, we have $87.5 million of convertible notes that have gone current and are due in June of 2025. Because of the conversion price of $37 per share, these notes are viewed as debt, and we'll prioritize a solution that we believe to be in the long-term interest of the company and our shareholders. Moving on to our guidance.

Antonio Rodriquez: As a reminder, we provide updates on our five-year backlog on our second- and fourth-quarter earnings calls. Now, before I review our outlook for the fourth quarter and fiscal year, I'd like to address our outstanding convertible notes. As you may be aware, we have $87.5 million of convertible notes that have gone current and are due in June of 2025. Because of the conversion price of $37 per share, these notes are viewed as debt. Given the coupon rate of 3%, these notes are favorable to the company compared to similar instruments available in the current debt market.

Tony Rodriguez: As a reminder, we provide updates on our five-year backlog on our second and fourth quarter earnings calls.

Tony Rodriguez: We are guiding the fourth-quarter revenue to be between $44 and $50 million. For the full fiscal year, we expect revenue to be between $321 and $327 million. Excluding the cash impact of our transformation activities, we expect fiscal year 24 cash flow from operations to be in the range of $10 to $15 million. We do expect total cash restructuring charges in the range of $18 to $22 million related to the transformation efforts.

Tony Rodriguez: now before i review our outlook for the fourth quter and fiscal year i'd like to address our outstanding convertible notes

Stefan Ortmanns: We recognize that some of you may be listening to our call for the first time and thought it would be helpful to provide a high-level overview of Serence and our business. Serence creates AI and voice power to user experiences across the transportation industry, primarily for automobiles. We were among the first to bring voice interaction to cars, and today we count nearly all the world's leading OEMs and tier 1 suppliers as our customers and partners.

Tony Rodriguez: As you may be aware, we have $87.5 million of convertible notes that have gone current and are due in June of 2025.

Speaker Change: because of the conversion price of thirty-seven dollars per sha these notes are viewed as debt

Speaker Change: Given the coupon rate of 3%, these notes are favorable to the company compared to similar instruments available in the current debt market.

Antonio Rodriquez: We were reviewing options for next steps, including evaluating the trade-off between cash flow and delusion, and we'll prioritize a solution that we believe is in the long-term interest of the company and our shareholders. We will update you when a decision has been made, and we will move on to our guidance. Thank you.

Tony Rodriguez: we are reviewing options for next steps including evaluating the tradeoff between cash flow and dilution

Tony Rodriguez: and we'll prioritize a solution that we believe to be in the long-term interest of the company and our shareholders.

Stefan Ortmanns: More than half of cars, that role of the production line globally includes Serence solutions. So as are that many of you have interfaced with Serence as the company behind the audio and voice technology in your cars. Whether it be Mercedes-Benz, Volkswagen, Stellantis, Toyota, or many others. In fact, we recently surpassed half a billion cars shipped with our technology. As the automotive industry faces an incredible transformation, we believe Serence is well-positioned to partner with automakers to deliver what drivers want and need from the in-car experience. That is an intuitive, seamless interaction in which they can complete virtually any task, all without comprising safety.

Tony Rodriguez: We will update you when a decision has been made.

Antonio Rodriquez: We are guiding the fourth-quarter revenue to be between $44 and $50 million. For the full fiscal year, we expect revenue to be between $321 and $327 million. Excluding the cash impact of our transformation activities, we expect fiscal year 24 cash flow from operations to be in the range of 10 to $15 million. We do expect total cash restructuring charges in the range of $18 to $22 million related to the transformation efforts.

Tony Rodriguez: Moving on to our guidance.

Tony Rodriguez: We are guiding the fourth quarter revenue to be between $44 and $50 million.

Tony Rodriguez: for the full fiscal year we expect revenue to be between three hundred and twenty-one and three hundred and twenty-seven million dollars

Tony Rodriguez: excluding the cash impact of our transformation activities we expect fiscal year twenty-four cash flow from operations to be the range of ten to fifteen million dollars

Tony Rodriguez: We do expect total cash restructuring charges in the range of 18 to 22 million dollars related to the transformation efforts.

Antonio Rodriquez: We expect to incur these charges in the fourth quarter of fiscal year 24 and the first quarter of fiscal year 25. Consistent with what we explained in last quarter's call, I want to take a moment to discuss our legacy contract with Toyota. This contract was a connected services contract acquired by our former parent, Nuance Communication, in 2013. Toyota decommissioned the solution in Q1 of fiscal 2024, resulting in accelerated deferred revenue in Q1 of this year for Toyota and a directly related contract. So as of the first fiscal quarter of this year, the contract is behind us.

Tony Rodriguez: We expect to incur these charges in the fourth quarter of fiscal year 24 and the first quarter of fiscal year 25. Consistent with what we explained in last quarter's call, I want to take a moment to discuss our legacy contract with Toyota. This contract was a connected services contract acquired by our former parent, Nuance Communication, in 2013. Toyota decommissioned the solution in Q1 of fiscal 2024, resulting in accelerated deferred revenue in Q1 of this year for Toyota and a directly related contract.

Tony Rodriguez: We expect to incur these charges in the fourth quarter of fiscal year 24 and the first quarter of fiscal year 25.

Stefan Ortmanns: We believe there are three key differentiators that distinguish our offering. First, we have a lengthy history and deep custom relationships giving us critical understanding of the unique dynamics in the automotive industry. We have extensive experience in both in production and in development systems. And we work closely with our customer as an innovation partner, helping to define and design their next generation infotainment system. Second, we have a strong IP position, approximately 700 patents.

Tony Rodriguez: consistent with what we explained in last quar's call i want to take a moment to discuss the legacy contract with toil

Tony Rodriguez: this contract was a connected services contract acquired by a former parent nuance communication in two thousand and thirteen

Speaker Change: toyta decommission the solution in q one of fiscal two thousand and twenty- four resulting in accelerated deferred revenue in q one of this year for toyota and a directly -related contract

Tony Rodriguez: So, as of the first fiscal quarter of this year, the contract is behind us. First, as Stefan mentioned, we expect to begin implementation of our recently identified cost reduction efforts within the month. And our initial expectation is to achieve net annualized cost savings on a run rate basis. Since fixed contracts have been trending down, we would expect significantly less fixed license consumption in fiscal year 25 compared to fiscal year 24, assuming flat OEM production and mixed-end pricing.

Antonio Rodriquez: It is important to view fiscal year 24 revenue excluding the impacts from those services because we believe this provides a new revenue run rate profile for the company. If you take the midpoint of our current fiscal year 24 revenue guidance, which I discussed earlier of $324 million, and exclude $87 million of legacy-related revenue recognized in Q1, the adjusted revenue for fiscal year 24 is approximately $237 million.

Speaker Change: So, as of the first fiscal quarter of this year, the contract is behind us.

Speaker Change: it is important to view fiscal year twenty-four revenue excluding the impacts from those services

Stefan Ortmanns: And automotive specific data, supporting an end-to-end solution that improves all aspects of the in-car user experience. From the moment a driver begins speaking, all the way through two task completion. Additionally, our global footprint spends more than 70 languages to support OEMs worldwide. Third, we are deeply customer-centric, empowering our OEM customers with flexible and customer-sabled solutions that put their brands at the forefront. So they cannot only differentiate themselves from their competitors, but also maintain ownership of their data.

Tony Rodriguez: We believe this provides a new revenue run rate profile for the company.

Speaker Change: if you take the midpoint of our current fiscal year twenty-four revenue guidance i just discuss on the previous slide of three hundred and twenty four million dollars and exclude eighty seven million dollars of legacy related revenue recognized in q one

Tony Rodriguez: The adjusted revenue for the company for fiscal year 24 is approximately $237 million.

Antonio Rodriquez: We consider this new revenue run rate relevant for both our cost model and as well as planning our business activities going forward. With this adjusted new run rate of our expected revenue, I do want to take a moment to look forward. While I'm not prepared to provide fiscal year 25 guidance at this time, I can discuss the framework we provided last quarter of how to think about fiscal year 25 revenue and profitability.

Tony Rodriguez: We consider this new revenue run rate relevant for both our cost model and as well as planning our business activities going forward.

Speaker Change: With this adjusted new run rate of our expected revenue, I do want to take a moment to look forward.

Stefan Ortmanns: Think about it. The infotainment system is a car-brands-ming interface with their customers on a daily basis. They don't want to just hand that brand equity over to a partner who doesn't have their interest as its top priority. Plus, we believe that OEMs want to maintain their ability to monetize the valuable data generated from their system, rather than handing it off to a third party. Our solutions address all of these considerations.

Speaker Change: While I'm not prepared to provide fiscal year 25 guidance at this time, I can discuss the framework we provided last quarter of how to think about the fiscal year 25 revenue and profitability.

Antonio Rodriquez: First, as Stefan mentioned, we expect to begin implementation of our recently identified cost reduction efforts within the month, and our initial expectation is to achieve net annual cost savings on a run rate basis of approximately $35 to $40 billion, which will predominantly be realized in fiscal 25. Since fixed contracts have been trending down, we would expect significantly less fixed license consumption in fiscal year 25 compared to fiscal year 24, assuming flat OEM production and mixed-end pricing next.

Tony Rodriguez: asthe first as to fund mentioned we expect to begin implementation of recently identified cost reduction efforts within the month

Tony Rodriguez: and our initial expectation is to achieve net annualized cost savings on a run rate basis of a approximately thirty-five to forty billion dollars which will predominantly be realized in fiscal twenty-five

Stefan Ortmanns: As we look to the future as a preferred supplier of voice and AI in the car, we are moving quickly to advance generative AI and large language model-powered innovation that we believe will be central to the automotive user experience of the future. I will provide more details on that in a few minutes.

Speaker Change: Since fixed contracts have been trending down, we would expect significantly less fixed license consumption in FY25 compared to FY24, assuming flat OEM production and pricing mix.

Antonio Rodriquez: In addition, if you assume $20 million of new fixed licenses in FY25, very modest growth in run rate connected services, and some modest revenue impact related to the cost reduction efforts of the Q4 transformation, it would be reasonable to anticipate a range of flat to low single-digit percentage decline off of the new estimated revenue run rate of $237 million. For some additional color on the sensitivity of this view, those assumptions could be lower or higher depending on global auto production changes, day shifts in the introduction of new platforms, pricing, and mix shifts.

Tony Rodriguez: In addition, if you assume $20 million of new fixed licenses in FY25, very modest growth in run rate connected services, and some modest revenue impact related to the cost reduction efforts of the Q4 transformation, it would be reasonable to anticipate a range of flat to low single-digit percentage decline off of the new estimated revenue run rate of $237 million. Again, this does not represent guidance but rather as a framework of how to think about fiscal year 25 revenue, which is subject to change based on a number of operating industry and customer-related factors.

Stefan Ortmanns: Given our relationships with nearly all the world's leading OEMs, we have deep insight into the many challenges how to make us are facing today. First, pressure for faster development cycle that consistently deliver a fresh user experience. Second, increasing software development requirements and the push on AI all by balancing cost. And lastly, growing pressure from involving regulatory landscape.

Tony Rodriguez: In addition, if you assume $20 million of new fixed licenses in FY25.

Tony Rodriguez: very modest growth in run rate connected services and some modest revenue impact related to the cost reduction efforts of the q fourun transformation

Tony Rodriguez: It would be reasonable to anticipate a range of flat to low single-digit percentage decline off of the new estimated revenue run rate of $237 million.

Tony Rodriguez: For some additional color on sensitivity of this view, those assumptions could be lower or higher depending on global auto production changes, day shifts in the introduction of new platforms, pricing, and mix shifts.

Stefan Ortmanns: These factors are driving automakers and their suppliers to assess their strategies and investment, and that includes serums. As such, we are undergoing a business transformation intended to position serums to meet the current and future needs of our customers. On our last conference call, we also shared that given our lower revenue run rate profile, we would be undertaking cost reduction actions that we expect to position us to consistently deliver positive adjusted EBITDA and positive cash flows.

Antonio Rodriquez: Again, this does not represent guidance but rather as a framework of how to think about fiscal year 25 revenue, which is subject to change based on a number of operating industry and customer-related factors. In terms of profitability, with a lower anticipated mix of professional services in the revenue framework, we expect improved gross margins as compared to a fiscal year 25 business without legacy revenue, including the impact of our CASA EMEA efforts. In the near term, we are striving for positive adjusted EBITDA in the single-digit margin range as we progress toward our higher long-term profitability goals. I'd now like to hand the call back to Stefan for his closing remarks.

Tony Rodriguez: Again, this does not represent guidance but rather as a framework of how to think about fiscal year 25 revenue, which subject changes based on a number of operating industry and customer related factors.

Tony Rodriguez: in terms of profitability with a lower anticipated makes a professional services in the revenue framework we expect improved gross margins as compared to a fiscal year twenty-five business without legacy revenue

Stefan Ortmanns: Along these lines, our objective is to re-align our cost structure to create a more efficient organization while also focusing our resources on the product areas we expect to reap the most reward, driving faster growth and improved profitability. We have partnered with a specialized firm to support us through our transformation efforts, which are well underway. As one of our first steps, we recently unified our product and core technology teams, which we believe will help to accelerate innovation and to drive efficiency to meet customer demands and elevate our pain points as well as deliver on our AI roadmap.

Tony Rodriguez: including the impact of our cost-saving efforts. In the near term we are striving for positive adjusted EBITDA in the single-digit margin range as we progress toward our higher long-term profitability goals.

Stefan Ortmanns: Tony, as we close out the fiscal year, we have three main priorities. First, accomplish our fiscal fourth quarter and full year financial objectives. Second, execute on our transformation plan while minimizing any disruptions to our ongoing customer operations. And third, deliver on our AI innovation roadmap. That concludes our prepared remarks, and we will now open the call to questions. Thank you.

Tony Rodriguez: Tony, as we close out the fiscal year, we have three main priorities. First... That concludes our prepared remarks, and we will now open the call to questions. Thank you.

Tony Rodriguez: I'd now like to hand the call back up to Stefan for closing remarks.

Tony Rodriguez: Thank you, Tony. As we close out the fiscal year, we have three main priorities. First,

Speaker Change: accomplish our fiscal fourth quarter and full year financial objectives. Second, execute on our transformation plan while minimizing any disruptions to our ongoing customer operations. And third, deliver on our AI innovation roadmap.

Stefan Ortmanns: We expect to begin the next steps in our cost reduction efforts within the months. Our initial expectations are to achieve net annualized cost savings on a run rate basis of approximately 35 to 40 million dollars, which will be predominantly realized in fiscal year 25.

Tony Rodriguez: That concludes our prepared remarks and we will now open the call up for questions.

Operator: Thank you. One moment while we compile the Q&A roster. The first question comes from Jeff Van Rhee of Craig Holland Capital Group. Jeff, please go ahead.

Speaker Change: Thank you. One moment while we compile the Q&A roster.

Tony Rodriguez: pret

Jeff Van Rhee: Great. Thank you for my questions. There are just a couple for me.

Stefan Ortmanns: Next quarter, we will provide fiscal year 25 guidance and give more specifics on regular savings for in the P&L. The gross savings are expected to be higher, allowing us to re-invest in the resources that are required to bring innovative new solutions to the market, including advancing our Gen. AI roadmap and next generation platform. We expect that some of the expense reductions will have an impact on certain revenue streams, primarily those that are less profitable.

Tony Rodriguez: what

Speaker Change: The first question comes from the line of Jeff Van Ree of Craig Hollum Capital Group. Jeff, please go ahead.

Stefan Ortmanns: First of all, on the AI wins, maybe just talk about what you're seeing early, understandably, but what are you seeing in terms of the actual usage on an apples-to-apples basis? I think you've got a slide in the deck that talks a little bit about that, but I wonder if you could quantify it a little more precisely. And then also along those same lines, any quantification around average revenue per unit or user, however you want to dial it in, what you're seeing in revenue back there.

Speaker Change: great that i just a couple for me first defund on the on the ai wins maybe just talk to what you're seeing early understandably but what are you seeing in terms of the actually usage

Speaker Change: On an apples-to-apples basis, I think you've got a slide in the deck that talks a little bit about that, but I wonder if you could quantify it a little more precisely. And then also, along those same lines, any quantification around average revenue per unit or user, however you want to dial it in, what you're seeing on revenue back there.

Stefan Ortmanns: We are carefully managing these actions to mitigate the impact and focus of our investments in the areas that we expect will drive our future growth and support OEMs as they continue to prioritize software and AI innovation.

Stefan Ortmanns: Hey, good morning, Jeff. And thanks for your question here. Yeah, so I think it's too early to quantify all the details here. I think in the near term, there will not be a significant impact on revenue and billings as the programs are just launched and have been rolled out. Feedback from the OEMs directly is very positive. There is also good growth potential, but still, as I said, at the early stage, and this depends heavily on user adaptation and user subscriptions.

Tony Rodriguez: mayit

Tony Rodriguez: Hey, good morning, Jeff. And thanks for your question here. Yeah, so I think it's too early to quantify all the details here. I think in the near term, there's not a significant impact on the revenue and billings as the programs are just launched and have been rolled out.

Stefan Ortmanns: Tony will discuss these more in his remarks and he will provide specific along with official fiscal year 25 guidance on our next call.

Stefan Ortmanns: From a product and technology perspective, we have three main areas of focus. First, advance our core technology stack as a foundation for everything we do. We continue to innovate across input, output, conversation AI, audio AI, and other solutions like emergency vehicle detection, bring in advanced capabilities and new features. Our turnkey offering Cerence Assistant provides the strong foundation for our new generative AI solutions. Second, we continue to capitalize on the traction we generated at CES in January for our generative AI power solution.

Speaker Change: Feedback from the OEMs directly are very positive.

Speaker Change: There is also a good growth potential, but still, as I said, at the early stage. And this depends heavily on the user adaption and user subscriptions. And as a reminder, our business is B2B.

Stefan Ortmanns: And as a reminder, our business is B2B. Nevertheless, what you can see from the graph in the deck is that it's not just about JetPro, which sees a tremendous improvement on general questions. It's across all domains here, from navigation up to simple command and control, calling moments on the force. And that shows, actually, or it's a proof of concept that we're doing the right thing here, as we said earlier, right?

Speaker Change: Nevertheless, what you can see from the graph in the deck is that it's not just about JetPro who sees a tremendous improvement for general questions.

Speaker Change: It's across all domains here, from navigation up to simple command and control, calling mom and so on and so forth. And that shows actually, or it's a proof of concept that we're doing the right thing here, what we said also earlier, right?

Stefan Ortmanns: This kind of JetGPT or JetPro is heavily integrated into the OEM assistant, the OEM branded assistant, and the assistant has full control of the solution. And also, by feeding the system with our own automotive data, we see fewer hallucinations, right? And overall, it's also a very cost-effective approach for the OEM.

Stefan Ortmanns: We have made fast progress with 8 OEM design wins in January and several global OEMs including Volkswagen, Audi, Seat, and Skoda already going live with these solutions, not only in new cars, but also those already on the road. We expect another 4 Gen AI customer programs to go live before the end of the calendar year, although based on a small sample size and short time frame, we are seeing a positive increase in price per unit for these offerings and an increase in user adaption and usage.

Speaker Change: this kind of jetgpt or jetpro is heavily integrated in the om assisted o em brenan assistant

Speaker Change: and the assistant has full controlled about the solution and also by

Speaker Change: feeding the system with our own automotive data, we see less hallucinations, right, and overall it's also a very cost-effective approach for the OEM.

Stefan Ortmanns: As you think about the usage of in-car engagement systems, if you will, and you look at the broad landscape, obviously, you've dominated what I would call the in-car systems, but then you've got people Bluetoothing in, CarPlay, and Android Auto. When you do your studies on the market and the TAM, so to speak, how are you seeing the evolution of the percent of users that are opting for which of those solutions? I'm talking about over time, but do you have any sense of how many people are opting for just simple Bluetooth versus embedded in-car systems, and if they are, which brands are using them, and how that's playing out?

Speaker Change: Unknown Speaker Got it.

Speaker Change: As you think about the usage of in-car sort of engagement systems, if you will, and you'll look at the broad landscape, obviously, you've dominated.

Stefan Ortmanns: Lastly, as OEMs are moving quickly and looking to Cerence as a trusted partner to help them efficiently bring AI into their cars, we are laying a strong foundation and developing an eager customer base that we have the potential to convert to our next generation AI computing platform down the line. This new platform leverages Cerence proprietary automotive large language model enabling a single conversation interface to work across application to complete task based on user preferences.

Speaker Change: the, what I would call the in-car systems, but then you've got people Bluetoothing in, CarPlay, Android Auto. You know, when you do your studies on the market and the TAM, so to speak,

Speaker Change: how are you seeing the evolution of the percent of users that are opting for which of those solutions i'm talking like over time but the evany sense of how many people are opting for just simple blue tooth versus embedding car systems and if they are which brands are using how that's playing out

Stefan Ortmanns: I mean, I cannot disclose all the information, but when referring to Mercedes, clearly, they want to see a higher boost in their solution with respect to car play, and that's indeed what they are achieving now. For us, it's much more than just bringing in large language models; it's all about an AI computing platform with multi-seat capabilities, full interaction with the car, and also bringing in general knowledge. So overall, I think that's a trend which is really appreciated by OEMs and, I'm pretty sure, also by their end consumers.

Stefan Ortmanns: I mean, I cannot disclose all the information, but when referring to Mercedes, clearly, they want to see a higher boost in their solution with respect to car play, and that's indeed what they are achieving now. For us, it's much more than just bringing in large language models; it's all about an AI computing platform with multi-seat capabilities, full interaction with the car, and also bringing in general knowledge. So overall, I think that's a trend which is really appreciated by OEMs and, I'm pretty sure, also by their end consumers.

Stefan Ortmanns: I mean, I cannot disclose all information, but when referring to Mercedes, clearly they want to see a higher boost in their...

Stefan Ortmanns: To give you a reward example, imagine getting into your car after a busy work day. You ask the entire assistant to summarize the next text-based messages you received throughout the day. It filters out a few less important messages and highlights one from your spouse that says you are low on groceries should we go out to dinner tonight. You ask the assistant to find you a French restaurant without a seating and an open reservation confirm the details then send a test message back to your spouse, bring them in on the plans.

Stefan Ortmanns: solution

Stefan Ortmanns: with respect to CarPlay and that's indeed what they are achieving now.

Stefan Ortmanns: For us it's much more than just bringing in large language models, right? It's all about AI computing platform.

Stefan Ortmanns: with multi-seat capabilities, right, and full interaction with the car, right, and also bring in general knowledge, right. So overall, I think that's a trend which is really appreciated by OEMs and I'm pretty sure also with their end consumers.

Jeff Van Rhee: Okay, great. I'll leave it there. Thank you.

Jeff Van Rhee: Okay, great. I'll leave it there. Thank you.

Stefan Ortmanns: The assistant confirms that there is a charging station near the restaurant that you have enough battery to get there and then start the navigation. This is all done in a single interaction rather than multiple steps that require switching back and forth between applications and you can speak naturally and comfortably to the system just as you would to another human. This new platform is in development and we are working closely with several customers on their specific needs. We do not expect our transformation plans to slow this program down. In fact, our plan is to take some of the broad savings, cost savings to reinvest them to scale and accelerate our Gen-AI roadmap.

Stefan Ortmanns: Okay, great. I'll leave it there. Thank you.

Stefan Ortmanns: One moment for your next question.

Colin Langan: The next question comes from the line of Colin Langan of Wells Fargo. Colin, please go ahead.

Stefan Ortmanns: even

Speaker Change: the next question comes from the line of colllin lengn of well's fargo columin please go ahead

Colin Langan: Oh, great. Thanks for taking my questions.

Speaker Change: Oh, great. Thanks for taking my questions. The comments are now, I thought last quarter you mentioned 25, you expected mid-single digit growth, and now it's flat to low. Is that right? And what sort of, if I'm right, what drove the slightly softer outlook into next year?

Colin Langan: The comments are now, I thought last quarter you mentioned 25. You expected mid-single-digit growth, and now it's flat to low. Is that right? And what sort of, if I'm right, what drove the slightly softer outlook for next year?

Stefan Ortmanns: Maybe let me start first, Colin, and good morning to you as well, and then I will ask Tony.

Stefan Ortmanns: Maybe I should start first, Colin, and good morning to you as well, and then I will ask Tony to share his view. So, overall, I think, you know, we have this significant reduction in costs, and we assume also there will be a modest impact on the revenue side. As we said, okay, this is a kind of product rationalization, right, and we believe that also some products with lower margins we are going to downsize, and Tony, what's your view on this? No, I think that

Stefan Ortmanns: In summary, we believe that our product strategy will further strengthen our ability to serve customers and lead to a healthy pipeline of business opportunities.

Speaker Change: So, overall, I think, you know, we have this significant reduction in costs, right?

Speaker Change: And we assume also there will be a modest impact on the revenue side. As we said, okay, this is kind of product rationalization, right? And we believe that also some products with lower margin

Richard Yerganian: I would like to now hand the call off to Tony to review our few three results and outlook for Q4. Tony joins us in early June as our interim CFO as we continue our search for a permanent CFO. Tony brings over 25 years of experience as a financial leader, managing all aspects of finance and accounting for both public and private global companies.

Antonio Rodriquez: No, I think that's exactly right. As you think about the guidance at single-digit growth year over year last quarter, really, it's the impact of the cost restructuring. As we take a significant amount of cost out of the business to realign our costs, it will have an impact on the top line, so we've brought that down slightly.

Stefan Ortmanns: We are going to downsize, but Tony, what's your view on this?

Speaker Change: No, I think that's exactly right. As you think about the guidance at single-digit growth year-over-year, last quarter, really it's the impact of the cost restructuring. As we take a significant amount of cost out of the business to realign our cost, it will have an impact to the top line, so we've brought that down slightly.

Antonio Rodriguez: After Tony's comments, I will be back for a few closing remarks and then you will take your questions. Tony, thank you Stefan. I will now talk through our Q3 results, Q4 and full your guidance, and continue the revenue framework discussion for fiscal year 25 that was introduced last quarter. For Q3, our revenue was $70.5 million, landing in the middle of our range of guidance of $66 to $72 million. This represents an increase of $8.8 billion or 14% over last year's Q3 revenue of $61.7 million.

Colin Langan: Got it. And in your comments, you mentioned the debt coming due next year. What are the options? It sounded like you were alluding to potentially maybe issuing equity to pay that down. But also, look at the balance sheet. I think you have over $100 million. Can you fund a lot of that repayment? With the cash on the balance sheet and it, are the debt markets open to you?

Speaker Change: Got it. And in your comments, you mentioned the debt coming due next year.

Speaker Change: What are the options? It sounded like you were alluding to potentially maybe issuing equity to pay that down. But also, look at the balance sheet. I think you have over $100 million. Can you fund a lot of that repayment?

Tony Rodriguez: with the cash on the balance sheet, and it..., are the debt markets open to?

Speaker Change: With the cash on the balance sheet and it, you know, are the debt markets open to refinance?

Antonio Rodriquez: Yeah, that's exactly right. I think we're looking at all the options. Certainly, as we mentioned, the 3% notes are beneficial to the company at this point, but we want to address the liquidity concerns of it coming due in June of 2025. So we're looking at all options, including refinancing using our existing cash as well, and looking at the benefit of the liquidity from a lower coupon rate, which would be adjusted higher on a refinancing, and certainly the conversion price would be lower than currently in the notes So we're looking at all those, but yes, the markets are open to refinancing. Got it. All right, thanks for taking my question.

Tony Rodriguez: Yeah, that's exactly right. I think we're looking at all the options. Certainly, as we mentioned, the 3% notes are beneficial to the company at this point, but we want to address the liquidity concerns of it coming due in June of 2025. So we're looking at all options, including refinancing using our existing cash as well, and looking at the benefit of the liquidity from a lower coupon rate, which would be adjusted higher on a refinancing, and certainly, the conversion price would be lower than currently in the So we're looking at all those, but yes, the markets are open to refinancing. Got it. All right, thanks for taking my call.

Antonio Rodriguez: At $12.5 billion, our Q3 adjusted the EBITDA for the quarter, was $9.7 million higher than a year ago and above the higher end of the guidance range. This quarter's revenue and profitability benefited from increased fixed license revenue as compared to prior year. Our cash flow from operations for the quarter was $12.9 million and our balance sheet at the end of the quarter included total cash and marketable securities of $126 million. As Stefan mentioned a few minutes ago, our gap results were negatively affected by a $357 million goodwill impairment.

Tony Rodriguez: Yeah, that's exactly right. I think we're looking at all options. Certainly, as we mentioned, the 3% notes are beneficial at the company at this point, but we want to address the liquidity concerns of it coming due in June of 2025. So we're looking at all options, including refinancing using our existing cash.

Tony Rodriguez: as well and looking at that the benefit of the liquidity from a lower coupon rate which would be adjusted higher in a refinancing and certainly the conversion price would be lower than currently in the note so we're looking at all those but yes the markets are open to a refinance

Colin Langan: Got it. All right. Thanks for taking my question.

Antonio Rodriguez: This is a non-cash impairment charge that only affects our gap results. Turning to our detailed revenue breakdown, variable license revenue was $23.1 million down $2.7 million or 10% from the same quarter last year. Fixed license revenue came in at $20 million for the quarter compared to a Q3 last year where we had no fixed license revenue. This brings our fiscal year-to-date 24 fixed license revenue total to approximately $30.4 million and we do not expect additional fixed license revenue in Q4.

Speaker Change: got right thank you my questions

Speaker Change: One moment for your next question.

Nick Doyle: The next question comes from the line of Nick Doyle of Needham & Company. Nick, please go ahead.

Operator: The next question comes from the line of Nick Doyle of Needham & Company. Nick, please go ahead.

Speaker Change: The next question comes from the line of Nick Doyle of Needham and Company. Nick, please go ahead.

Nick Doyle: Hey, guys, good morning, and thanks for taking my questions also. We had just talked about, you know, the lower OPEX will impact revenue. And you talked about it a couple of times in your script.

Nick Doyle: Hey guys, good morning and thanks for taking my questions also.

Speaker Change: you had we just talked about you know the lower opex or impact revenue and you talked about a couple times in your spt

Nick Doyle: Could you just be a little more specific on which product streams are impacted, or at least which segment? And then that adjusted net cost savings of thirty five to forty million. Would that put you in the one hundred and forty million a year range for 2025, or is it still too early? Thanks.

Nick Doyle: Could you just be a little more specific on which product streams are impacted, or at least which segment, and then that adjusted net cost savings of $35 to $40 million, would that put you in the $140 million

Antonio Rodriguez: Connected services revenue was $10.9 million. This was slightly higher than last year's connected services revenue of $10.2 million. When excluding $8.4 million of revenue from the legacy contract that we will discuss again in a little more detail later. Our professional services revenue was down 4% year over year. As a reminder, our professional services are not a revenue growth driver for us in itself but rather a enabler of both license and connected services revenue.

Nick Doyle: a year range for 2025 or is it still too early? Thanks.

Antonio Rodriquez: Yeah, so I'll take that. Yeah, when you think about the impacts of the cost reductions, they will be primarily related to professional services revenue. So that's where Stefan mentioned that if that that makes us a bit lower than prior expectations, we'd expect higher gross margins overall. And then, I'm sorry, I missed the last question about the $140 million.

Tony Rodriguez: Yeah, so I'll take that. Yeah, when you think about the impacts of the cost reductions, they will be primarily related to professional services revenue. So that's where Stefan mentioned that if that that makes us a bit lower than prior expectations, we'd expect higher gross margins overall. And then, I'm sorry, I missed the last question about the $140 million.

Tony Rodriguez: so i'll take that yes when when you think about the impacts of the cost reductions it will be primarily related to professional services revenue

Tony Rodriguez: so that's where a stiff mention that if that makes us a bit lower than than prior expectations we'd expect to her gross margins overall also and i'm sryi miss the last question about one hundred and forty million

Antonio Rodriguez: We expect professional services revenue to be flat to down year over year going forward. Moving on with more detail on our license business. As a reminder, pro-former royalties is an operating measure representing the total value of variable licenses shipped in a quarter as it includes a consumption of previously recognized fixed license contracts. Rex. Our pro-former royalties were $39.6 million, which were flat to Q2, but down is compared to Q3 of last year due to lower volume of licensing royalties.

Tony Rodriguez: Just asking if that, you know, the adjusted net cost savings number of $35 to $40 million would put you around $140 million a year in total.

Nick Doyle: Just asking if that, you know, the adjusted net cost savings number of $35 to $40 million would put you around $140 million a year in total output.

Speaker Change: Just asking if that, you know, the adjusted net cost savings number of 35 to 40 million would put you around 140 million a year in total OPEX.

Tony Rodriguez: Yeah, well, you know, there's a combination of things. We've got a run rate from 2024, but that's an entire year. We also have increases in 2025, and so we're looking at a run rate off of Q4 run rate, and the expenses would be off of that.

Antonio Rodriquez: Yeah, well, you know, there's a combination of things. We've got a run rate from 2024, but that's the entire year. We also have increases in 2025. And so we're looking at a run rate off of Q4 run rate, and the expenses would be off of that.

Tony Rodriguez: Yeah, well, you know, there's...

Tony Rodriguez: When you think about it, there's a combination of things. We've got run rate from 2024, but that's entire year. We also have increases in 2025. And so we're looking at really a run rate off of Q4 run rate, and the expenses would be off of that number.

Nick Doyle: Got it. Thank you. And then on the fixed contract consumption, you're saying, you know, you hope to normalize by 2026, and the consumption should go lower over time as that normalizes. And that all makes sense. But do you have a specific number that you're looking at for the fourth quarter? And maybe what we're thinking? Of for through 2025, is that a 10 million a quarter number? You know, I get that it moves up and down. Yeah, I don't have specifics that I can speak of now on consumption rights.

Tony Rodriguez: Got it. Thank you. And then on the fixed contract consumption, you're saying, you hope to normalize by 2026, and the consumption should go lower over time as that normalizes. And that all makes sense. But do you have a specific number that you're looking at for the fourth quarter and maybe what we're thinking about for through 2025 is that 10 million a quarter number? You know I get that it moves up and down. Yeah, I don't have any specifics that I can speak of now on consumption rights.

Antonio Rodriguez: Consumption of our previously recognized fixed license contracts totaled $16.5 million this quarter, lower than same quarter of last year by 12%. Because the annual value of fixed contracts has been trending down over time, this result in smaller consumption of royalties associated with past fixed contracts. As consumption levels decline, we expect that should correspondably result in variable license revenue growth in future periods, as royalties will accrue directly to the revenue line as production occurs.

Tony Rodriguez: got it thank you and then on the fixed contract consumption 're you're saying you know you hope to normalize by two thousand and twenty six and and the consumptions you go lower over time as at normaliz and that 'll make sense but do you have a specific number that you're looking at for the fourth quarter and and maybe what we're thinking

Tony Rodriguez: of for through 2025 is that 10 million a quarter number you know I get that it moves up and down.

Tony Rodriguez: Yeah, I don't have specifics that I can speak of now on consumption rates, other than what we've said, that we expect that to be lower in fiscal 2025.

Antonio Rodriquez: Yeah, I don't have specifics that I can speak of now on consumption rates, other than what we've said, that we expect that to be lower in fiscal 2025.

Antonio Rodriguez: We continue to expect consumption run rates to normalize by the end of fiscal year 26, at which time new fixed contracts should roughly align with the level of consumption during the year. As we review our key performance indicators as quarter, our penetration of global auto production for the trailing 12 months declined slightly to 53% due to weaker production volumes among our top customers. We shipped 11.7 million cars with Cerence Technology in the quarter, down 6.2% year-over-year, while IHS production for the same period declined 0.5%.

Tony Rodriguez: Yeah, I don't have specifics that I can speak of now on consumption rates other than what we've said, that we expect that to be lower in fiscal 2025.

Speaker Change: Okay, thank you.

Speaker Change: One moment for your next question.

Luke Junk: The next question comes from the line of Luke Junk from Bayard. Luke, please go ahead.

Speaker Change: The next question comes from the line of Luke Junk from Bayard. Luke, please go ahead.

Luke Junk: Good morning. Thanks for taking the questions. Stefan, I wanted to start with maybe just a higher-level question and understand the approach to the R&D organization going forward. You know, clearly, there are going to be some impacts in terms of the pro services element of R&D. I think you also mentioned sort of a unified product and core technology team in your prepared remarks. If you just maybe could expand on that, and I know you're not breaking out the cost reductions into individual buckets right now, but R&D is going to be an important part of that, clearly.

Caller: Good morning. Thanks for taking the questions. Stefan, I wanted to start with maybe just a higher-level question and understand the approach to the R&D organization going forward. You know, clearly, there's going to be some impacts in terms of the pro services element of R&D. I think you also mentioned sort of a unified product and core technology team in your prepared remarks. If you could, just maybe, expand on that.

Speaker Change: Good morning. Thanks for taking the questions.

Caller: define wanted to start with may be just a higher level question and understanding the across to the rnd organization going forward

Antonio Rodriguez: Quarter over quarter, we were up 3%, while IHS production was also up 3%. The number of cards produced that use are connected services increased 19% on a trailing 12 month basis compared to the same metric a year ago, as some programs that were previously delayed started ramping production. Adjusted total billings increased 3% for the trailing 12 month period this year compared to the previous year. As a reminder, we provide updates on our five-year backlog on our second and fourth quarter earnings calls.

Caller: You know, clearly it sounds like there's going to be some impacts in terms of the pro services.

Speaker Change: I think you also mentioned sort of a unified product and core technology team in your prepared remarks.

Caller: maybe could expand on that. And I know you're not breaking up the cost reductions into individual buckets right now, but R&D is going to be an important part of that clearly. So maybe just at a high level if you could comment on R&D opportunities on cost. Thank you.

Luke Junk: So, maybe just at a high level, if you could comment on R&D opportunities. Yes, so, as I said, right, our focus is clearly on our gen AI roadmap, including the new AI computing platform.

Caller: And I know you're not breaking out the cost reductions into individual buckets right now, but R&D is going to be an important part of that clearly. So maybe just at a high level, if you could comment on R&D opportunities.

Stefan Ortmanns: Yes, so as I said, our focus is clearly on our Gen AI roadmap, including the new AI computing platform. We have recently unified our product and core technology teams. We believe that we will see some efficiency here, and this will also help us to accelerate innovation, again, and drive efficiency to meet the demands of our OEMs. That's very important.

Speaker Change: Yes, so as said, right, our focus is clearly on our

Speaker Change: gener iofmap including the new i computing platform we have frecently unified our product and cote technology teams we believe that we will see some

Antonio Rodriguez: Now, before I review our outlook for the fourth quarter in fiscal year, I'd like to address our outstanding convertible notes. As you may be aware, we have $87.5 million of convertible notes that have gone current and are due in June of 2025. Because of the conversion price of $37 per share, these notes are viewed as debt. Given the coupon rate of 3%, these notes are favorable to the company compared to similar instruments available in the current debt market.

Speaker Change: efficiency here, and also this will help us to accelerate

Stefan Ortmanns: again, drive efficiency to meet also the demands of our OEMs. That's very important.

Stefan Ortmanns: again drive efficiency to meet also the demands of our OEMs. Now that's very important.

Stefan Ortmanns: Overall, what I said is that our solution, our new solution, is well received by a couple of OEMs across the globe. I think we're doing the right things here also with respect to cost optimization and finding synergies between the two teams, right? And Nils Schanz, who joined us one half year ago from Mercedes, who has been essential for various launches over the last couple of weeks here. He is extremely qualified, and he will run both R&D and product and professional services.

Stefan Ortmanns: Overall, what I said is that our solution, our new solution, is well received by a couple of OEMs across the globe. I think we're doing the right things here also with respect to cost optimization and finding synergies between the two teams, right? And Nils Schanz, who joined us one half year ago from Mercedes, who has been essential for various launches over the last couple of weeks here. He is extremely qualified, and he will run both R&D and product and professional services.

Stefan Ortmanns: Overall, what I said is that our solution, our new solution is well received by a couple of OEMs across the globe.

Antonio Rodriguez: We were reviewing options for next steps, including evaluating the trade-off between cash flow and dilution, and will prioritize a solution that we believe to be in the long-term interest of the company and our shareholders. We will update you when the decision has been made.

Stefan Ortmanns: I think we are doing the right things here, also with respect to cost optimization, finding synergies between the two teams, right?

Stefan Ortmanns: and Nils Schanz, who joined us one and a half year ago from Mercedes, who was also...

Antonio Rodriguez: Moving on to our guidance. We are guiding the fourth quarter revenue to be between $44 and $50 million. For the full fiscal year, we expect revenue to be between $321 and $327 million. Excluding the cash impact of our transformation activities, we expect fiscal year 24 cash flow from operations to be in the range of $10 to $15 million. Rivers. We do expect total cash restructuring charges in the range of 18 to 22 million dollars related to the transformation efforts. We expect to incur these charges in the fourth quarter of fiscal year 24 and the first quarter of fiscal year 25.

Stefan Ortmanns: essential for various launches over the last couple of of weeks here he is extremely qualified and he will run both r andd and product and professional services

Mark Delaney: The next question comes from the line of Mark Delaney of Goldman Sachs. Mark, please go ahead.

Speaker Change: The next question comes from the line of Mark Delaney of Goldman Sachs. Mark, please go ahead.

Caller: Yes, good morning. Thanks very much for taking the time to answer my questions. First, I was hoping to better understand how you're thinking about professional services going forward. I think in the past you've used that as a lead generator, and you've described it as part of your investments that help with your longer-term traction and revenue growth. It sounds like you want to make some cuts there and understand the lower margins, but maybe help us better understand the implications for revenue growth and why you're making some of the cuts in that part of your business. Thank you. Thank you.

Mark Delaney: Yes, good morning. Thanks very much for taking the time to answer my questions. First, I was hoping to better understand how you're thinking about professional services going forward. I think in the past you've used that as a lead generator, and you've described it as part of your investments that help with your longer-term traction and revenue growth. It sounds like you want to make some cuts there and understand the lower margins, but maybe help us better understand the implications for revenue growth and why you're making some of the cuts in that part of your business. Thank you. Thank you.

Speaker Change: yes goodmorning thanks so much for taking my questions first 't bitbetter understandhoware you thinking about professional services going forward i think in the past you've used that as a lead generator and you've described it as part of your investments so helps with longerterm traction and revenue growth you donsound like you want to make some cuts there and understandthe lower margins but maybe help us better understand the implications for revenuegrow and you'remaking with thecut of thatpart of business

Antonio Rodriguez: Consistent with what we explained in last quarter's call, I want to take a moment to discuss the legacy contract with Toyota. This contract was a connected services contract acquired by a former parent nuanced communication in 2013. Toyota decommissioned the solution in Q1 of fiscal 2024, resulting in accelerated deferred revenue in Q1 of this year for Toyota and a directly related contract. So as of the first fiscal quarter of this year, the contract is behind us.

Stefan Ortmanns: So still, I mean, professional services is a very important tool for us for enabling licenses, whether it's embedded or cloud services, right? So don't get us wrong here.

Speaker Change: So, still, I mean, professional services is a very important tool for us for enabling licenses, whether it be embedded or cloud services, right, so don't get us wrong here.

Antonio Rodriguez: It is important to view fiscal year 24 revenue, excluding the impacts from those services. We believe this provides a new revenue run rate profile from the company. If you take the midpoint of our current fiscal year 24 revenue guidance, I just discussed on the previous slide of $324 million and exclude $87 million of legacy-related revenue recognized in Q1, the adjusted revenue for the fiscal year 24 is approximately $237 million. We consider this new revenue run rate relevant for both our cost model and as well as planning our business activities going forward.

Stefan Ortmanns: We see some optimizations in professional services and also for streamlining our products. We also see efficiencies in deploying our new products. To give you an example, a POC, so proof of concept can be done within a car within less than two and a half weeks. And then, of course, for doing the fine-tuning and optimization and customizations with respect to the OEM demands, like branding and so on and so forth, it takes us between four to six months. Compare this with the past, where it took us 12 to 18, 24 months, right?

Stefan Ortmanns: We see some optimizations in professional services and also for streamlining our products. We also see efficiencies in deploying our new products. To give you an example, a POC, so proof of concept can be done within a car within less than two and a half weeks. And then, of course, for doing the fine tuning and optimization and customizations with respect to the OEM demands like branding and so on and so forth, it takes us between four to six months. Compare this with the past, where it took us 12 to 18, 24 months, right?

Stefan Ortmanns: We see some optimizations in professional services and also for streamlining our products. We see also efficiencies in deploying our new products, to give you also an example.

Stefan Ortmanns: a POC, so proof of concept can be done within a car within less than two and a half weeks.

Stefan Ortmanns: And then, of course, for doing the fine-tuning and optimization and customizations with respect to the OEM demands like branding and so on and so forth, it takes us between four to six months. Compare this with the past, where it took us 12 to 18, 24 months, right?

Stefan Ortmanns: And of course, then PS revenue goes down. But nevertheless, PS is the enabler for the license business. And that goes also hand-in-hand with the expectations from OEMs, right? What we said in the earnings call earlier is that, I mean, there's clearly a demand for more flexibility and faster deployment and also keeping the system fresh and up-to-date, and we're supporting these new requests from the OEMs and, finally, from consumers.

Stefan Ortmanns: And, of course, then PS revenue goes down. But, nevertheless, PS is the enabler for the license business. And that goes also hand-in-hand with the expectations from OEMs, right? What we said in the earnings call earlier is that, I mean, there's clearly a demand for more flexibility and faster deployment and also keeping the system fresh and up-to-date. And we're supporting these new requests from the OEMs, and finally, from the consumers.

Caller: understood. Thank you.

Caller: And, of course, then PS revenue goes down. But nevertheless, PS is the enabler for the licensed business.

Antonio Rodriguez: With this adjusted new run rate of our expected revenue, I do want to take a moment to look forward. While I'm not prepared to provide fiscal year 25 guidance at this time, I can discuss the framework we provided last quarter of how to think about the fiscal year 24 25 revenue and profitability. As first, as DeFon mentioned, we expect to begin implementation of our recently identified cost reduction efforts within the month.

Mark Delaney: understood. Thank you.

Caller: And that goes also hand-in-hand with the expectations from OEMs, right, what we said also in the earnings.

Caller: earlier, is that I mean there's clearly a demand for more flexibility and a faster deployment and also keeping the system fresh and up to date and we're supporting these new requests from the OEMs.

Mark Delaney: My other question was just better understanding your commentary, Stefan, around how to think about monetization for the. You mentioned your revenue is going to depend on usage and what OEM customers are seeing in terms of how often these services are being used. Can you elaborate a little bit more on how your revenue will flow through? Is there some piece of it that is... more committed in terms of the subscription rates you're seeing, and then, you know, how much is maybe based on usage rates of your products in the car themselves, and just, you know, is it more tilted towards usage rates more, you guys have more guaranteed subscription fees? Just trying to better understand that dynamic, if I could please. Thanks. So, what again?

Caller: My other question was just a better understanding of your comments, Stefan, around how to think about monetization for the. You mentioned your revenue is going to depend on usage and what the OEM customers are seeing in terms of how often these services are being used. Can you elaborate a little bit more on how your revenue will flow through? Is there some piece of it that is... more committed in terms of the subscription rates you're seeing and then, you know, how much is maybe based on usage rates of your products in the car themselves and just, you know, is it more tilted towards usage rates more, or do you guys have more guaranteed subscription fees? Just trying to better understand that dynamic, if I could please. So, what again?

Caller: and finally from the consumers.

Antonio Rodriguez: And our initial expectation is to achieve net annual cost savings on a run rate basis of approximately $35 to $40 billion, which will predominantly be realized in fiscal 25. Since fixed contracts have been trending down, we would expect significantly less fixed license consumption in fiscal year 25 compared to fiscal year 24 assuming flat OEM production and in pricing mix. In addition, if you assume $20 million of new fixed licenses in fiscal year 25, very modest growth in run rate connected services and some modest revenue impact related to the cost production efforts of the Q4 transformation.

Caller: Understood, thank you. My other question was just better understanding your commentary, Stefan, around how to think about monetization for the

Speaker Change: New Gen AI types of subscriptions. You mentioned your revenue is going to depend on usage and

Caller: What the OEM customers are seeing in terms of how often these services are being used. Can you elaborate a little bit more on how your revenue will flow through? Is there some piece of it that is...

Caller: More committed in terms of the subscription rates you're seeing and then, you know, how much is maybe based on usage rates of your products in the car themselves and just, you know, is it more tilted towards usage rates more, you guys have more guaranteed subscription fees, just trying to better understand that dynamic if I could please. Thanks.

Antonio Rodriguez: It would be reasonable to anticipate a range of flat to low single digit percentage decline off of the new estimated revenue run rate of $237 million. For some additional color on sensitivity of this view, those assumptions could be lower or higher depending on global auto production changes, day shifts in the introduction of new platforms, pricing and mix shifts. Again, this does not represent guidance, but rather as a framework of how to think about fiscal year 25 revenue, which subject changes based on a number of operating industry and customer-related facts.

Stefan Ortmanns: So, again, we are currently at an early stage with those OEMs and our new products. We've seen an uptick in usage of about 50% to 70%. We also see a nice increase in our price per unit per year because most of the services are cloud services. So we should also focus in the future a bit more on billing. Then you asked about monetization of the data. Here we are still in discussion with OEMs about what we can do together. And as I said before, right, we are still a B2B partner of the OEMs, but nevertheless, we see for those deals really a significant increase in price per unit. Thank you.

Stefan Ortmanns: So, again, we are currently at an early stage with those OEMs and our new products. We've seen an uptick in usage of about 50% to 70%. We also see a nice increase in our price per unit per year because most of the services are cloud services. So we should also focus in the future a bit more on billing. Then you asked about monetization of the data. Here we are still in discussion with OEMs about what we can do together. And, as I said before, right, we are still a B2B partner of the OEMs, but nevertheless, we see for those deals really a significant increase in price per unit. Thank you.

Stefan Ortmanns: So, again, we are currently at an early stage with those OEMs and our new products.

Stefan Ortmanns: We've seen an uptick in usage of about 50 to 70 percent. We see also a nice increase in our price per unit per year.

Stefan Ortmanns: Most of the services are cloud services, yeah, so we should also focus in the future a bit more on buildings.

Stefan Ortmanns: Then you asked about monetization of the data. Here we are still in discussion with OEMs what we can do together.

Antonio Rodriguez: Partners. In terms of profitability, with a lower anticipated mix of professional services in the revenue framework, we expect improved gross margins as compared to a fiscal year 25 business without a legacy revenue, including the impact of our cost ending at efforts. In the near term, we are striving for positive, adjusted EBIDA in the single-digit margin range as we progress toward our higher long-term profitability goals.

Stefan Ortmanns: and

Stefan Ortmanns: has said before rights we are still bto b partner of the oems but nevertheless we see for those deals really a significant increase in price per unit

Operator: As a reminder, to ask a question, please press star one one on your telephone. I see no further questions at the moment, so I would now like to hand the call back over to Richard Yerganian, Senior Vice President, Investor Relations. Richard, please go ahead. Thank you.

Operator: As a reminder, to ask a question, please press star one one on your telephone. Thank you, Felicia.

Felicia: Thank you.

Speaker Change: As a reminder, to ask a question, please press star 11 on your telephone.

Speaker Change: Unknown Attendee, Stefan Ortmanns, Thomas Beaudoin, Nils Schanz, Unknown Attendee, Richard Yerganian,

Stefan Ortmanns: I now like to hand the call back up to Stefan for closing remarks. Thank you, Tony. As we close out the fiscal year, we have three main priorities. First, accomplish our fiscal force quarter and full year financial objectives. Second, execute on our transformation plan while minimizing any disruptions to our ongoing customer operations and third, deliver on our AI innovation roadmap.

Richard Yerganian: I see no further questions at the moment so I would now like to hand the call back over to Richard Yerganian, Senior Vice President, Investor Relations. Richard, please go ahead.

Stefan Ortmanns: Thank you, Felicia, and thank you to everyone who joined us on the call this morning, and we look forward to further discussions. Thank you, and have a good day.

Richard Yerganian: Thank you, Felicia, and thank you to everyone who joined us on the call this morning, and we look forward to further discussions. Thank you, and have a good day.

Operator: This does conclude today's conference call; you may now disconnect.

Operator: This does conclude today's conference call. You may now disconnect.

Operator: That concludes our prepared remarks, and we will now open the call up for questions. Thank you. One moment while we compile the Q&A roster.

Operator: This does conclude today's conference call. You may now disconnect.

Jeff Van Ree: The first question comes from the line of Jeff Van Ree of Craig Holland Capital Group. Jeff, please go ahead. Great. Thank you for your questions. Just a couple for me. First of all, on the AI wins, maybe just talk to what you're seeing early, understandably, but what are you seeing in terms of the actual usage on an Apple's, Apple's basis? I think you got a slide in the deck that talks a little bit about that, but wonder if you could quantify it a little more precisely.

Jeff Van Ree: And then also along those same lines, any quantification about average revenue per unit or user, however you want to dial it in. What you're seeing on revenue impact there. Good morning, Jeff, and thanks for your question here. Yeah, so I think it's it's too early to quantify all the details here. I think in the near term, there's not a significant impact on the revenue and buildings as the problems are just launched and have been rolled out feedback from the OEMs directly are very positive.

Jeff Van Ree: Yeah, there is also a good growth potential, but still as said at the early stage and this depends heavily on the user adaption and do the subscriptions and as a reminder, our business is me to be nevertheless what you can see from the graph in the deck is that it's not just about chat pro who see the tremendous improvement for general questions. It's across all domains here from navigation up to simple command and control calling moment on the course and that shows actually is a proof of concept that we're doing the right thing here, what we said also earlier right.

Jeff Van Ree: This kind of jet GPT or jet pro is heavily integrated in the OEM assisted OEM branded assistant and the assistant has full control about the solution and also by feeding the system with our own automotive data. We see less hallucinations right and overall is also a very cost effective approach for the OEM.

Stefan Ortmanns: Scott. As you think about the usage of in-car, sort of engagement systems, if you will, and you'll look at the broad landscape, obviously you've dominated the, what I would call the in-car systems, but then you've got people Bluetoothing in, CarPlay and Red Auto, you know, when you do your studies on the, on the market and the TAM, so to speak, how are you seeing the evolution of the percent of, users that are opting for which of those solutions?

Stefan Ortmanns: I'm talking like over time, but the evidence sense of how many people are opting for just simple Bluetooth versus embedded in-car systems, and if they are which brands are using, how that's playing out. I mean, I cannot disclose all information, but when referring to Mercedes, clearly, they want to see a higher boost in their solution with respect to CarPlay, and that's indeed what they are achieving now. For us, it's much more than just bringing in large language models, right?

Stefan Ortmanns: It's all about a eye computing platform with smart DC capabilities, right? And full interaction with the car, right? And also bring in general knowledge, right? So overall, I think that's a trend, but it's really appreciated by OEMs, and I'm pretty sure also with, with their end consumers. Okay, great.

Jeff Van Ree: I'll leave it there. Thank you.

Operator: One moment for your next question.

Colin Langan: The next question comes from the line of Colin Langen of Wells Fargo. Colin, please go ahead. Oh, great. Thanks for making my questions. The comments are now, I thought last quarter, you mentioned 25, you expected mid-single digit growth, and now it's flat to low. Is that right?

Stefan Ortmanns: And what sort of, if I'm right, what throw the slightly softer outlook into next year? Maybe let me start first Colin and good morning to you as well. And then I will ask Tony to share his view. So overall, I think you know we have this significant reduction in costs, right? And we assume also there will be a modest impact on the revenue side. As we say, okay, we are with this is kind of product rationalization, right?

Stefan Ortmanns: And we believe that also some products with lower margin. We are going to downsize and Tony, what's your view on this? No, I think that's exactly right. As you think about the guidance at single digit growth year over year last quarter, really is the impact of the cost restructuring as we take a significant amount of cost out of that. So the business to realign our cost, it will have an impact to the top line. So we brought that down slightly. Got it.

Antonio Rodriguez: And in your comments, you mentioned that debt coming due next year. What are the options that sounded like you were leading to potentially maybe issuing equity to to pay that down. But also, look at the balance sheet. I think you have over a hundred million. I mean, can you fund a lot of that repayment with the cash on the balance sheet? Are the debt markets open to refinances? Yeah, that's exactly right.

Antonio Rodriguez: I think we're looking at all options. Certainly as we mentioned, the 3% notes are beneficial at the company at this point, but we want to address the liquidity concerns of it coming due in June of 2025. So we're looking at all options, including refinancing, using our existing cash as well. And looking at the benefit of the liquidity from a lower coupon rate, which would be adjusted higher on refinancing. And certainly the conversion price would be lower than currently in the notes. So we're looking at all those, but yes, the markets are open to refinance. Got it. All right. Thanks for taking my questions.

Operator: One moment for your next question.

Nick Doyle: The next question comes from the line of Nick Doyle of Needham and Company. Nick, please go ahead. Hey guys, good morning, and thanks for taking my questions also. You had, we just talked about, you know, the lower op-ex or impact revenue and you talked about a couple of times in your script. Could you just be a little more specific on which product streams are impacted or at least which segment. And then that adjusted net cost savings of 35 to 40 million. Would that put you in the 140 million. A year range for 2025 or still too early. Thanks.

Antonio Rodriguez: So I'll take that. Yeah, when you think about the impacts of the cost reductions, it will be primarily related to professional services revenue. So that's where Stefan mentioned that if that makes us a bit lower than prior expectations, we'd expect to hire gross margins overall. Also, and then I'm sorry, I missed the last question about the 140 million. Just asking if that, you know, the adjusted net cost savings number of 35 to 40 million would put you around 140 million a year in total op-ex.

Antonio Rodriguez: Yeah, well, you know, there's, when you think about it, there's a combination of things. We've got run rate from 2024, but that's an entire year. We also have increases in 25. And so we're looking at really run rate off of Q4 run rate and the expenses would be off of that number. Got it. Thank you.

Antonio Rodriguez: And then on the the six contract consumption, you're, you're saying, you know, you, you hope to normalize by 2026 and, and the consumption should go lower over time as that normalize and that all makes sense. But do you have a specific number that you're looking at for the fourth quarter and, and maybe what we're thinking of. Of for through 2025, is that 10 million a quarter number, you know, I get that it moves up and down.

Antonio Rodriguez: Yeah, I don't have specifics that I can speak of now on consumption rights, but other than what we said that we expect that to be lower in fiscal 2025. Okay. Thank you. One moment for your next question.

Luke Junk: The next question comes from the line of Luke Junk from Beaud. Luke, please go ahead. Good morning, thanks for taking the questions.

Stefan Ortmanns: To find what it to start with maybe just a higher level question and understanding the approach to the R&D organization going forward, clearly it sounds like there's going to be some impacts in terms of the pro-services elements of R&D. I think you also mentioned sort of a unified product and core technology team in your prepared remarks. You just maybe could expand on that, and I know you're not breaking out the cost.

Stefan Ortmanns: Production since the individual buckets right now, the R&D is going to be an important part of that, clearly, so maybe just a higher level if you Yes, so as said, our focus is clearly on our Gen AI roadmap including the new AI computing platform. We have recently unified our product and core technology teams. We believe that we will see some efficiency here, and also this will help us to accelerate innovation and again drive efficiency to meet also the demands of our OEMs.

Stefan Ortmanns: That's very important. Overall, what I said is that our solution, our new solution is well received by a couple of OEMs across the globe. I think we're doing the right things here also with respect to cost optimization, finding synergies between the two teams, right? And Neat Chance, who joined us one or a few years ago from Mercedes, who was also essential for various launches over the last couple of weeks here. He is extremely qualified and he will run both R&D and product and professional services.

Operator: One moment for your next question.

Mark Delaney: The next question comes from the line of Mark Delaney of Goldman Sachs. Mark, please go ahead. Yes, good morning. Thanks very much for taking my questions. First, I've been to better understand how you're thinking about professional services going forward. I think in the past, you've used that as a lead generator and you've described it as part of your investment that helps with your longer-term traction and revenue growth.

Stefan Ortmanns: It sounds like you want to make some cuts there and understand the lower margins but maybe help us better understand the implications for revenue growth and why you're making some of the cuts in that part of your business. So, still, I mean professional services is a very important tool for us for enabling licenses, whether it's be embedded or cloud services, right? And so don't get us wrong here. We see some optimizations in professional services and also for streamlining our products.

Stefan Ortmanns: We see also efficiencies in deploying our new products to give you also an example. A POC, so proof of concept can be done within a car within less than two and a half weeks. And then, of course, for doing the fine tuning and optimization and customizations with respect to the OEM demands like branding and so on the floor. It takes us between 4 to 6 months. Compare this with the past where it took us 12 to 18 24 months, right?

Stefan Ortmanns: And of course, then PS review goes down. But nevertheless, PS is the enabler for the license system, and that goes also hand in hand with the expectations from OEMs, right? What we said also in the earnings call earlier is that I mean there's clearly a demand for more flexibility and a faster deployment and also keeping the system fresh and up-to-date and we're supporting these new requests from the OEMs and finally from the consumers.

Mark Delaney: Understood. Thank you.

Stefan Ortmanns: Another question was just better understanding your commentaries to find around how to think about monetization for the new Genai types of subscription. You mentioned your revenues going to depend on usage and what the OEM customers are seeing in terms of how often these services are being used. You can elaborate a little bit more on how your revenue will flow through. Is there some piece of it that is more committed in terms of the subscription rates you're seeing and then how much is maybe based on usage rates of your products and the car themselves and is it more tilted towards usage rates?

Stefan Ortmanns: You have more guaranteed subscription fees and just trying to better understand that dynamic if I could please. Thanks. So again, if you are currently at the early stage with those OEMs and our new quotas, we've seen an uptick in usage of about 50 to 70 percent. We see also a nice increase in our price per unit per year. Most of the services are cloud services. So we should also focus on the future a bit more on buildings.

Stefan Ortmanns: Then you ask about monetization of the data. Here we are still in discussion with OEMs. What we can do together. And as said before, we are still a B2B partner of the OEMs. But nevertheless, we see for those deals a really significant increase in price per unit.

Stefan Ortmanns: Thank you.

Operator: As a reminder to ask the question, please press star 11 on your telephone. I see no further questions at the moment.

Richard Yerganian: So I would now like to hand the call back over to Richard Yergan, Senior Vice President and Investor Relations. Richard, please go ahead. Thank you, Felicia. And thank you for everyone joining us on the call this morning. And we look forward to our further discussions.

Operator: Thank you and have a good day. This does conclude today's conference call.

Operator: You may now disconnect.