Q4 2024 Cerence Inc Earnings Call
Thank you.
Speaker Change: Good day and welcome to SARES's 4th Quarter 2024 Earnings Call. At this time, all participants are in listen-only mode.
Speaker Change: After the speaker's presentation, there will be a question and answer session.
and many more. Thank you. Thank you.
Speaker Change: Welcome to Sarence's fourth quarter of fiscal year 2024 conference call.
Speaker Change: 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: Serance 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.
Speaker Change: as described in our SEC filings, including the Form 8K with the press release preceding today's call, our Form 10K filed on November 29, 2023, and our most recent Form 10Q.
Speaker Change: In addition, the company may refer to certain non-GAAP measures, key performance indicators, and pro forma financial information during this call.
Speaker Change: 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. The press release is available in the IR section of our website.
Speaker Change: Joining me on today's call are Brian Kurzanich, CEO of CERNS, and Tony Rodriguez, Interim CFO of CERNS.
Speaker Change: Please note that the slides with further context are available in the investor section of our website.
Now on to the call. Brian?
Brian Kurzanich: Thank you, Jason. Good morning, everyone, and welcome to the Q4 2024 Serence Earnings Call.
Brian Kurzanich: I'm excited to talk to you this morning about Sharon's new CEO.
Speaker Change: While Tony will walk you through the details of our Q4 and fiscal year 24 earnings,
Speaker Change: I'm very proud of what the organization has delivered for Q4.
Speaker Change: The top line revenue of $54.8 million and adjusted EBITDA of negative $1.9 million both exceeded the high end of our guidance. I couldn't be more proud of what the team has accomplished and the head start this gives us for 2025.
Before I give you our forecast for 2025,
Speaker Change: I'd like to spend a few minutes now to talk to you about my vision for SERAS.
Speaker Change: which also gives you insight into why I chose to come to the company.
Speaker Change: Succession is at the forefront of the revolution that is occurring in the automotive industry as AI, specifically generative AI and large language models, grow in use and importance.
Speaker Change: Ceres already has a large footprint in the automotive space with a broad range of products that bring voice assistance to the vehicle.
including 28 design wins in fiscal year 24.
Speaker Change: Our vision moving forward is that every product in our solution portfolio will have artificial intelligence and specifically large language models built into them to bring simplicity and convenience to in-car interaction.
Speaker Change: This is not a transition that will happen far out in the future.
but rather one that has already begun in earnest.
Speaker Change: This is evidenced by the strong momentum we've seen for our generative AI solutions, with 10 customer wins and 6 program launches for these products in FY24.
including Volkswagen, Renault, Skoda, Audi, and Smart.
Speaker Change: And importantly, more Gen-AI programs shipped than any of our competitors and key wins across our solution portfolio with automakers like BMW, Great Wall Motor, and Zeker.
Speaker Change: It's worth mentioning that in these deals we've signed so far, our generative AI solutions are commanding unit economics that meaningfully exceed the rest of our portfolio.
fueling PPU growth on the cloud side.
Speaker Change: These first deployments also show an increase in overall usage and adoption and this is based on a small sample size and short time frame.
But we are encouraged by these results.
Speaker Change: This quarter, we also signed our first customer deal for the first generation of our new AI platform, which is based on our proprietary family of language models.
Speaker Change: By the fourth quarter of this year, we will launch the second generation of this platform, which leverages large language models across the entire solution and allows us to greatly simplify and speed up how we bring new products to the market.
Speaker Change: In fact, just last week we introduced CalmEdge, which builds on our strength in embedded solutions as the first LLM running in automotive on the edge, allowing for advanced and simplified voice interaction with the vehicle, even when not connected.
Speaker Change: We did this in collaboration with Microsoft. We selected Cerence as their preferred automotive industry partner as they announced their adapted AI models ahead of this week's Ignite conference.
Speaker Change: Microsoft is partnering with Ceres and other industry leaders like Bayer and Siemens.
Speaker Change: to create fine-tuned models pre-trained using industry-specific data to address customers' top use cases, as was highlighted in Microsoft CEO Satya Nadella's keynote earlier this week in their Ignite conference.
Speaker Change: The implementation of LLMs is an important transition for voice in the vehicle, and I want to spend a moment explaining why.
Speaker Change: In most cars today, in order to interact with the various systems in the vehicle, you have to use very specific commands. For example, to enter an address, you have to use navigation or to operate systems within the vehicle, like air conditioning or windows.
Speaker Change: With the implementation of LLMs, we removed the need for script for interaction.
Speaker Change: And the assistant's ability to understand complex and multi-step commands in natural, human language becomes virtually limitless.
Speaker Change: The vehicle now becomes an assistant that saves you time and simplifies your life.
Speaker Change: In addition to our deep technical expertise, the world's leading automakers and tier one suppliers love to work with Saros.
because we're a uniquely neutral and highly specialized supplier.
Speaker Change: living and breathing automotive and speaking the same language as our customers, unlike our competitors.
Speaker Change: As auto OEMs face the threat of commoditization, much like what was seen in the mobile handset industry years ago, they are becoming increasingly focused on the in-cabin experience as a differentiator from their competitors, as well as the main touchpoint between their drivers and their brand.
Speaker Change: And they're also choosing to partner with Ferris to drive their in-car experiences forward.
The End
Speaker Change: Now looking at fiscal year 2025, we're issuing initial fiscal year 2025 revenue guidance of $236 million to $247 million.
Speaker Change: with related adjusted EBITDA in the range of $15 million to $26 million and free cash flow in the range of $20 million to $30 million.
Speaker Change: This anticipates a return to profitability and represents both our strong market position
Speaker Change: partnerships with Vehicle OEM and the hard work the organization has already done in terms of cost reductions.
which Tony will cover in detail in a few minutes.
Speaker Change: For Fiscal Year 2025, we will transition from doing broad cost-cutting to simplifying and streamlining our organization and our structure to continue taking cost and spending out of service.
Speaker Change: It's been my observation that CERNS has been burdened by the operational and business process and complexities that resulted from the company's 2019 spin from nuance.
Speaker Change: With a new set of eyes, I believe that I can provide a perspective to find more efficient and productive ways to accomplish the same task, while also finding opportunities to vastly improve our speed to market and get exceptional products into the hands of our customers at a more rapid and competitive pace.
This is my first earnings call as CEO of Shares.
Speaker Change: And I hope you see the vision and potential of the company that I do.
and that led me to joining the company.
Speaker Change: Cerence is bringing AI and large language model capabilities to the vehicle now, not just in the future.
Speaker Change: Fiscal year 2025 will be a year of execution, streamlining the company, and bringing these industry-leading products to our partners in the market.
Speaker Change: Our fiscal year 2025 plan is to return deterrence to profitability.
A critical step to fuel the future growth.
Speaker Change: Cerence is a strong company with an exciting path ahead. It's now my job to turn the strong company into a great business.
Speaker Change: With that, I'll turn it over to Tony to go through the details of our quarterly numbers, our guidance, and our restructuring activities.
Tony?
Thanks, Brian.
Today I'll be covering three major topics.
First, I'll review our Q4 and full year 2024 results.
Then I'll go into some details of our restructuring.
Speaker Change: Lastly, I'll provide some guidance for fiscal Q1 and the full fiscal year of 2025.
Let's get into the Q4 and full year 2024 figures.
Speaker Change: At the top, we achieved Q4 revenue of $54.8 million, which exceeded our high end of our guidance range of $50 million.
Speaker Change: Revenue ahead of guidance this quarter was aided by approximately five million dollars in licensed royalty true-ups for two of our OEM customers.
Speaker Change: Our customers self-report royalty volumes that approximate their auto shipments that include our technology each quarter and periodically true up to actual. This is not uncommon and we will call this out whenever we believe it is meaningful to the numbers.
Speaker Change: Approximately four points of this were due to the drop-through benefit of the noted revenue true-ups.
Speaker Change: Moving down, our income statement, our adjusted EBITDA loss of $1.9 million, well exceeded our guidance of a loss of $13 million.
Speaker Change: This was driven by the improved gross profit from the higher-than-expected revenue and decreased operating expenses from the accelerated restructuring efforts during the quarter of approximately $6 million.
Speaker Change: As compared to prior year, Q4 revenue declined by $26 million or 32%.
Speaker Change: This highlights some of the noise in our P&L that makes year-over-year comparison somewhat difficult.
Speaker Change: The two biggest drivers of the year-over-year decline were that in Q4 of last year, we signed $12.8 million of fixed license revenue during the quarter and had $9.2 million of revenue associated with the Legacy Connected Services contract with Toyota.
Speaker Change: You may remember that this contract was acquired by Nuance in 2013 and that Toyota decommissioned the solution in Q1 of 2024.
Speaker Change: After Q1 of 2025, we expect that the full year-over-year comparison for our quarterly results will be more meaningful.
Speaker Change: Our non-GAAP operating expenses were $39.5 million for Q4 compared to $44.5 million for the same quarter in fiscal 23.
Speaker Change: The decrease of $5 million, or 11%, represents some of the in-quarter savings from the Q4 restructuring efforts.
Speaker Change: We ended the quarter with $130.4 million of cash from marketable securities, up $4.1 million versus Q3.
Our free cash flow during the quarter was $4.7 million.
Speaker Change: With Q4 in the books, we landed at full year revenue of $331.5 million, or $244.9 million, excluding the legacy revenue of $86.6 million.
Fully Adjusted EBITDA was $80.6 billion.
Speaker Change: Adjusting for the impact of the non-cash legacy contract, adjusted EBITDA would have been negative $6 million, highlighting the importance of the Q4 cost restructuring efforts, which I will now spend a few more minutes discussing.
Speaker Change: Last quarter we mentioned that we identified net savings of approximately 35 to 40 million dollars. We are on track to meet or exceed the upper end of that range.
Speaker Change: This includes cost reductions across all of our major cost drivers, including headcount and facilities.
Speaker Change: We are discussing our savings on a net basis because we have identified costs for removal that exceeded this amount, but plan to reinvest a portion of these cost savings back into driving the growth of our next generation products.
Speaker Change: To help you with your models, the expense base for these net calculations was based on the annual run rate of our non-GAAP operating expenses of $189 million as we entered Q4 of this year.
Speaker Change: Additionally, we reduced certain professional services cost of goods sold by approximately nine million dollars.
Speaker Change: We took action to implement much, but not all, of the cost reduction actions in Q4. We expect to action the balance by the end of Q1.
Speaker Change: Accordingly, we did realize some of the P&L benefits associated with the cost reduction efforts in Q4, but expect to see the vast majority of the benefits in our Q1 non-GAF operating expense exit run rate of approximately $39 million per quarter.
The End
Speaker Change: We identified approximately $16.3 million in one-time costs associated with these actions, split primarily between severance, retention bonuses, and consulting fees.
Speaker Change: We incurred $10.3 million of total restructuring expenses in Q4 and expect to incur another $6 million in Q1.
Speaker Change: And the guidance I will give for the fiscal 25 free cash flow will absorb the impact of another $8.8 billion of these one-time restructuring costs that we don't expect to incur in future periods.
Speaker Change: We also expect some revenue headwinds from these actions, particularly in our professional services business, where we've made the decision to reduce staff and refocus our efforts on projects that we expect will drive long-term client engagement.
Speaker Change: We have reduced our focus on one-off projects or those that we don't see having significant long-term potential upside.
Speaker Change: Our revenue guidance for fiscal 25 absorbs a headwinds of approximately five to seven million dollars related to this.
As we look at our revenue breakdown and operating metrics,
Speaker Change: Variable license revenue was $25.3 million, down $5 million or 17% for the same quarter last year, but up from Q3.
Speaker Change: As planned, there were no fixed license revenue during this quarter.
Speaker Change: Q4 connected service revenue, without legacy, was $12.1 million, up $1.3 million, or 12%, from $10.8 million the same quarter last year.
Speaker Change: And our professional services revenue was down 6% year over year.
As a reminder, when we look at total life-size shifts,
Speaker Change: Pro forma license royalties is an operating measure we use representing the total value of variable licenses shipped in a quarter including the shipment from fixed licenses where revenue was previously recognized upon contract signing.
Speaker Change: We refer to these shipments where revenue was recognized in a prior period as fixed license consumption.
Speaker Change: Our pro forma royalties were $42.2 million, which were flat compared to Q4 of last year, and up from $39.6 million for Q3.
Speaker Change: Consumption of our previous fixed license contracts totaled 16.9 million dollars this quarter, higher than the same quarter last year by 9%. However, because the annual value of fixed contracts has been trending down, over time there will be lower consumption of royalties associated with past fixed contracts and correspondingly that will result in variable license growth in future periods.
Speaker Change: We continue to expect our consumption run rate 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.
Speaker Change: As we review our key performance indicators this quarter, our penetration of global auto production for the trailing 12 months declined slightly to 52% due primarily to weaker production volumes among our top customers.
Speaker Change: We shipped approximately 10.6 million cars with Sarin's technology in the quarter, down 14% year-over-year, while IHS production for the same period declined 5%.
Speaker Change: Quarter over quarter, we were down 11%, while IHS production was also down 3%.
Speaker Change: The number of cars produced that use our connected services increased 16% on a trailing 12-month basis compared to the same metric a year ago, as some programs that were previously delayed started ramping in production.
Thank you for watching!
Speaker Change: Total adjusted billings of $220.7 million adjusted to exclude professional services, prepaid billings, and prepaid consumption increased one percentage point for the trailing 12-month period this year compared to the previous year.
Our five-year backlog metric is currently approximately $969 million.
Now turning to our guidance.
Speaker Change: Currently, the street consensus for revenue for the full fiscal year 2025 is $234 million and Q1 is $57 million.
Speaker Change: As we go through the guidance, please remember that any one quarter can be materially impacted by the level of fixed license revenue signed in the quarter, and in Q1, we are not forecasting any fixed license revenue.
and many more. Thank you. Thank you.
Speaker Change: For Q1, we currently expect revenue to be in the range of $47 to $50 million.
Speaker Change: This absorbs headlines of approximately $1 million related to the de-emphasis of professional service projects I mentioned a moment ago.
Speaker Change: We currently expect Q1 adjusted EBITDA to be in the range of negative 9 to negative 6 million and free cash flow to be in the range of negative 4 million to zero.
Speaker Change: This absorbs the impact of approximately $6 million in one-time costs associated with our restructuring.
Speaker Change: For fiscal year 25, we currently expect revenue to be in the range of $236 million to $247 million.
Speaker Change: This absorbs headwinds of approximately five to seven million dollars related to the emphasis of professional service projects, as I mentioned.
Speaker Change: We currently expect adjusted EBITDA to be in the range of $15 million to $26 million and expect free cash flow to be in the range of $20 million to $30 million, including the costs associated with our restructuring.
Speaker Change: I'd like to provide some additional factors to help you in understanding our business and how the 2025 model is coming together.
Speaker Change: At the midpoint of guidance, we are currently planning for $20 million of new fixed licenses in fiscal year 2025. Had we planned for fixed licenses comparable to 2024, $30 million, fiscal year 2025 midpoint revenue guidance would have reflected a 3% growth rate over 2024.
Speaker Change: We are also planning for very modest growth in our run rate of connected services line.
Speaker Change: As a reminder, our new products are all connected in nature. The way we recognize these new contracts in our financial statements is that when units are shipped, we book them into deferred revenue, then typically over a period of 12 to 20 quarters, we amortize that revenue onto our income statement.
Speaker Change: And so, as these products begin to gain traction, variable license and connected services billings will increasingly become an indicator of how our business is progressing.
Speaker Change: As this develops over time, I'll make sure to point out and direct your attention to our leading metrics.
Speaker Change: For 2025, we expect variable license and connected services billings to increase by high single digits.
Speaker Change: Our gross margins for FY25 are expected to be in the range of 67-69%.
Speaker Change: Now I'd like to address our 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.
Speaker Change: We believe that given our current cash position and positive cash flow expectations for 2025, it is in the best interest of our shareholders to pay down a portion of these notes when due.
Speaker Change: However, we also believe that refinancing some of the debt could put us in a better position to execute our long-term strategic direction of the company while allowing us to retain cash reserve and be flexible as we move forward.
Speaker Change: As such, we are actively looking at alternatives for refinancing a portion of these notes and anticipate having more to report in our next earnings call.
Speaker Change: Overall, we are pleased with the solid results of Q4. As we begin fiscal year 25, we believe we are on the right track to continue to show improvement in our financial performance and to strengthen our balance sheet moving forward.
Speaker Change: I will now return it back to Brian to close our remarks.
Thanks, Tony.
Brian Kurzanich: In closing, we are happy with and motivated by this quarter's results.
Brian Kurzanich: We remain focused on execution, business process improvement, and cost reduction in advancing our generative AI roadmap.
Brian Kurzanich: We take our commitments to the streets seriously, and we are committed to streamlining our reporting so that investors can understand the trends in the business.
Brian Kurzanich: We believe in our ability to deliver on our Fiscal 25 guidance and fueling in our growth for Fiscal 26 and beyond.
We look forward to continuing to share our progress.
We will now open it up for questions.
Speaker Change: Thank you. As a reminder, if you'd like to ask a question, please press star 11. If your question has been answered and you'd like to remove yourself from the queue, please press star 11 again.
Speaker Change: Our first question comes from Jeff Van Ree with Craig Hallam Capital Group. Your line is open.
The End
Speaker Change: Hey guys, thanks for taking my questions, good morning. A few for me, I wanted to start on the AI side.
Speaker Change: You touched on the economics of AI being more compelling. Just curious on the margin, because that was one of the questions coming in, just how the margins compare on AI-related deals. And then you also referenced pricing uplift. I mean, without being – well, be as precise as you're willing, but give us a sense of magnitude of the pricing uplift related to AI.
Thank you very much.
I can start and then Tony can, this is Brian.
Speaker Change: and Tony can add in some of the details. You know, in general, we don't really give absolute pricing, but in general, we're seeing a price uplift. And most of the AI models, the generative AI models...
Speaker Change: actually have an equal, relatively equal cost of development and operations as our current models. So the margins are improving with those applications.
So we are seeing a margin uplift with those products.
Speaker Change: kind of deals and POCs that we've started with the product.
Speaker Change: But it's promising from that perspective. People are seeing the value.
Speaker Change: and being able to just speak naturally, you know, hey, my seat is cold. Well, the thing to realize is that you want the seat heat turned on.
Speaker Change: Hey, crack open the window. It goes in 10% increments and opens up your window and it just knows how to interpret natural language much better and people see that value and you can build assistance and they can build on to the product.
So in general we're seeing a
Speaker Change: A better margin, and more importantly, or as importantly, we're seeing a strong demand for the product and interest by our customers.
Speaker Change: and Karine Dewey-House. Yeah, I mean, a couple things on the margins. Yes, they're improving. Remember that these are connected services products. You'll see that the margin that we're anticipating next year is...
Higher than our margin for 2024 overall
Speaker Change: primarily, when you take out the legacy revenue. And that's really a product mix for next year, more licenses, and less professional services. But the connected service in these bookings that were
Thank you.
Okay.
Speaker Change: and I guess just Brian, then on that same topic as it relates to Connected.
Brian Kurzanich: And I heard your comments about, look, these contracts take time. Totally understood. I get the rev-rec on it.
Brian Kurzanich: But over the last several years, the lack of growth in that line suggests something deeper about the competitive landscape, share loss, functionality.
Brian Kurzanich: maybe just a little deeper sense of what you think your competitive position is and connected and your right to win and I get it you just touched on AI like going forward you think that's going to be a part of it but curious beyond that how you would frame the connected opportunity and competitive position
Brian Kurzanich: Hey, this is Tony, and I'll start first with a comment on growth, and then Brian can take the other second part of that question. But if you look at our – I mean, there's – we've talked about it in the script,
and...
Brian Kurzanich: We've mentioned it before on calls that there's a little bit of noise within our P&L as we compare year over year. But if you look a fourth quarter of last year and take out the Toyota legacy, non-cash legacy revenue from Connected last year, a year ago quarter, we actually grew the Connected business 12% year over year.
Brian Kurzanich: So, we see that growing in fiscal 25 as we move forward, and then growing beyond that with the new bookings that are happening, that happened in the fourth quarter of this year, third and fourth quarter of this year, and as we go into the fourth quarter. So, that business is growing, and we anticipate it to be a growth area of the business.
Speaker Change: Yeah, Jeff, let me answer kind of your, the second part or, you know, another part of your question, which was, you know, what's our right or, you know, position to be in that business.
And it's
Speaker Change: It's really around, one, our product is quite strong. It's designed and we understand the automotive space, so.
Speaker Change: There's, for example, 23,000 different instructions you have to be able to understand and manage and put through those large language models.
you know, charging ports, and all kinds of...
Speaker Change: very automotive specific functions that we work with the OEMs to really introduce. And that partnership is very strong. Second is our willingness and our ability to customize and really create the experience that the OEM wants.
Speaker Change: that is very different than most of our competitors, especially the big guys. They tend to come in with one answer, one structure, one product. It's connected all the time.
Speaker Change: We have the ability to be connected, to be local, we will customize around their feature set. Sometimes, for example, they want to go and look at any kind of a call-out to an LLM model.
Speaker Change: and say they want to, you know, not have it go to the public LLMs, they want to go to their own private LLM that they have.
Speaker Change: that for whatever business strategy they have, they want to use those models.
to guide the instruction set that comes back.
Speaker Change: We have the ability to structure that so that we can architect where the request goes to, whether it goes to the public search.
Speaker Change: or whether it goes to a private search at the OEM. And our competition tends to only go to the public or where they're preferentially treated.
Speaker Change: So it's all of this customization, the number of languages we can deal with that really gives us much more of a customized experience for the OEM and that's really where we are strongest and where we perform and why they typically want us.
for their experience.
Speaker Change: Understood. And one last brief one if I could, Brian. As it relates to you coming in and taking the reins here, and I realize this is somewhat unfair because you just got in and you're getting your hands around what the business is and where we're headed. But if you look over the last handful of years, the pro forma royalty number, which adjusts for all the prepaids and everything else, has been relatively flattish. And clearly,
Speaker Change: Some things have worked many have not but you're sizing up the business
Speaker Change: Essentially, why do you think if you look at the last five years as a company not been able to grow? Is this fundamentally...
Speaker Change: A product market fit? Is it a go-to-market sales function? Is it something else? Just your early takes on kind of the brief history lesson of what hasn't worked and what you think you can get working.
Speaker Change: Well, you know, I'm still kind of digging into the past and I've been a little hesitant to...
Speaker Change: I don't want to think too much about the past because, if you take a look at, as you said, where it came from, it was a very different model and experience where they were really focused on
Speaker Change: driving bookings and just really trying to grow at any cost and rather than focusing on what are the products
Speaker Change: and how do we really differentiate ourselves relative to the competition.
So as I look forward
Speaker Change: The large language models and the whole AI application and how there's really two things that are changing. One, you're seeing large language models go into the end-user experience, right? So we've talked a lot about that. What we haven't talked a lot about is how those models are going into actually how we create the product.
Speaker Change: And so there's our speed of how fast we can put a product into a customer's hand, into their...
Speaker Change: product themselves or to their vehicle has shrunk now from like eight to twelve months down to four months of development work on our part to customize and focus our product to the customer. So those are the things that are really changing the business, right?
Speaker Change: that we get paid more for that. We can produce the large language models that make the end-user experience much better, but also, by driving those models into our own product and how we develop the product, it makes it quicker, it makes it faster, it makes it less expensive for us.
Speaker Change: to develop them and to customize them around what the customer needs.
are
Speaker Change: And those are the things that are really shifting now versus the old models, which were using the standard software where it was much harder to differentiate.
Speaker Change: and speed up the time to production and all for the customer. And so when I look at this...
Speaker Change: We've already seen price increasing and, you know, getting paid for these products, and we're seeing our costs go down over this time period, as it's much quicker and simpler for us to develop the product.
So that's what's really changing in my mind.
Speaker Change: Got it. Great. Thanks for the thoughtful answers. I appreciate the detail.
Thank you.
Speaker Change: The next question comes from Colin Langan with Wells Fargo. Your line is open.
Speaker Change: year-over-year and quarter-over-quarter. What is driving that and sort of what, I think if I sort of scrub out some of the fixed contracts and the exit of some of the professional services, underlying growth still seems to be up maybe 5%-ish.
Speaker Change: What's driving the underlying growth if your shipments are actually underperforming the market?
Yes, so...
So, yes, it's really, if we think about this, it's...
Speaker Change: It's kind of more average PPU. So if we think about our – if we strip out fixed out of our license year-over-year, we are down in the license business year-over-year, so that kind of falls in line with some of the volume decreases. But what's interesting is that connected is up. So one of the last questions is, again, where are we going in growth? I think that – a couple things.
Speaker Change: We have less of the fixed license consumption, 25, so we're shipping cars, but more that will drop down, so there's growth there. And then the connected services business, the volumes are up with those cars that include our connected services, so there's a growth area there. So as we think about overall volumes being down, it's really kind of, if you average out the growth in connected and the higher PPU in connected, that provides the growth area in total dollars with volume down.
Speaker Change: and I guess Brian, from your perspective, what are your priorities? Is it right now just get the costs in line and then focus on revenue? How do we think about that?
Brian Kurzanich: Yeah, so as we looked at our backlog, it's close to a billion dollars in backlog. You've got to remember a couple of things in the backlog. It represents our current contracts.
Brian Kurzanich: that are in place, the prices that we have in those contracts, with expected volumes through either a contract term or, in certain cases where we have a long contract, it could be a particular program of a car, and when we expect it, that particular program will cease.
Brian Kurzanich: The next growth of that backlog will be in the next generation connected billings bookings that we anticipate going forward.
Speaker Change: Yeah, and those, I mean, just to add to Tony's and I'll answer your other question, Colin, about priorities.
Speaker Change: is, you know, you got to remember, that's trying to estimate out.
Thank you very much.
Speaker Change: And that's just, so I look at that with kind of a bit of a grain of salt. It gives us insight into what our
Speaker Change: revenues and and billings will be, but it's not a perfect number. So as long as it sits around that billion number, I'm I'm okay. What's more important is we have to really look at
Speaker Change: You know, what are the actual deals that we're signing and and what are the prices that we've signed up for? And that really gives to me an insight. And then, you know, the volumes will be what they are.
Twenty-five is really a return to profitability.
Speaker Change: And to me, that means execution, and there are, as Tony mentioned in his talk, there are still some things we need to do to continue to cut costs.
Speaker Change: out of the organization. Most of those plans and items have already been identified. And it's just a matter of finishing out the execution and continuing to hold those costs in line, not let things creep back in.
It's finishing the generative AI work, our first gen.
model brings Gen-I to the end user.
Speaker Change: Our second-gen model, which is targeted towards the end of our fiscal year.
Speaker Change: which is really kind of like the end of third quarter of the calendar year of next year, brings the generative AI, large language models, all the way through our product. And as I mentioned earlier, that really simplifies our work and reduces the workload that we have.
It's critical that we finish that work.
Thank you. Bye.
finish our products.
• And thank you all for coming.
And third is, you know, we have some...
Speaker Change: usages outside of automotive where you know just launched with Garmin
Speaker Change: two models of the Garmin watch, we've been working with LG on TVs. Voice and these products can go into other products.
Speaker Change: but 25 is where we really need to go and figure out the one or two spaces we want to move into beyond automotive as well to continue to grow this company in voice activation.
That's very helpful. Thanks, Jake, for your questions.
Speaker Change: Thank you. Our next question comes from Nicholas Doyle with Needham. Your line is open.
Nicholas Doyle: Hey guys, thanks for taking my questions. The first one, professional services was up quarter over quarter. I know you mentioned it was down year over year, but you know that comes despite the cuts over the last couple quarters and then you mentioned you know five to seven. I was just wondering if you could explain you know what's driving that kind of
Nicholas Doyle: change quarter over quarter. And then you mentioned the five to seven million headwind in fiscal 25. Is that off the fiscal 24 number? Thanks.
So, yes, the, uh, the...
Nicholas Doyle: and the NPS in fiscal 25 over 24. So as we look at it year over year, it was down. We did have a slight uptick from Q3, but we anticipate that with some of the cost-cutting that we've done and headcount reductions, there's really a deeper focus within NPS that we really are looking at, you know,
Nicholas Doyle: But remember, some of those cuts really were Q4, so we really didn't see a lot of that. We saw $1 million of that headwind in Q1, but as we think about it again year over year, but looking at it going forward, it will be a more focused effort.
Speaker Change: Okay, just clarifying, so I just asking I guess again is it was up quarter over quarter and I guess we expected it to be flat to down, so any explanation on what to drove the strength there?
this quarter.
Brian Kurzanich: This is Brian, Nicholas, it's just going to be a little bit lumpy from quarter to quarter. It's really, as Tony said, we're focusing more on where do we actually add value and where do we get paid for professional services.
Brian Kurzanich: and so you know when we looked at the business we said this thing should go down and we went ahead and let some people go and shrunk the organization.
Brian Kurzanich: in professional services to kind of right size it to where we thought the quality business was.
Brian Kurzanich: Now, that said, you know, we've told them, hey, if there's good business, then we can get paid for the work.
We'll do it.
Brian Kurzanich: And so you're going to see kind of a lumpiness. And as projects come in, and somebody wants the professional services because they don't want to do the work or they cannot do the work themselves either way, and they're willing to pay us to go do it, we'll do it. And so you're just seeing a little bit of that lumpiness of, hey, there's some more work. And some quarters, it may be a little bit less than that quarter over quarter or year over year trend.
Brian Kurzanich: But when we look at the long-term, the full-year guidance, we think we've right-sized the organization and right-sized the amount of work relative to professional services, so that the margin and getting paid for what we do is right.
Speaker Change: Does that help answer why? Like I wouldn't worry about one quarter.
Speaker Change: yes yes got it just a little lumpy and I know you know splitting hairs it's like about a million dollar change here
Speaker Change: Okay, thank you. Second question, I think the license average PPU jumped to the highest level since fiscal 22. Did those six Gen AI rollouts this year or the past
Speaker Change: one or two quarters really drive that much of a change or just any detail on what drove the strength this quarter in the average PPU and thoughts on fiscal 25. Thanks.
Speaker Change: And again, it's hard, right? We're trying to... Brian and I both have a...
and Philip Tegel.
Speaker Change: It is kind of difficult. One is, you know, from a license standpoint, yes, that drops down. You have to take out the fixed, but then if you take out the fixed and then drop that down and look at our volumes, you can kind of see, you know, calculate an average PPU because those do get recorded in gap revenue on shipment. Connected is a little harder because, you know, we will bill for something, and that's one thing we need to continue to highlight as a leading metric is our billings, which were $80 million this quarter compared to a gap revenue of 54.5. But those billings then are, you know, deferred and then amortized into revenue over a subscription period. So, it's really hard to look at those connected
Speaker Change: volumes and try and do an average PPU because you really have some legacy stuff from deferred that's going in there and then the higher PPU for the new next generation products, you really won't see in the revenue until future periods. So and then from a license standpoint, you got to it's really trying to understand
Speaker Change: How much of a license, or components of a license, are being billed within that number? So, do we have volumes? What are we shipping? And do those shipments have...
Speaker Change: higher PPU for those those components and or weighted PPU, if you will, for the components that we're actually selling there. But that's the short answer is that, you know, in the license
is that we have higher PPUs because
Speaker Change: of effectively higher components within that license that are being billed.
Thank you.
Speaker Change: Thank you. Again, to ask a question, please press Star 11.
Speaker Change: Our next question comes from Mark Delaney with Goldman Sachs. Your line is open.
Speaker Change: Hi, yes, thank you for taking our questions. You have them on zipped on for Mark Delaney. First, I guess, last quarter, you guys provided a framework for fiscal 25 of kind of a flat to low single digit decline for revenue year on year, excluding the legacy business. And, you know, midpoint now is
Speaker Change: showing growth year-on-year. Can you kind of speak to maybe some of the puts and takes that drove that and what's driving some of that strength you're seeing?
Speaker Change: Yes, certainly. I think we're fairly close. Yeah, we had, you know, we took out the legacy business. I think we're, you know, at that point we were looking at a framework of, you know, mid guidance of 238 and, you know, right now we're doing, you know, our guidance is 236 to 247. So we are seeing some growth. It's as we look at...
You know a couple things. One is
Speaker Change: On the license side, looking at our volumes and making sure we right-size that backlog and the expectation of what will be shipped within the quarter. You know, as we mentioned, professional services will be down, but in line with what we were kind of providing the framework, we said that it was gonna be down. And then connected services actually being slightly up than what we were thinking about in the framework. But overall, I think it's actually very close to what we had guided in the framework last quarter.
Speaker Change: Thank you for that, Claire. I appreciate it. And then maybe kind of a higher level one on the AI products and appreciate the context for the first-gen versus second-gen. Given that you have kind of this second-gen product that's supposed to be a little simpler to make, how should we think about both AI kind of launches and pipeline going through the year? Are you kind of waiting to get more of that second-gen product before you pursue kind of a higher level of
AI wins, or how should we think about that pipeline?
Speaker Change: For the most part, Chat Pros through Next Gen 1 through Next Gen 2 are backward compatible. So we can upgrade people to those products. So we don't slow this down at all, and I wouldn't want to do that.
Speaker Change: So if a customer comes in and they see our, whether they want to look at Chat Pro or whether they want to look at the next Gen 1, whether they want to do Chat Pro and then skip Gen 1 and go to Gen 2.
Speaker Change: and then we help guide them through that selection process, right?
Speaker Change: And there's a series of things we kind of go through with them as they're going through that. What are the features they want? What is the experience they want?
really good.
operational experience. You can do things in a natural language.
Speaker Change: Some others want a true assistant in the car. Renault is a good example of that. We just launched with them.
Speaker Change: where they have their avatar called Reno and that really helps, it becomes like an assistant and they have plans to move that assistant all the way through their product line and much further beyond even just the auto. In that case, we're working with them, you know, to go from what we can do today to looking out at Gen 2.
Speaker Change: You're going to see, it's going to be kind of like a continuum.
for people as they go through these products.
Speaker Change: down-the-wire upgrades if they want to upgrade everybody's experience later on. So we have all of that ability in these products.
Does that help you understand kind of the product portfolio?
Yeah, that was super helpful. Thank you very much.
Speaker Change: Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Brian for any closing remarks.
Brian Kurzanich: Okay, so I just want to thank everybody for attending the call this morning. I thought the questions were excellent and I really appreciate the interest in our business.
Speaker Change: I hope you see from Tony and I's remarks that we're really excited about where the business is headed.
Speaker Change: For 2025, our priorities, as we said, you know, one, it's execution.
Speaker Change: execution in order to achieve the numbers we talked about this morning to return the company to profitability.
Speaker Change: by the next quarter's update, and, you know, I think the organization overall, we've made through this transition, and we're all really excited about our next generation products.
Speaker Change: So, that's the other real focus for 2025 is execution of those and really getting our customers to see and feel the experience that we're able to generate.
Speaker Change: And so with that, I just want to thank everybody again for attending this morning, and we look forward to seeing you at the end of the next quarter and showing you the progress we've made so far. So thank you very much.
Thank you. Thank you.
Speaker Change: Music by Hunter Art and Design by Nils Rodriguez See you again next fall
Speaker Change: You may call me neoliberal, but I am rich. And I am slaughtered, I am starved I am a serial killer by the habit of killing