Q1 2025 Cerence Inc Earnings Call
Okay.
Welcome to <unk> first quarter of fiscal year 2025 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 Sharon's makes no representation as to update those statements. After today. These.
Statements are subject to risks and uncertainties, which may cause actual results could differ materially from such estimates as described in our SEC filings, including the form 8-K with the press release preceding today's call in our Form 10-K filed on November 22024.
In addition, the company may refer to certain non-GAAP measures key performance indicators and pro forma financial information during this call.
Please refer to today's press release for further details of the definitions limitations and uses of those measures and reconciliations of non-GAAP measures to the closest GAAP equivalent. The press release is available on the IR section of our website.
Joining me on today's call are Brian <unk>, CEO of <unk>, and Tony Rodriguez CFO up here.
Please note that slides with further context are available in the investors section of our web site.
Now onto the call Brian.
Brian: Thank you, Jason and good afternoon, everyone.
And welcome to the Q1 2025 series earnings call.
Brian: We're really excited to speak with you today.
Speaker Change: Tony will walk you through the details.
Tony: I have the pleasure of sharing our great Q1 results with you first.
Tony: Top line revenue of $50 $9 million and adjusted EBITDA of one $4 million.
Tony: Both exceeded the high end of our guidance and we had strong free cash flow of $7 9 million.
Tony: On our last call I shared that our fiscal year 2025 goal is to return <unk> to profitability a critical step to fuel the future growth.
Tony: With our Q1 results on a non-GAAP basis, we have moved towards profitability, even earlier than we forecasted.
Tony: I couldnt be more proud of what the team has accomplished and a great start this has given us for 2025.
Tony: In addition, during Q1, we repurchased $27 million of our convertible notes due in June of 2025.
Tony: Now as we've discussed in the past our plan is to extinguish this step through some combination of repurchases and financing.
Tony: And we will decide the best path forward taking into account shareholders' interests.
Tony: With a view towards driving long term value.
Tony: As many of you know, but those who are new to the call may not.
Tony: <unk> AI delivers AI powered multi modal and conversational agent experience for automotive and beyond.
Tony: We partner with the world's leading automakers and transportation Oems to create AI powered assistance.
Tony: Empowering them to deliver incredible user experiences to their drivers while also maintaining a unique brand and data ownership and keeping costs in line.
Tony: In addition to our deep technical expertise and our exciting product roadmap.
Tony: More on that in a moment, the world's leading automakers and tier one suppliers love to work with <unk>, because we are neutral and highly specialized supplier living.
Tony: Living and breathing automotive and speaking the same language as our customers.
Tony: Unlike our competitors.
Tony: With the ongoing challenges Oems are facing cost pressures slowdown in EV in car sales in an ever changing geopolitical landscape.
Tony: <unk> is uniquely positioned.
Tony: AI innovation partner, who can help automakers deliver a premium experience while also navigating the impact impacts of a complex and rapidly changing industry.
Tony: This quarter. The team has been laser focused on our three key deliverables for 2025.
Tony: First continuing our work to bring <unk>. Our next Gen product based on our Com family of language models to market.
Tony: <unk> multi L. O M architecture provides deep customization and enables compatibility with both new and existing infotainment systems.
Tony: Making it easier for automakers to deploy to both current and future vehicles.
Tony: We reached several important milestones for <unk> Gen, one within the quarter, including delivering five proof of concepts and kicking off our first major customer program.
Tony: Further validating and solidify our product and go to market strategy.
Tony: And we've partnered with leading AI companies like Nvidia and Microsoft empowering us with tools and resources to deliver improved performance and cost efficiency to our customers and their drivers.
Tony: These AI leaders are eager to work with us given our position with global Oems and installed base.
Tony: You'll see more announcements in this space as we approach Nvidia GTC in March and the Shanghai Auto show in April.
Tony: The <unk> Gen. Two which you are demonstrating now and will be available to our customers by the end of 2025, we will deliver a single conversational interface that works across both cloud and embedded applications.
To complete tasks based on user preferences integrating all aspects of a user's interaction into a seamless conversational interface that extends beyond voice.
Tony: Our future product vision is to enable the driver to get into the vehicle and put their phone down.
Tony: Using their in car system to complete the tasks they would normally do in their phone.
Tony: And this new <unk> World, we can combine activities like navigation full calorie text messaging and web search that even with your phone today would require multiple steps.
Tony: And switching between various apps.
Tony: <unk> brings the future of agenda, and conversational idea vehicle and transforms the car into an assistant that saves you time and truly simplify your life.
Tony: The second key deliverable for 2025 is continuing to grow our business with new and existing customers. In this first quarter of fiscal 2025, we secured six new design wins across our current product line and two new wins for our generative AI solutions across large and global Oems.
Tony: We also saw us start of production for six major customer programs and to generative AI programs within the quarter, including a large trucking customer and a major cloud win back in China.
Tony: And we now added to our program that includes our Gen AI solution.
Tony: The third key deliverable for 2025 is continuing our transformation and cost management.
Tony: We've already seen the benefits of this work in our Q1 top and bottom line results.
Tony: And as I previously stated we believe we should always be looking at how we can be more efficient from both a cost and operational perspective.
Tony: For fiscal year 2025, we are focused on simplifying and streamlining our organization and our structure to continue taking cost and spending out of service.
Tony: We can find more efficient and productive ways to accomplish the same task, while also finding opportunity to vastly improve our speed to market and get exceptional products into the hands of our customers at a more rapid and competitive pace.
Tony: This work is underway as we've continued to evaluate our office space and legal entities.
Tony: Off a process to streamline and improve our relatively complex customer contracts.
Tony: And continue to evaluate every we hire a new higher as we move forward.
We are looking forward to fiscal Q2 2025.
Tony: Issuing initial revenue guidance of 74 million to $77 million with.
Tony: With GAAP net income expected to be in the range of $1 million to $5 million in.
Tony: And adjusted EBITDA in the range of 18% to $22 million.
Tony: And Tony will provide further details on our second fiscal quarter in his remarks.
Speaker Change: So this is my second earnings call as CEO of <unk>.
Speaker Change: And I and the rest of the team are proud and encouraged by the first quarter results.
Speaker Change: Sure. It's AI is bringing conversational AI and true a gentle capabilities to the vehicle now not just in the future.
Speaker Change: And we have an exciting roadmap ahead.
Speaker Change: With that I'll turn it over to Tony to go through the detail of our quarterly numbers, our guidance and our restructuring activities.
Speaker Change: Tony.
Tony: Thank you Brian.
Speaker Change: Today, I will be reviewing our Q1 results for fiscal year, 2025, and providing some guidance for our second quarter.
Speaker Change: I will also comment on our progression toward full fiscal year 2025 guidance.
Speaker Change: Let's get into the Q1 operating statement.
Speaker Change: At the top we achieved Q1 revenue of $50 $9 million, which exceeded the high end of our guidance range of $40 million to $50 million.
Speaker Change: Our revenue this quarter was aided by $2 million in connected royalty true ups for one of our OEM customers.
Speaker Change: As a reminder, this is normal as our customers' self important royalty volumes that approximate their auto shipments with our technology in each quarter and periodically true up to actual.
Speaker Change: With this revenue achievement, our gross margin for the quarter of 65% also exceeded.
Speaker Change: The high end of our guidance of 60%.
Speaker Change: Gross profit was also benefited from a greater mix of higher margin license and connected service revenue as compared to professional services revenue.
Speaker Change: While our professional services revenue was lower than anticipated during the quarter. It performed at a higher gross margin than anticipated.
Speaker Change: Moving down the operating statement, our non-GAAP operating expenses were $34 1 million for Q1 compared to $44 $4 million from the same quarter in fiscal year 'twenty four.
Speaker Change: This decrease of $10 4 million or 23% represents a full quarter of savings from our restructuring efforts conducted at the end of last year.
Speaker Change: We also delayed some planned R&D hiring until Q2.
Speaker Change: Additionally, the company received notice of acceptance of an international tax credit that allowed us to record a $2 $5 million in operating cost benefit.
Speaker Change: The tax credit benefit recognized this quarter related to 2021 through 2024 fiscal years and was anticipated in our full year guidance, but later in the fiscal year.
Speaker Change: Okay.
Speaker Change: Our adjusted EBITDA of $1 $4 million, well exceeded our guidance of loss in the range of $6.6 million to $9 million.
Speaker Change: This was driven by improved gross profit as well as decreased operating expenses from continued effort on managing our ongoing operating costs and the previously discussed international tax credit of $2 $5 million.
Speaker Change: As compared to prior year, our Q1 revenue declined $87 4 million, but this was driven by $86 6 million of noncash revenue recorded in last fiscal year associated with our legacy connected services contract that was decommissioned in Q1 of fiscal 2024.
Speaker Change: Our net loss for Q1 was $22 $4 million compared to net income of $23 $9 million for the same quarter in fiscal 'twenty four.
Speaker Change: Again, the decline driven by the decommissioned legacy contract.
Speaker Change: We ended the quarter with $110 $5 million of cash and marketable securities.
Speaker Change: Down $19 9 million compared to where we ended last fiscal year.
Speaker Change: Lower cash balances quarter related to our repurchase of $27 $4 million in principal value of our 2025 convertible notes.
Speaker Change: Set by our positive free cash flow during the quarter of $7 9 million.
Speaker Change: Our cash flow in Q1 absorbed approximately $8 $9 million of cash restructuring costs associated with the transformation efforts of Q4 last year.
Speaker Change: We believe the good start to lead to the year positions us well to achieve our full year cash flow expectations.
Speaker Change: During the quarter, we recorded restructuring and other costs of $11 1 million.
Speaker Change: Which included a $10 $2 million charge, primarily related to our transformation initiatives of which $3 million related to accelerated stock based compensation associated with the termination of a former senior management employees.
As we look at our revenue breakdown operating metrics.
Speaker Change: They are the license revenue of $22 $7 million was up $1 9 million or nine 1% from the same quarter last year and slightly ahead of our expectations.
Speaker Change: As planned there was no material fixed license revenue during the quarter.
Speaker Change: Q1 connected services revenue of $13 $7 million was up $3 $5 million or 34% from $10 2 million the same quarter last year when excluding the legacy revenue.
Speaker Change: We believe this reflects a positive trend of increased demand for connected vehicles.
Speaker Change: As planned our professional service revenue was down year over year. However, the work performed was more profitable than a year ago.
As a review of our key performance indicators this quarter total adjusted billings, which are defined as our total billings adjusted to exclude professional services prepaid billings in prepaid consumption was $227 million an increase of 3% for the trailing 12 month period this year compared to previous year.
Speaker Change: Billings, including professional services for Q1 of $69 million were up 7% compared to $64 6 million for Q1 last year.
Speaker Change: As a reminder, when we look at our total licensed this shift pro forma royalties is an operating metric we use representing the total value of variable licenses shipped in a quarter, excluding the shipment from fixed licenses where revenue was previously recognized upon contract signing.
Speaker Change: We referred to as shipments where revenue was recognized in prior periods as fixed license consumption.
Speaker Change: Our pro forma royalties were $36 7 million, which were higher by approximately $1 $4 million as compared to Q1 last year and in line with our expectations.
Speaker Change: Consumption of previously fixed contracts totaled $14 million this quarter lower than the same quarter last year by about 3% and lower than projected.
Speaker Change: Going forward, we anticipate a lower level of consumption of royalties associated with past fixed license contracts.
Speaker Change: Our penetration of global auto production for the trailing 12 months declined by $2, 51%.
Speaker Change: We shipped approximately 11 million cars with SaaS technology in Q1 up two 6% compared to last quarter, So down 10, 5% year over year.
Speaker Change: Q1 worldwide IHS production declined one 2% compared to the same quarter last year and was up 10, 8% quarter over quarter.
Speaker Change: Excluding China worldwide car production was only up two 8% quarter over quarter and down four 8% versus same quarter last year.
Speaker Change: This is important to note as this shows that part of our worldwide penetration decline relates to the increase in China production within worldwide auto production and to date, we have not been significantly successful at selling into Chinese Oems into the Chinese domestic market.
Speaker Change: We can production volumes among our top customers also contributed to our year over year total volume decline.
Speaker Change: But the number of cars produced that use our connected services increased five 1% on trailing 12 months basis compared to the same metric a year ago, and five 6% compared to last quarter. This reflects the increased demand for connected vehicles.
Speaker Change: Now turning to our guidance.
Speaker Change: For Q2, we currently expect revenue to be in the range of $74 million to $77 million.
Speaker Change: This includes $20 million projected fixed license revenue expected to be signed during the quarter.
Speaker Change: Additionally, our Q2 revenue guidance absorbs approximately $2 million of headwinds and professional services, we saw in Q1.
Speaker Change: We're projecting we are not projecting any additional fixed license revenue for the remainder of the year.
Speaker Change: With the level of fixed license revenue forecast in Q2, we expect gross margin to improve to between 74 and 76% net.
Speaker Change: Net income to be in the range of $1 million to $5 million and adjusted EBITDA to be in the range of 18% to $22 million.
Speaker Change: When taken in the context of our full year guidance. This means that the implied second half guidance for adjusted EBITDA would be negative if you're simply based on your calculations off the midpoint of our range.
Speaker Change: To be clear this is not our intention to signal any change in direction of the business rather it is still early in the year and as mentioned Q1 was aided by a few timing related factors on the expense side that will catch up to US later and later in the year.
Speaker Change: With that said, we had a positive first quarter, but are not yet prepared to officially revise our 'twenty two fiscal 'twenty five revenue profitability and cash flow guidance.
The strong start to the year position us very well and gives us confidence that our full year numbers are likely to come in towards the top end of the range of our guidance that we gave last quarter, especially full year, adjusted EBITDA and free cash flow.
Speaker Change: When looking at our liquidity as previously noted we repurchased $27 $4 million of outstanding 2025 convertible notes as Brian mentioned our.
Speaker Change: Our plan is to extinguish the remaining $60 million of convertible notes due in June through some combination of payoffs and financing.
Speaker Change: Between now and June we will continue to evaluate potential capital structures that could position the company to execute our longer term.
Speaker Change: Our strategic direction, while also allowing us to retain our cash reserve to be flexible as we move forward.
Overall, we are pleased with the solid results for Q1, and our continued financial performance.
Brian: I will now turn it back to Brian to close our remarks.
Brian: Thanks, Tony.
Speaker Change: In closing, we're happy with our Q1 results and motivated by our Q2 forecast.
Speaker Change: We remain focused on execution business process improvement cost reduction and advancing our nextgen roadmap.
Speaker Change: Now before we close I want to take a moment to explain my philosophy on forecasting.
Speaker Change: We take our commitment to the street seriously and our goal is always to meet or beat our forecast.
Speaker Change: I have a firm policy not to change guidance after the first quarter.
Speaker Change: Our first quarter results and second quarter forecast give us confidence in our fiscal year 2025 forecast for revenue and we're projecting to be in the upper end of the range for adjusted EBITDA and free cash flow.
Speaker Change: With regards to the recent tariff announcements.
Speaker Change: We don't believe that there will be a meaningful impact to Q2 as we're already halfway through the quarter.
Speaker Change: And the recent tariffs were paused earlier this week.
Speaker Change: Now for the rest of the fiscal year, considering the number of changes that have occurred just in the last several weeks. We believe the situation is still incredibly fluid.
Speaker Change: It would be too speculative for us to say, what if any impact there will be on our results at this time.
Speaker Change: I will provide an update on our next earnings call in May if there is meaningful impact.
Speaker Change: We continue to believe in our ability to deliver on our Q2 and fiscal year 'twenty five guidance.
Speaker Change: And then a growth for fiscal year, 'twenty, six and beyond and we look forward to continuing to share our progress with you.
Speaker Change: And we'll now open it up for questions.
Speaker Change: Thank you ladies and gentlemen, if you have a question or comment at this time. Please press star one on your telephone. If your question has been answered you were seeing with yourself from the queue. Please press star one again, we will pause for a moment, while we compile the Q&A roster.
Nick: Our first question comes from Nick <unk> with Needham <unk> Company. Your line is open.
Nick: Hey, guys. Thanks for taking my questions.
Speaker Change: The design win in SLP commentary its really positive. So two questions. There how big can that first major customer program with Sharon Zackfia Y B and second how many units or any help around.
Speaker Change: Sizing the fixed <unk> that are expected to to really start here and and how does that impact your PPA going forward. Thanks.
Speaker Change: Sure.
Bryan: So Nick this is Bryan I'd tell you that.
The first one is with a European auto manufacturer.
Speaker Change: If you look over the life of the contracts.
Speaker Change: Several million units I think in the first year, it's roughly a $1 million ish, maybe slightly less.
Speaker Change: And we're seeing.
Speaker Change: PPA upgrades that we've talked about in the past.
Speaker Change: Tony is going to talk to you a little bit about <unk>. After I'm done here, because we really have a plan to start bringing PPA to you guys.
Speaker Change: Moving and it starting in the next quarter.
Speaker Change: If you take a look at the rest of the POC that we have going it's with all of the major.
Speaker Change: Oems just about.
Speaker Change: And various.
Speaker Change: <unk> levels.
Speaker Change: Completion or start.
Speaker Change: And so again there could be for the X Gen. One that we're looking at right now it could be.
Speaker Change: Multiple millions of units as we move forward and we're seeing the <unk> upgrade.
Speaker Change: That we expect for this product so.
Speaker Change: There is interest and we're getting paid for the product will break. This this technology is really the beginning of the adjourn tick.
Speaker Change: Connected vehicle.
Speaker Change: Model that we have and it will continue with X gene one and then X Gen two as well.
Speaker Change: Thanks.
Got it.
Speaker Change: Hi, Nick.
Speaker Change: You may have done on PPE.
Speaker Change: Talked in the past on these calls that we really need to simplify the model and get to a volume.
Speaker Change: Times price our model effectively what we can say we are not prepared to two.
Speaker Change: Guide on PPE, you were affected TPU going forward at this point by next quarter, we will and we'll be able to give you more of these volume questions and people have questions, but what I can say is there's really two fronts to us growing our PPE.
Speaker Change: And I'll comment a little bit about that.
Speaker Change: How we are kind of seeing that trajectory, but but the two fronts. Our the number of connected cars. How many of our overall cards shipped are connected the second is the price in the with the additional features of these newer products on the connected side that increase in price and how it's how it's driving our effective PPE and again at this point.
Speaker Change: I'm not prepared to.
Speaker Change: Provide a number I would say that our effective <unk> is really thinking about our license revenue in a quarter for those those cars shipped.
Speaker Change: So divided so that revenue divided into those cars shipped and then on the connected side, it's the volume of the connected.
Speaker Change: Vehicles times really are fighting the billings because as you as we've talked about before those billings are then recognized over subscription period. So we wanted to get to an effective TPU what was the value of those cars shipped.
Speaker Change: Have seen kind of pre.
Speaker Change: Precursor to next quarter is is that we are seeing the benefits of.
Speaker Change: Those two fronts that increased number of connected cars and the increased price.
Speaker Change: Impacting positively.
Speaker Change: That effective PPA number.
Speaker Change: Really helpful. Thank you and then second billings is trending in the right direction, Ken the conversion of some of what's in the pipeline today get you to the 299 that you talked about and then if I could just squeeze in why taken all of the fixed contracts this quarter. Thanks.
Speaker Change: Yes, two things, yes, so the number that we the company has historically given on its trailing 12 month's billings right.
Speaker Change: We quoted that to a $227 million of trailing 12 months.
Speaker Change: Adjusted Billings and again adjusted for not including Billings related to <unk> services, and then gets up and down associated with <unk>.
Speaker Change: Previous fixed in current fixed so that's a good number.
Speaker Change: We've talked about the billings this quarter will outpace our projected revenue and again, our projected revenue, which we have not re guided is $2 36 to $2 47. So again the billings outpacing that I think we are on track to certainly do that.
Speaker Change: The.
Speaker Change: Second question what was the second question was why do all the.
Speaker Change: The prepay now and really it's.
Speaker Change: Just a combination Nick.
Speaker Change: Customers and.
Speaker Change: What we are able to negotiate you got to remember the prepaid come with a discount.
Speaker Change: That discount was often quite high.
Speaker Change: And by a shrinking the total footprint that we're going to do down to $20 million.
Speaker Change: <unk>.
Speaker Change: Really being more selective and making sure thats with deep partners.
Speaker Change: The right <unk>.
Speaker Change: Counts, we're able to get this discount down to record levels. So it was really we had more demand than we had.
Speaker Change: Budgeted of 'twenty.
Speaker Change: And we got the right discounts and so we went ahead and.
Speaker Change: Administrative that's why we always Tony and I always say you really need to look at the full year that is going to be lumpiness in our numbers quarter to quarter.
Jeff: It's Jeff.
Jeff: Right customers, great discounts lower than we've almost ever achieved.
Jeff: And it's the right thing to do now and then.
Jeff: And lastly, the timing.
Speaker Change: In these cases these these customers with those lower discounts and everything that Brian said are coming to a point where their previous fixed is now consuming down to a point, where they want they want to re up that prepayment and it fits into their fiscal year as well, which starts April one.
Jeff: Well start within this quarter, so they want to get ahead of.
Jeff: The next quarter. So so I think all of those things are why we would do it it's not that we planned per se to do it. It's we're taking we're being opportunistic with that $20 million.
Jeff: Thank you.
Jeff: One moment for our next question.
Mark Delaney: Our next question comes from Mark Delaney with Goldman Sachs. Your line is open.
Speaker Change: I guess, John good afternoon, and thanks for taking the questions. Good to hear about the breadth of your customer engagements and momentum with your Gen. AI solutions I'm, hoping you can expand a bit more on that topic and maybe speak to the competitive landscape for digital assistance and any sense of how your market share may trend relative.
Mark Delaney: To what you'd seen with your traditional products.
Speaker Change: Sure so.
The competitive landscape is.
Speaker Change: Really pretty much what it was last quarter as well we continue to see some of the big players like Google and Amazon in there we see some of the.
Speaker Change: I'll call software providers like ourselves, we see sound hone in some of the others.
Speaker Change: And then we see some I'll call it DIY, where there are either FSC providers or some.
Speaker Change: Some of the Oems starting now what happens is.
Speaker Change: They are biting off bits and pieces.
Speaker Change: And there are oftentimes being.
Very prescriptive in some of the things that they must be conducted or.
Speaker Change: You're locked into certain LMS so.
Speaker Change: So our approach to that as always hey, we're agnostic, we can use the latest and greatest and you can choose we can customize.
Speaker Change: Can choose customized wake upwards.
Speaker Change: Good example, with Renault's Avatar, where we.
Speaker Change: Customize the wake up word around Reno, which is their avatar theme and really customize the user experience.
Speaker Change: Yeah.
Speaker Change: And Thats really how we approach these so.
Speaker Change: And then we offer a.
Speaker Change: Better capabilities that are quite strong and as we move through this year get even stronger nextgen too and this is what Microsoft's really helping us with around <unk> com.
Speaker Change: Embedded aladdin capabilities shrinking the footprint and getting to a gentex LLM capabilities embedded in a car, which means we have to get small footprint for memory.
Speaker Change: The right sizing their Soc and.
Speaker Change: Being able to get a capable of having the right latency.
Speaker Change: Those are all the things that we compete with but otherwise the competitive landscape hasn't really changed.
Speaker Change: Okay.
Speaker Change: That's helpful context.
Speaker Change: Too soon to try and quantify that.
Speaker Change: The share of Margaret do you think it's similar to what you said before you can maybe gain some share with all of the traction youre seeing.
Speaker Change: Yes, so I mean, Tony tried to kind of walk you through and basically if you look at the Oems that we typically.
Speaker Change: Participate in which are the I'll call it let's call it the western Oems.
Speaker Change: Our market share is relatively flat in that space, what we're seeing is.
Speaker Change: China inside of China, which.
Speaker Change: As is.
Speaker Change: Taken away from our traditional Oems and our ability to progress into China in China.
Speaker Change: Not has not been there yet and we're continuing to look at options and ways to do that and we believe our technology competes very well in that space.
Speaker Change: All about.
Speaker Change: Basically national.
Speaker Change: Or is that theyre selecting.
Speaker Change: Now China outside of China.
Speaker Change: We have good relationships and are in BYD, and Zika and great wall.
Speaker Change: So we're in some of the Chinese outside of China, but if you look at the Oems that we typically the western Oems that we typically plan or our market share is relatively flat yes.
Speaker Change: Got it one last one for me just on the.
Speaker Change: Our current actions.
Speaker Change: <unk> said on the last call you expect it to be at the high end or maybe even somewhat above the $35 million to $40 million annualized target, maybe update us on where that came in and.
Speaker Change: I think you said, it's all in place exiting.
Speaker Change: The fiscal first quarter, but just to clarify where you stand on cost action and if theres any more to come or it's all in place. Thank you.
Speaker Change: So I can start that and Tony.
Tony: And Tony can.
Speaker Change: I can answer in more detail I think also.
Speaker Change: Mark I may not have completely answered. Your first question. So I do think we will in the Oems that we play with our that we participate with we will gain share our target is to gain share we saw a win back in China around the cloud.
Speaker Change: We're continuing to drive we believe our leading edge roadmap of product. So our goal is to continue to gain share in the guys that we typically play with.
Speaker Change: And then.
Speaker Change: We're aggressively testing what we can do inside of China.
Speaker Change: Your question was cost reduction your second question was around cost reductions and cost improvements.
I can tell you that what we've already forecasted for 2006 or excuse me for 25.
Speaker Change: As already is work that's for the most part already Doug So youre seeing the results of it filters through the cost system, whether its head count reductions or site closures or site reduction things like that are already.
Speaker Change: Yes.
Speaker Change: Filtering through as the year goes on.
Speaker Change: We do have a set of programs that I talked about that we're continuing to look at and drive and.
Speaker Change: And if we take something like our improving our contracts and the efficiency within our finance unit. That's what Tony has ongoing right now that work will probably take through at least halfway through this year and into probably the second half of next year, and you're really going to see the benefits of that one roll into 'twenty, six and it's hard for us to <unk>.
Speaker Change: Cask right now because as we look at things like.
Reducing the number of legal entities or improving how we financially account for things and improving the streamlining that.
Speaker Change: We're still trying to figure out how do we account for how much effort and work.
Speaker Change: Does that remove from the system and spending how many fewer tax returns that we have to do and how many.
Speaker Change: Filings do we not have to do.
Speaker Change: But most of those will roll into 'twenty six for additional cost reductions as we move forward.
Speaker Change: Okay.
Speaker Change: One moment for our next question.
Speaker Change: Yes.
Speaker Change: Our next question comes from Colin Langan with Wells Fargo. Your line is open.
Colin Langan: Oh, great. Thanks for taking my questions.
Speaker Change: You mentioned.
Speaker Change: You guided to the high end of the range. You said there were some factors in Q1 that were outliers. Please just remind me what they are at with.
Speaker Change: The $2 million of royalty true ups, and then to your 0.5 of tax credit or let's say items youre, referring to that were kind of.
Speaker Change: Better than a.
Speaker Change: Couple of.
Speaker Change: Couple of other onetime items, we say onetime items and I'll talk to you a couple of it one is the.
Speaker Change: The true ups and as we as our royalty reports come in are Oems and tier one to import royalties.
Speaker Change: They report and then they oftentimes, we'll true up the actual report estimated number of trip to actual.
Speaker Change: So in this case there with the connected services contract and we did some work with an OEM and wanted to make sure. We're capturing all of our activity and got $2 million of a true up for past. So some of that was in quarter of that $2 million. So it isn't.
Speaker Change: It would have it would have hit the quarter as well so and then some of it is before the quarter, but even if you take that 2 million away, we were kind of smack Dab in the middle of our guidance this put us over the edge Guy.
Speaker Change: Guidance on the topline.
Speaker Change: The tax credit.
Speaker Change: That was baked into our full year expenses, which happened to get confirmation of that credit in Q. Once we were able to record it.
Speaker Change: For previous years 'twenty as the years 2021 through 2024 in the first in Q1, where we had had that baked into a savings of opex for fiscal 'twenty, five but not necessarily in Q1. So.
Speaker Change: So those were the two main items that drove.
Speaker Change: And improved profitability to the bottom line.
Speaker Change: And the tax credit is in our specialty wasn't treated as a special item.
Speaker Change: I'm, sorry say that again.
Speaker Change: The tax credit wasn't a special adjustment in special item Johnstown, Yes, the tax credit was.
Speaker Change: Opex credit with international tax credit associated with offsetting R&D cost and so in previous years, we incurred the entire internationally for this international this country, we incur the cost for R&D without the savings of the credit this was a catch up for that country.
Speaker Change: Again, the $2 five related to 'twenty four and before so we will have some savings.
Speaker Change: In 'twenty five.
Speaker Change: Well the rest of the year for the 25 expectations for that credit, but but that was kind of a catch up.
Speaker Change: And you mentioned on the closing commentary about tariff risk or kind of a bit of a little surprise.
Speaker Change: I kind of assume software wouldn't have my crystal, whereas your tariff exposure. If there are tariffs I should we be thinking about that if you could frame up.
Speaker Change: Sure.
Speaker Change: Just be in unit volume.
Speaker Change: So if.
Speaker Change: The projections were at one point that if the tariffs were applied to the effects of.
Speaker Change: 25% of the cars.
Multiple thousands of dollars.
Speaker Change: Increases in cost and salespeople by fewer cars.
Speaker Change: That's the way.
Speaker Change: We get paid.
Speaker Change: Shipment standpoint, right so.
Speaker Change: It would be purely volume so we don't get.
Speaker Change: We our U S company and so.
Speaker Change: Right now the talk of tariffs.
Speaker Change: It doesn't apply to our product.
Speaker Change: But it applies to the <unk>.
Speaker Change: Would have applied potentially to our customers' products.
Speaker Change: And Thats all we were.
Okay.
Speaker Change: Counting against that that makes sense.
Speaker Change: Said right now evolve it but on whole then we're halfway through the year. So we don't see it right now.
Speaker Change: It's just it's just.
Speaker Change: And then <unk>.
Speaker Change: Hospital predictions.
Speaker Change: And just lastly, you talked about ex U.
Speaker Change: Quickly cabinets ramp how quickly kind of adoption because our contracts two to three years or is this something that could be.
Speaker Change: Drive.
Speaker Change: Pricing higher in the next year.
There are two pretty quickly.
Speaker Change: Sure so.
Speaker Change: You have to remember that there is.
Speaker Change: Two.
Speaker Change: Versions of our agenda.
Large language model software version that we think about one is an embedded non connected version and the other one is a connected version and the connected version gives you the ability to do things like Hey, what was the latest score on the football game or.
Speaker Change: Who won la Liga this weekend.
Speaker Change: It gives you real time data. It also gives you points of interest that are updated and all of that kind of information.
Speaker Change: But it's not required to run the car do navigation those are all embedded efforts.
Speaker Change: Typically the cars come from anywhere 29, we're talking about this this morning from one two we have seen as long as 10 year contracts for connectivity I would tell you that the majority of them are probably.
Speaker Change: Somewhere in that two to three years at.
Speaker Change: At that point the customer the end user the driver.
Speaker Change: Makes some agreement with the OEM the manufacturer or the car to continued connectivity.
Speaker Change: At some rate, we don't drive that.
Speaker Change: And we're just at the early days of seeing what we.
Speaker Change: Sign up as well.
Speaker Change: For people. So we don't really have a forecast for that when we look at this we look at most.
Speaker Change: Most cars are being connected as we ship them.
Speaker Change: Is that right and that's how we project through 'twenty five.
From that perspective, because most of those cars are going to still be within the one year to three year.
Speaker Change: Sure.
Speaker Change: Got it alright, thanks for taking my questions.
Speaker Change: One moment for our next question.
Our next question comes from Jeffrey <unk> with Craig Hallum Capital Group. Your line is open.
Daniel: Hey, Brian Tony This is Daniel on for Jeff.
Daniel: Maybe just sort of as an example of the sort of places where you're seeing momentum if you could speak to the Chinese wind back you mentioned could you just describe that a little bit more detail what that bake off with like how you won why you won et cetera.
Daniel: Sure. So that one was with the western Oems cloud infrastructure.
Daniel: And we won based on again.
Daniel: The technology leadership that we provided and our willingness to be.
Daniel: Much more flexible and configure their cloud system.
Daniel: <unk>, how they want it.
Daniel: So it was a win back.
Daniel: That we've had.
Daniel: Okay.
Daniel: Very strong competitor.
Daniel: Private local competitor.
Speaker Change: Okay. That's helpful. And then just on connected either for Brian or Tony just on the metrics that we should be looking at a few different ways. We could read this new connected I guess, if you exclude the $2 million true up this quarter I guess, it's down sequentially, it's up single digits year over year.
Daniel: Trailing 12 month cars shipped.
Speaker Change: One 5%, but.
Speaker Change: Deceleration from last quarter, just a bunch of different ways, we could read that how would you cutting through all that speak to the metrics. What's the most relevant how should we be looking at the trajectory there.
Speaker Change: Yes, so I think theres a couple of ways to look at it as we think about our two two fronts of growth with regard to connected right. The number of connected cars connected.
Speaker Change: Right well for every carload chips at how many of those are connected and then two what is that price per unit that.
Speaker Change: That we're seeing over both connected is that growing.
Speaker Change: We anticipate and how is that contributing to overall TPU. So it's those two fronts. What I would say is that we're not ready to provide that guidance right now on.
Speaker Change: On.
Speaker Change: Ah connected rates and PPE use but.
And then the second one is or the third one would be billings. So just remember to that so if a car ships out with.
Speaker Change: With our connected.
Speaker Change: At that time were billing for two things one is the embedded license with drops to revenue right away and then the connected which then gets recognized over the future Thats why as the first question was hey.
What's your billings are you on track for your billings this year, which will outpace our GAAP revenue because of connected billings will be billed but not recognized until the future. So.
And we don't break apart our billings between.
Speaker Change: Our license and connected so there's components that if youre trying to model are missing.
Speaker Change: We know that it's important view, what's important for us to know.
Speaker Change: But to give you that information to help you model.
Speaker Change: But thats really next quarter, but I think the way things you need to think about as we go forward are the connection rate.
Speaker Change: Price per unit on the connected side the price per unit overall car shipped and then lastly.
Speaker Change: Growing billings within connected.
Speaker Change: And then just last for me just a modeling question on the professional services Cogs.
Speaker Change: So $10 million this quarter I think first time I've ever seen that and thats kind of been a little bit of a trajectory over the past year Cogs have been going down is that sustainable is that structural or is that one time, just sort of our expectations for PFS Cogs.
Speaker Change: Yes.
Speaker Change: Yes, so PFS is down as we as we've said what I've mentioned in the call is that our margin for for PFS has actually improved I think we typically plan that business to see that business as a 30% margin business, which brings down our overall margin. This quarter. It was north of that which was.
Speaker Change: It's beneficial to us so overall Cogs were down because professional service revenue was down but also what we did sell we sold it at a higher margin so.
Speaker Change: As you think about modeling.
Speaker Change: Probably model.
Speaker Change: Special service margins at North of 30 now.
Speaker Change: Okay. Thanks, Brian Thanks, Dan.
Speaker Change: One moment for our next question.
Okay. Our next question comes from Jeff Osborne with TD Cowen Your line is open.
Jeff Osborne: Hey, Thank you just two quick ones from my side.
Speaker Change: I think it was last quarter you gave some usage stats on the Gen. II platform I want to say with me. The June July that your first customer in Europe pushed that update into the installed base is there any metrics you can share about usage of the newer platform relative to the older conversational AI.
Jeff Osborne: AI.
Jeff Osborne: <unk> solutions.
Jeff Osborne: I don't have any just any new metrics I would tell you. We're continuing to see increased usage just if you look at our cloud traffic.
Jeff Osborne: That degenerative AI connected vehicles go out we're continuing to see our cloud usage increase as well.
Jeff Osborne: But I don't have any new numbers for you from that perspective.
Jeff Osborne: But it is good as well.
Jeff Osborne: Okay.
Jeff Osborne: For this year, if there's like a halo effect in particular as you had.
Jeff Osborne: Stall base of I think it was the <unk> threes and fours if my Memory's right.
Jeff Osborne: New users are using it for a month or two and then that tapered off but it doesn't sound like that's the case is that right.
Jeff Osborne: That's not what we're observing now we're continuing to see an effect.
Jeff Osborne: One of the biggest things we work on is is really helping.
End users understand just what the car is capable of doing.
Jeff Osborne: So what we're finding is as users see all they can do with voice.
Jeff Osborne: Their car with connected cars with AI.
Jeff Osborne: They are using it more and more.
Jeff Osborne: That's great to hear my my last question is just as we approach the June.
Jeff Osborne: Deadline for the debt.
Jeff Osborne: Can you remind us is there a minimum cash balance that you feel comfortable.
Jeff Osborne: Obviously, you have got a nice EBITDA guidance here for Q2 assume you generate nice free cash flow, but.
Jeff Osborne: As you think about paying off the remaining tranche how should we think about the options and then what the minimum cash balance you feel comfortable having.
Jeff Osborne: Yes, we don't we don't have a minimum per se that said, we're very comfortable with paying out if we pay it off and don't refinance any.
Jeff Osborne: It will likely be north of $70 million and any at the lowest point so so.
Jeff Osborne: Is that the exact right number that's what we're looking at as far as overall capital structure to see where we want to be but we're comfortable that.
Jeff Osborne: If we need to we can continue to grow the cash flow of the business.
Jeff Osborne: And growth from a lower point of 70 million of cash after the payoff too.
Jeff Osborne: To where that optimal amount is.
Got it that's all I had thank you.
Jeff Osborne: And I'm not showing any further questions at this time I would like to turn the call back over to Brian for any remarks.
Jeff Osborne: Okay, I would just like to.
Jeff Osborne: Reiterate we're really.
Jeff Osborne: <unk> of our Q1 results.
Jeff Osborne: You saw our forecast for Q2.
Jeff Osborne: And we've also said that for the full year.
Jeff Osborne: Sure.
Jeff Osborne: Comparable in saying, we'll be in the upper end of our guidance for both free cash flow and adjusted EBITDA.
Jeff Osborne: We are really driving hard as we entered Q2 into.
Jeff Osborne: Continuing to push our generative AI development work and doing our poc's at the customers.
Jeff Osborne: And we look forward to talking to you in May to give you an update on the progress on all of those.
Jeff Osborne: And with that I'd, just like to close the call with a thank you very much and I look forward to talking to you all in May.
Jeff Osborne: Thank you ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
Jeff Osborne: Okay.
Okay.
Jeff Osborne: [music].