Q2 2026 Cerence Inc Earnings Call

May 7, 2026

Operator: Good day, and thank you for standing by. Welcome to the Cerence Q2 2026 earnings conference call. I would now like to hand the conference over to your speaker today, Kate Hickman, Vice President, Corporate Communications and Investor Relations. Please go ahead.

Operator: Good day, and thank you for standing by. Welcome to the Cerence Q2 2026 Earnings Conference Call. I would now like to hand the conference over to your speaker today, Kate Hickman, Vice President, Corporate Communications and Investor Relations. Please go ahead.

Speaker #1: Good day. And thank you for standing by. Welcome to the Cerence second quarter, 2026 earnings conference call. At this time, all participants are on the listen-only mode.

Speaker #1: After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone.

Speaker #1: You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded.

Speaker #1: I would now like to hand the conference over to your speaker today, Kate Hickman, Vice President, Corporate Communications and Investor Relations. Please go ahead.

Speaker #2: Hello, everyone, and welcome to Cerence's second quarter, 2026 conference call. Before we begin, I would like to remind you that this call may involve certain forward-looking statements.

Kate Hickman: Hello, everyone. Welcome to Cerence's Q2 2026 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, anticipations, intentions, estimates, assumptions, beliefs, outlooks, strategies, goals, priorities, objectives, targets, and plans, are forward-looking statements. Cerence makes no representations to update those statements after today. These statements are subject to risks and uncertainties, which may cause actual results to differ materially from such statements and expectations as described in our SEC filings, including the Form 8-K with the press release preceding today's call, our most recent Form 10-Q, and our Form 10-K filed on 20 November 2025. In addition, the company may refer to certain non-GAAP measures, key performance indicators, and pro forma financial information during this call.

Speaker #2: Any statements that are not statements of historical fact—including statements related to our expectations, anticipations, intentions, estimates, assumptions, beliefs—outlook, strategies, goals, priorities, objectives, targets, and plans—are forward-looking statements.

Speaker #2: Cerence makes no representations to update those statements after today. These statements are subject to risks and uncertainties, which may cause actual results to differ materially from such statements and expectations.

Speaker #2: As described in our SEC filings, including the Form 8K with the press release preceding today's call, our most recent Form 10Q, and our Form 10K filed on November 20th, 2025.

Speaker #2: In addition, the company may refer to certain non-GAAP measures—key performance indicators—and pro forma financial information during this call. Please refer to today's press release for further details of the definitions, limitations, and uses of those measures, and reconciliations of non-GAAP measures to the closest GAAP equivalent.

Kate Hickman: Please refer to today's press release for further details of the definitions, limitations, and uses of those measures and reconciliations of non-GAAP measures to the closest GAAP equivalent. The press release is available in the investor section of our website. Joining me on today's call are Brian Krzanich, CEO, and Tony Rodriguez, CFO. In order to provide expanded access to our leadership team, we'll also be joined by Christian Mentz, our Chief Revenue Officer, for the Q&A portion of the call. Please note that slides with further context are available in the investor section of our website. Before handing the call over to Brian, I would like to mention that we will be participating in the TD Cowen 54th Annual Technology, Media, and Telecom Conference on 27 May. Now on to the call. Brian?

Speaker #2: The press release is available in the Investor section of our website. Joining me on today's call are Brian Krzanich, CEO, and Tony Rodriguez, CFO.

Speaker #2: In order to provide expanded access to our leadership team, we'll also be joined by Christian Mentz, our Chief Revenue Officer, for the Q&A portion of the call.

Speaker #2: Please note that slides with further context are available in the Investor section of our website. Before handing the call over to Brian, I would like to mention that we will be participating in the TD Cowen 54th Annual Technology, Media, and Telecom Conference on May 27th.

Speaker #2: Now onto the call. Brian?

Speaker #3: Thank you, Kate. And good afternoon, everyone. Starting with the key results for our fiscal second quarter, we delivered another strong quarter with revenue of $64.2 million and adjusted EBITDA of $7.2 million.

Brian Krzanich: Thank you, Kate, and good afternoon, everyone. Starting with the key results for our fiscal Q2, we delivered another strong quarter with revenue of $64.2 million and adjusted EBITDA of $7.2 million, both above the high end of our guidance. Free cash flow came in at $13.6 million. Now, these results reflect both disciplined execution and continued stability in our core automotive business. As usual, Tony will provide more detail shortly. Before we dig in more detail on the quarter, I'd like to discuss some of the recent market moves in the AI and software space. My belief as to why Cerence is in a unique position and why our customers continue to choose Cerence. Our technology excels in the automotive environment where reliability, safety, and deep integration matter.

Speaker #3: Both above the high end of our guidance. Free cash flow came in at 13.6 million. Now, these results reflect both disciplined execution and continued stability in our core automotive business.

Speaker #3: And as usual, Tony will provide more detail shortly. Before we dig into more detail on the quarter, I'd like to discuss some of the recent market moves in the AI and software space.

Speaker #3: My belief as to why Cerence is in a unique position and why our customers continue to choose Cerence are technology excels in the automotive environment.

Speaker #3: We're reliability, safety, and deep integration matter. Cerence AI solutions are fully customizable, flexible, and deeply integrated with one of the most complex technical environments on the planet.

Brian Krzanich: Cerence AI solutions are fully customizable, flexible, and deeply integrated with one of the most complex technical environments on the planet, the car. The environment requires a thoughtful, optimized orchestration of LLMs, SLMs, and agents, giving drivers seamless access to whatever they may need regardless of connectivity. Cerence is differentiated in our ability to deliver this, thanks to our unique domain expertise and experience integrating into vehicles. Our broad AI-native tech portfolio of both embedded and cloud solutions, backed by our proprietary automotive-specific dataset and our skilled team, also differentiate us from our competitors. Plus, we have a flexible architecture that gives our customers the freedom to leverage the latest AI innovation, including from our partners like NVIDIA and Microsoft, while helping future-proof their products by not locking them in to one ecosystem or model.

Speaker #3: The car. The environment requires a thoughtful, optimized orchestration of LLMs, SLMs, and agents, giving drivers seamless access to whatever they may need regardless connectivity.

Speaker #3: Cerence is differentiated in our ability to deliver this thanks to our unique domain expertise and experience integrating into vehicles. Our broad AI-native tech portfolio of both embedded and cloud solutions backed by our proprietary automotive-specific dataset and our skilled team also differentiate us from our competitors.

Speaker #3: Plus, we have a flexible architecture that gives our customers the freedom to leverage the latest AI innovation—including from our partners like NVIDIA and Microsoft—while helping future-proof their products by not locking them into one ecosystem or model.

Speaker #3: We know that three years from now, today's best general-purpose LLM or parking agent is likely not to be the one that is here today.

Brian Krzanich: We know that 3 years from now, today's best general purpose LLM or parking agent is likely not to be the one that is here today. With Cerence AI, our customers can easily evolve their offering to best serve their end users. This is what sets us apart from general purpose AI models. That's why we continue to secure major wins across our portfolio amongst technology and platform providers, big tech, and hyperscalers. As I mentioned on our last quarter's call, we have 3 key priorities for 2026. The first is advancing our business through leading technology. Second is maintaining our cost diligence. Third is driving profitable top-line growth. We continue to see strong momentum for Cerence xUI.

Speaker #3: And with Cerence AI, our customers can easily evolve their offerings to best serve their end users. This is what sets us apart from general-purpose AI models.

Speaker #3: That's why we continue to secure major wins across our portfolio against technology and platform providers—big tech, and hyperscalers—As I mentioned on our last quarter's call, we have three key priorities for 2026.

Speaker #3: The first is advancing our business through leading technology. Second, maintaining our cost diligence. And third, driving profitable, top-line growth. And we continue to see strong momentum for Cerence XUI.

Speaker #3: In addition to JLR, a VW Group brand, and Geely, I can now also name BYD, a major Chinese automaker, as a new customer who is leveraging XUI for its overseas programs.

Brian Krzanich: In addition to JLR, a VW Group brand, and Geely, I can now also name BYD, a major Chinese automaker, as a new customer who is leveraging xUI for its overseas programs. BYD is also the first to start production, with cars rolling off the lines as we speak. A very exciting milestone for our team. I can also give a bit more detail on the major global automaker we mentioned last quarter's call. This is a multi-year, multi-platform contract with a Japanese automaker with significant volume, and importantly, a win-back from a hyperscaler. These wins speak volumes of our technology and team, and we are encouraged by the strong economics. All programs signed to date carry PPUs that exceed our current run rate, reinforcing both the value of our platform and OEM's desire to invest in next-generation in-vehicle experiences.

Speaker #3: BYD is also the first to start production with cars rolling off the lines as we speak. A very exciting milestone for our team. I can also give a bit more detail on the major global automaker we mentioned last quarter's call.

Speaker #3: This is a multi-year, multi-platform contract with a Japanese automaker with significant volume, and importantly, a win back from a hyperscaler. These wins speak volumes of our technology and team.

Speaker #3: And we are encouraged by the strong economics, all programs signed to date, carry PPUs that exceed our current run rate, reinforcing both the value of our platform and OEM's desire to invest in next-generation in-vehicle experiences.

Speaker #3: We also have additional opportunities in late-stage discussions and strong pipeline of RFQs and POCs with the strong win rate we've seen thus far for XUI deals we believe will continue to see success in these pending opportunities.

Brian Krzanich: We also have additional opportunities in late-stage discussions and strong pipeline of RFQs and PFC. With the strong win rate we've seen thus far for xUI deals, we believe we'll continue to see success in these pending opportunities. From an xUI revenue standpoint, billings are already ramping up, with more revenue to flow in fiscal year 2027 and beyond. Importantly, this timing is consistent with our expectation that the transition to xUI will be a multi-year rollout. As Tony will explain, some recent wins are not yet reflected in backlog as contracting and implementation needs to be finalized. Outside of xUI, we have a broad, sticky technology portfolio that continues to keep us deeply embedded with OEMs and remaining integrated with their platforms, even if they split their sourcing or go in a different direction for their voice solution. A good example of this is our Audio AI suite.

Speaker #3: From an XUI revenue standpoint, billings are already ramping up with more revenue to flow in fiscal year 27 and beyond. Importantly, this timing is consistent with our expectation that the transition to XUI will be a multi-year rollout.

Speaker #3: And as Tony will explain, some recent wins are not yet reflected in backlog as contracting and implementation needs to be finalized. Outside of XUI, we have a broad, sticky technology portfolio that continues to keep us deeply embedded with OEMs and remaining integrated with their platforms, even if they split their sourcing or go in a different direction for their voice solution.

Speaker #3: A good example of this is our audio AI suite. In Q1, we signed audio AI deals with several OEMs, including GM, Daihatsu, Mercedes-Benz, and Toyota.

Brian Krzanich: In Q1, we signed Audio AI deals with several OEMs, including GM, Daihatsu, Mercedes-Benz, and Toyota. Our progress continued in Q2 with several significant wins, including BMW and Maruti Suzuki India. Maintaining our position in these programs means we keep our seat at the table and secure recurring business, even in coexistence with competitors, giving us the opportunity to expand over time. We also signed a new program win with Toyota Europe that includes the addition of generative AI capabilities to their existing Cerence Assistant-based platform, demonstrating that our GenAI solutions, like Chat Pro, continue to serve as a strong option for OEMs to bring LLM-based capabilities into the car. In addition to the BYD xUI program starting production, several notable programs leveraging tech across our portfolio also started production in this quarter.

Speaker #3: Our progress continued in Q2 with several significant wins. Including BMW, and Ferrari/Suzuki India, maintaining our position in these programs means we'll keep our seat at the table and secure recurring business even in coexisting with competitors.

Speaker #3: Giving us the opportunity to expand over time. We also signed new program wins with Toyota Europe that includes the addition of generative AI capabilities to their existing Cerence assistant-based platform.

Speaker #3: Demonstrating that our Gen AI solutions like Chat Pro continue to serve as a strong option for OEMs to bring LLM-based capabilities into the car.

Speaker #3: In addition to the BYD XUI program starting production, several notable programs leveraging tech across our portfolio also started production in this quarter. JLR went live with Chat Pro being an over-the-air update bringing Gen AI to cars already on the road as they continue developing their future platform based on XUI.

Brian Krzanich: JLR went live with Chat Pro via an over-the-air update, bringing GenAI to cars already on the road as they continue developing their future platform based on xUI. We also expanded our presence in smart brand vehicles with the addition of our GenAI-powered car knowledge solution to their existing Cerence-based platform. Other key startup productions include Toyota, Renault, Changan Mazda, Audi, HKMC, Great Wall Motor, Mercedes-Benz, Subaru, and Geely. Outside of automotive and consistent with what we've said in the past, we are concentrating our efforts on high-value verticals where our strength in edge solutions, quality, reliability, privacy, and domain-focused approach matter most. Where we believe we have a clear right to win. Specifically, we are prioritizing dealership AI, commercial and industrial operations, and select IoT and robotics applications.

Speaker #3: We also expanded our presence in smart brand vehicles with the addition of our Gen AI-powered car knowledge solution to their existing Cerence-based platform. Other key startup productions include Toyota, Renault, Changan Mazda, Audi, HKMC, Great Wall Motor, Mercedes-Benz, Subaru, and Geely.

Speaker #3: Outside of automotive, and consistent with what we said in the past, we are concentrating our efforts on high-value verticals where our strength in edge solutions quality, reliability, privacy, and domain-focused approach matter most.

Speaker #3: And where we believe we have a clear right to win specifically, we are prioritizing dealership AI, commercial and industrial operations, and select IoT and robotics applications.

Speaker #3: Rather than selling voice as a standalone component, our approach is to deliver full vertical solutions combining voice, LLMs, and SLMs orchestration and workflow integration into purpose-built vertical packs.

Brian Krzanich: Rather than selling voice as a standalone component, our approach is to deliver full vertical solutions combining voice, LLMs, and SLMs, orchestration, and workflow integration into purpose-built vertical packs. In terms of go-to-market, we are scaling responsibly through a mix of direct engagements with our core verticals and distributor-led expansion in areas like kiosk, logistics, and defense, where we leverage our existing partners for broader domain reach and co-sell leverage. We are encouraged by early customer traction, and we continue to believe the initial financial contribution from non-automotive markets begin as we exit fiscal year 2026, consistent with our prior guidance. To give an update on our intellectual property strategy and ongoing enforcement efforts, earlier this week, we filed a patent infringement action against Amazon, reflecting our conviction in the strength and breadth of our patent portfolio.

Speaker #3: In terms of go-to-market, we are scaling responsibly through a mix of direct engagement with our core verticals and distributor-led expansion in areas like kiosk, logistics, and defense.

Speaker #3: Where we leverage our existing partners for broader domain reach and co-cell leverage. We are encouraged by early customer traction, and we continue to believe the initial financial contribution from non-automotive markets to begin as we exit fiscal year 26 consistent with our prior guidance.

Speaker #3: To give an update on our intellectual property strategy, an ongoing enforcement effort, earlier this week we filed patent infringement action against Amazon. Reflecting our conviction in the strength and breadth of our patent portfolio.

Speaker #3: We have invested for years to develop this foundational IP that is embedded in an underpins our core voice and conversational AI technologies. Which are deployed across our products and customer programs.

Brian Krzanich: We have invested for years to develop this foundational IP that is embedded in and underpins our core voice and conversational AI technologies, which are deployed across our products and customer programs. We actively protect and commercialize this technology as part of the ordinary course of our business. When we identify unauthorized use, we will pursue appropriate remedies to reinforce our rights, protect our platform, and safeguard the value of our innovation. While the timing of IP-related outcomes can be difficult to predict on a quarterly basis, we view these efforts as integral part of sustaining and enhancing our operational business over the long term. Turning to our outlook. For Q3, we expect revenue between $68 to 72 million and adjusted EBITDA between $8 to 12 million. For the full year, we are raising the midpoint for both revenue and adjusted EBITDA guidance.

Speaker #3: We actively protect and commercialize this technology as part of the ordinary course of our business. When we identify unauthorized use, we will pursue appropriate remedies to enforce our rights.

Speaker #3: Protect our platform and safeguard the value of our innovation. While the timing of IP-related outcomes can be difficult to predict, on a quarterly basis, we view these efforts as integral part of sustaining and enhancing our operational business over the long term.

Speaker #3: Turning to our outlook, for Q3, we expect revenue between 68 and 72 million dollars. And adjusted EBITDA between 8 and 12 million dollars. For the full year, we are rating the midpoint for both revenue and adjusted EBITDA guidance.

Speaker #3: We now expect revenue to be in the range of 305 million to 320 million. And adjusted EBITDA to be in the range of 60 to 70 million.

Brian Krzanich: We now expect revenue to be in the range of $305 to 320 million, and adjusted EBITDA to be in the range of $60 to 70 million. We are raising our free cash flow guidance by $10 million, which represents a 16% increase at the midpoint. Tony will provide further details. We are pleased with our results this quarter. As we reach the midpoint of fiscal year 2026, I want to close by anchoring on our four strong value drivers we continue to see for Cerence AI. First, Cerence plays a key role in the automotive AI stack and across the global automotive ecosystem, creating durable recurring revenue. Our long-term relationships with global automakers enable us to drive growth in our core business by expanding within existing platforms and transitioning OEMs to xUI over time.

Speaker #3: And we are raising our free cash flow guidance by 10 million dollars, which represents a 16% increase at the midpoint. As Tony will provide further details.

Speaker #3: We are pleased with our results this quarter. And as we reach the midpoint of fiscal year 2026, I want to close by anchoring on our four strong value drivers we continue to see for Cerence AI.

Speaker #3: First, Cerence plays a key role in the automotive AI stack. And across the global automotive ecosystem. Creating durable, recurring revenue. Our long-term relationships with global automakers enable us to drive growth in our core business by expanding within existing platforms and transitioning OEMs to XUI over time.

Speaker #3: Second, our XUI wins will drive PPO growth as they scale, which will drive increased total company growth over time. And third, we continue to deliver strong free cash flow while maintaining our focus on disciplined capital allocations.

Brian Krzanich: Our Cerence xUI wins will drive PPU growth as they scale, which will drive increased total company growth over time. Third, we continue to deliver strong free cash flow while maintaining our focus on disciplined capital allocation. Our business model supports debt reduction, balance sheet strength, and strategic and operational flexibility. Lastly, we are driving new income streams. As we've discussed previously, our expansion outside of automotive and our IP enforcement efforts are expected to be long-term sources of potential incremental value creation. With that, I'll turn it over to Tony.

Speaker #3: Our business model supports debt strategic and operational flexibility. And lastly, we are driving new income streams. As we've discussed previously, our expansion outside of automotive and our IP enforcement efforts are expected to be long-term sources of potential incremental value creation.

Speaker #3: And with that, I'll turn it over to Tony.

Speaker #1: Thank you, Brian. Good afternoon, everyone. And thank you for joining us today. We appreciate your continued interest in Cerence. I will walk through our second quarter fiscal 2026 results.

Tony Rodriguez: Thank you, Brian. Good afternoon, everyone, thank you for joining us today. We appreciate your continued interest in Cerence. I will walk through our Q2 fiscal 2026 results, highlight the key drivers for the quarter, and then share our outlook for the remainder of the year. For the quarter, total revenue was $64.2 million, exceeding the high end of our guidance range of $58 million to $62 million. The variance from $78 million reported in the prior year period was primarily attributable to the timing of fixed license contract execution rather than any change in underlying demand. Notably, our core technology business remains resilient, highlighted by steady variable license revenue and continued growth in our recurring connected services revenue, reinforcing the strength and durability of our business model.

Speaker #1: I'd like to key drivers for the quarter. And then share our outlook for the remainder of the year. For the quarter, total revenue was 64.2 million dollars.

Speaker #1: Exceeding the high end of our guidance range of 58 to 62 million dollars. The variance from 78 million dollars reported in the prior year period was primarily attributable to the timing of fixed license contract execution.

Speaker #1: Rather than any change in underlying demand. Notably, our core technology business remains resilient. Highlighted by steady variable license revenue and continued growth in our recurring connected services revenue.

Speaker #1: Reinforcing the strength and durability of our business model. Variable license revenue for the quarter was 31.8 million dollars. A 6% year-over-year increase. Reflecting steady customer utilization and consistent program performance.

Tony Rodriguez: Variable license revenue for the quarter was $31.8 million, a 6% year-over-year increase, reflecting steady customer utilization and consistent program performance. Connected services revenue was $15.3 million, up 21% year-over-year, driven by continued expansion of our connected install base through a higher attach rate. This growth underscores the increasing importance of recurring revenue within our business model and provides improved visibility into future performance. Professional services revenue was $11.3 million, down 19% year-over-year, reflecting our continued focus on standardization and higher margin implementations, as well as the impact of revenue deferrals when services are bundled with license arrangements. Fixed license revenue was $5.8 million this quarter, compared to $21.5 million in the prior year period.

Speaker #1: Connected services revenue was 15.3 million dollars. Up 21% year-over-year. Driven by continued expansion of our connected install base through a higher attach rate. This growth underscores the increasing importance of recurring revenue within our business model and provides improved visibility into future performance.

Speaker #1: Professional services revenue was 11.3 million dollars. Down 19% year-over-year. Reflecting our continued focus on standardization and higher margin implementations. As well as the impact of revenue deferrals when services are bundled with license arrangements.

Speaker #1: Fixed license revenue was 5.8 million dollars this quarter. Compared to 21.5 million dollars in the prior year period. As discussed, fixed license revenue can vary quarter to quarter based on the timing of the contract execution.

Tony Rodriguez: As discussed, fixed license revenue can vary quarter to quarter based on the timings of contract execution. The prior year quarter included a higher level of fixed license agreements, creating a difficult year-over-year comparison. Taking into account year-to-date performance and our current expectations for the remainder of the year, we continue to expect full year fixed license revenue to be comparable to prior year. We view this quarterly variance as timing related rather than structural. Gross margin for the quarter was 74%, compared to 77% in the prior year period. The decline was primarily driven by lower fixed license revenue mix, partially offset by continued discipline across cost of revenue.

Speaker #1: The prior year quarter included a higher level of fixed license agreements creating a difficult year-over-year comparison. Taking into account year-to-date performance and our current expectations for the remainder of the year, we continue to expect full year fixed license revenue to be comparable to prior year.

Speaker #1: And we view this quarterly variance as timing related rather than structural. Gross margin for the quarter was 74%. Compared to 77% in the prior year period.

Speaker #1: The decline was primarily driven by lower fixed license revenue mix. Partially offset by continued discipline across cost of revenue. Total non-gap operating expenses were 43.3 million dollars compared to 34.1 million dollars in the prior year period.

Tony Rodriguez: Total non-GAAP operating expenses were $43.3 million compared to $34.1 million in the prior year period. R&D expense increased to $27.5 million, reflecting lower capitalization of internally developed software and lower technology cost of goods sold rather than an increase in overall investment. Additionally, the prior year quarter benefited from a $2.1 million R&D tax credit catch-up, creating a difficult comparison. Importantly, overall, total technology spending remains stable. Sales and marketing expense was $5.1 million, driven by higher employee-related costs and marketing activities consistent with the continued investment to support our customer base and long-term growth initiatives. G&A expense was $10.7 million, reflecting normalized general operating costs as well as additional legal expenses associated with our ongoing efforts to protect, enforce, and license our IP portfolio.

Speaker #1: R&D expense increased to 27.5 million dollars. Reflecting lower capitalization of internally developed software and lower technology cost of goods sold. Rather than an increase in overall investment.

Speaker #1: Additionally, the prior year quarter benefited from a 2.1 million dollar R&D tax credit catch-up. Creating a difficult comparison. Importantly, overall, total technology spending remained stable.

Speaker #1: Sales and marketing expense was 5.1 million dollars. Driven by higher employee-related cost and marketing activities consistent with the continued investment to support our customer base and long-term growth initiatives.

Speaker #1: G&A expense was 10.7 million dollars. Reflecting normalized general operating cost. As well as additional legal expenses associated with our ongoing efforts to protect, enforce, and license our IP portfolio.

Speaker #1: As discussed previously, the prior quarter included elevated legal costs related to the execution of the Samsung patent license agreement. And as Brian noted, we continue to view IP licensing and enforcement as a long-term value driver rather than a near-term factor.

Tony Rodriguez: As discussed previously, the prior quarter included elevated legal costs related to the execution of the Samsung patent license agreement. As Brian noted, we continue to view IP licensing and enforcement as a long-term value driver rather than a near-term factor. Despite increased expenses, adjusted EBITDA for Q2 was $7.2 million, exceeding the upper end of our guidance range of $2 million to $6 million. From a GAAP profitability perspective, net income and EPS were both within our guidance ranges. Q2 net income was $1.7 million, and diluted EPS was $0.04, compared to $21.7 million and $0.46 respectively in the prior period. On taxes, recall that withholding taxes associated with the Samsung license drives an unusually high effective tax rate this year.

Speaker #1: Despite increased expenses, adjusted EBITDA for Q2 was 7.2 million dollars. Exceeding the upper end of our guidance range of 2 to 6 million dollars.

Speaker #1: From a gap profitability perspective, net income and EPS were both within our guidance ranges. Q2 net income was 1.7 million dollars and diluted EPS was 4 cents.

Speaker #1: Compared to 21.7 million dollars and 46 cents respectively in the prior period. On taxes, recall that withholding taxes associated with the Samsung license drives an unusually high effective tax rate this year.

Speaker #1: We continue to model full year income tax expense of approximately 18 to 22 million dollars. Unchanged from our projection last quarter. Q1 represented the peak quarterly tax expense.

Tony Rodriguez: We continue to model full-year income tax expense of approximately $18 to 22 million, unchanged from our projection last quarter. Q1 represented the peak quarterly tax expense, and we expect meaningful lower tax expense for the full year through the income tax benefit recorded in Q2 and expected in H2. Importantly, Q2 profitability exceeded expectations driven by operating performance, despite the absence of IP license revenue compared to last quarter and lower fixed license revenue compared to the prior year. During Q2, we generated $14.1 million of cash from operations and $13.6 million of free cash flow, further demonstrating strong cash conversion and the benefit of connected billings outpacing GAAP revenue over time.

Speaker #1: And we expect meaningful lower tax expense for the full year through the income tax benefit recorded in Q2 and the expected and expected in the second half.

Speaker #1: Importantly, Q2 profitability exceeded expectations driven by operating performance. Despite the absence of IP license revenue compared to last quarter and lower fixed license revenue compared to the prior year.

Speaker #1: During Q2, we generated 14.1 million dollars of cash from operations and 13.6 million dollars of free cash flow. Further demonstrating strong cash conversion and the benefit of connected billings outpacing gap revenue over time.

Speaker #1: We ended the quarter with 108.3 million dollars of cash and cash equivalents. And believe the company remains well positioned to fund strategic initiatives while continuing to strengthen the balance sheet.

Tony Rodriguez: We ended the quarter with $108.3 million of cash and cash equivalents and believe the company remains well-positioned to fund strategic initiatives while continuing to strengthen the balance sheet. Our strong cash generation from operation provides meaningful capital allocation flexibility. From a metric standpoint, approximately 11.3 million cars were produced that included Cerence technology in the quarter, compared to 11.6 million in the prior year period. Connected cars shipped increased 12% on a trailing twelve-month basis. 50% of worldwide auto production included Cerence technology in line with historical penetration. Adjusted total billings were $239 million, an increase of 7% year-over-year. Our pro forma royalties were $40.3 million, up from $39.7 million in the prior year period.

Speaker #1: Our strong cash generation from operation provides meaningful capital allocation flexibility. From a metric standpoint, approximately 11.3 million cars were produced that included Cerence Technology in the quarter.

Speaker #1: Compared to 11.6 million in the prior year period. Connected cars shipped increased 12% on a trailing 12-month basis. 50% of worldwide auto production included Cerence Technology in line with historical penetration.

Speaker #1: Adjusted total billings were 239 million dollars. An increase of 7% year-over-year. Our pro forma royalties were 40.3 million dollars, up from 39.7 million dollars in the prior year period.

Speaker #1: Fixed license consumption totaled 8.8 million dollars and benefited the current quarter as more pro forma royalties converted to revenue in the current period compared with last year.

Tony Rodriguez: Fixed license consumption totaled $8.8 million and benefited the current quarter as more pro forma royalties converted to revenue in the current period compared with last year. As we have discussed, we expect the quarterly year-over-year comparisons to flatten out as we exit fiscal 2026 and continue to keep annual fixed license revenue consistent. Our five-year backlog is currently approximately $971 million, up from $960 million a year ago and down slightly from year-end, as not all recent wins we've highlighted are yet reflected in our reported backlog. As a reminder, backlog may not be indicative of future revenue. Our PPU metric increased to $5.09 for the trailing 12 months, up 5% year over year, reflecting continued pricing discipline and increased adoption of connected solutions.

Speaker #1: As we have discussed, we expect the quarterly year-over-year comparisons to flatten out as we exit fiscal 2026 and continue to keep annual fixed license revenue consistent.

Speaker #1: Our five-year backlog is currently approximately 971 million dollars. Up from 960 million dollars a year ago and down slightly from year-end as not all recent wins we've highlighted are yet reflected in our reported backlog.

Speaker #1: As a reminder, backlog may not be indicative of future revenue. Our PPU metric increased to $5.09 for the trailing 12 months. Up 5% year-over-year.

Speaker #1: Reflecting continued pricing discipline and increased adoption of connected solutions. Looking ahead to Q3 in the second half of fiscal 2026, we expect continued stability in our variable license revenue, ongoing growth in connected services, and continued potential and potentially favorable variability in fixed license timing during the second half.

Tony Rodriguez: Looking ahead to Q3 in H2 of fiscal 2026, we expect continued stability in our variable license revenue, ongoing growth in connected services, and continued potential and potentially favorable variability in fixed license timing during H2. For Q3, we expect revenue between $68 and $72 million, including $10 million of expected fixed license deals, gross margin between 75% and 76%, adjusted EBITDA between $8 and $12 million, net income between -$1 and $3 million, EPS between -$0.02 and +$0.07. Our full-year outlook has improved. For the full year, we are narrowing the range of revenue to $305 million to $320 million, increasing the midpoint to $312.5 million. We are reaffirming gross margin range of 79% to 80%.

Speaker #1: For Q3, we expect revenue between 68 and 72 million dollars, including 10 million dollars of expected fixed license deals. Gross margin between 75 and 76 percent.

Speaker #1: Adjusted EBITDA between $8 million and $12 million. Net income between negative $1 million and $3 million. EPS between negative $0.02 and positive $0.07.

Speaker #1: Our full year outlook has improved. For the full year, we are narrowing the range of revenue to 305 million to 320 million dollars, increasing the midpoint to 312.5 million dollars.

Speaker #1: We are reaffirming gross margin range of 79 to 80 percent. We are narrowing the ranges for net income to negative 3 to positive 7 million dollars and EPS to negative 7 cents to positive 15 cents while maintaining the midpoints.

Tony Rodriguez: We are narrowing the ranges for net income to $ -3 to +7 million and EPS to $ -0.07 to +0.15 while maintaining the midpoints. We are narrowing the range of adjusted EBITDA to $60 to 70 million, increasing the midpoint by 8%. In addition, we are raising full-year free cash flow guidance $10 million or 16% at the midpoint to a range of $66 to 76 million. In closing, we delivered strong execution in the quarter with stable performance in our core business. We continue to benefit from strong visibility driven by our backlog and long-term OEM relationships, while we further improve the quality of our revenue through continued growth in recurring connected services.

Speaker #1: We are narrowing the range of adjusted EBITDA to 60 to 70 million dollars increasing the midpoint by 8%. In addition, we are raising full year free cash flow guidance 10 million dollars or 16% at the midpoint to a range of 66 to 76 million dollars.

Speaker #1: In closing, we delivered strong execution in the quarter with stable performance in our core business. We continue to benefit from strong visibility driven by our backlog and long-term OEM relationships while we further improve the quality of our revenue through continued growth in recurring connected services.

Speaker #1: As we look ahead to the second half of fiscal 26, we remain focused on discipline execution, strong cash flow generation, and maintaining the financial flexibility needed to support long-term profitable growth.

Tony Rodriguez: As we look ahead to H2 of fiscal 2026, we remain focused on disciplined execution, strong cash flow generation, and maintaining the financial flexibility needed to support long-term profitable growth. With that, I'll turn it back to Brian.

Speaker #1: With that, I'll turn it back to Brian.

Speaker #2: Looking at the quarter, we are proud of our performance through the first half of 2026. Our results reflect strong execution, solid cash generation, and continued customer momentum.

Brian Krzanich: Looking at the quarter, we are proud of our performance through H1 of 2026. Our results reflect strong execution, solid cash generation, and continued customer momentum alongside a disciplined approach to capital allocation. Our priorities remain clear: driving profitable top-line growth, advancing our technology, and maintaining cost discipline. We remain confident in our strategy and execution through H2 of this year. We're excited about the path ahead. With that, I'll open the line up for questions.

Speaker #2: Alongside a disciplined approach, the capital allocation. Our priorities remain clear. Driving profitable, top-line growth, advancing our technology, and maintaining cost discipline. We remain confident in our strategy and execution through the second half of this year and we're excited about the path ahead.

Speaker #2: And with that, I'll open the line up for questions.

Speaker #3: Thank you. As a reminder, to ask a question, please press *11 on your telephone and wait for your name to be announced. To withdraw your question, please press *11 again.

Operator: Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Mark Delaney with Goldman Sachs. Your line is now open.

Speaker #3: Please stand by while we compile the Q&A roster. Our first question comes from the line of Mark Delaney with Goldman Sachs. Your line is now open.

Mark Delaney: Yes, good afternoon. Thank you for taking the questions. Brian Krzanich, you mentioned vehicles using XUI are now coming off the production line. I was hoping you could give a bit more context about how the product's being received at the auto OEMs, and if you have it yet, or any early feedback you can share from consumers who perhaps now have XUI in their cars.

Speaker #4: Yes. Good afternoon, and thank you for taking the questions. Brian, you mentioned vehicles using XUI are now coming off the production line, so I was hoping you could give a bit more context about how the product is being received at the auto OEMs and, if you have it yet, any early feedback you can share from consumers who perhaps now have XUI in their cars.

Brian Krzanich: Sure, Mark. First, I just wanna say if people notice my voice a little bit more slurred, I had my tonsil removed a couple of weeks ago, and I'm still recovering. If you can't clearly understand me, just ask again. What I said was BYD is the one OEM that is currently shipping. The other OEMs are starting to ship, I'll say June, July timeframe through the end of the year. BYD just started shipping, like, 2 weeks ago, 3 weeks ago. We haven't really gotten any consumer feedback yet. We'll be collecting that probably over this quarter. At the end of Q3, we should be able to give you some feedback and update. As far as how it's being received at the other OEMs, you know, I brought Christian on.

Speaker #2: Sure, Mark. First, I just want to say, if people notice my voice a little bit more slurred, I had my tonsils removed a couple of weeks ago and I'm still recovering.

Speaker #2: So if you can't clearly understand me, just ask again. So what I said was BYD is the one OEM that is currently shipping. The other OEMs are starting to ship, I'll say June, July, timeframe through the end of the year.

Speaker #2: BYD just started shipping like two weeks ago. Three weeks ago. So we haven't really gotten any consumer feedback yet. We'll be collecting that probably over this quarter and so at the end of Q3, we should be able to give you some feedback and update.

Speaker #2: As far as how it's being received at the other OEMs, I brought Christian on. Christian is our CRO, our Chief Revenue Officer. He's the one directly in front of the customers.

Brian Krzanich: Christian is our CRO, our Chief Revenue Officer. He's the one directly in front of the customers. I'm gonna let him actually give you some just, you know, on the face feedback of how we are being received at OEM. Christian, you wanna give some feedback?

Speaker #2: some just on the face feedback of how we are being received at OEMs. So Christian, you want to give some feedback?

Speaker #5: Yeah. Hey, Mark. Great to meet you. Yeah. As Brian said, the BYD announcement just went out and the launch just happened in April, two weeks ago.

Christian Mentz: Yeah. Hey, Mark. Great to meet you. Yeah, as Brian Krzanich said, the BYD announcement just went out, and the launch just happened in April, 2 weeks ago. The feedback that we are hearing from OEMs, obviously, that we are working very closely with leading up to the start of production, is that they really appreciate the performance of the technology, the rich feature set, and the automotive-grade integration of the technology. Our LLMs have been fine-tuned specifically for some of the automotive use cases, the fast latency, and the collaboration model that we sometimes even have agile teams working directly with these OEMs together to integrate the tech and then also support them post-SOP. Once we actually will receive that feedback, we'll continue to work with our customers to make the technology better for customers over time.

Speaker #5: But the feedback that we are hearing from OEMs obviously that we are working very closely with leading up to the start of production. Is that they really appreciate the performance of the technology, the rich feature set, the automotive-grade integration of the technology.

Speaker #5: So, our LLMs have been fine-tuned specifically for some of the automotive use cases. The fast latency, and also the collaboration model, that we sometimes even have agile teams working directly with these OEMs together to integrate the tech and then also support them post-SOP.

Speaker #5: So once we actually will receive that feedback, we'll continue to work with our customers to make the technology better for customers over time.

Mark Delaney: Helpful context. Thank you both for that. My other question is hoping for some perspective on what Cerence expects with respect to medium to longer term revenue growth. We can see the 5-year backlog fell from 6 months ago, you mentioned it doesn't have all the wins in it. The percent of vehicles shipped with Cerence technology was 50%, you know, down from about 52% at the end of the year. You also talked about how PPU is growing. You've got the xUI engagement, some non-auto opportunities. As you think about all these different factors and what appear, at least from the outside, to be somewhat mixed data points, what does that all mean for the medium to longer term revenue potential of the company? Thanks.

Speaker #4: So helpful context. Thank you both for that. And then my other question is hoping for some perspective on what Cerence expects with respect to medium to longer-term revenue growth.

Speaker #4: We can see the five-year backlog fell from six months ago, but you mentioned it doesn't have all the wins in it. The percent of vehicles shipped with Cerence technology was 50% down from about 52% at the end of the year.

Speaker #4: But you also talked about how PPU is growing. You've got the XUI engagement, some non-auto opportunities. So as you think about all these different factors and what appear, at least from the outside, to be somewhat mixed data points, what does that all mean for the medium to longer-term revenue potential of the company?

Speaker #4: Thanks.

Speaker #2: Sure, Mark. I could start and then Tony may have some thoughts when you take a look at all those things, right? You can't look at this business ever and I always look well beyond this.

Brian Krzanich: Sure, Mark. I can start, and then Tony may have some thoughts. You know, when you take a look at all those things, right, you can't look at this business ever. I always look well beyond this. You can't look at it on a quarterly basis. You know, yeah, I think our backlog dropped by a little bit, you know, that's against $1 billion. Like we said, it didn't include a bunch of these deals that just, you know, when the cutoff for calculating was done. We don't expect that number to really change much over the year. We think we'll exit around $1 billion.

Speaker #2: You can't look at it on a quarterly basis. So yeah, I think our backlog dropped by a little bit but that's against a billion dollars.

Speaker #2: And like we said, it didn't include a bunch of these deals that just when the cutoff for calculating was done. So we don't expect that number to really change much over the year.

Speaker #2: We think we'll exit around a billion dollars. And the nice thing is, we've taken a look and you can look five years out, and that backlog number, if you didn't sell anything more, is still quite strong, right?

Brian Krzanich: The nice thing is we've taken a look and you can look 5 years out and that backlog number, if you didn't sell anything more, is still quite strong, right? The thing that's nice about this, we have good insight into kind of a long-term revenue profile of the company because of that backlog. As far as growth, until we get more insight into things like outside automotive and IP enforcement, the core business can grow somewhere in the high single to low double-digit growth rate year-over-year. That's gonna be fueled by connectivity, more and more connected cars. That'll be more of the nearer-term growth.

Speaker #2: The thing that's nice about this, we have good insight into kind of a long-term revenue profile of the company because of that backlog. As far as growth, I still say until we get more insight into things like outside and IP enforcement, the business, the core business can grow somewhere in the high single to low double digit growth rate, year over year.

Speaker #2: And that's going to be fueled by connectivity, more and more connected cars. That'll be more of the near-term growth. And then XUI, which we said the deals that we're signing are multiples of our current PPU for the most part.

Brian Krzanich: xUI, which we said, the deals that we're signing are multiples of our current PPU for the most part. I still say the core will be in that high single to low double-digit. We'll start adding in things like IP and enforcement and outside of automotive as we just get a little more insight into it at the end of this year. Tony, anything else?

Speaker #2: So I still say the core will be in that high single to low double digit. And then we'll start adding in things like IP enforcement and outside of automotive as we just get a little more insight into it at the end of this year.

Speaker #2: Tony, anything else?

Speaker #3: No, I think that's good. I will comment by saying we, of course, have not given guidance for fiscal 2027. But Brian hit the highlights, right?

Tony Rodriguez: No, I think that's good. I will caveat by saying we, of course, have not given guidance for fiscal 2027. But Brian hit the highlights, right? You know, our core, we feel strong in our core business, core technology business. Remember one thing that the growth that Brian talked about, you know, low, low single-digit, you know, excuse me, low double-digit to high single-digit growth within our core, is, remember that the billings and the piece of our business that's growing is connected. You know, we get those billings, and we have to amortize that over the typical subscription period.

Speaker #3: We feel strong in our core business. Core technology business. And remember one thing that the growth, Brian talked about low single-digit excuse me, low double-digit high single-digit growth within our core.

Speaker #3: Is remember that the billings and piece of our business that's growing is connected and we get those billings and then we have to amortize that over the typical subscription period.

Speaker #3: So even though you'll start seeing XUI ramp at the end of this year and into '27, that'll help our billings and our cash flow.

Tony Rodriguez: Even though you'll start seeing xUI ramp at the end of this year and into 2027, that'll help our billings and our cash flow, but it takes a little bit more time to see that in revenue. We still see, you know, what Brian's saying as far as expectations of the core. Then, you know, as you get to midterm, growth outside of a year or so, is where the traction outside of automotive will take place.

Speaker #3: But it takes a little bit more time to see that in revenue. But we still see that what Brian's saying as far as expectations of the core.

Speaker #3: And then as you get to midterm, growth outside of a year or so, is where the traction outside of automotive would take place.

Speaker #4: Thank you.

Mark Delaney: Thank you.

Speaker #1: Thank you. Our next question comes from the line of Jeff Venry with Craig Hallam Capital Group. Your line is now open.

Operator: Thank you. Our next question comes from the line of Jeff Van Rhee with Craig-Hallum Capital Group. Your line is now open.

Daniel Hibshman: Hey, this is Daniel Hibshman on for Jeff Van Rhee. Brian, maybe just on the connected traction, I guess, first off, you know, is it fair to say that's where, you know, the particular strength for this quarter is? If you were pointing between connected and fixed license and PS, where you would say sort of the outperformance was on the quarter. On the connected in particular, you know, that has been, you know, accelerated. I take it that's not xUI flowing through yet, as Tony was just saying, it takes a while for that to flow through the waterfall. Just where that connected strength is that's been hitting outside of xUI. Thanks.

Speaker #6: Hey, this is Daniel. Have you been on for Jeff Venry?

Speaker #7: Brian, maybe just on the connected traction. I guess first off, is it fair to say that's where the particular strength for this quarter is?

Speaker #7: Or if you were pointing between connected and fixed license and PS, where you would say sort of the outperformance was on the quarter? And then on the connected in particular, that has been accelerated.

Speaker #7: I take it that's not XUI flowing through yet as Tony was just saying it takes a while for that to flow through the waterfall.

Speaker #7: So just where that connected strength is that's been hitting outside of XUI. Thanks.

Speaker #2: Sure. I'll start. See if I can answer that was about three questions in one. But yeah, if I take a look at this quarter, I'd say that it was driven by the outperformance was driven by a couple of things.

Brian Krzanich: Sure. I'll start. See if I can answer you. That was about 3 questions in one. Yeah, if I take a look at this quarter, I'd say that it was driven by the outperformance was driven by 2 things. 1, absolutely connected. Connected continues to be our leading growth engine. Why do we see more connected? You're right. It's not xUI yet. xUI, as Tony just said, you know, even the BYD cars that are shipping today, he has to amortize that over the life of that contract.

Speaker #2: One absolutely connected. Connected, continues to be our leading growth engine. Now, why do we see more connected? You're right. It's not XUI yet. XUI, as Tony just said, even the BYD cars that are shipping today he has to amortize that over the life of that contract so you won't really start to see the kind of the compounding interest of XUI as a way to think about it until starting next year.

Brian Krzanich: You won't really start to see the kind of the compounding interest of XUI, as a way to think about it, until, you know, starting next year, because that's just how long it'll take for all of these deals to kind of kick in and start to see. What you're seeing is really the connected on our current technologies, things like Chat Pro, which bring things like ChatGPT. And we showed you that we brought that to several customers over the last quarter, where you can now have an LLM-like, or not just LLM-like, an actual LLM environment, but only through a connected experience. That, you know, has a lot of use, a lot of interest. I have a car that has it, and it's great.

Speaker #2: Because that's just how long it'll take for all of these deals to kind of kick in and start to see. So what you're seeing is really the connected on our current technologies, things like Chat Pro, which bring things like ChatGPT and we showed you that we brought that to several customers over the last quarter.

Speaker #2: Where you can now have an LLM-like or not just LLM-like, an actual LLM environment. But only through a connected experience. And so that has a lot of use, a lot of interest.

Speaker #2: I have a car that has it and it's great. It's a lot of fun to use. And I get I use it all the time for information.

Brian Krzanich: It's a lot of fun to use. I use it all the time for information. That's what's fueling. You can see already that people like the LLM, they like being able to get real-time knowledge, they like being able to get access to the real world in their vehicle. That's why connected's growing so fast. The other thing that is fueling some of our growth, slightly to a lesser extent, is we've talked to you about we've been bringing down the fixed revenue stream. As we bring down that fixed revenue stream, we're also doing much less discounts. The company in the past had a process that often gave, you know, multiple double-digit discounts in order to do these fixed, you know, extended early pay licenses. We've reduced that.

Speaker #2: So that's what's fueling you can see already that people like the LLM. They like being able to get real-time knowledge. They like being able to get access to the real world in their vehicle.

Speaker #2: And that's why connected's growing so fast. The other thing that is fueling some of our growth, slightly to a lesser extent, is we've talked to you about we've been bringing down the fixed revenue stream.

Speaker #2: And as we bring down that fixed revenue stream, we're also doing much less discounts. So the company in the past had processed that often gave multiple double-digit discounts in order to do these fixed extended early pay licenses.

Speaker #2: And we've reduced that. We said it'll be about 23 million for this year. And that brings the discounts that we're doing down to like single digits, which are starting to get close to the weighted average cost of capital.

Brian Krzanich: We've reduced that. We said it will be about $23 million for this year. That brings the discounts that we are doing down to, like, single digits, which are, you know, starting to get close to the weighted average cost of capital, and so it is like net. That is increasing the real-time revenue you are seeing today. I think those are the two big drivers. Just Christian's team of constantly going out and selling, you know, like our Audio AI or just enhancements that we are constantly driving across the platform. Tony, did I miss anything?

Brian Krzanich: We said it will be about $23 million for this year. That brings the discounts that we are doing down to, like, single digits, which are, you know, starting to get close to the weighted average cost of capital, and so it is like net. That is increasing the real-time revenue you are seeing today. I think those are the two big drivers. Just Christian's team of constantly going out and selling, you know, like our Audio AI or just enhancements that we are constantly driving across the platform. Tony, did I miss anything?

Speaker #2: And so it's like net. And so that is increasing the real-time revenue you're seeing today. I think those are the two big drivers. And then just Christian's team of constantly going out and selling like our audio AI or just enhancements that we're constantly driving across the platform.

Speaker #2: Tony, did I miss anything?

Speaker #3: No, no. I think those are certainly the two largest areas. And I think from an outperform standpoint, you remember that there's strength in that visibility of the license business, right?

Tony Rodriguez: No, no, I think those are certainly the two largest areas. I think from an outperformance standpoint, you remember that there's strength in that visibility of the license business, right, in that penetration within that OEM base. We did see some outperformance in this quarter on license. Some of which is, yes, what Brian's saying is that we're getting a bit more price because we're there's less discounting happening with lower fixed. But also, some volume or related outperforms in with some of our customers this quarter.

Speaker #3: In that penetration within that OEM base. We did see some outperformance in this quarter on license. Some of which is, yes, what Brian's saying is that we're getting a bit more price because there's less discounting happening with lower fixed.

Speaker #3: But also some volume-related outperforms with some of our customers this quarter.

Speaker #6: Yeah. Thanks, Tony. That's helpful. And then on and Brian. And then in terms of one, Tony, for you on the modeling, I just wanted to make sure I heard correctly.

Daniel Hibshman: Yeah. Thanks, Tony. That's helpful. Brian. Then in terms of, one, Tony, for you on the modeling, I just wanted to make sure I heard correctly. On the R&D, non-GAAP OpEx, I believe that's up from about $22.5 million to $27.5 million, the non-GAAP OpEx for R&D this quarter sequentially up. Just to be clear, you said that's sort of to think of this as the new baseline for R&D. I didn't quite catch what you said on that. Then if that is the new baseline, just sort of what all the investments were in that were made this quarter and how to think about that in terms of the roadmap that's pushing going ahead. Thanks.

Speaker #6: On the R&D non-gap OPEX, I believe that's up from about 22 and a half mil to 27 and a half million. The non-gap OPEX for R&D this quarter.

Speaker #6: Sequentially up. Just to be clear, you said that's sort of to think of this as the new baseline for R&D. I didn't quite catch what you said on that.

Speaker #6: And then if that is the new baseline, just sort of what all the investments were in that were made this quarter and how to think about that in terms of the roadmap that's pushing going ahead.

Speaker #6: Thanks.

Speaker #3: Yeah. I would say from an OPEX standpoint, that is effectively the baseline you should be modeling out going forward. One thing to remember is less CAPEX, right?

Tony Rodriguez: Yeah. I would say from an OpEx standpoint, that is effectively the baseline you should be modeling out going forward. One thing to remember is less CapEx, right? We had more CapEx in Q1 than we did OpEx as certain of our programs kind of rolled off that internally developed software GAAP capitalization. We had less capitalized software this quarter and those costs then go into OpEx. That was probably one of the biggest drivers was that. We did benefit in Q1. There was also some delayed timing of some R&D that came on board in Q2. I think your pointed question is right. This is effectively the way you'd model out for the remainder of the year.

Speaker #3: So we had more CAPEX in Q1 than we did OPEX as certain of our programs kind of rolled off that internally developed software gap capitalization.

Speaker #3: So we had less capitalized software this quarter and those costs than go into OPEX. So that was probably one of the biggest drivers was that.

Speaker #3: We did benefit in Q1. There was also some delayed timing of some R&D that came on board in Q2. So I think your pointed question is right.

Speaker #3: This is effectively the way you'd model out for the remainder of the year.

Speaker #2: And I just want to add, yeah, I just want to add one thing. This is Brian. What we're really talking about here is mostly headcount, right?

Brian Krzanich: I just wanna add-

Daniel Hibshman: Thanks, Brian.

Brian Krzanich: Yeah. Yeah, I just wanna add one thing. This is Brian. You know, what we're really talking about here is mostly headcount, right? It's the engineers doing this work. When they move from CapEx to OpEx, that's a good thing. That says that they're working on projects. Those projects are moving into production. You want that. I think you'll see, you know, I think Tony's right. The rest of this year, this number's right. You may see some of that headcount move back into CapEx next year as we develop next generation xUIs, start doing some work on things outside automotive that are capitalized because they're invention and they're new. You're gonna see some jogging between these two over time. The headcount is flat. We are not growing headcount.

Speaker #2: It's the engineers doing this work. And when they move from CAPEX to OPEX, that's a good thing. That says that they're working on projects and those projects are moving into production.

Speaker #2: And so you want that. I think you'll see I think Tony's right. The rest of this year, those numbers, right? But you may see some of that headcount move back into CAPEX next year.

Speaker #2: As we develop next generation XUIs, start doing some work on things outside automotive, that are capitalized. Because there are invention and they're new. So you're going to see some jogging between these two over time.

Speaker #2: But the headcount is flat. We are not growing headcount. We are disciplined and controlling that. So that overall expend is not going to really change.

Brian Krzanich: We are disciplined and controlling that. That overall spend is not going to really change when you look at just the cash.

Speaker #2: When you look at just the cash.

Speaker #6: Yep. Makes sense. Nice to see the EBITDA and earnings quality going up with less of a cap software. So it makes sense. Thanks, Brian.

Daniel Hibshman: Yeah. Makes sense. Nice to see the EBITDA and earnings quality going up with less of the cap software. Makes sense. Thanks, Brian. Thanks, Tony.

Speaker #6: Thanks, Tony.

Tony Rodriguez: Yeah.

Speaker #1: Thank you. As a reminder, to ask a question at this time, please press star 11 on your touchstone telephone. Our next question comes from the line of Thomas Blakey with Canter Fitzgerald.

Operator: Thank you. As a reminder, to ask a question at this time, please press star one one on your touchtone telephone. Our next question comes from the line of Thomas Blakey with Cantor Fitzgerald. Your line is now open.

Speaker #1: Your line is now open.

Speaker #7: Hi. Yeah. Thanks for taking my questions and congratulations on the strong quarter. In prior conversations, Brian, I think we talked about maybe the XUI orders coming in maybe even a little bit stronger than expected.

Thomas Blakey: Hi. Yeah. Thanks for taking my questions, and congratulations on the strong quarter. You know, in prior conversations, Brian, I think we talked about, you know, maybe the XUI orders coming in maybe even a little bit stronger than expected, as this, you know, product is brand new in the market. I wonder if you could just maybe talk about on the heels of looking out, not asking for guidance here, what the pipeline looks like to sustain this kind of, like, strong momentum that you have out the gate here in terms of XUI interest. I have a follow-up, please.

Speaker #7: As this product is brand new in the market, I wonder if you could just maybe talk about on the heels of looking out, not asking for guidance here, what the pipeline looks like to sustain this kind of strong momentum that you have out the gate here in terms of XUI interest.

Speaker #7: And I have a follow-up, please.

Speaker #2: Sure. I'll start, and this will be another one I think Christian can give you real-time insight. I can tell you that there are a couple of other POCs that we're we were at a large OEM earlier in April doing a presentation of XUI for their next generation vehicles.

Brian Krzanich: Sure. I will start, and this will be another one I think Christian can give you real-time insight. I can tell you that there are, you know, a couple of other POCs. We were at a large OEM earlier in April doing a presentation of xUI for their next generation vehicles. There is at least one other one that I know of that is out there. We are always at the somewhat timeline of the OEM, right? They put out a bid process, we come in and present our xUI. One of the things that is very unique and strong about our presentation is we actually bring several vehicles with xUI running on it, usually like a BYD, a Geely, and another vehicle.

Speaker #2: And there's at least one other one that I know of that's out there. We're always at the somewhat timeline of the OEM, right? So they put out a bid process.

Speaker #2: We come in and present our XUI. One of the things that's very unique and strong about our presentation is we actually bring several vehicles.

Speaker #2: With XUI running on it, usually like a BYD, a Geely, and another vehicle, and they get to sit in the vehicle, drive whatever they want to do.

Brian Krzanich: They get to sit in the vehicle, drive, whatever they wanna do, and actually experience the product real time. You know, will we get those resolved by the end of their Q3? I hope to have at least one of those, I think. I don't know if we'll get the second one resolved. We're not losing to others. We're just simply waiting for decisions. Christian, if you have any other insight.

Speaker #2: And actually experience the product real-time. So will we get those resolved by the end of their Q3? I hope to have at least one of those, I think.

Speaker #2: I don't know if we'll get the second one resolved. But we're not losing to others. We're just simply waiting for decisions. Now, Christian, if you have any other insight.

Christian Mentz: Not much. I would go a bit further and I'm confident that in Q3 we will close at least one more. As Brian said, we're participating in the bidding process and actively doing proof of concept work with several global OEMs as we speak. Yeah, it's not always easy to put your finger on the close date, but we feel that we have a solid pipeline and demand for the product.

Speaker #7: Not much. I would go a bit further and I'm confident that in Q3, we will close at least one more. And as Brian said, we're participating in the bidding process and actively doing proof of concept work with several global OEMs as we speak.

Speaker #7: And yeah, it's not always easy to put your finger on the close date. But we feel that we have a solid pipeline and demand for the product.

Speaker #2: That's great. And that would be I think that would bring us up to four very solid wins in a very short period of time showing the demand.

Thomas Blakey: That's great. You know, I think that would bring us up to four very, you know, solid wins in a very short period of time, showing the demand.

Speaker #2: And I agree.

Brian Krzanich: No, there's more.

Speaker #7: No, there's more. No, we've said that we've got five or six. So there's been six. Six bids. We've got five. If Christian's right, and so you guys all heard it, I'll hold that to his review now.

Thomas Blakey: I agree.

Brian Krzanich: No, we.

Thomas Blakey: Oh, there's more?

Brian Krzanich: We've got five of six. There's been.

Thomas Blakey: Oh, 5, 6.

Brian Krzanich: 6 bids. We've got five. If Christian's right, you guys all heard it, I'll hold that to his review now. That would make it 6 out of 7 likely by the end of the quarter, and we'll see about any others.

Speaker #7: That would make it six out of seven likely. By the end of the quarter and we'll see about any others.

Speaker #2: That's great. And I was just going to mimic that I've tried the product and I agree Brian, I definitely want it in my car as well in due time.

Thomas Blakey: That's great. I was just gonna mimic that I've tried the product, and I agree, Brian Krzanich, I definitely want it in my car as well in due time. Maybe as a second question, sticking with the top line here, you know, just the non-auto business, I think you guys clearly have, you know, solid traction here and a pipe for the core business. You have so many other growth vectors here, and I think you should have visibility to them. Love to hear you kind of maybe expand a little bit on the non-auto business, whether it's consumer electronics, any timing of expected revenues there. You know, I know, you know, Tony's, you know, gating the IP-related business. You know, would love to just kinda understand.

Speaker #2: So and then maybe as a second question, sticking with the top line here, just the non-auto business, I think you guys clearly have solid traction here and a pipe for the core business.

Speaker #2: Do you have so many other growth vectors here? And I think you should have visibility to them. Love to hear you kind of maybe expand a little bit on the non-auto business with those consumer electronics.

Speaker #2: Any timing of expected revenues there and I know Tony's gating the IP-related business. But would love to just kind of understand not talking about the top line in that regard, but I guess maybe shifting a little bit more to the expenses, how hard we want to step on the accelerator here with regard to the IP business.

Thomas Blakey: Not talking about the top line in that regard, but more, I guess, maybe shifting a little bit more to the expenses, how hard we wanna step on the accelerator here with regard to the IP business. That'd be it for me. Thank you so much.

Speaker #2: That'd be it for me. Thank you so much.

Speaker #7: Sure. I'll start. This is another one that Christian can give some insight. On the non-auto, I think it'll contribute small numbers, a couple of million at most this year when you add it all together.

Brian Krzanich: Sure. I'll start. This is another one that Christian can give some insight. On the non-auto, I think, you know, it'll contribute small numbers, $2 million at most this year when you add it all together. Most of that's NRE-type funding for POCs. The way we're looking at it, not much of it's gonna be in consumer electronics. You're not gonna see us in a much around, like, Game Boys and things like that or whatever, right? You're not gonna talk to your PS3 through us. We're looking for things that are like automotive. Part of the reason I did the discussion at the beginning of the earnings call was to show you where we think we have a right to play.

Speaker #7: But most of that's NRE-type funding for POCs. And the way we're looking at it, not much of it's going to be in consumer electronics.

Speaker #7: You're not going to see us in a much around Game Boys and things like that or whatever, right? You're not going to talk to your PS3 through us.

Speaker #7: We're looking for things that are like automotive. And part of the reason I did the discussion at the beginning of the earnings call was to show you where we think we have a right to play.

Speaker #7: And it's where machinery is complex, integration into that machinery is complex, and general-purpose LLMs will have a hard time integrating into those. Because they require unique tuning and training against models.

Brian Krzanich: It's where machinery is complex, integration into that machinery is complex, and general purpose LLMs will have a hard time integrating into those because they require unique tuning and training against models. That's where we look at things like industrial robotics. We've looked at aerospace and have many interests there. We've looked at automotive going further into things like the dealership and the end user experience post purchase of your vehicle, right? You know, providing an app for the OEM that you can just ask it, you know, Hey, you know, how do I do this in my vehicle? You know, What are all the features my vehicle has for, you know, whatever, for audio or things? We're looking for more things like that. Go ahead, Christian.

Speaker #7: And so that's where we look at things like industrial robotics, we've looked at aerospace and have many interests there. And we've looked at automotive going further into things like the dealership and the end-user experience post-purchase of your vehicle, right?

Speaker #7: Providing an app for the OEM that you can just ask it, "Hey, how do I do this in my vehicle?" Or, "What are all the features my vehicle has for whatever, for audio or things?" So we're looking for more things like that.

Speaker #7: Go ahead, Christian. Any other ads or thoughts? And yeah, maybe think of it as a core tenet that it's easy relatively easy to produce a quick win but we really don't see ourselves doing everything for everyone.

Brian Krzanich: Any other adds or thoughts?

Christian Mentz: Yeah, maybe, think of it as a core tenet that, you know, it's easy, relatively easy to produce a quick win. We really don't see ourselves doing everything for everyone. We really want to be disciplined in that we invest our time, resources in things that can really scale. These are the areas that Brian mentioned where we believe we have a right to win and where we do really well, and we can transfer some of the competence that we have built over years in the automotive space into other areas. Again, it's very important for us that they are scalable, build a meaningful recurring business, and are not one-offs.

Speaker #7: We really want to be disciplined in that we invest our time, resources, in things that can really scale. And these are the areas that Brian mentioned where we believe we have a right to win and where we do really well and we can transfer some of the competence that we have built over years in the automotive space into other areas.

Speaker #7: And again, it's very important for us that they are scalable and build a meaningful recurring business. And they're not one-offs.

Speaker #2: Yeah. And then the second part of your question was around the legal expenses. It's a bit always hard to predict, but I would say that the pace that we're going at right now is about the right pace.

Brian Krzanich: Yeah. The second part of your question was around the legal expenses. You know, it's a bit always hard to predict, but I would say that, you know, the pace that we're going at right now is about the right pace. You know, we've said, you know, we got an agreement on the Samsung deal. That one's closed out. We have Apple, Sony, TCL, and now we have Amazon. Those are enough to probably cover most of this year. You know, we also shifted how we did these deals, where we are now paying the legal fees as we go along rather than sharing in the profit like we did with the Samsung agreement.

Speaker #2: We've said we got an agreement on the Samsung deal. That one's closed out. We have Apple. We have Sony. We have TCL. And now we have Amazon.

Speaker #2: Those are enough to probably cover most of this year. And we also shifted how we did these deals where we're now paying the legal fees as we go along rather than sharing in the profit like we did with the Samsung agreement.

Speaker #2: And so I think we've got enough of the legal teams to push through for the rest of this year. We'll see maybe something opportunistic will pop up.

Brian Krzanich: I think we've got enough of the legal team to push through for the rest of this year. You know, we'll see, maybe something opportunistic will pop up. I think this is about the right pace.

Speaker #2: But I think this is about the right pace.

Thomas Blakey: And then with re-

Tony Rodriguez: And then with re-

Speaker #3: Yeah. And then with regard to the legal cost, we've like I said, we've accelerated a little bit Brian just kind of alluded to where we are.

Brian Krzanich: Appreciate all the details.

Thomas Blakey: Appreciate all the details.

Thomas Blakey: With regard to-

Tony Rodriguez: With regard to-

Brian Krzanich: Go ahead, Tony.

Tony Rodriguez: The legal cost, you know, we've, like I said, accelerated a little bit. Brian just kind of alluded to where we are. We've anticipated a bit more legal fees in H2. It's all included in our profitability expectation.

Speaker #3: We've anticipated a bit more legal fees in the second half, but it's all included in our profitability expectation.

Speaker #2: And remember, we've projected no revenue from any of these.

Brian Krzanich: Remember.

Tony Rodriguez: Pretty confident, yeah.

Tony Rodriguez: we've projected no revenue from any of these.

Brian Krzanich: we've projected no revenue from any of these.

Speaker #3: That's right.

Tony Rodriguez: That's right.

Brian Krzanich: You know, several of these have court dates towards the end of this year, calendar year. We'll see what happens from a revenue, but it's too hard to predict revenue by, you know, the quarter. If I'm off by a couple weeks, you guys will yell at me, 'cause I missed it even though, you know, we win. We'd rather just have it be, We'll keep you updated. We'll let you know, and it'll come in real time.

Speaker #2: And so several of these have court dates towards the end of this year, calendar year. So we'll see what happens from a revenue. But it's too hard to predict revenue by the quarter.

Speaker #2: If I'm off by a couple of weeks, you guys will yell at me. Because I missed it, even though we win. And so we'd rather just have it be we'll keep you updated.

Speaker #2: We'll let you know. And it'll come in real time.

Speaker #3: Thank you all for the details.

Thomas Blakey: Thank you all for the details.

Speaker #1: Thank you. And I'm currently shown no further questions at this time. I'd like to hand the call back over to Brian Krzanich for closing remarks.

Operator: Thank you. I'm currently showing no further questions at this time. I'd like to hand the call back over to Brian Krzanich for closing remarks.

Speaker #2: So thank you, everybody. As we said, we are very excited about the potential of the company and where we're headed. I think the strong cash flow and just good discipline performance by the entire organization, whether it's the engineers working with the OEMs on the vehicles, launching these XUI programs, and doing upgrades to our existing programs, all the way through the finance team, the legal team, the HR team, everybody's just really firing on all cylinders right now.

Brian Krzanich: Thank you, everybody. As we said, we are very excited about the potential of the company and, you know, where we're headed. I think the strong cash flow, and just good disciplined performance by the entire organization, whether it's the engineers working with the OEMs on the vehicles, launching these xUI programs, and doing upgrades to our existing programs, all the way through the finance team, the legal team, and the HR team. Everybody's just really firing on all cylinders right now. We really are positive about our future. I really appreciate you guys attending the phone call this morning, thank you very much.

Speaker #2: And so we really are positive about our future. I really appreciate you guys attending the phone call this morning. And thank you very much.

Operator: This concludes today's conference. Thank you for your participation. You may now disconnect.