Cerence Q3 2023 Earnings Call Transcript

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Provided by Quartr
August 8, 2023

There are 11 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the Cerence Quarter 3 2023 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' 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.

Operator

You will then Hear an automated message advising your hand is raised. Please be advised that today's conference call is being recorded. I would now like to hand the conference over to your speaker today, Rich Yerginian, Senior Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you, Britney, and welcome to Cerence's Q3 fiscal year 2023 conference call. Before we begin, I would like to remind you that this call may involve certain Any statements that are not statements of historical fact, including statements related to our expectations, Estimates, assumptions, goals, targets and plans should be considered to be 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 As described in our SEC filings, including the Form 8 ks with the press release preceding today's call, our Form 10 Q filed on August 8, 2023, in our Form 10 ks filed on November 29, 2022. In addition, the company may refer to certain non GAAP measures, Key performance indicators and pro form a 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.

Speaker 1

The press release is available in the IR section of our website. Joining me on today's call are Stephan Ortmans, CEO of Cerence Tom Boden, CFO of Cerence and Iqbal Ashad, our Chief Technology Officer. As a reminder, the only authorized spokespeople for the company are Stefan, Tom and me. Before handing the call over to Stefan, I would like to mention that we will be presenting at the Goldman Sachs Communicopia Tech Investor Conference in San Francisco on September 6 and the Raymond James Virtual Lean Mean and Green Vehicle Investor Conference on September 18. Now on to the call, Stefan?

Speaker 2

Thank you, Rich. Welcome, everyone, and thank you for joining us to discuss our Q3 results. There were several important developments in the quarter I would like to highlight. First, we delivered solid results with revenue of approximately $62,000,000 coming in at the high end of our guidance. In addition, our strong focus on operational excellence Contributed to all profitability metrics performing better than expected, except for GAAP net income, which included a charge associated with Our convertible debt financing.

Speaker 2

Operationally, we delivered on everything we committed to investors in our last call. I'm extremely pleased with the progress the company has made in the last 12 months creating an organizational structure committed to 3 key principles. 1st, continue to lead innovation in AI for the transportation space. 2nd, delight our customers with on time and quality 3rd, win strategic accounts that support our long term growth. At the core of our commitment Through innovation are the enhancements we are making to several Cerence products using large language modes and generative AI.

Speaker 2

Iqbal will detail these important product updates in his remarks. At a high level, our deep expertise in AI for Automotive And strong OEM relationships put us in a unique and favorable position to partner with our customers to deliver game changing application of these technologies, bringing us one step closer to our future product vision, the immersive companion. As a result, Cerence remains well positioned to capitalize on the transformative trends within AI, incorporating new inputs into our as we continuously strive to enhance customer experience and expand product functionality. Our core auto business continues to perform well with our global auto penetration rising to 54%. That means that 54% of total new global life vehicle production includes some level of technology from Cerence.

Speaker 2

This is the 3rd consecutive quarter of increasing penetration, and this figure is now the highest we have seen in nearly 2 years. This elevated level of penetration continues to be a straightforward endorsement of Cerence Superior Technology. Tom will comment on the product mix associated with this market expansion in a few minutes. While there are some Crosscurrents creating a level of uncertainty about the macroeconomic environment, we remain quite confident in our visibility and our ability to deliver a strong Q4 and full fiscal year. While semiconductor shortages for the auto industry are becoming less of an issue, The uncertain effect of rising interest rates and the slowing global economy remain a modest concern on auto demand and production.

Speaker 2

We are monitoring this closely and have considered this for our Q4 and full year guidance. Also in the quarter, we successfully restructured our debt through the insurance of new convertible notes. We used the proceeds to pay off the term loan that was at a high variable interest rate and to buy back half of the existing notes at half the coupon rate. The net effect is cash interest savings of approximately $8,000,000 a year, While moving a sizable portion of our debt from 2025 maturity to 2028, Very pleased with the results of the transaction. Overall, we continue to make solid progress across key areas.

Speaker 2

As we advance to our destination next, our vision for the future for all aspects of our business: product innovation, target markets and the financial model and performance. We believe in our ability to achieve our long term objective of double digit revenue growth with strong EBITDA margins. And of course, one of the keys to achieving our long term objective is winning new business with customers. Securing new business and next generation platform wins is key to our future success. As many of you know, once designed in, You are the supplier of the technology for the program's life.

Speaker 2

This means a new contract can generate revenue for many years. I'm happy to say that in Q3, we had several strategic wins, and I'm expecting additional ones in Q4. In our core auto business, we had 2 strategic wins. The first was for a major Japanese OEM, Where we displaced a competitor to provide connected services. The second was for our emergency vehicle detection technology for a major Korean car company.

Speaker 2

We also continue to make progress in the 2 wheeler and truck markets. We were excited when iconic motorcycle brand chose our technology over several other competitors, Including niche players and Consumer Tech. While revenue contribution from the 2 wheeler segment is expected to be small this year, Four two wheeler solutions started production in Q3 and should support revenue growth in this segment in FY 2024 and beyond. Our sales team is laser focused on finishing the fiscal year strong, And I'm confident we will win key strategic pipeline opportunities to drive our business forward. We continue to be Extremely pleased with our continued success in building upon our strong core and capitalizing on adjacent market opportunities.

Speaker 2

On our Q4 earnings call, Tom will provide you with an update on bookings and their expected contribution to Backlog and Revenue Growth. While it may be repetitive for some of you, I want to again highlight our operational priorities as they are vitally important to our near and long term success. This means Meeting or exceeding our customers' expectation for our technology, maintaining a strong competitive advantage, Continuing to focus on operational excellence and locking down the new business opportunities in front of us, including several win back opportunities. We believe very strongly in meeting our commitments to our customers, employees and you, our investors. We are on a strong track to deliver fiscal year results better than we anticipated at the beginning of the fiscal year.

Speaker 2

With that, I'm excited to have Iqbal Arshad, our Chief Technology Officer, on the call with us today. Since joining the company 3 plus months ago, Iqbal has had an immediate impact, and we were excited about how he And Nir Chand, our Chief Product Officer, are teaming up to execute the future vision and direction of our technology. Iqbal will brief you on how we are leveraging the latest in generative AI and large language models to enhance our product offerings. I'm looking forward to how these advancements can help us deliver a truly immersive companion experience to our customers. And I look forward to the role Cerence can play in continuing to unite a wide array of technology In the car, while maintaining a uniquely branded experience for our customers and delighting our end users.

Speaker 2

Iqbal?

Speaker 3

Thank you, Stefan. With decades of extensive vertical expertise in the automotive industry And a rich history of leading AI innovation, Cerence is uniquely positioned to bring the latest advances in AI into the car. We bring unmatched experience and knowledge to the application of generative AI and large language models in transportation, As well as a strategic methodical focus on creating groundbreaking user experiences. As we envision the future of in car experiences, we are keenly focused on solving user problems by harnessing Transformer based foundational AI models. These models enable us to develop intuitive voice And multimodal user interfaces, as well as generative AI applications that empower our customers To deliver high value user experiences.

Speaker 3

These new capabilities seamlessly extend our existing AI based product At the core of this offering is our next generation Serin's assistant powered by generative AI. Through the implementation of large language models in our architecture, we are taking significant strides Towards realizing our vision of an immersive companion. The next generation Serence Assistant is optimized to provide users with more natural, intuitive and accurate interactions. Serence Assistant adaptly handles complex queries and multi step tasks within a single request. The Assistant's deep customizability cares to both our automaker customers and end users, Effortlessly adapting to their preferences as it learns.

Speaker 3

Please allow me to show you some of Serence Assistant's New generative AI powered capabilities.

Speaker 4

Introducing the next generation Cerence Assistant. The assistant will be fully capable of handling various scenarios, ensuring you will no longer hear sorry again.

Speaker 5

It's starting to rain out

Speaker 4

Time. Got it. I will close the windows and the sunroof for you. Next generation Serence Assistant's capability of handling multi intent will be increased significantly. You can ask your Car to perform a theoretically unlimited number of tasks by saying just one single sentence.

Speaker 5

Please turn on the AC, set temperature to 24, increase the fan speed to maximum, and navigate to work.

Speaker 4

Got it. Turning on AC, Setting the temperature to 24 degrees for driver and increasing the fan speed to the highest level for the driver. I will start the navigation for you. Your conversation with your car will be much Smoother with the system's powerful contextual awareness.

Speaker 5

Which song was written by Paul McCartney for his wife?

Speaker 4

Paul McCartney wrote the song, Maybe I'm Amazed for his wife, Linda McCartney. The song was released in 1970 as Part of his debut solo album, it is considered one of his most heartfelt and enduring love songs dedicated to his wife.

Speaker 5

Great. Can you please play it for me on Apple Music?

Speaker 4

Sure. I will play it for you.

Speaker 3

Designed to be friendly, helpful and enjoyable, the next generation Serence Assistant Adds meaningful value to drivers' daily journeys. These capabilities will be available to our existing Cerence customers Who will greatly benefit from these new generative AI powered features. In addition to Serin's assistant, We continue to gain traction for our generative AI powered car knowledge product discussed during our last quarter's earnings call. Cerence car knowledge offers users real time contextual answers to all car related queries. We are engaged with customers globally to adopt an expanded car knowledge product that leverages large language models And the specific data associated with a car supplied by the OEM.

Speaker 3

This is just the beginning. We are expanding our architecture with fine tune LLMs based on our curated transportation data And leveraging our industry leading edge technologies like audio AI, automatic speech recognition, Neural text to speech, biometrics, emotional AI and in car communications to create the future of automotive user experiences. I will now turn it over to Tom to review the Q3 results in more detail.

Speaker 6

Thank you, Iqbal. I will review our guidance for Q4 and the full fiscal year in a moment. But first, I want to share more details on our Q3 results. Our Q3 results continue Stephan and my commitment to consistently deliver on our guidance. Q3 revenue came in just shy of $62,000,000 at $61,600,000 At the high end of our guidance.

Speaker 6

This is due to strength in our core business. As we guided on our last call, we closed a new fixed contract in Q4 originally planned for Q3. Consumption of fixed contracts was higher than expected. I will explain why in a few minutes. As revenue came in at the high end of the range, combined with our focus on operational excellence, We exceeded most of the key profitability metrics we guided for the quarter.

Speaker 6

Non GAAP gross margin Was 66.5 percent. Non GAAP operating margin was a positive 0.5%. Adjusted EBITDA was $2,800,000 or 4.5 percent margin And non GAAP loss per share was $0.04 Except for GAAP net income, Which was impacted by the refinancing of our convertible debt, most key financial metrics came in above the high end of our guidance. During the quarter, we had negative cash flow as expected. Cash flow from operations was approximately Negative $8,200,000 We expect positive cash flow in Q4 and for the full fiscal year.

Speaker 6

Our balance sheet remains strong with total cash and marketable securities of approximately $116,000,000 Here is our breakdown of revenue for the quarter. Variable license revenue was up 16% From the same quarter last year and down slightly quarter over quarter due to a higher than Expected level of fixed contract consumption. As you will see in a few moments, our penetration Global auto production rose to 54% as we continue to maintain a strong position in the market. The higher level penetration is partially due to single component solutions in emerging markets, Which yield a lower revenue per car. We view this as a strategic market expansion opportunity And potential launching point for gaining further business and eventual higher PPUs with OEMs in emerging markets.

Speaker 6

New Connected Services revenue was up 3% from the same quarter last year, Well, down 3% from the last quarter. You may recall last quarter, we had a true up Of approximately $700,000 from a customer. Adjusting for the one time true up, New connected revenue was up quarter over quarter. We expect our new connected services to continue to ramp up in FY 'twenty four As several key programs that have been delayed by customers go into production. Finally, and as expected, Our professional services revenue was down 24% year over year and down 8% quarter over quarter.

Speaker 6

As we have stated previously, professional services will vary based on the progress or completion of customer projects. We do not project professional services as a revenue growth driver for the company, but instead as an enabler for future license And connected revenue. Additionally, our newer products and solutions include improved implementation And integration features, which lowers the requirement for professional services. Moving on to the details in our license business. Overall, the license business remains strong And it's indicating improvement from the issues that have plagued auto production over the last few years.

Speaker 6

While the semiconductor shortage Seems to be receding, the macro economy and especially higher interest rates have the potential to slow demand And production growth. This and other factors have led IHS to reduce their calendar year production growth To 1%. Pro form a royalties were up 7% year over year And 6% quarter over quarter due to increased auto production and penetration of our technology. Part of the growth in pro form a royalties in the quarter was due to a one time true up with a customer That had underreported royalties of approximately $1,000,000 Most of this upside revenue Was reported in consumption as this customer was operating under a minimum commitment deal. As a result, you can see higher than expected consumption in the quarter.

Speaker 6

Our Q3 pro form a royalties represented the highest amount In over 2 years, even when adjusting for the true up. As we discussed in the call last quarter, we pushed out An expected fixed contract from Q3 to Q4. As a result, we did no fixed contracts in Q3. Since the quarter closed, we have signed the expected fixed contract and will be staying within our commitment Of $40,000,000 for the full year. As you may recall, we have previously stated, We model prepay fixed contracts based on an assumed 6 quarter consumption period.

Speaker 6

We have also noted The Q1 fixed contracts we signed had an expected consumption over 8 quarters, leading to lower consumption in FY 'twenty three versus our model and extending consumption through FY 'twenty four. The fixed contract we signed in Q4 Has an expected consumption period of 4 quarters shorter than our model. The net effect of the prepaid contracts we signed in FY20 3 will yield lower FY 'twenty three consumption versus our model and estimated higher consumption Of approximately $10,000,000 in FY 'twenty four. We are providing you with an additional data point Quarter regarding fixed contracts. We expect the inventory balance of fixed contracts at the end of fiscal 2023 To be approximately $98,000,000 down from approximately 125,000,000 At the end of fiscal 2022.

Speaker 6

We currently estimate the balance of fixed contracts to be approximately $70,000,000 at the end of FY 'twenty four and approximately $57,000,000 in FY 'twenty five. The balance at the end of each year assumes the addition of $40,000,000 of new fixed contracts, Less expected 6 quarter consumption. The majority of our KPIs continue to indicate strength in the business. Our penetration of global auto production for the trailing 12 months Increased to 54% from 53% last quarter. This means over half of global auto production includes Some level of Cerence Technology.

Speaker 6

12,200,000 cars with Cerence Technology were shipped in the quarter. This is up 25% year over year and reflects the improving production environment and our continuing strong Competitive position. Cars produced that use our connected services increased 50% year over year And we flex the trend of more and more cars being connected and the growth in our ability to successfully provide our customers With innovative cloud based solutions. We also saw a large increase in monthly active users, 29% year over year, indicating increased popularity among consumers of our technology. Billings per car KPI declined 6%, including a negative FX impact of 200 basis points.

Speaker 6

The decline is primarily due to product mix. Some of the new business contributing to growing license And increased penetration is coming from emerging markets where OEMs initially are adopting components of our full software stack. These are important wins that are driving penetration and the opportunity for these customers to drive Higher revenue per car over time as they adopt additional components of our technology. The other factor which we mentioned on our last conference call are macroeconomic and OEM driven delays In the start of production, the higher price per car next generation platforms. We see a positive trend in this KPI And expect it to trend higher over the next few quarters.

Speaker 6

Now turning to revenue guidance for Q4 and fiscal year. As I mentioned earlier, as expected, we closed the Q4 fixed contract of approximately $13,000,000 For Q4, we are guiding revenue from $72,000,000 to $76,000,000 for Q4. The tight range is due to knowledge of the fixed contract already closed and strong visibility to our other revenue sources. With our strong first three quarter results and strong visibility to Q4, we are providing a narrow range For our full fiscal year guidance of $286,000,000 to $290,000,000 Raising the midpoint of our full year guidance to $288,000,000 You can see on this slide The revenue guidance and the effect of the associated financial metrics. Overall, the business continues to perform.

Speaker 6

As we outlined at the beginning of the fiscal year, we remain focused on innovation, operational excellence And strong bookings in the second half to achieve our long term goals. This concludes our prepared remarks. And now we will open the call for questions.

Operator

Okay. Thank you. We will now conduct the question and answer session. As a reminder, to ask a question, please press Please standby while we compile the Q and A roster. Our first question comes from the line of Colin Langan with Wells Fargo.

Operator

Your line is now open.

Speaker 7

Great. Thanks for taking my questions. I did want to follow-up on the I think you made some comments on billings. They were down Again, year over year, I think at your Investor Day, you talked about kind of going from 3.80 to $480,000,000 in 'twenty three to 'twenty four. How are you tracking now?

Speaker 7

I mean, is the 'twenty three actually lower because the billings are coming in lower? And Is there a risk to 2024 sales targets if some of these launches get pushed out too much?

Speaker 6

Yes. So first of all, the metrics are related but different. So the Numbers that you talked about were the embedded PPEs. And as we've talked about, we have seen Some production delays across OEMs, and we'll provide updated we'll provide our guidance for 24 In November. With respect to billings per car, which includes both embedded and connected, It's a factor of that, which some of those higher PPUs Get delayed.

Speaker 6

It's also a factor of I think this is a trailing 12 month Metric, and I think during some of the supply chain shortages, some of the OEMs were leveraging To the higher cars which have more of our technology. And that as we just pointed out, Some of our higher penetration is driven by winning new Opportunities in emerging markets where they start out with 1 or 2 of our components, And therefore, it has a relatively lower billings per car, but does provide an opportunity for Accelerated penetration for winning additional business with those OEMs in those markets And then adding additional components and features over time in association with those OEMs.

Speaker 7

Got it. All right. Thanks for the color. Just a second question. The other KPI that sort of stood out is the contract duration Was 6.4 years.

Speaker 7

I think it was in Q4, it was over 7 years. What is causing the contract, average contract to shrink? What is driving that?

Speaker 6

It's just a mix issue of deals and how those deals Play out. I mean, it's still it depends on how OEMs sign up for Production schedules, it's still quite a long commitment level for OEMs.

Speaker 7

Okay. All right. Thanks for taking my questions.

Operator

All right. Thank you. One moment for our next question, please. All right. Our next question comes from the line of Luke Junk with Baird.

Operator

Your line is now open.

Speaker 8

Good morning. Thanks for taking the questions. I wanted to start with a follow-up question on the billings per car metric. Again, really through the lens of what you're expecting From a content per vehicle standpoint in fiscal 2024. And specifically, I'm just wondering to what extent The single component solutions that you've spoken to today were already contemplated in your outlook or just how they impact the outlook for fiscal 2024 in general

Speaker 6

Thanks, Luke. I really can't comment much on FY 'twenty four. We'll Provide our 'twenty four guidance and we'll take a look at the longer range plans When we do the Q4 guidance in November. But I think if you look across Almost all the KPIs, it does show that we're continuing to win new business. We're continuing to get more Active users, the connected and embedded are continuing to grow.

Speaker 6

And the billings per car, I think, is just a factor of all the things that I mentioned. And It does provide some growth opportunities for us with some of these newer OEMs and some of these emerging Countries. And so I don't think it's a bad thing.

Speaker 8

Got it. And then for my follow-up, maybe just a bigger picture question, a question of Revenue models going forward. So the press release discussed the idea of positioning, Serence, as an enabler for large language models and consumer tech in the car, Sitting on top of the white label proposition that we all know, just wondering to what extent you think you can get Paid for that incrementally and just any thoughts you can share on what that revenue model might look like? Are you conceiving as something that's more License like that would be one time or could we see more connected like sort of subscription models come out of this? Thank you.

Speaker 2

Maybe let me take this question and good morning, Luc here. So and I think what we just said and what Tom mentioned, So overall, we have a very high penetration rate. That's our foundation. We have a strong IP from conversational AI and a rock solid business model And also good relationship with OEMs. And now how we can further improve the quality of our products, right?

Speaker 2

And what you have seen also in the video, I think that's based on the integration of Large Language Models and generative AI. We are working across the globe with all big OEMs on our new applications. For example, Car knowledge, right? We are prototyping with them. And we're also in discussion on the business model, right?

Speaker 2

I cannot go into the details here, But we have huge opportunities. And you know also that JetGPT is quite expensive, and Iqbal and team are working on a very efficient cost Efficient solution also covering privacy topics. Maybe Iqbal, do you want to add a bit from your side on the technology here?

Speaker 3

No, I think you covered for the most part. Unless there's any other specific questions, I'll be more than happy to answer that.

Speaker 8

Thanks for that, Stefan. I think I'll go ahead and leave it there for now.

Operator

All right. Our next question comes from the line of Nicholas Doyle with Needham. Your line is now open.

Speaker 9

Hey, guys. Thanks for taking my questions. I wanted to ask How you're thinking about the 2 wheeler contributions next year? You had talked about production Total production around 50,000,000, 60,000,000 units and kind of making up the difference in your longer term assumptions. That difference is coming from these transportation adjacencies.

Speaker 9

So just wondering, How big are these three models? Do they make up a decent portion of that of those units? And then also you talked about Seven design wins, I think, in the Q1 this year. Are these 3 wins coming out of that pipeline? Thanks.

Speaker 6

So we've had Kevin, let me hand it over to you. Yes, we've had a number of design wins. I think It's a we had some go in production in Q3 and we have some more going in Q4. The 2 wheeler market is about half the size of the auto. And This is a new market for us, so we'll have to see how these ramp.

Speaker 6

As we've said in Some of the comments here, it's not going to be a big contributor to FY 2023. But as these go into production and they start ramping and we get royalty reports and these are kind of hybrid solutions, so some of it will get Some of it, the connected side of it will have to get amortized over the service life of the agreement. Then again, we'll provide some updates on this particular transportation adjacency market in November.

Speaker 2

And maybe let me also just add here that we have in total 80 design wins for rent life, so into production in last quarter. I think it's also distributed across the globe in China, in India. There's mass volume right in Japan, North America and also Europe. And I expect that we will see also revenue growth in FY 2024, as Tom mentioned.

Speaker 9

Okay. And then for the emerging market wins, they're adopting 1 or 2 components.

Speaker 7

Is that related to the 2 wheelers?

Speaker 9

Like side Question. And can you just tell us more maybe what the 1 or 2 components are? What the customers really are liking taking to? And then how they're working with the software component and how much of that is related to the immersive Thanks.

Speaker 2

So overall, I think that was actually a contribution to this high penetration ride in the emerging markets here. That's cars in the mid to low range, cost range. They're starting with typical audio AI, let's say, for speech signal enhancement for enabling third party opportunities like CarPlay, But this gives us also the huge opportunity for bringing in our future solution for creating with those new OEMs also We are branded Conversational AI Solutions.

Operator

All right. Our next question comes from the line of Daniel Hipschmidt. I'm sorry, I can't pronounce your last name, Hipschmidt. Schmitt?

Speaker 7

You're all good.

Speaker 3

You're all good.

Operator

This is Craig Hallum.

Speaker 10

Hey. This is Daniel on for Jeff Craig Hallum, just on the connected units, really strong performance. I see it up 50% year over year, the number of units. Just wondering, would you view that sort of as lumpy numbers or indicative really of a larger trend there in terms of the strength of Connected? And in terms of if that is more of a larger trend, More success than we've been seeing in a while, would you view that as a change in buyer behavior?

Speaker 10

Is that the product sort of reaching a critical mass on the capabilities? How would you see that momentum? So let

Speaker 2

me start first and then I will hand it over to Tom. So overall, we reported over the last 3, 4 quarters A couple of design wins and win back also on Connected Services. And again, this is our foundation and also across the globe. I think we have Clearly improved the quality for Connected Services. And also, we are in discussion for more because we have, Especially on the Connected side.

Speaker 2

And clearly, this is our advantage also in various benchmarks with OEMs across the globe. Tom?

Speaker 6

Yes. I mean, As we've said, I mean, Connected is a great opportunity for us because it sits on top of our embedded and it provides Some of the key elements of our Destination Next and immersive cabin. You do have to adjust a little bit the previous quarter where we had a $700,000 true up from Remember that underreported, but even when you adjust for that, you're right, we're starting to see growth there. And that's So Stephan said that some of these programs going live. We've also talked about over the last few quarters that there were some Older contracts that were coming to the end of their amortization schedule and They weren't up for renewals.

Speaker 6

They're just older programs. They're separate from the legacy one that we split out separate. And For the most part, we probably replaced newer technologies on newer platforms going forward. So as those Continue to wind down that kind of tailwind Gets minimized and the effect of the newer platforms start to take effect. So We're pretty excited about the connected opportunities and a lot of it plays to what Iqbal was talking about Around the enhancements that are being made to the products.

Speaker 10

Thanks for that. And then just one follow-up for me on the actually jumping back to the press release that you guys had out In July, talking about working with a partner on IoT use cases. Can you just refresh us, reiterate what the nature of the agreement with Nuance is, What the freedom is to enter adjacencies and is this just sort of tech development or is there an ability to really go in actually to customers or where we're at in that

Speaker 2

So also here, I think you know we have a restriction here, the field of use restriction With MotherCo, with Nuance, now Microsoft. And this WU expires in a year from now, October 24. And as you can imagine, we are already planning here the areas where we can go in. There was also recently a press release from us that we have also optimized the embedded AI stack For new devices, yes. And we see huge potential for us also in the future beyond 2024.

Speaker 6

But in the short term, there's 2 or 3 technologies That were developed and owned by Cerence that we can play. Some of it's in our audio Our audio stack, some of it's in our text to speech. We also have Developed our own voice biometrics technology separate from what came over at the time of the spin. So there are opportunities that we're pursuing in those particular areas That are exempt from the FOU for the next year. And then as Stefan said, pretty much a year from now, there are no restrictions.

Speaker 2

And we have also established a team fully dedicated on non transportation opportunities for us, business development and R and D people.

Speaker 10

And thanks for taking my question guys. Great quarter. Thanks.

Operator

All right. Thank you so much, Daniel. I am showing no further questions at this time. I would now like to turn the conference back to Rich for closing remarks.

Speaker 1

Thank you, Brittany, and thank you for everyone joining us on the call this morning. We look forward to having further Discussions. Enjoy the rest of the summer. Thank you.

Operator

Great. Thank you so much. This concludes today's conference call. Thank you for participating. You may now disconnect.

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Key Takeaways

  • Q3 revenue was $61.6 M, at the high end of guidance, with all non‐GAAP profitability metrics exceeding expectations despite a GAAP net income charge from convertible debt refinancing.
  • Cerence’s next‐generation Assistant powered by generative AI and large language models advances the “immersive companion” vision, offering more natural, multi‐intent interactions and enhanced car knowledge capabilities.
  • Global auto penetration hit 54% of new light vehicle production, the highest level in nearly two years and marking three consecutive quarters of growth.
  • A recent debt restructuring replaced a high‐rate term loan with new convertible notes, extending maturities to 2028 and yielding approximately $8 M in annual cash interest savings.
  • Q4 revenue is guided to $72 M–$76 M and full‐year fiscal 2023 guidance raised to $286 M–$290 M, reflecting strong visibility from closed fixed contracts and rising connected services.
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Earnings Conference Call
Cerence Q3 2023
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