Cerence Q1 2024 Earnings Call Transcript

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February 6, 2024

There are 8 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the Syrris First Quarter 20 24 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised today's conference is being recorded. I would now like to turn the conference over to your speaker, Rich Yerganian, Senior Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, Michelle. Welcome to Cerence's Q1 of fiscal year 2024 conference call. Before we begin, I would like to remind you that this call may involve certain forward looking statements. Any statements that are not statements of historical fact, including statements related to our expectations, estimates, assumptions, Strategy, goals, targets and plans should be considered to be forward looking statements. Cerus makes no representations to update those statements after today.

Speaker 1

These statements are subject to the 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 and our Form 10 ks filed on November 29, 20 23. 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. The press release is available in the IR section of our website. Joining me on today's call are Stephan Ortmans, CEO of Cerence and Tom Boden, CFO of Cerence.

Speaker 1

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 Baird 20 24 Vehicle Technology Mobility Conference on February 29th in the Raymond James 45th Annual Institutional Investors Conference and the Morgan Stanley Technology Conference the week of March 4. Now on to the call.

Speaker 2

Stefan? Thank you, Rich. Welcome, everyone, and thank you for joining us to discuss Cerence's 1st quarter results. Over the next few minutes, I will update you on the highlights from our Q1 and provide an update on our AI product strategy and the exciting interest we received from OEMs, partners and press at CES. But first, a review of our Q1 highlights.

Speaker 2

As we have briefed you on previous calls, the R and D and product teams at Cerence has been working at full speed, integrating the latest developments in generative AI and large language models into our automotive and adjacent transportation focused solutions. We believe our enhanced products and future road map represent an industry leading inflection point for the in cabin experience for drivers and passengers. Not only are existing customers showing interest in deploying our new solutions as quickly as possible, but we have also seen interest in deploying our new innovations from OEMs that had previously chosen alternative solutions. Discussions with these OEMs and customers gained momentum during Q1 and post CES, resulting in a greater pipeline of business opportunities as we progress through the fiscal year. Notably, we made steady progress during the quarter in aligning our product strategy with key partners.

Speaker 2

We announced major engagements with NVIDIA and Microsoft leading up to CES. The hardware and toolchains available to us through these partnerships are important contributors to fulfilling our vision of creating the ultimate AI based immersive in cabin experience. In December, we introduced the CERN's Automotive Large Language Model called KN. KN is an automotive specific large language model leveraging NVIDIA's computing and hardware capabilities for the training of generic and OEM specific models. Cerence is working with NVIDIA to solve several key challenges, including shortening time to deployment by moving at true AI innovation speed.

Speaker 2

The collaboration with Microsoft focusing on the evolving in cabin user experience and the future of connected mobility. We are combining our deep expertise and comprehensive AI powered in car assistant portfolio with the innovative technology and intelligence of Microsoft Azure OpenAI Services. As a first step, the focus is on delivering a curated automotive grade in cabin experience that leverages JetGPT and Azure OpenAI Services. This enables OEMs to swiftly implement next generation experiences into new car programs as well as retroactively upgrade cars on the road. This extends customer value through access to more frequent feature updates, hence creating new revenue opportunities for OEMs.

Speaker 2

Customer highlights during the quarter included several key developments. A major North American OEM extended an existing program with Cerence as the competitor solution they had previously chosen has experienced significant delays. A Japanese OEM that has chosen a competitor solution prior to our spin from Nuance returned to Cerence for some of our key enabling technologies. This is an important first step with the OEM, and we believe it opens the door for expanded opportunities moving forward. We have previously mentioned our success in China with OEMs, who have chosen our AI technology and broad language portfolio for expansion of their global footprint.

Speaker 2

Where 5 major platform programs went live with 3 Chinese OEMs in Q1. This trend continued with several more carmakers selecting Cerence to support their overseas program and is expected to drive new opportunities in the Chinese domestic market. We also had a key AIoT design win with a North American company for wearables, as we continue to leverage our scalable AI technology stack beyond transportation. And finally, for the 6th quarter in a row, we have delivered our quarterly results as guided. Our penetration in global auto production remained at 55 percent 54% and we had several new platform programs achieve start of production that we expect to ramp as we progress through the fiscal year.

Speaker 2

We had several one time adjustments in the quarter, including the previously mentioned revenue of the Toyota legacy contract, which Tom will explain in further detail. Even taking these adjustments into account, we would have delivered another strong quarter of financial performance. Much noise and hype has been made about the possibilities that generative AI large language models will unlock across industry. CERN is one of the few companies to swiftly and intelligently incorporate these innovative and advanced technologies into our products, adding significant value to our OEMs and their end users. As previously discussed, we have enhanced our product portfolio with generative AI and large language models.

Speaker 2

Our advanced solutions address several key challenges regarding accuracy, speed and cost, while at the same time allowing OEMs to control and customize the solution to the unique brand and digital cockpit experience. You can see from the chart on this slide the number of programs in predevelopment, meaning a prerequisite for a design win and ultimately for start of production. Since CES, the pipeline of opportunities has grown even larger. 2nd, concurrent with our integration of large language models into existing products, We are developing a new platform that is expected to fully take advantage of the promise generative AI and large language models can provide. This is based on our fine tuned growing automotive data set and compassing billions of tokens of data collected over the 20 plus years we have been serving the industry.

Speaker 2

At CES, we selectively demonstrated this product to key OEMs. And I think I can say that uniformly OEMs and tech partners were very impressed. For competitive and confidentiality reasons, we are keeping the details of this product close to the vest, but we'll share more details with you in the coming months. Overall, I'm very excited about the progress and accomplishments. Now for those of you that were not able to visit our booth at CES, We thought we would share a short video clip that gives you a sense for the energy, team spirit and momentum we built during our week in Las Vegas.

Speaker 2

Let's run the video.

Speaker 3

Our goal at Zerence is to create better AI Showcase our advancements in generative AI and how we make our products way more powerful with the help of large language models. Our flagship product, assistant, a full stack AI experience, which we have deployed already to more than 15 customers, is now powered by generative AI and can handle very complex questions and the endless number of multi intents. Another highlight was our launch of Serence Jet Pro. Serence Jet Pro is a cloud based new service where we bring the capabilities of large language models like Jet GPT to drivers globally. We have launched Jet Pro with Volkswagen and in the first half of twenty twenty four, VW drivers in Europe and North America will be able to enjoy a better voice AI experience in their cars.

Speaker 3

This solution was

Operator

According to Chet GPT.

Speaker 3

Another huge milestone for us was the announcement of 2 major partnerships. We will work with Microsoft to bring Azure Open AI Services and their co pilot capabilities into our product portfolio. Also, we have announced a partnership with NVIDIA to develop the first and enrich our core offerings. With audio AI and multi seat intelligence or our ability to detect driver emotions, we showcased our avatar here at CES. This virtual avatar is fully powered by Serence with many new innovations like emotion detection and our embedded to neural text to speech capabilities.

Speaker 3

This enables Mercedes together with us, build a very conversational, highly

Speaker 2

As you all may know, CES has become the most important trade show for the latest in transportation and mobility. We were very pleased when Volkswagen approached us about kicking the show off with a joint press conference announcing our partnership to enhance Volkswagen's in car experience with Cerent's AI capabilities. The press conference hosted over 300 journalists and was a fantastic way to kick off the week. Together, we have created an amazing user experience by enhancing Volkswagen's in car assistant called AIDA with Cerence Chat Pro, bringing the best of both worlds together. The execution from concept to product was done in less than 3 months.

Speaker 2

We showcased the IDA assistant at CES in the ID7 and Golf. And we expect the rollout of the upgraded assistant across Volkswagen and Skoda models starting mid calendar year 2024. An already full schedule of customer demos became even more crowded as word spread about our product demos. This included several representatives from multiple OEMs that had worked with a big consumer tech company. After the demos, every one of these OEMs asked to reengage in discussions with us about the next generation solutions.

Speaker 2

These discussions are ongoing and we believe provides realistic opportunities for additional win backs. It wasn't just OEMs that were impressed with our demonstrations at CES. We had over 400 references in the press, including 15 mentions as one of the best products of the show. Additionally, several influential journalists and bloggers produced videos showing the new Cerence power capabilities in action in the ID7, while providing very positive commentary. CES was a great opportunity for Cerence to showcase our AI product strategy and reinforce our belief that we are on the right track and that we remain in a leadership position for applying the promise of AI to the transportation industry.

Speaker 2

As we look to Q2 and beyond, we have a number of priorities we are keenly focused on. 1st and foremost is to capitalize on the positive momentum generated from CES. Our objective is to secure new business with existing customers and aggressively target the potential win back opportunities. 2nd, We need to continue to hit our delivery targets for both existing and new projects, especially ones that are cloud based and provide us the opportunity to generate revenue in a shorter period of time. However, OEMs control the final time line of their start of production or software updates.

Speaker 2

And finally, execute on Cerneus' next gen computing platform, facilitating a truly immersive in cabin experience. Now I will turn it over to Tom to share our financial results. Tom?

Speaker 4

Thank you, Stefan. Let me first discuss our Q1 FY twenty twenty four results followed by our guidance for Q2 FY twenty twenty four. Associated with the legacy contract that we had previously communicated. We came in above our revenue target primarily due to the net effect of 2 additional one time events. Another was with a customer whose contract with Cerence provided additional services to the Toyota legacy solution.

Speaker 4

This customer notified us of the decommissioning of their service in Q1, resulting in acceleration of the deferred revenue associated with their service in Q1 in the amount of approximately $9,900,000 Additionally, a separate customer notified us in Q1 that they had determined they had been over reporting royalties for a period of time. This resulted in a negative one time true up of $4,800,000 to our license revenue. As we have reported in the past and as recently as Q4 of last fiscal year, we do get notifications from customers when they realize they have either been under or over reporting royalties to us. While the updates we usually get our positive true up. In this particular case, the customer determined they had been over reporting royalties.

Speaker 4

And therefore we took a reserve as part of our Q1 results. Q1 revenue came in at $138,300,000 approximately $6,000,000 above the high end of our guidance, primarily due to the factors mentioned above. Adjusting for the items I noted earlier, our Q1 revenue still would have delivered a solid financial performance. Revenue for Q1 included no prepay contracts as communicated during our Q4 conference call. The results in the quarter were driven by our core transportation business.

Speaker 4

As revenue came in above the high end of our guidance range, Combined with our focus on operational excellence, we exceeded most financial metrics. GAAP gross margin was 81%. GAAP net income was 23,900,000 and GAAP income per share was $0.53 Non GAAP gross margin was 81.5%. Non GAAP operating margin was 49.4 percent. Adjusted EBITDA was 70,400,000 or 50.9% margin and non GAAP income per share was 1.12 During the quarter, we had negative cash flow of about $2,800,000 This was mainly due to the timing of customer payments we expect to receive in Q2.

Speaker 4

We expect positive cash flow for the full fiscal year. Our balance sheet remains strong with total cash and marketable securities of approximately $116,000,000 This chart is our breakdown of revenue for the quarter. Core revenue drivers remained solid. Q1 license revenue includes the one time negative true up mentioned a few minutes ago. This was a negative impact of approximately 4 $800,000 Also, when comparing quarter over quarter, our performance in Q4 included a positive true up of about $3,000,000 As expected, we did not execute any fixed prepaid contracts in Q1.

Speaker 4

Our penetration of global auto production remained at 54% on a trailing 12 month basis, as we continue to maintain a strong position in the market. Connected services revenue was up slightly from the prior quarter due to accelerated non cash revenue associated with the legacy contract and an additional approximately 9,900,000 associated with the other contract discussed earlier. Excluding this acceleration of deferred revenue, New connected revenue would have been up 5% quarter over quarter and 13% year over year. We expect a ramp in new connected services in FY 2024 as several key programs that have been delayed by customers go into production. We continue to see a solid pipeline of opportunities for Connected Services even as some expiring programs of old technology restrain the near term growth.

Speaker 4

Regarding the contract with the 2nd customer who had a portion of their contract with us related to the legacy solutions, The revenue associated with that contract has been historically reported as part of new connected revenue line. The customer who reported their over reporting of royalties license revenue and the other customer that required acceleration of revenue related to the decommissioning of connected services associated with the Toyota solution will negatively impact our go forward revenue by approximately $800,000 of license revenue and approximately $400,000 of new connected services revenue per quarter respectively. As we have previously stated, Professional services will vary quarterly 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 view it as an enabler for future license and connected services revenue. Additionally, our newer products and solutions include improved implementation integration features, which lowers the utilization of professional services.

Speaker 4

Moving on to our license business. Overall, the license business remained fundamentally strong. Pro form a royalties in the quarter were impacted by the negative true up due to over reported royalties and to a lesser extent, additional program delays were slower than expected volume ramps from several customers. As a reminder, pro form a royalties represent the value of variable licenses shipped during the quarter and those consumed as part of a fixed contract. Adjusting for one time items, including the $3,000,000 true up in Q4 and a one time volume discount, pro form a license royalties were relatively flat quarter over quarter.

Speaker 4

As we planned, we did not execute any fixed contracts in Q1, but do expect a contribution in Q2 of approximately $5,000,000 towards our fiscal year target of approximately $20,000,000 We believe that our KPIs continue to indicate strength in the business. As stated earlier, our penetration of global auto production for the trailing 12 months stayed steady at 54% with 12,400,000 cars with Cerence Technology shipped in the quarter. This means over half of global auto production includes some level of embedded Cerence technology. Cars produced that include our connected services in addition to our embedded solutions increased 36 months, trailing 12 months over the prior trailing 12 months, reflecting the trend of cars being increasingly connected and our ability to successfully provide our customers with innovative cloud based solutions. Total adjusted billings increased 4%, and we believe that this is a leading indicator of our potential future revenue growth.

Speaker 4

Related to our growth in cars shipping with our connected services, we once again saw a large increase in monthly active users, 30% year over year, which we believe indicates increasing popularity among the end users of our technology. As we discussed on last quarter's conference call, we were informed by our legacy Connected Services customer, Toyota, that they were electing to terminate the service offering effective December 31, 2023. Prior to this change, Cerence would have reported revenue associated with this contract of approximately $8,400,000 per quarter through Q1 of fiscal 2026, meaning the end of calendar year 2025 as the service associated with the contract achieved end of life. You may recall there is no cash flow associated with the remaining deferred revenue associated with this contract. The contract came via an acquisition in 2013, while Cerence was part of Nuance.

Speaker 4

The Cerence deferred revenue represents the amortization of the revenue associated with the contractual service period, which was scheduled to end December 31, 2025 and was accelerated by such termination by Toyota to our Q1 FY 2024. Therefore, our revenue for the Q1 includes approximately $73,600,000 in revenue associated with this change. The decommissioning by the other customer with a contract in support of the Toyota legacy solution also resulted in an acceleration of approximately $9,900,000 of revenue in Q1. Because the contract with this other customer was for more than just the legacy solution, this revenue has been reported as part of our new connected services revenue. As I mentioned earlier, our new connected services revenue will be lower by approximately $400,000 per quarter moving forward.

Speaker 4

Now turning to revenue guidance for Q2 and the fiscal year. We are guiding our Q2 revenue to be from $60,000,000 to 64,000,000 We expect Q2 revenue to include approximately $5,000,000 contracts in Q2. We are in the process of negotiating final contracts with a couple of customers, which may result in our projection for Q2 to vary as we ensure we achieve satisfactory terms. The best estimate we can provide at this time would be to spread the remainder of the approximately $20,000,000 annual amount relatively evenly throughout the balance of this fiscal year with the caveat that actual execution of fixed contracts can vary quarter to quarter. For the full fiscal year, we continue to expect revenue to be between $355,000,000 to $375,000,000 You can see on this slide the revenue guidance and the effect of the associated financial metrics.

Speaker 4

As you can see, there were updates to our guidance for the fiscal year regarding our GAAP operating margin, net income, net income margin and EPS and non GAAP net income. The adjustments to our GAAP operating margin and net income due to restructuring charges and an asset indemnification release. Non GAAP net income improved due to a favorable foreign exchange gain in Q1. In summary, CES was a resounding success for the company with significant interest in our new products and technology from existing and potential customers alike. The goal now is to advance these discussions into new business and ultimately revenue growth for the company, while in the near term we remain focused on operational excellence.

Speaker 4

As a reminder, we expect to update our 5 year backlog in conjunction with our Q2 earnings release. This concludes our prepared remarks. And now we will open the call for questions.

Operator

Thank you. And our first question is going to come from the line of Jeff Van Rhee with Craig Hallum Capital Group. Your line is open. Please go ahead.

Speaker 5

Great. Thank you for taking the questions. A couple. Just maybe start with the customer that left with Toyota that was apparently in new did. And just maybe a little more color.

Speaker 5

Was that a surprise given they were correlated to Toyota? Was there a vision that somehow they were going to stay excluding Toyota? And then just again a little more color on what exactly they were doing?

Speaker 4

So Jeff, thank you. So they had a separate contract. So they were kind of a Tier 2 to that overall solution. I don't think we truly expected them to also cancel that. I mean, we certainly had to wait for them to understand what their relationship was and what their activities and contractual obligations were with Toyota.

Speaker 4

So, they actually notified us a little bit after, we got the notification from Toyota on our legacy contract and that's a little bit why we didn't include it in Q4, because we hadn't been informed at that time.

Speaker 5

And so was the explanation that they were leaving because they simply had to because that partner was going away or because they were changing product direction and you're no longer a fit. What was the logic to leave if it wasn't a foregone conclusion that they had to leave?

Speaker 4

Pretty much the same logic with Toyota Legacy. They got informed by Toyota. We don't know what their contractual arrangement was with Toyota. But they were also told that Toyota was ending that service. And therefore, they came back to us and informed us that they were also canceling the service associated with that solution.

Speaker 2

And maybe as a reminder, Jeff, good morning, Jeff. Toyota legacy program started in 2011, right? So it's a very old, old fashioned program compared to nowadays solutions, especially when looking at CES, right? And they have been informed actually in parallel and then came back to us here. Nevertheless, we have an excellent relationship with Toyota and we are focusing on new programs, for example, model year 2024 and upcoming programs and they have invited also us to discuss new opportunities beyond model year 2024.

Speaker 5

Okay, helpful. Then if I could just sneak 2 other quick ones in. You referenced, Tom, I think in the script that you had headwinds remaining from some other old contracts in Connected. Can you just put some bounds around how much of a revenue headwind that is on an annual basis?

Speaker 4

We haven't split out the exact amount there because some of its programs end and sometimes there's a ramp delay. I think there's some other indicators on the positive momentum we're seeing in Connected Services. And I think we'll start to see that growth in the next couple of quarters in 2024. And again, a piece of it is some delayed production starts and ramps by some of the OEMs.

Speaker 5

Yes. Okay. And then just maybe last, Stephane, on the very high level question here, but I guess if you look at the overall landscape, And obviously, you quote this 54%. So your share in the in car systems is steady, but folks can use CarPlay, Android Auto, there are a lot of avenues that they have to consume or interact with the vehicle while they're in the vehicle. So two questions.

Speaker 5

Just how are you gauging end user satisfaction of your solution versus the other solutions? And then any commentary about market share within Actually what's getting used in the car because I think some of those Apple CarPlay and Android Auto might not be measured in that 54%. Thanks.

Speaker 2

So maybe Jeff, there are in our view, in my view, actually 3 key pillars. 1st of all, we have a very diversified strong customer base with strong engagement. That was crystal clear at CES and as opposed to CES, right? And we're getting also valuable feedback from lead OEMs across the globe. Secondly, I think also with the opportunity for market and OEM relevant brand customization, we have some huge advantages over the big tech giants, right?

Speaker 2

Because all OEMs understand now that they need to drive the immersive in cabin experience, the digital cockpit experience, right? And they are heavily engaged also with their user, with their users, right, and sharing this information with us. But equally or even more important is, I mean, you know, at our last Investor Day, we said, okay, We are moving ourselves from a component supplier technology supplier to a full solution innovation partner. And really I can say we have achieved this important goal for the company, right? So we are providing actually now a leading innovation computing platform, providing really a compelling income and experience with yes, you can say commercialized hybrid large language model architecture, right?

Speaker 2

And that was one of the best products at CES and the demand from other OEMs is just amazing and terrific, right? And with this huge penetration rate of 54%, right, we have now huge opportunities in upselling those solutions in the short term, but also in the mid- or long term, bring in our new hybrid large language monogenerative AI solution. And therefore, we are partnering also with NVIDIA for accelerating the rollout. I mean, languages is still a key topic, right? We are a global player compared to others in the market here, right?

Speaker 2

And our promise to the market is that we have by end of this calendar year 20 languages supported hybrid, that means embedded in cloud based. So overall, I think we're on a very, very good track.

Speaker 6

Okay, great. Thank you.

Operator

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Quinn Bolton with Needham and Company. Your line is open. Please go ahead.

Speaker 7

This is Nick Doyle on for Quinn. Your adjusted total billings growth decelerated slightly from 6% last quarter to 4 this quarter. Can you expand on that data point? It sounds like it might be impacted by the additional program delays that you're talking about. And then maybe you can touch on the key reason you're I think you're seeing these delays, how the OEMs are thinking about SOPs this year, while auto production and auto sales remain relatively strong lately?

Speaker 7

Thanks.

Speaker 4

Yes. Quinn, I'll take the first part and then maybe Stefan can talk about the second piece. I mean, again, we saw growth in billings. I think we'll see accelerated growth in billings over the next few quarters. I think it's just a little bit of a timing and seasonality in that billings number.

Speaker 2

And looking at delayed SOP here also here have also some positive messages, just been informed that one of the program, which has been delayed for more than 2 years, go live in calendar week 12 of this year. That's great because here we see higher PPU and it's a mass volume OEM, right? And there was also another big OEM who had also some delays of 9 months and they will also go live within the next 2 months, which is really great for us. And then as said, we have this diversified customer platform. You have also heard about BYD.

Speaker 2

They're becoming now more important for the European market. And as know we are their preferred partner here when it comes to the in cockpit experience leveraging conversational AI. So we are on a good track, but we have still some dependencies on the OEMs. And as you also said earlier, right, the OEM defines start of production and they will also let us know when they are doing this kind of software updates over the air.

Speaker 7

Okay. Thank you. And then what part of your technology stack drove the AIoT win? I guess why wasn't this piece limited by the FOU? And can you talk about the size or timing of the win?

Speaker 7

You had I think you had about a $5,000,000 win with Big Tech Company in fiscal 1 quarter 1Q 2022. Is it it's bigger than that?

Speaker 2

So over the last couple of months, we have made great progress also in the non transportation space. We have in Q1 4 product launches, yes, 1 in Korea, that's for home, 1 in China and 2 in North America with well known companies, industrial steel, right? And we had also another big design win in North America for wearables. We are still under the Abu, so we are selling technologies, which are applicable, for example, audio AI, embedded solutions and text to speech.

Speaker 4

Yes. So just a little bit on that. I mean, we've said all along that there were certain elements that we were able to advance prior to the expiration of the FOU. Those were clearly defined in the contract with Nuance, now Microsoft. And that's what we in the short term, that's what we've been pursuing.

Speaker 4

And then as of October, there will be no restrictions.

Speaker 2

And our focus, Quinn, is on industrial IoT, wearables, also health, well-being and we are also in discussion with big companies, especially North America and smart home and office.

Speaker 4

Yes. Some of those will have to wait until October, But we're getting ready.

Speaker 2

Thank you.

Operator

Thank you. And our next question comes from the line of Mark Delaney with Goldman Sachs. Your line is open. Please go ahead.

Speaker 6

Good morning, everyone. This is Will Bryan on for Mark Delaney. And thank you for taking my question. Can you give us some additional color on OEM feedback to Chat Pro, which you featured at CES and how broad based is the OEM interest and Any color you can give on the PPE opportunity?

Speaker 2

So good morning again. Yes, it was really amazing feedback from all OEMs, from North American, big OEMs, European OEMs, OEMs in Korea, Japan and China. I think that's clearly a game changer with but we are also going beyond CHAT Pro. Maybe not sure whether you have seen also our new CERTAIN's assistant with Energe plus here, right? So We clearly have changed the dynamic in the market here.

Speaker 2

Feedback was amazing. Some of the OEMs told me actually, hey, when can we have it in our car? We have various discussions also with our sales force and OEMs, I think they want to have it ASAP as soon as possible here. Really there are huge opportunities and it goes far beyond CHATPRO. When looking at the PPU, I mean, I cannot share everything here as you imagine here.

Speaker 2

But also here, we hope it can also drive our future revenue. And as you also mentioned earlier, right, we are going to address also cars on the road and what we can share is, I mean, you saw also the press announcements from both VW and Skoda, they're trying to bring it in also on cars on their own, which will also drive revenue on our side.

Speaker 6

Thank you for that. And then if I can sneak in one more question. So with the added company focus on Gen AI, what does that mean for the company's OpEx for the business? And any additional color you can give there on kind of the gross margin opportunity for some of these new Gen A opportunities or applications you all are working on?

Speaker 2

As you know, we are very sensitive to cost see you're right. So there are actually no incremental OpEx required. You have heard also about our partnership with NVIDIA. This is also part of our story here, a very important partner now to us. Yes, and we gross margin as mentioned by Tom here, right?

Speaker 2

So overall, we are very sensitive to costs here, right? And with our partnership engagements, we're on a very, very good track. It is also worth it to mention here that we're using a hybrid solution, meaning embedded and cloud. And we are doing also quite a lot on the embedded side, side not just for privacy reasons, but also for cost efficiencies.

Speaker 6

Thank you.

Operator

Thank you. And I would now like to turn the conference back over to Rich Yergini for any closing remarks.

Speaker 1

Well, thank you to everyone for joining us on the call this morning. We look forward to seeing you at some of the upcoming conferences or at other times. Have a good day. Thank you.

Operator

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

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Key Takeaways

  • Cerence has integrated generative AI and large language models across its in-cabin solutions, driving strong OEM interest and an expanded business pipeline following CES.
  • The company announced major collaborations with NVIDIA to develop its automotive LLM “KN” and with Microsoft Azure OpenAI Services to enable cloud-based AI-powered user experiences.
  • Notable customer developments include program extensions and win-backs from North American and Japanese OEMs due to competitor delays, continued expansion with Chinese carmakers, and an AIoT wearable design win.
  • In Q1, Cerence reported $138.3 million in revenue (about $6 million above guidance), a 54% penetration in global auto production, and a non-GAAP operating margin of 49.4%.
  • For Q2, revenue is guided at $60 million–$64 million (including ~$5 million in fixed contracts), with full-year revenue expected at $355 million–$375 million, driven by CES momentum and operational excellence.
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