Cerence Q2 2024 Earnings Call Transcript

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May 9, 2024

Key Takeaways

  • Q2 revenue of $67.8M beat the high end of guidance due to a one‐time $5M license settlement and $2.6M OEM true‐up. GAAP results were burdened by a non‐cash $252M goodwill impairment, while adjusted EBITDA was breakeven with $1M of operating cash flow and $115M of cash and marketable securities.
  • Connected services revenue grew 30% year‐over‐year and 33% sequentially on a true‐up basis, with 8% organic quarter‐over‐quarter growth, although only a modest ramp is expected in H2.
  • Variable license revenue was down 4% year‐over‐year (though up 21% sequentially), and pro forma royalties of $39.6M show a declining trend, with Cerence‐powered vehicle shipments down 6% versus a 1% industry decline and a $200M reduction in backlog to $1B.
  • Cerence guided Q3 revenue to $66M–$72M and full‐year revenue to $318M–$332M (ex‐restructuring), outlining a new FY24 run‐rate of $238M excluding $87M of legacy Toyota revenue and projecting $5M–$15M in operating cash flow.
  • Management plans to prioritize investment in Generative AI and large language model technologies with upcoming product launches, while executing cost actions to improve profit margins and cash flows.
AI Generated. May Contain Errors.
Earnings Conference Call
Cerence Q2 2024
00:00 / 00:00

There are 5 speakers on the call.

Operator

Data set and deep relationships with our customers will continue to be true differentiators for Syrens. As we progress through the second half of the fiscal year, we have prioritized several objectives into order to strengthen our position in our core automotive business. 1st, balance our cost structure in accordance with our current levels of business, while still ensuring we can successfully deliver on our Gen AI roadmaps and customer commitments. 2nd, release several Gen AI solutions into production with high end user satisfaction. And 3rd, convert the deals currently in the pipeline, including some win back opportunities.

Operator

Before I turn the call over to Dan Tempesta, our new CFO, I would like to take a moment to introduce him. Dan joined us in mid March and was previously CFO of Nuance. As such, he is very familiar and experienced with the auto business and our solutions. With Dan Stryker of leadership and experience in the space, we are happy to have Dan on board at this important moment in Cerence's journey. I would also like to take the opportunity to thank Tom Boden for his contributions and partnership during his tenure as Cirence's CFO and look forward to his continuing support as a Cirence Board member.

Operator

With that, I would like to hand the call over to Dan to review our Q2 results in detail and share more about our guidance for Q3 and the full fiscal year. Dan?

Speaker 1

Thank you, Stefan. Before I begin, let me just say to our shareholders that while this is clearly a challenging quarter to come on board, I am optimistic about the roadmap and new products that Stephan discussed. Also, I look forward to meeting with many of you during the several investor conferences and NDRs we have in the coming weeks. Turning to our results. Our Q2 revenue of $67,800,000 was above the high end of the guidance, mainly due to an unplanned fixed license of approximately $5,000,000 This license was directly related to a settlement of an obligation created by a large customer's over reporting of royalties discussed and reported on last quarter's conference call.

Speaker 1

In addition, our connected services revenue line also benefited from an unplanned OEM under reporting true up of approximately $2,600,000 Excluding these unplanned items, revenue would have landed within the lower end of our Q2 guidance range. Our adjusted EBITDA for the quarter was approximately breakeven and benefited from higher than expected revenue in the quarter. Our Q2 profitability was negatively impacted by approximately $6,000,000 related to the write off of a long term unbilled contract asset associated with one of our non automotive customers that declared bankruptcy during the quarter. Our cash flow from operations was $1,000,000 and our balance sheet had total cash and marketable securities of approximately $115,000,000 As Stephane mentioned a few minutes ago, our GAAP results were also negatively affected by a $252,000,000 goodwill impairment. This is a non cash impairment charge that only affects our GAAP results.

Speaker 1

Turning to our detailed revenue breakdown. Variable license revenue was $25,100,000 down 4% from the same quarter last year and up 21% sequentially quarter over quarter. Fixed license revenue came in at $10,400,000 for the quarter, $5,000,000 higher than originally expected due to the unplanned fixed license previously mentioned. Looking forward, we expect $20,000,000 of fixed licenses in the Q3. This will bring our fiscal 2024 fixed license total to approximately $30,000,000 including the unplanned $5,000,000 settlement, which is above our initial expectations of $20,000,000 Connected services revenue, excluding the legacy contract, was $13,600,000 as discussed earlier.

Speaker 1

And as discussed earlier benefited from the $2,600,000 true up from under reporting by a customer resulting in 30% growth for the same quarter last year and up 33% from the prior quarter. Excluding the true up, Connected Services revenue was approximately $11,000,000 up 8% compared to the prior quarter. Excluding the impacts of legacy and the True Up, we expect only a modest ramp in connected services in the second half of twenty twenty four compared to the first half. Our professional services revenue was flat year over year and down 10% quarter over quarter. As a reminder, while professional services is an enabler of both license and connected services revenue, we expect professional services revenue to remain generally flat.

Speaker 1

Going a bit deeper into our variable license revenue, we have adjusted this schedule. First, we've added a row to highlight the periodic adjustments that can occur with OEM reporting. While there are always small adjustments that can occur in the ordinary course, our intention is to include within this line individual OEM related adjustments that are greater than $2,000,000 in any given quarter. This will allow us to highlight items that are impacting the variable license trends. 2nd, we have updated the format to show at the bottom of the page the operational metrics that we have discussed and presented in the past.

Speaker 1

As previously mentioned, variable license this quarter was $25,100,000 Looking at our operational metrics, consumption of our previous fixed license contracts totaled $14,500,000 this quarter, a reduction of 14% compared to the same quarter last year and in line with our expectations. As a reminder, because we have been managing down the annual value of fixed contracts, over time, this will result in a smaller consumption of royalties associated with past fixed contracts. As consumption levels decline, we expect that should correspondingly result in variable license growth in future periods as royalties will accrue directly into revenue as production occurs. We continue to expect to normalize our consumption run rate by the end of fiscal year 2026, at which time any new fixed contracts should roughly align to the level of consumption during the year. Our pro form a royalties were $39,600,000 and show a recent declining trend.

Speaker 1

As we review our key performance indicators this quarter, our penetration of global auto production for the trailing 12 months remained steady at 54%. We shipped 11,700,000 cars with Cerence Technology in the quarter, down 6% year over year, while IHS production for the same period declined 1%. Cars produced that use our connected services increased 23% on a trailing 12 month basis compared to the same metric a year ago as some programs that were previously delayed went into production. Total adjusted billings increased 9% in the 2nd quarter compared to the previous year. Turning to our 5 year backlog metric, we are making an approximately $200,000,000 reduction to our 5 year backlog, which brings that figure to approximately $1,000,000,000 Incorporating the impacts just discussed, we are guiding our 3rd quarter revenue to be between $66,000,000 $72,000,000 which includes the $20,000,000 fixed license previously mentioned.

Speaker 1

For the full fiscal year, we expect revenue to be between $318,000,000 $332,000,000 Excluding the impact of any restructuring activities that may occur as we consider cost reductions, we expect fiscal year 2024 cash flow from operations to be in the range of $5,000,000 to $15,000,000 Before I provide our thoughts on fiscal 2025, since the legacy Toyota contract is now behind us, I think it's important to discuss the 2024 revenues excluding the impacts of those services. We believe this view provides the new run rate revenue profile for the company. If you take the midpoint of our current fiscal year 'twenty four revenue guidance, I just discussed on the previous page of $325,000,000 and exclude approximately $87,000,000 of legacy related revenue recognized in Q1, the adjusted revenue for the company for fiscal year 2024 is approximately $238,000,000 We consider this new estimated run rate revenue relevant for both assessing our cost model as well as planning our business activities going forward. As we exit the first half of fiscal twenty twenty four with this new adjusted view of the run rate of our expected revenues, I do want to take a minute to look forward. While I am not prepared to provide 25 or mid term guidance at this time, I can provide a framework for how to begin to think about fiscal year 2025 revenue.

Speaker 1

If you assume flat OEM production and flat pricing mix, similar to what is incorporated in our last 'twenty four guidance, our latest 'twenty four guidance, we would expect significantly less in fiscal 2025 compared to fiscal year 2024 as our past commitments continue to wind down. In addition, if you assume $20,000,000 in new fixed licenses in fiscal year 2025 and very modest growth in our run rate connected services, it would be reasonable to anticipate mid single digit growth off of the new estimated run rate of $238,000,000 For some additional color on the sensitivity of this view, those growth rates could be lower or higher depending on global auto production changes, date shifts and the introduction of new platforms and pricing and mix shifts. Again, this does not represent guidance, but is rather a framework for how to think about fiscal 'twenty five revenue. Also, this framework is subject to change based on a number of industry and customer related factors. With regards to our business in the adjacent markets, as previously mentioned by Stephan, they are developing slower than anticipated.

Speaker 1

Although we do believe there is an opportunity for revenue growth in these markets in the midterm, we are not expecting a meaningful uplift in revenue contribution in fiscal 2025. Wrapping up my comments, I'd like to leave you with a few key thoughts. We believe that generative AI and LLM technologies are critical to our future product roadmaps and we plan to ensure that our resources are focused to invest in these technologies and related product offerings. Additionally, we believe that our position in the industry, our long standing relationships with our customers and our initial success with our recently announced GenAI products provide us with a solid foundation to reinvigorate growth in the future. And finally, given the current financial headwinds, we plan to take cost actions in the near term that will position us to deliver stronger profit margins and stronger cash flows.

Speaker 1

That concludes our prepared remarks and we will now open the call up for questions.

Speaker 2

Thank you. We will now begin the question and answer session. And your first question comes from the line of Jeff Van Rhee with Craig Hallum. Please go ahead.

Speaker 3

Great. Thanks. Thanks for taking the questions. I missed the first monologue there, was I don't know, it wasn't live. So I apologies if I'm repeating stuff here, Stefan.

Speaker 3

But if you look at the magnitude of the reduction at the midpoint on the revenue picture, I mean, obviously, a very material number. When you look at what's being taken out, how does that affect your thinking about share gains, share loss, competitive landscape? Just start to parse that a little deeper, if you would.

Operator

Yes. Okay. Maybe good morning, Jeff here. And let me give you also my view and then we'll also ask then for his thoughts here. Yes, so after receiving the Q1 royalty reports, we observed some downward trends here and then we conducted in Q2 a deep dive account by account reviews starting in February and we finished in April.

Operator

And we observed a couple of factors resulting in a reduction in forecast. So first of all, our forecast projection based on the latest data and some of the historical trends and data we have. And then we compare this also with the input from customers, the input from IHS. We still have a high penetration of 54%, but for this fiscal year, IHS is flat, yes. We assume also a growth of 3% and we saw also a decline quarter over quarter of 12%.

Operator

Now bringing this together, as we mentioned also in earlier calls, right, we see also some impact of delays in programs. So and also that means delay in start of production and also a slower ramp of new programs here, right. And of course, this is hitting the revenue forecast and also because driven by a higher PPU. This goes actually into the line of the core business running royalties, but we see also as another aspect here, a slower ramp in 2 wheelers than originally anticipated. That's the first part of my answer.

Operator

And the second part, obviously, yes, I would like to split your market share question, losing the market share in actually 2 parts. 1 is related to a real time adjustment. Yes, and as you know, in the past, we lost some deals here, but this was already baked into our original forecast. We are completely convinced that based on our success at CES, we have a lot of opportunities also for winning back and we believe also that the large hyperscalers are not performing. And as I mentioned also earlier, since CES, so within the last couple of months, we won 6 OEM programs, right?

Operator

And currently, we are working or we are in predevelopment programs of about 14. That shows actually that we are on the right track with our new Gen AI roadmap.

Speaker 3

Along the lines of the second part there, if you look at the competitive win backs, you said you've got a bunch of them kind of percolating here. Can you expand on that a little bit? In terms of the last couple of years, where have the competitive losses taken place and in terms of against who? And then secondly, those that you think are on path to win back, where do you see most of your win backs coming?

Operator

So when looking back, that was actually prior to the spin at Nuance days. So we lost, for example, GM against Google. There was another loss at Volvo and a few others. But I think now we have huge opportunities for winning back a lot of deals here. And also with our new product roadmap and also with our new AI computing platform, I think we are forward to a breakthrough here for the conversational AI in the automotive world.

Operator

And that's a feedback from more or less all OEMs across the globe.

Speaker 3

Yes. I mean, obviously, a lot of the OEM programs and particularly around software have struggled mightily. So certainly there have been some delays, although it seems your revenue is falling short of that. Is there any reduction in now versus their expectations, the OEMs a year ago, 18 months ago in terms of the quantity of your product they're taking and expecting to put into each car, the ARPU per car?

Operator

I mean, when looking at the current automotive trends, I see obviously actually 3 major trends. One is related EV, and we all aware that there is a slowdown in the EV field. Secondly, as I also mentioned, the software defined CAS, it's creating another dimension of complexity, right? And unfortunately, we're seeing also some delays in new programs where we can provide actually a higher PPU for us here, right, that's missing. And the third one is the emergence of GenAI.

Operator

And this is really appreciated by more or less all carmakers across the globe, even in China, in Europe and North America.

Speaker 3

Okay. I'll leave it there. Thank you.

Speaker 2

Your next question comes from the line of Nick Thill with Needham. Please go ahead.

Speaker 4

Hey guys, thanks for taking my questions. The first one on the fixed contract consumption, I understand you're talking about lower consumption over time and the drivers around that. But near term, should we expect that same $15,000,000 level $14,000,000 $15,000,000 level through the fiscal year 'twenty four? And can you give a little more detail on this fiscal 'twenty five consumption Is maybe less than half of the rate that we're seeing in 2024 a good place to be modeling wise? Thanks.

Speaker 1

It's Nick. Hi, Nick. How are you? This is Dan. Thanks for the question.

Speaker 1

I do think in general, the remainder of the year is the past trends are good indicators of sort of the remainder of the year. That's the first part of your question. But remember what I said about 'twenty six. By the end of 'twenty six, we are we should be starting to get to close to parity of the fixed licenses that we do in those years. And our goal, of course, has always been to get to $20,000,000 So that's our intention next year.

Speaker 1

And if we change that intention, we'll let you know, but just take that as our expectations at this time. So if we get to a $20,000,000 level or approximately and we're at that run rate, you could expect that to come down over the next 2 years. So that should give you some indicators of how that's going to come down next year and the year after to get to that landing point.

Speaker 4

Yes, that's helpful. And the base that we're running on the fixed contract base is around $60,000,000 today?

Speaker 1

Yes, approximately. It was a little higher last year. That number can fluctuate up and down, but that's a reasonable estimation.

Speaker 3

Got it. Thank you.

Speaker 4

And then my second question on the ASP, the average billings per car, I think we saw a nice increase off the bottom this quarter. But I mean given all the moving pieces in your guidance, it seems like ASPs may be flat, possibly down. I mean Q4 could be up. I mean just a little more detail on how the ASPs are trending through the year and I could because it seems like what we kind of come out with on 2024 is a good way to model the go forward?

Speaker 1

I'll comment quickly and then I'll let Stephane. I mean given the sort of reset, I think it's fair to say we should not be thinking about significant growth in ASPs just yet. So that's the first item. We are we continue to be impacted. The one of the ways that ASPs get better is when we don't have the start of delay start of production delays because oftentimes we're going from old program lower ASP to new program higher ASP.

Speaker 1

And so we don't those start up productions impact that. But for the time being, it's relatively flat for this fiscal year.

Operator

It's relatively flat for this fiscal year, right. So overall, with the new products, we will see or I believe we will see a higher ASP because we are creating a complete solution for the new in cabin experience with the Spector Conversation AI and going also beyond. So as we also said, so we will see the first launch in 4 weeks from now. That's good, yes? Secondly, also, I mean, in the era of AI, alternative AI, there's also a new speed to give you also some ideas here.

Operator

We can easily integrate our new SIRENS assistant based on large language models and generative AI within 1 to 2 weeks on an automotive platforming, fully tested Q8 in the car, but then it's all about customization, the branding and so on and so forth. So overall, that's the path we are going here. And as Dan mentioned also in his script here, we are going for a transitioning for a cost cutting approach here. But nevertheless, for us, the most important thing is also to drive innovation in the field of generative AI and large language model. And the new platform, what we call it, the new AI computing platform, goes far beyond automotive.

Speaker 3

Thank you.

Speaker 2

There are no questions. I will now turn the conference back over to Richard Scheuerginian, Vice President of Investor Relations for closing remarks.

Operator

Thank you very much. And we will be again at several conferences upcoming and look forward to speaking with you. Thank you.

Speaker 2

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may

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