Cerence Q2 2025 Earnings Call Transcript

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Provided by Quartr
May 7, 2025

There are 8 speakers on the call.

Operator

Hello, everyone, and welcome to Cerence's second quarter twenty twenty five conference call. I'm Kate Hickman, VP of corporate communications and investor relations. I've been with the company for nearly eight years leading communications, and I'm excited to now be leading Investor Relations as well. I look forward to getting to know all of you. Before we begin, I would like to remind you that this call may involve certain forward looking statements.

Operator

Any statements that are not statements of historical fact, including statements related to our expectations, anticipations, intentions, estimates, assumptions, beliefs, outlook, strategies, goals, objectives, targets, and plans are forward looking statements. Cerence makes no representations to update those statements after today. These statements are subject to risks and uncertainties, which may cause actual results to differ materially from such statements and expectations as described in our SEC filings, including the Form eight ks with the press release preceding today's call, our most recent Form 10 Q, and our Form 10 ks filed on 11/25/2024. 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.

Operator

The press release is available in the IR section of our website. Joining me on today's call are Brian Krizanich, CEO and Tony Rodriguez, CFO. Please note that slides with further context are available in the Investors section of our website. Before handing the call over to Brian, I would like to mention that we will be presenting at the T. D.

Operator

Cowan Technology, Media and Telecom Conference on May 29 and the Evercore ISI Global Automotive OEM, Dealer and Supplier Conference on June 10. Webcast details will be provided soon. Now onto the call. Brian?

Speaker 1

Thank you, Kate. Good afternoon, everyone, and welcome to the Q2 '20 '20 '5 Cerence earnings call. I'm really excited to speak with you today. And while Tony will walk you through the details, we're very pleased with the strong results the team delivered this quarter, exceeding the high end of our guidance with a revenue of $78,000,000 and adjusted EBITDA of $29,500,000 Importantly, we generated strong free cash flow of $13,100,000 marking our fourth consecutive quarter of positive free cash flow. As a result, we are raising our full year guidance for adjusted EBITDA and free cash flow, and Tony will provide further details on this.

Speaker 1

I'm proud of our team and what it has accomplished. Despite ongoing macro challenges and uncertainty facing the automotive industry. We're focused on the future and believe that we remain well positioned to support our customers. Cerence continues to be differentiated by our unique combination of technology innovation, our diverse and expansive customer base, and our deep automotive expertise. Our experienced management team and deep bench of talent are keenly focused on delivering to our customers and executing against our roadmap.

Speaker 1

As we anticipated and stated in our last earnings call, we did not see a meaningful impact from tariffs on this quarter's results. For Q3, we believe the impact will remain limited. However, we are seeing some pressure from our customers on pricing and some changes in their program timelines as they work to understand the true impact that tariffs will have on their businesses. We're working cooperatively with our customers to find ways to optimize our partnership to best support them during this time, while also maintaining favorable conditions for serums. Based on what we can see today and on currently available information for fiscal year twenty twenty five, we continue to assume minimal impact from tariffs.

Speaker 1

However, it's important to note that the situation remains fluid and may evolve over the remainder of the year. We continue to recognize the importance of differentiation and diversification. And as I've mentioned, we've had some great wins outside of automotive. We're building on that foundation to ramp up on our automotive efforts. For example, we're working to expand our partnerships with our network of distributors.

Speaker 1

You may have seen our announcement with CodeFactory earlier this week. Together, we're introducing Voice Topping, a new solution that will bring Serif's conversational AI to self-service kiosks in a variety of settings. And we believe that this solution will be particularly relevant for things like placing orders and getting information in restaurants and hospitality, retail and self checkout, health care, transportation, banking, and entertainment settings, enabling users to interact with kiosks using only their voice. We're continuing to identify new verticals where we think we have a solid value proposition and can win. And we believe we will see the impact of this work on our revenue and profitability in fiscal year twenty twenty six and beyond.

Speaker 1

Another area in which we are strategically investing is IP protection. We intend to aggressively protect the time and effort Cerence has put into developing our innovative technology. And as you may know, we have ongoing lawsuits against Samsung for patent infringement. This week, we filed an action against Microsoft and Nuance for copyright infringement and breach of contract. As many of you know, these types of actions can take a long time to resolve and have risks, including loss of these actions.

Speaker 1

But as a company deeply rooted in innovation, we feel it's critical at this time that we take the steps to vigorously defend our IP. Of course, we also continue to make progress on three key deliverables planned for 2025 that are laid out in last quarter's call. First, we continue our work on Cerence XUI, our hybrid agentic AI assistant platform. We reached several important milestones for XUI within the quarter, including the product's market launch, which coincided with an appearance at NVIDIA JTC in partnership with our customers JLR and Renault. And we continue to evolve and enhance XUI with further edge and multimodal capabilities.

Speaker 1

Our teams worked hard this quarter to showcase XUI in both English and Mandarin at the recent Auto Shanghai twenty twenty five. This included new multimodal features within our CalmEdge embedded small language model developed in partnership with NVIDIA and MediaTek. This means we feed the SLM with car sensor data and camera based video streams to create an experience that integrates context from both inside and outside the car, something no one else has done before. For example, XQI can explain or translate road signs, identify roadside buildings, and even offer details about something interesting on a billboard, which has the potential to open up new revenue streams for OEMs. In the coming months, we plan to continue to expand XUI's features and capabilities, as well as increased language availability to serve automakers globally.

Speaker 1

We continue to see strong customer interest for XUI. We've signed several deals with top automakers, including JLR, and have several more that we believe will close within the coming quarter. Additionally, we have a robust pipeline of ongoing customer interest with a steady stream of proof of concept programs. It's important to note that we can push out the cloud aspects of XUI over the air to existing programs that are already shipping. As OEMs navigate the complexity and ambiguity of the current market, we're well positioned to help them continue to deliver new features and capabilities within their existing user experiences without having to invest in a full build out or rebuild of their infotainment platforms.

Speaker 1

And we continue to build the pipeline for the hybrid cloud embedded aspects of UI for automakers' future programs. The second key deliverable for 2025 is to continue growing our business with new and existing customers. Seven major customer programs started production this quarter, including the Mercedes Benz virtual assistant within the fourth generation of MBUX. First introduced in a new electric CLA, Cerence's AI solutions serve as the core input and output mechanisms across 25 languages, enabling seamless interaction across the platform's agentic architecture, including Mercedes' new avatar. Additionally, emotion detection and embedded neural text to speech from Cerence AI enabled MBUX to deliver more natural and empathetic interactions.

Speaker 1

The previously announced two wheeler program with Kawasaki also started production, as well as several China for the rest of the world programs with Great Wall Motor and Lincoln Company, among others. In addition, our Gen AI solutions went live with three customers, Hyundai, Kia, and PSA. The third key deliverable for 2025 is to continue our transformation and cost management. As you can see from our strong cash performance this quarter, we're seeing the real benefits from this work, and it's being delivered to our bottom line for our shareholders. In conclusion, we are encouraged by our second quarter results, especially with regards to free cash flow and solid path we have established ahead of us.

Speaker 1

And with that, I'll turn the call over to Tony.

Speaker 2

Thank you, Brian. Today, I'll be reviewing our Q2 results for fiscal twenty twenty five and providing some guidance for our third quarter and full fiscal year. Let's get into the Q2 operating statement. At the top, we achieved Q2 revenue of $78,000,000 which exceeded the high end of our guidance range of 74,000,000 to $77,000,000 As projected, the revenue this quarter included $21,500,000 of fixed license revenue contracts. With Q2 behind us, we expect no material fixed license revenue to be signed during the remainder of the fiscal year.

Speaker 2

As compared to the prior year, Q2 revenue increased $10,200,000 primarily related to the year over year increase in fixed license revenue of $11,100,000 This was offset by a decrease in professional services revenue. Additionally, as compared to our expectation, revenue was negatively impacted this quarter by the euro to dollar exchange rate. This fluctuation was neutral to profitability as it had a corresponding positive impact to our operating expenses for the quarter, and the euro has rebounded to our forecasted rate for April. Our gross margin for the quarter of 77% also exceeded the high end of our guidance range of 74% to 76%, as our technology revenue constituted a larger percentage of the revenue mix than forecasted. Moving down the operating statement.

Speaker 2

Our non GAAP operating expenses were $34,100,000 for Q2 compared to $50,000,000 for the same quarter last year. This decrease of $15,900,000 or 32% represents savings from the restructuring efforts conducted at the end of last year. As compared to our forecast, we also continued to delay some planned R and D hiring until Q3 and had lower translated operating costs in our European subsidiaries with the euro to dollar exchange rate for the quarter. Additionally, the company received notice of acceptance of another international tax credit that allowed us to record a $2,200,000 operating cost benefit catch up. The tax credit benefit recognized this quarter was similar to the credit reported last quarter, but for a different jurisdiction.

Speaker 2

These credits reflect our continuing effort to maximize the R and D benefits in our offshore locations. While we do not expect similar catch up amounts going forward, ongoing R and D costs will reflect in period credits we have applied for. Our adjusted EBITDA of $29,500,000 exceeded the high end of our guidance range of 18,000,000 to $22,000,000 and was $29,800,000 better than the approximate $300,000 EBITDA loss for Q2 of last fiscal year. The improvement in non GAAP operating expenses over prior year and expectations was driven by continued focus on managing operating costs and improving profitability. Our net income for Q2 was $21,700,000 compared to a net loss of $278,000,000 for the same quarter last year.

Speaker 2

In Q2 of last year, the company recorded a goodwill impairment charge of $252,000,000 This was a noncash charge that only affected the GAAP results. Excluding the impairment charge, our net income still improved from last year by approximately $48,000,000 this quarter. We ended the quarter with $122,800,000 of cash and marketable securities, up $12,300,000 compared to where we ended last quarter, derived from our positive free cash flow during the quarter of $13,100,000 As we look at our revenue breakdown and operating metrics, variable license revenue of $29,900,000 was up $4,800,000 or 19% from the same quarter last year and slightly ahead of expectations. As mentioned, fixed license revenue during the quarter was $21,500,000 compared to $10,400,000 for Q2 last fiscal year. Q2 connected services revenue was $12,600,000 down $1,000,000 or 7% from $13,600,000 for the same quarter last year.

Speaker 2

However, in Q2 of last year, the company recorded a $2,600,000 revenue true up. We believe this improvement in Connected Services revenue reflects a positive sign of increased demand for Connected Vehicles. As planned, our Professional Services revenue was down year over year by approximately $4,800,000 but down a bit more than expected. As our solutions become more standardized, they become more easily integrated and require less of our professional services to integrate. Additionally, some OEMs are bringing more of this integration in house.

Speaker 2

As we review our key performance indicators this quarter, total adjusted billings, which are defined as our total billings adjusted to exclude professional services, prepaid billings, and prepaid consumption, was $224,000,000 and flat for the trailing twelve month period this year compared to the previous year. Total billings, including professional services for Q2 of $77,700,000 were also comparable to Q2 of last fiscal year. As a reminder, when we look at total licenses shipped, pro form a royalties is an operating measure we use representing the total value of variable licenses shipped in a quarter, including the shipments from fixed licenses where revenue was previously recognized upon contract signing. We refer to the shipments where revenue was recognized prior period as fixed license consumption. Our pro form a royalties were $39,700,000 which were comparable to Q2 of last fiscal year.

Speaker 2

Consumption of our previous fixed license contracts totaled $9,700,000 this quarter, lower than the same quarter last year by about 33% and in line with expectations. As discussed in previous calls, we anticipated a lower level of consumption given the lower level of fixed contracts than historical periods. Our penetration of global auto production for the trailing twelve months ending this quarter was 51%. Approximately 11,600,000 cars with Cerence technology were shipped in Q2, flat year over year and down 1.3% quarter over quarter. Q2 worldwide IHS production increased 1.3% year over year and was down 10.9% quarter over quarter.

Speaker 2

Excluding China, worldwide car production was down three percent versus the same quarter last year and down 1% quarter over quarter. This is important to note as it shows that a big part of the worldwide production decline quarter over quarter relates to the Chinese market and not to the regions where we are more predominant. To date, we have not really sold to the Chinese OEMs for the China domestic market. The number of cars produced that use our connected services increased 10% on a trailing twelve month basis compared to the same metric a year ago. We believe this reflects increased demand for connected vehicles.

Speaker 2

So last quarter, we discussed the possibility of introducing a price per unit, or PPU, operating metric, providing insight into pricing. For our business, PPU represents the average technology price per vehicle shipped, including both embedded license fee and Connected Services subscription. Although PPU is not immediately recognized as revenue at the time of shipment, it reflects the average per vehicle value that will ultimately be recognized. PPU is influenced by contract pricing, the take rate of technology features, and the adoption rate of connected services. For Q2, the trailing twelve month average PPU was 4.87 up from $4.51 for the same period last year.

Speaker 2

This increase was primarily driven by higher attachment rate of connected services. 29% of vehicles were connected this quarter compared to 26% a year ago. We believe this growth in Connected Services reflects consumer demand for interactive technologies that allow users to control vehicle function and communicate externally through a unified interface. While we expect continued adoption of connected solutions, past performance does not guarantee future growth rate results. Our five year backlog metric, which is currently approximately $960,000,000 which was consistent with where it was two quarters ago.

Speaker 2

Now turning to our guidance. For Q3, we expect revenue to be in the range of $52,000,000 to $56,000,000 where no material fixed license revenue is expected to be signed during the quarter. Additionally, our Q3 revenue guidance absorbs approximately $1,000,000 of headwinds in our professional services we saw in Q2. With no fixed license revenue forecasted in Q3, we expect gross margins to return to between 6668%, net loss to be in the range of $10,000,000 to $13,000,000 and adjusted EBITDA to be in the range of 1,000,000 to $4,000,000 We are reiterating our revenue guidance for the full fiscal year to be in the range of $236,000,000 to $247,000,000 This absorbs headwinds of approximately 4,000,000 to $6,000,000 related to professional services projects for the second half of the year, offset by higher than expected technology revenue. While we expect revenue to be consistent to previous guidance, we expect profitability and free cash flow to be better than originally projected.

Speaker 2

Subject to the macro risk we have discussed, we currently expect full year adjusted EBITDA to be in the range of 28,000,000 to $34,000,000 and expect free cash flow to be in the range of 25,000,000 to $35,000,000 When looking at our liquidity, we plan to use our cash on hand to repay the remaining $60,100,000 of our 2025 convertible notes due in June. Following this, we expect to maintain a cash balance above $70,000,000 for the rest of the fiscal year. While this supports our day to day operations, a higher balance, closer to, say, dollars 100,000,000 would give us more flexibility to invest in growth and strategic priorities. We will continue to use cash from operations to get to our optimal position and evaluate other capital structure options as needed. Overall, we are very pleased with the solid results in Q2 and our continued financial performance.

Speaker 2

I will now turn back to Brian to close our remarks.

Speaker 1

Thanks, Tony. In closing, we're happy with our Q2 results and are feeling confident in our outlook for the full year, while also recognizing that there are macro risks and uncertainties. We remain focused on execution and customer delivery, business process improvement and cost reduction, and advancing Cerin's xUI, while also accelerating the diversification of our business. Based on the current available information, we continue to believe in our ability to deliver on our Q3 and fiscal year 'twenty five guidance. We look forward to continuing to share our progress with you.

Speaker 1

We'll now open it up for questions.

Speaker 3

Thank Our first question comes from Jeff Van Rhee with Craig Hallum Capital Group. Your line is open.

Speaker 4

Hey, this is Daniel Hipschman on for Jeff Van Rhee. Thanks for taking my questions, guys. Just on the metrics, maybe if

Speaker 2

we can walk through a little bit

Speaker 4

of the puts and takes, billings, deceleration towards 0%, but connected cars, of real nice uptick, acceleration from five to 10. Maybe just puts and takes on the metrics, what are driving those and sort of which of those you see is sort of pointing to the future trajectory?

Speaker 2

Hey, thanks for the question. Yeah, when you look at it, you look at our overall volumes, they're in line with effectively in line with our expectations, maybe a tick up compared to what we thought for the quarter overall in volumes. And then the connected rate, what it shows again is that more and more cars are being connected within our overall volume that is done. So that's good to see. Remember that as we as more connected cars ship, it doesn't have an immediate impact to revenue, right?

Speaker 2

We get the billings in quarter as they ship, but those billings are recognized over a period of time. So it's good to see the increased connected rates. It's gonna see those billings and we know those revenues will come as we amortize that over the subscription period.

Speaker 4

And then it looks like new connected revenue, if you back out some of the one times that you were speaking to Tony, it looks like new connected is up about a million sequentially, which is one of the larger jumps that's taken. And generally, that's from SOPs going live that take time to ramp. Is that fair to say then that whatever is ramping there, it would be fair to expect to continue to ramp into Q3, Q4 and drive some similar sequentials? Or is there anything one time there? Just kind of walk me through the progression of new connected and the underlying business aspect.

Speaker 2

Sure. No problem. Yes, you're right. We're up about 8%, which is good to see. And again, remembering that that revenue that's recognized this quarter is from previous billings that are now amortizing into revenue.

Speaker 2

So as we think about our revenue going forward, we do believe, of course, that given the past billings that we would expect increased connected revenue as we go forward.

Speaker 1

That's Just to give you some flavor. Like, it it it takes a quarter or two. Right? Because we we get paid on the connected when the car sells, and the dealer and the consumer basically connect the car. And that's when that contract starts.

Speaker 1

So that, you know, how long is the lock, know, shipment out and lock time, things like that. And then, you know, before we actually see the revenue, it can be a little bit of time too. So I always look at it as like it's a quarter or so, maybe slightly more depending on the vehicle and all and the geography before we see that revenue.

Speaker 4

Yeah. And then just in terms of another one for you, Brian, in terms of AI and where that's landing, I assume that that's going to be showing its head in Connected more so than in Variable. So terms of that connected kind of sequential uptick as you're looking through the rest of the year, what's driving that the most right now? Is that units? Is that the AI functionality, other functionality getting in, in terms of impacts in the PPU?

Speaker 4

Just sort of what are the drivers the key drivers between behind connected? And what, if anything, can quantify either qualitatively or quantitatively in terms of the AI impact to date?

Speaker 1

Sure. So what you have to remember is that large language models, and so let's just call it AI, is in almost everything we do. And so even the embedded, as we call it, or the non connected vehicle, has a large and this is what our Cerence Assistant large language model, the CALM embedded version is, it's sitting on the vehicle. And even for just vehicle controls, you want to turn your floor heat on, you want to change the colors in your car, you want to turn on adaptive cruise control, you want to adjust the temperature, whatever those directions are, you no longer need to use a key phrase. You no longer need to say a specific set of words.

Speaker 1

You can just say, hey, my feet are cold. Hey, could you crack the window? It's able to then translate that to a large language model and do the CAR function. So that has already penetrated the vehicle and doesn't require connectivity. The next place is where it does call outs.

Speaker 1

If you want to know, hey, where's the nearest restaurant? What was the score of the football game last night? Who won the hockey game against the Oilers in Vegas Knights last night? Whatever that is, that's a connected car. And so all of those things are AI.

Speaker 1

Are driving consumer demand. They are driving PPU increases. And the more of those things that people want to do outside of the vehicle, things like scores or temperature, weather or drive connected and why we're seeing the connected increase. But AI is driving usage of the voice in the vehicle across the board, whether it's connected or not. Does that help?

Speaker 4

Yeah. Yeah. That does help in terms of, you know, obviously, when I think about the opportunity generally with calm and embedded, I don't think you'd first intuitively think of that as the opportunity. But, you know, that makes sense in terms of how that is a component as well in the edge. So a good thing to call out.

Speaker 4

And then just last question for me. In terms of how because a lot of people are going to be asking and wondering in terms of macro, where, if anywhere, would we be seeing that if it was showing its head? Would that be in the IHS units as in just sort of total units shipped in the industry trickling down to you? Would that be in pricing with your customers? Where, if anywhere, would we be seeing impacts?

Speaker 1

So you'll see a little bit of it with both of those as and if those kick in. So I mentioned in the call that we are starting to see some requests from OEMs, a few of them, to talk and have discussions about price reductions as their cost structures and all are getting pressured. We're going in rather than just saying, okay, we're gonna give them an x percent price decrease. We're trying to go in and say, hey. We think we can save you even more money.

Speaker 1

We think, you know, we can take some of your software offload. We can consolidate some of your software needs and give you a better price. And by the way, yes, we'll get some increased revenue but save you money over the long run. So we're trying to take it as a win win. So that'll be that standpoint, how we try and deal with pricing.

Speaker 1

Volume wise, we'll be, you know, I'll basically say, you know, victims of whatever occurs there around volume. So if volumes decrease dramatically, we would be just directly impacted by that. Remember, you know, we ship worldwide, so a large number of our cars are shipped outside of The US. So even if there are tariffs and impacts in The US, it may not be directly correlated to what we'll see. If it's down x percent, we may not be down as much because we sell a lot of cars outside or sell in a lot of cars outside The US.

Speaker 1

But that's where you would see it.

Speaker 4

And that's it for me. Congrats on the quarter. And thanks, Brian. Thanks, Tony.

Speaker 3

Thank One moment for our next question. Our next question comes from Nicholas Doyle with Needham. Your line is open.

Speaker 5

Hey, guys. Thanks for taking my questions. The first one, keeping the fiscal twenty twenty five guide unchanged, you talked about a little bit coming out of the professional services and more coming from the higher tech revenue. Could you just be a little more specific on what that is and kind of why it's a little bit higher? I know you gave kind of some a lot of metrics around the Connected Services, but it sounds like it might not be coming from that just because of the lags, but any commentary there?

Speaker 5

Thank you.

Speaker 2

Yes, no problem. Yeah, as we've talked about the last now, this quarter last quarter, we're seeing a little bit headwind in PS. But as you've mentioned, we did not adjust guidance for the full year, we still think we'll hit that range. And so if we're not hitting there, where's it coming from? It's the tech.

Speaker 2

We are up probably a little bit more than our original plan on the connected side. But the other piece is really from the license volume that we're seeing. We saw a little bit of uptick in compared to expectation in license volume in Q2. Maybe some of that would have to do with some of the production levels for getting prepped for tariffs, but we did see that. So it's really coming from the license business.

Speaker 1

And don't forget, one of the key factors that we're doing very differently than a year ago and was especially evident this quarter's, we're really limiting the amount of prepays or as it's called in the discussion fixed contracts. And by limiting those, we're also getting less of a discount in those spaces cause we're being able to be more competitive in that space. And we're not giving as many discounts, right? So we did 20,000,000 ish, I think it was like 21.3 this quarter, and that'll be it for this year. You know, prior years, the numbers were quite a bit higher and those came with even bigger discounts.

Speaker 1

So by just reducing that, increases our effective price. But it's really because we're not doing as much of this pull in of of contracts with big discounts.

Speaker 5

Thank you for that, and makes sense. I think we could see that a little bit in the gross margins coming through. You had a press release last month with MediaTek for your edge solution. I guess, what was the if there is, what was the missing piece that MediaTek is the partnerships bringing to you with that edge solution? Thank you.

Speaker 1

Well, it's it's really a three way relationship. It's NVIDIA, MediaTek, and and CERENS. And what we're working together so MediaTek and NVIDIA are working together on cores that are directly related to automotive, that have the right pricing and go to market within the automotive space. So they're building those SoCs. And we're helping them, and they're helping us, by integrating our software and making sure we optimize together for performance.

Speaker 1

There's a lot of things we can do around latency, around overall performance, power, amount of memory required, all of those kinds of things, that if we work with the SoC providers, we can optimize that, and that then makes it lower cost for the OEM and the tier one integrator. Also makes it simpler, part of why we don't need as much professional services. So that relationship is really a three way relationship. NVIDIA and MediaTek working on the SOC, and then us working with the combined group there to really deliver the software stack.

Speaker 5

Thanks. And then if I could just ask one more. On the lawsuit, I guess, what are you really trying to achieve going into Microsoft who are also a partner to you guys? So I'm just wondering if it's trying to set a bit of a precedent here as other startups are moving into these voice assistant space. And I understand that it's specific to text to speech.

Speaker 5

Thank you.

Speaker 1

Yeah, I mean, what we're to achieve. I mean, we're protecting our intellectual property, right? We, you as a shareholder are investing with us on the development of this technology and text to speech and wake up word and a lot of those IPs were foundational to CEREC's and we continue to advance those and really drive those. And so really, we're protecting those. And so our goal is nothing more than that.

Speaker 1

We don't have some other goal around other companies where we can only manage a certain number of these because we don't have infinite funds. And we're going with the ones that we feel like are the clearest to us that allow us to clearly state our position. But it's all about protecting our IP and protecting your investment.

Speaker 5

Understood. Thank you.

Speaker 3

One moment for our next question.

Operator

Goodbye.

Speaker 3

Our next question comes from Mark Delaney with Goldman Sachs. Your line is open.

Speaker 6

Yes. Good afternoon. Thank you for taking my questions. Price per unit increased on a TTM to TTM basis, and you talked about some of the potential positive drivers such as AI in the vehicle, but then you also spoke on some pricing headwinds that have emerged in your prepared remarks. I'm hoping you can help us better understand how these various puts and takes will lead to PPU and where you think PPU may go over the next twelve to twenty four months as well.

Operator

Hey, Mark, Kate here. So we just lost connection to Tony and Brian briefly. They're dialing in in one second. So we'll just have you repeat the question when they get back on.

Speaker 6

Okay. Thanks, Kate.

Speaker 3

Ladies and gentlemen, please stand by. Your call will resume momentarily.

Operator

Thanks all for bearing with us. We're getting them back in just one second.

Speaker 1

Hello, Brian. Can you guys hear us now?

Speaker 3

Yes. We can hear you now. Can you hear me? Can't hear them. Yes.

Speaker 3

We can hear you. One moment.

Speaker 1

So they can hear me. I can't

Speaker 6

hear you.

Speaker 3

Again, ladies and gentlemen, please stand by.

Speaker 1

Kate, can you hear us now?

Operator

Yes. We have you.

Speaker 1

For some reason, I can't hear you.

Speaker 4

One

Speaker 3

moment. Ladies and gentlemen, please stand by. Your call will resume momentarily.

Speaker 4

Can

Speaker 1

you hear us now, Kate?

Operator

Yes. We can hear you.

Speaker 3

And can you hear us now, Tony? Are you back on looks like you're back online.

Speaker 2

Yeah. We can. Back. Okay. We're back.

Speaker 3

And, Mark Mark,

Speaker 2

could you go ahead and guys. We had tech technical difficulties on this side.

Speaker 3

No problem. Mark, could you go which continue with your question?

Speaker 6

Yes. Thank you. It's Mark Delaney with Goldman. A question on pricing. So PPU increased on a TTM to TTM basis, and you have potential positive drivers tied to AI in the vehicle.

Speaker 6

But you also mentioned some pricing headwinds have emerged in your prepared remarks. I'm hoping you can help us understand the size of some of these puts and takes and overall, where do you think PPU will go over the next twelve to twenty four months?

Speaker 2

Hey, well, let me give a little background on that on PPU. So yes, there are puts and takes within there. And we're not going to give guidance on a go forward basis. As we really work this metric, we will get, I think, better at it. Our last call, we said, hey, we know that it's important to you guys and to us and so we've developed this metric.

Speaker 2

So the puts and calls would be this. So even if there is pricing pressure in the future, What Brian is saying is, hey, if you have more, let's say, a take rate on the technology stack or something, we can give that as a discount, but overall that would still may drive a higher PPU, you know, could be plus or minus based on those two aspects of that bit of pricing pressure, but maybe an uptick in the take rate of the amount of technology. And then the other driver too is the overall volumes and then the amount of connected cars within within that because again, you know, on average over, you know, a period of time, we have more connected cars, that price per that individual car will go up. So there we believe that there are pluses and minuses in this. And at this point, I'm not willing to give any guidance going forward.

Speaker 2

But again, the positive trend over the last trailing twelve months.

Speaker 1

And remember, we're reporting here an average number, right? So, you know, this number is gonna incorporate variance over time, and it's we're trying to learn ourselves how to use this to, you know, look at our operations and look at our overall business. So we're trying to share this as quickly as we can with you guys and you're gonna have to give us a little bit of time to really start doing things like projections and forecasts and understanding it much beyond this, but we wanted to share it with you because we've been talking about it and promising it.

Speaker 6

Understood. And thank you for the disclosure that you did have on GPU, it is helpful. I also wanted to ask around the situation with Microsoft. Can you help us better understand what led to the lawsuit? You you spoke to an earlier question, Brian, around trying to protect your IP, but but I wanna understand, are you seeing Microsoft start to compete more with you?

Speaker 6

And they moved into the vehicle space?

Speaker 1

Yeah. So, you know, it's an active lawsuit. I'm just not allowed to talk about much detail beyond this other than it's really about protecting our IP. And, you know, like we said in the earnings call, we have one and have had one with Samsung for some period of time. That's going through the court process.

Speaker 1

You know, these things take some time to go through this process. So that that's going through. There's some events that occur, you know, this year and and into next year. For that case, the Microsoft one has just started, but it's it's really about, you know, use of our IP and and Sarah's getting paid for it, and we're just protecting that. And and that's what the suit's about.

Speaker 1

But I can't go into much other detail beyond that just because it's active lawsuit.

Speaker 6

Okay. Yeah. I understood. I separate from the the the court case, you you you did have a announcement you're working with them to bring chat and GPT to vehicles. Are are you still able to work, you know, on a on a business basis and put it in a velocity side?

Speaker 1

You know, companies have disputes about contracts and legal issues all the time, and yet, you know, they're able to still work together. So we absolutely are continuing to work with Microsoft. You know, The lawsuit is one separate issue. You're always having issues along with progress when you're working with other companies. And so we've had meetings even over the last day or so with Microsoft on some of the technical items.

Speaker 1

And so the technical teams are still heads down on bringing innovation and capabilities between the two companies, and the lawsuit is a separate issue that is really not affecting that side of it, the work together.

Speaker 6

Understood. Thank you.

Speaker 3

One moment for our next question. Our next question comes from Itay Michaeli with TD Cowen. Your line is open.

Speaker 7

Great. Thank you. Good afternoon, everyone, and congrats on the quarter. Just maybe a question on customer interest and some of your latest offerings. And I ask because as the automakers struggle with tariffs and all the disruptions to their new vehicle production business in the last few years, they're looking to shift as you know more towards earning revenue from their installed base through various services.

Speaker 7

And I'm wondering if maybe the tariffs could actually increase interest in your go forward offerings and whether you're already having or seeing some of that in your latest conversations. And that's my first question.

Speaker 1

I don't know if you can tie it to tariffs, right? I guess I'm too much of a technologist and believe that it's the technology itself. I mean, we talked about multimodal, and we demonstrated this live and actual production at the Shanghai Auto Show. I mean, it's really cool when you can pass by a street sign or a advertisement and ask your car, hey, what did that sign just say, and was there a phone number to call? Hey, was that the turn off for Exit 23, or did I miss it?

Speaker 1

And the system uses cameras and it can tell you exactly what's going on, right? So we are seeing uptake. We have some really cool proofs of concept and development work going on with our OEMs that is slated to come out, I'll say, like late this year, early next year, that starts to use this both in cabin and outside of cabin capability, this multimodal. Things like, hey, I'm noticing you're blinking a lot, you're tired, would you like me to find a coffee place to stop or would you like to rest? All those kinds of capabilities are really kicking in.

Speaker 1

Consumers like it, The OEMs like it. We're able to do a lot of this over the air because it's on the connected version. You know, it's easy for us to connect it into the cloud based supply. With new hardware, we're able to do it embedded on the vehicle, so those will be the cars that are really delivering in '26. So I don't know if tariffs are really driving this.

Speaker 1

I do think, though, companies are if they're gonna have to increase prices, they're going to have to find an effective way to provide more capability for that price too. People aren't just gonna accept pricing and price increases. And so I do think there's an opportunity for that. I don't see it right now. We're not reflecting any of that.

Speaker 1

But I think it's something I'm hoping we'll see as we move forward in this. Right now, everyone, prices change on a weekly basis, or tariffs change on a weekly basis, what's in and what's out, and people are just trying to absorb what's there and figure out how to work together. The good thing is the industry is working well together. Everybody's communicating. Everybody's talking.

Speaker 1

Everybody's trying to help each other out through this process.

Speaker 7

That's great to hear. Thank you. And just as a follow-up, was hoping maybe you could expand a bit more in some of the non automotive opportunities you alluded to before, maybe size some of opportunities for the companies and kind of how long could it take to see some kind of meaningful revenue emerging from these verticals? Thank you.

Speaker 1

Sure. So we're looking for verticals where we can take the software expertise and capabilities and innovation that we already have and apply that over to applications that we think consumer demand will be there. So one of the ones you saw or the ones we talked about here was with CodeFactory and the voice topping. So this is taking what we can do in a car already around the large language models, both embedded and connected, and applying that to kiosks and using a partner like CodeFactory to go to market. So I don't want to build a sales force that has the ability to go to 5,000 malls and airports in the world.

Speaker 1

I want to use a partner to go do that. So we're trying to do this very cost effectively, which means we may grow a little slower than we possibly could if we did it, you know, guns a blazing, but it it, I think, is a smart way to do it. So imagine you're in a mall and rather than trying to find where the Lululemon is or the whatever restaurant you wanna find is, you just walk up and say, hey. Can you point me to the Lululemon or to the, you know, Tally Bahama restaurant or whatever? Or you're in the airport and you just you see a kiosk with a map and you go, where's C 12?

Speaker 1

And it just shows it on the map. It shows your walking path. Those are the kinds of applications, real world applications, that we think end users will appreciate and will deliver capability. And what's nice is if the layout of the mall changes, the stores change, we'd be able to do that over the air rather than having to come in and update the software directly. So we can do those kinds of things as well and continue to increase the capability.

Speaker 1

So that's really where we're starting. We're looking at some other verticals, but they're very nascent right now, just making sure understanding does our technology apply, do we think there's real demand for it, things like that.

Speaker 7

Terrific. That's all very helpful. Thank you.

Speaker 3

And I'm not showing any further questions at this time. And as such, this does conclude today's presentation. We thank you for your participation. You may now disconnect and have a wonderful day.

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Key Takeaways

  • Q2 results exceeded guidance with $78 M revenue, $29.5 M adjusted EBITDA and $13.1 M free cash flow, prompting a raise in full-year adjusted EBITDA and free cash flow guidance.
  • Cerence expects minimal impact from tariffs in FY25 and is working with auto OEMs on pricing and program-timeline adjustments to share any cost pressures.
  • The company is diversifying beyond automotive via a new “Voice Topping” self-service kiosk solution with CodeFactory for restaurants, retail, healthcare and more, targeting FY26 revenue.
  • Cerence is aggressively defending its IP by suing Samsung for patent infringement and Microsoft/Nuance for copyright breach to protect its core voice-technology investments.
  • On its three 2025 priorities, Cerence has launched XUI (a hybrid AI assistant with multimodal edge capabilities), kicked off seven major production programs (e.g., Mercedes MBUX, Kawasaki), and delivered cost-structure improvements.
AI Generated. May Contain Errors.
Earnings Conference Call
Cerence Q2 2025
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