Cerence Q2 2026 Earnings Report

Cerence EPS Results

• Actual EPS: $0.04
• Consensus EPS: $0.21
• Beat/Miss: Missed by -$0.17
• One Year Ago EPS: N/A

Cerence Revenue Results

• Actual Revenue: $64.19 million
• Expected Revenue: $60.87 million
• Beat/Miss: Beat by +$3.32 million
• YoY Revenue Growth: N/A

Cerence Announcement Details

• Quarter: Q2 2026
• Date: 5/7/2026
• Time: After Market Closes
• Conference Call Date: Thursday, May 7, 2026
• Conference Call Time: 4:30PM ET

Cerence (NASDAQ:CRNC) (NASDAQ: CRNC) develops artificial intelligence and conversational computing technology for the automotive industry. Its software enables drivers and passengers to interact with vehicles using natural language, supporting functions such as navigation, media, vehicle controls, messaging, information services and connected features.

The company offers embedded and cloud-based solutions, including voice assistants, conversational AI platforms, speech recognition, natural-language understanding and multilingual automotive user experiences. Cerence’s technologies are designed to integrate with vehicle systems and connected services, helping automakers create digital assistants that can operate across different vehicle models and markets.

Cerence was established as an independent public company in 2019 after being spun off from Nuance Communications’ automotive business. It serves automotive manufacturers and transportation-related customers internationally, with products intended for use in multiple languages and geographic markets. Stefan Ortmanns has served as the company’s chief executive officer.

Cerence Q2 2026 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Cerence beat Q2 guidance with $64.2M revenue, $7.2M adjusted EBITDA, and $13.6M free cash flow, highlighting strong cash conversion and execution.
• Positive Sentiment: Momentum for xUI accelerated — BYD has started production and Cerence secured a multi-year, multi-platform win with a major Japanese OEM (a win-back from a hyperscaler), with billings ramping and PPUs that exceed current run rates.
• Positive Sentiment: Recurring and connected revenue is growing — connected services rose 21% YoY, variable license revenue increased 6% YoY, connected cars shipped are up 12% TTM, and trailing-12-month PPU rose to $5.09, improving revenue quality and visibility.
• Positive Sentiment: Management raised full-year targets, narrowing ranges and increasing midpoints to $305M–$320M revenue and $60M–$70M adjusted EBITDA, and boosted free cash flow guidance by $10M.
• Negative Sentiment: Near-term variability and cost pressures remain — fixed license revenue was down sharply this quarter due to timing ($5.8M vs. prior-year $21.5M), non‑GAAP R&D OpEx increased (less capitalization), and legal/IP enforcement costs are elevated, all creating quarter-to-quarter noise despite strong underlying trends.

Presentation

[Operator]

Good day, and thank you for standing by. Welcome to the Cerence second quarter 2026 earnings conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kate Hickman, Vice President, Corporate Communications and Investor Relations. Please go ahead.

[Kate Hickman, VP of Corporate Communications and Investor Relations at Cerence]

Hello, everyone, welcome to Cerence's second quarter 2026 conference call. Before we begin, I would like to remind you that this call may involve certain forward-looking statements. Any statements that are not statements of historical fact, including statements related to our expectations, anticipations, intentions, estimates, assumptions, beliefs, outlooks, strategies, goals, priorities, objectives, targets, and plans are forward-looking statements. Cerence makes no representations to update those statements after today. These statements are subject to risks and uncertainties, which may cause actual results to differ materially from such statements and expectations as described in our SEC filings, including the Form 8-K with the press release preceding today's call, our most recent Form 10-Q, and our Form 10-K filed on November 20th, 2025. In addition, the company may refer to certain non-GAAP measures, key performance indicators, and pro forma financial information during this call.

[Kate Hickman, VP of Corporate Communications and Investor Relations at Cerence]

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

[Brian Krzanich, CEO at Cerence]

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

[Brian Krzanich, CEO at Cerence]

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

[Brian Krzanich, CEO at Cerence]

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

[Brian Krzanich, CEO at Cerence]

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

[Brian Krzanich, CEO at Cerence]

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

[Brian Krzanich, CEO at Cerence]

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

[Brian Krzanich, CEO at Cerence]

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

[Brian Krzanich, CEO at Cerence]

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

[Brian Krzanich, CEO at Cerence]

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

[Brian Krzanich, CEO at Cerence]

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

[Brian Krzanich, CEO at Cerence]

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

[Tony Rodriquez, CFO at Cerence]

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

[Tony Rodriquez, CFO at Cerence]

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

[Tony Rodriquez, CFO at Cerence]

As discussed, fixed license revenue can vary quarter to quarter based on the timing of contract execution. The prior year quarter included a higher level of fixed license agreements, creating a difficult year-over-year comparison. Taking into account year-to-date performance and our current expectations for the remainder of the year, we continue to expect full-year fixed license revenue to be comparable to prior year, and we view this quarterly variance as timing related rather than structural. Gross margin for the quarter was 74%, compared to 77% in the prior year period. The decline was primarily driven by lower fixed license revenue mix, partially offset by continued discipline across cost of revenue. Total non-GAAP operating expenses were $43.3 million compared to $34.1 million in the prior year period.

[Tony Rodriquez, CFO at Cerence]

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

[Tony Rodriquez, CFO at Cerence]

As Brian noted, we continue to view IP licensing and enforcement as a long-term value driver rather than a near-term factor. Despite increased expenses, adjusted EBITDA for Q2 was $7.2 million, exceeding the upper end of our guidance range of $2 million-$6 million. From a GAAP profitability perspective, net income and EPS were both within our guidance ranges. Q2 net income was $1.7 million, and diluted EPS was $0.04, compared to $21.7 million and $0.46 respectively in the prior period. On taxes, recall that withholding taxes associated with the Samsung license drives an unusually high effective tax rate this year. We continue to model full year income tax expense of approximately $18 million-$22 million, unchanged from our projection last quarter.

[Tony Rodriquez, CFO at Cerence]

Q1 represented the peak quarterly tax expense, and we expect meaningfully lower tax expense for the full year through the income tax benefit recorded in Q2 and expected in the second half. Importantly, Q2 profitability exceeded expectations driven by operating performance, despite the absence of IP license revenue compared to last quarter and lower fixed license revenue compared to the prior year. During Q2, we generated $14.1 million of cash from operations and $13.6 million of free cash flow, further demonstrating strong cash conversion and the benefit of connected billings outpacing GAAP revenue over time. We ended the quarter with $108.3 million of cash and cash equivalents and believe the company remains well-positioned to fund strategic initiatives while continuing to strengthen the balance sheet.

[Tony Rodriquez, CFO at Cerence]

Our strong cash generation from operation provides meaningful capital allocation flexibility. From a metric standpoint, approximately 11.3 million cars were produced that included Cerence technology in the quarter, compared to 11.6 million in the prior year period. Connected cars shipped increased 12% on a trailing twelve-month basis. 50% of worldwide auto production included Cerence technology in line with historical penetration. Adjusted total billings were $239 million, an increase of 7% year-over-year. Our pro forma royalties were $40.3 million, up from $39.7 million in the prior year period. Fixed license consumption totaled $8.8 million and benefited the current quarter as more pro forma royalties converted to revenue in the current period compared with last year.

[Tony Rodriquez, CFO at Cerence]

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

[Tony Rodriquez, CFO at Cerence]

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

[Tony Rodriquez, CFO at Cerence]

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

[Tony Rodriquez, CFO at Cerence]

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

[Brian Krzanich, CEO at Cerence]

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

[Operator]

Our first question comes from the line of Mark Delaney with Goldman Sachs. Your line is now open.

[Mark Delaney, Analyst at Goldman Sachs]

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

[Brian Krzanich, CEO at Cerence]

Sure, Mark. First, I just want to say if people notice my voice a little bit more slurred, I had my tonsil removed a couple weeks ago, and I am still recovering. If you cannot clearly understand me, just ask again. What I said was BYD is the 1 OEM that is currently shipping. The other OEMs are starting to ship, I will say June, July timeframe through the end of the year. BYD just started shipping, like, two weeks ago, three weeks ago. We have not really gotten any consumer feedback yet. We will be collecting that probably over this quarter and so at the end of Q3, we should be able to give you some feedback and update. As far as how it is being received at the other OEMs, you know, I brought Christian on.

[Brian Krzanich, CEO at Cerence]

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

[Christian Mentz, EVP and Chief Revenue Officer at Cerence]

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

[Mark Delaney, Analyst at Goldman Sachs]

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

[Brian Krzanich, CEO at Cerence]

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

[Brian Krzanich, CEO at Cerence]

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

[Brian Krzanich, CEO at Cerence]

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

[Tony Rodriquez, CFO at Cerence]

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

[Tony Rodriquez, CFO at Cerence]

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

[Mark Delaney, Analyst at Goldman Sachs]

Thank you.

[Operator]

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

[Daniel Hibshman, Analyst at Craig-Hallum Capital Group]

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

[Brian Krzanich, CEO at Cerence]

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

[Brian Krzanich, CEO at Cerence]

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

[Brian Krzanich, CEO at Cerence]

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

[Brian Krzanich, CEO at Cerence]

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

[Tony Rodriquez, CFO at Cerence]

I think those are certainly the two largest areas. I think from an outperformance standpoint, you remember this, there's strength in that visibility of the license business, right, in that penetration within that OEM base. We did see some outperformance in this quarter on license, some of which is, yes, what Brian's saying is that we're getting a bit more price because there's less discounting happening with lower fixed. Also, some volume related outperforms with some of our customers this quarter.

[Daniel Hibshman, Analyst at Craig-Hallum Capital Group]

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

[Tony Rodriquez, CFO at Cerence]

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

[Brian Krzanich, CEO at Cerence]

I just want to add.

[Daniel Hibshman, Analyst at Craig-Hallum Capital Group]

Thanks, Brian.

[Brian Krzanich, CEO at Cerence]

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

[Brian Krzanich, CEO at Cerence]

We are disciplined in controlling that. That overall spend is not gonna really change when you look at just the cash.

[Daniel Hibshman, Analyst at Craig-Hallum Capital Group]

Makes sense. Nice to see the EBITDA and earnings quality going up with less of the CapEx software. Makes sense. Thanks, Brian. Thanks, Tony.

[Tony Rodriquez, CFO at Cerence]

Yeah.

[Operator]

Thank you. As a reminder, to ask a question at this time, please press star 11 on your touchtone telephone. Our next question comes from the line of Thomas Blakey with Cantor Fitzgerald. Your line is now open.

[Thomas Blakey, Analyst at Cantor Fitzgerald]

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

[Brian Krzanich, CEO at Cerence]

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

[Brian Krzanich, CEO at Cerence]

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

[Christian Mentz, EVP and Chief Revenue Officer at Cerence]

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

[Thomas Blakey, Analyst at Cantor Fitzgerald]

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

[Brian Krzanich, CEO at Cerence]

No, there's more.

[Thomas Blakey, Analyst at Cantor Fitzgerald]

I agree.

[Brian Krzanich, CEO at Cerence]

No, we said.

[Thomas Blakey, Analyst at Cantor Fitzgerald]

Oh, there's more?

[Brian Krzanich, CEO at Cerence]

We've got five or six. There's been six.

[Thomas Blakey, Analyst at Cantor Fitzgerald]

Oh, five or six.

[Brian Krzanich, CEO at Cerence]

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

[Thomas Blakey, Analyst at Cantor Fitzgerald]

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

[Thomas Blakey, Analyst at Cantor Fitzgerald]

You know, would love to just kinda understand not talking about the top line in that regard, but more, I guess, maybe shifting a little bit more to the expenses, how hard we wanna step on the accelerator here with regard to the IP business? That'd be it for me. Thank you so much.

[Brian Krzanich, CEO at Cerence]

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

[Brian Krzanich, CEO at Cerence]

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

[Brian Krzanich, CEO at Cerence]

Any other adds or thoughts?

[Christian Mentz, EVP and Chief Revenue Officer at Cerence]

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

[Brian Krzanich, CEO at Cerence]

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

[Brian Krzanich, CEO at Cerence]

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

[Thomas Blakey, Analyst at Cantor Fitzgerald]

And then with regard-

[Thomas Blakey, Analyst at Cantor Fitzgerald]

Appreciate all the details.

[Thomas Blakey, Analyst at Cantor Fitzgerald]

With regard to.

[Tony Rodriquez, CFO at Cerence]

Go ahead, Tom.

[Tony Rodriquez, CFO at Cerence]

The legal cost, you know, like I said, we've accelerated a little bit. Brian just kind of alluded to where we are. We've anticipated a bit more legal fees in the second half, but it's all included in our profitability expectation.

[Brian Krzanich, CEO at Cerence]

Remember...

[Thomas Blakey, Analyst at Cantor Fitzgerald]

Appreciate all the details.

[Brian Krzanich, CEO at Cerence]

We've projected no revenue from any of these.

[Thomas Blakey, Analyst at Cantor Fitzgerald]

That's right.

[Brian Krzanich, CEO at Cerence]

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

[Thomas Blakey, Analyst at Cantor Fitzgerald]

Thank you all for the details.

[Operator]

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

[Brian Krzanich, CEO at Cerence]

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

[Operator]

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

Participants

Executives

• Brian Krzanich, CEO
• Christian Mentz, EVP and Chief Revenue Officer
• Kate Hickman, VP of Corporate Communications and Investor Relations
• Tony Rodriquez, CFO

Analysts

• Daniel Hibshman, Analyst at Craig-Hallum Capital Group
• Mark Delaney, Analyst at Goldman Sachs
• Thomas Blakey, Analyst at Cantor Fitzgerald