Cerence Q3 2026 Earnings Call Transcript

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Provided by Quartr
August 6, 2026

Key Takeaways

  • Positive Sentiment: Strong Q3 execution: Revenue rose 12% year over year to approximately $70 million, adjusted EBITDA reached $13.5 million above guidance, and free cash flow was $20 million.
  • Positive Sentiment: Cerence raised fiscal 2026 free cash flow guidance to $76 million–$82 million and authorized its first share repurchase program, allowing up to $30 million of stock buybacks over the next 12 months.
  • Positive Sentiment: Recurring Connected Services revenue increased 20% year over year, while xUI reached approximately 100,000 vehicles on the road and is expected to scale to several million vehicles during fiscal 2027, supporting higher per-vehicle economics.
  • Positive Sentiment: The company reported additional momentum in agentic AI and non-automotive markets, including its first Mobile Work Agent customer and early Dealer Assist results showing increased sales opportunities and service appointments.
  • Negative Sentiment: Q4 revenue is expected to decline sequentially to $61 million–$65 million, with lower gross margin and EBITDA, primarily because Q3 included $12.5 million of fixed-license revenue that is not expected to recur and due to normal seasonal production patterns.
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Earnings Conference Call
Cerence Q3 2026
00:00 / 00:00

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Operator

Good day. Thank you for standing by. Welcome to the Cerence third quarter 2026 earnings conference call. At this time, all participants are in listen only mode. After the speaker's presentation, there will be a question answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. 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
Kate Hickman
VP of Corporate Communications and Investor Relations at Cerence

Hello, everyone. Welcome to Cerence's third 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, outlook, 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
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 Rodriguez, CFO. 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 Raymond James 2026 Industrial Showcase on August 13th and the Needham Virtual Semiconductor and Semicap Conference on August 19th. On to the call. Brian?

Brian Krzanich
Brian Krzanich
CEO at Cerence

Thank you, Kate. Good afternoon, everyone. Before we dig in, I'd like to briefly reflect on Cerence's progress as I approach my two-year anniversary as CEO in October. When I stepped into the role, we established a clear roadmap. The first year was about strengthening the foundation of the business, improving our financial profile, restoring profitability, generating cash flow, and reducing debt. I believe we delivered on those commitments. We said the second year would be about execution as we approach the end of fiscal year 2026. I believe we have delivered there as well. We advanced our technology roadmap by bringing Cerence xUI from concept to production. We improved free cash flow, and we are continuing to create value for customers and shareholders. Most importantly, we're now beginning to see the early stages of our next chapter. Cerence xUI is entering into commercialization phase.

Brian Krzanich
Brian Krzanich
CEO at Cerence

Our Agentic AI portfolio is gaining traction. Our non-automotive initiatives are beginning to move from proof points toward revenue contribution. We believe that our fiscal third quarter results demonstrate a company executing against its strategy, delivering strong financial performance, and positioning itself for future growth. In Q3, we delivered another strong quarter with revenue of approximately $70 million, in line with our guidance. Adjusted EBITDA above the high end of our guidance at $13.5 million, and free cash flow of $20 million. Importantly, we continue to grow our recurring Connected Services business with revenue up more than 20% year-over-year. This growth further increases the recurring portion of our revenue mix, enhancing visibility into the future performance and demonstrates the value of the connected platform we've built across our installed base.

Brian Krzanich
Brian Krzanich
CEO at Cerence

Looking ahead to the rest of the fiscal year, we're again raising our fiscal year 2026 free cash flow guidance, now to $76 million-$82 million, and narrowing most of our remaining forecasts as we approach the end of fiscal year 2026. Given the continued cash generating strength of our business, I'd like to give an update on our capital allocation strategy. As mentioned in the past, we have several core capital allocation priorities, all focused on delivering returns to our shareholders. Investing organically to support growth, reducing debt, managing equity dilution, and selectively pursuing inorganic opportunities that can enhance our long-term growth and strategic position. We evaluate these priorities based on the opportunities available to us, the strength of our balance sheet, and where we believe capital can generate attractive risk-adjusted return for shareholders.

Brian Krzanich
Brian Krzanich
CEO at Cerence

With that, I'm pleased to share that our board has authorized Cerence's first ever share repurchase program. This reflects our confidence in the business, the progress we've made in improving profitability and cash generation, and our commitment to disciplined capital allocation. As we look ahead, we remain focused on creating long-term shareholder value through execution, strategic investment, and prudent capital allocation. The stock repurchase program adds another tool to that approach while preserving our flexibility to continue investing in growth and reducing debt, while also helping to offset dilution. Tony will provide further details on the program. Now, turning to updates and highlights from the quarter. We continue to see strong investment in next-generation AI-powered user experiences. Automakers increasingly view AI not as a discretionary investment, but as a strategic priority that reinforces their competitive position.

Brian Krzanich
Brian Krzanich
CEO at Cerence

As vehicles become more software-defined, automakers are seeking differentiated user experiences that reinforce their brands, improve customer satisfaction, and create opportunities for recurring revenue. That's where we believe Cerence AI continues to be uniquely positioned and why we continue to win. We combine decades of automotive expertise with leading AI capabilities, enabling OEMs to bring powerful conversational experiences to market while reducing complexity, cost, and execution risk. As a result, despite the dynamic industry that OEMs are navigating, customer engagement remains strong. Our pipeline continues to grow and interest in our next-generation platform is growing. Cerence xUI, which is now available in nearly 20 languages, remains the center of our automotive strategy. In Q3, we signed a new xUI deal with Stellantis, who expects to deploy our platform across multiple brands and regions, with initial production having recently started.

Brian Krzanich
Brian Krzanich
CEO at Cerence

Throughout the quarter, we continued to advance our xUI programs with JLR, a Volkswagen Group brand, BYD, Geely, and a major Japanese automaker. Several of these programs have started production or are expected to start production in fiscal Q4. Today, we have approximately 100,000 xUI-powered cars on the road, an important milestone in bringing this technology to market and consistent with what we've said in the past, that xUI will begin its ramp at the end of 2026 and impact revenue during fiscal year 2027 and beyond as additional programs enter production and vehicle volumes scale up. We continue to expect xUI deployments to support higher average price per unit, reflecting its broader functionality, increased software content, and expanding agentic capabilities. A testament to the value we're bringing to our customers, Cerence AI was recognized at JLR's Global Supplier Excellence Awards in June.

Brian Krzanich
Brian Krzanich
CEO at Cerence

JLR honored us with their Exceptional Creator recognition, a special category they introduced specifically to highlight truly outstanding partners. In their nomination, the JLR team highlighted how we fast-tracked our partnership into a true AI era collaboration. They specifically called out Cerence's flexibility as a key enabler in their ability to adopt new AI capabilities faster and innovate with confidence. That execution, paired with our disciplined delivery and sharp roadmap alignment, is now their blueprint for future-facing technology. We believe this recognition validates not only our technology, but also our ability to serve as a trusted strategic partner as OEMs transition to next-generation AI platforms. During the quarter, we also advanced our Agentic AI roadmap across parking, dining, and other task-oriented experiences.

Brian Krzanich
Brian Krzanich
CEO at Cerence

Our goal is to evolve the in-vehicle assistant from a system that primarily responds to requests into an agentic experience that can take action and help users complete tasks in context. Of note, we reached an important milestone in this strategy in Q3 by signing the first customer for our Mobile Work Agent, developed in collaboration with Microsoft. The customer is a global premium automaker and an existing Cerence customer, with rollout expected to begin in fiscal Q4. We believe this win is significant for two reasons. First, it demonstrates our ability to quickly deploy a complex agent that turns a car into a managed, trusted device with compliant access to enterprise tools in the Microsoft 365 suite. Second, it validates our strategy to sell and deploy agents on a standalone basis.

Brian Krzanich
Brian Krzanich
CEO at Cerence

Not only can these agents be deployed within new xUI programs, but they can also be integrated into non-xUI programs and even competitive stacks. This expands our addressable opportunity and gives OEMs a flexible path to introduce agentic capabilities. We're in talks with several other automakers to deploy our Mobile Work Agent in the near future. Beyond xUI and our agent roadmap, we continue to win business across our broader technology portfolio. During the quarter, we signed our first customer for Exterior Vehicle Interaction, which extends the reach of the vehicle's voice assistant outside the cabin, allowing drivers to use their voice to perform authenticated vehicle actions like unlocking doors or opening the trunk. We also secured wins across our stack with Subaru, HKMC, and GM.

Brian Krzanich
Brian Krzanich
CEO at Cerence

We signed an Emergency Vehicle Detection program with a Chinese robotaxi company and a Cerence Assistant program with Stellantis for their vehicles that will not initially use xUI. These programs have the potential to generate recurring business, maintain our seat at the table within the OEM technology stack, and create opportunities to expand our role over time, even when customers use multiple technologies. We are also making progress in extending our voice AI and agentic capabilities beyond the vehicle. We continue to focus on complex environments similar to the car, including commercial and industrial operations, robotics, and select IoT applications. We believe our products have the ability to serve as the trusted interaction layer across a broad range of verticals, where our edge AI, reliability, security, and domain-specific integration translate well and provide a meaningful competitive advantage.

Brian Krzanich
Brian Krzanich
CEO at Cerence

One example of our progress is the launch of our Dealer Assist Agent live at Infiniti of Grand Rapids, Michigan, targeting a real pain point for dealerships, missed and after-hour sales and service calls that can translate into lost leads and revenue. Our AI agent provides an always-on, instant response, serving as a virtual expert on vehicle features, scheduling test drives, and booking service appointments while freeing staff from routine repetitive calls. Since the program went live, Dealer Assist Agent has delivered measurable business impact to the customer. With 100% of after-hour calls now being captured, there has been a 20% increase in sales opportunities driven by always-on lead engagement and qualification, and nearly 30% increase in service appointments booked, improving utilization and capturing additional service revenue. While this is an early deployment, we believe that it demonstrates the impact of our agentic solutions can deliver.

Brian Krzanich
Brian Krzanich
CEO at Cerence

With tens of thousands of car dealerships worldwide, we see this as a promising growth opportunity. Consistent with our prior outlook, we expect approximately $7 million-$9 million in non-auto revenue forecasted for full fiscal 2026, and the larger opportunity ahead of us in fiscal year 2027 and beyond. On our next earnings call, we look forward to providing you additional details on our fiscal year 2027 roadmap, forecast, and strategy for building a meaningful business beyond automotive. In terms of our intellectual property strategy and ongoing enforcement efforts, we continue to actively protect our technology and investments as part of the ordinary course of our business. While the timing of IP-related outcomes can be difficult to predict on a quarterly basis, we believe these efforts support our broader commitment to innovation and long-term shareholder value.

Brian Krzanich
Brian Krzanich
CEO at Cerence

We will continue to keep you posted as additional progress is made. As we approach the end of fiscal 2026, I want to close with the four drivers that underpin our belief in Cerence's long-term value. First is Cerence occupies an important position in the automotive AI stack, supported by deep OEM relationships and a large install base and durable recurring revenue. Second, our xUI and agentic AI wins provide an opportunity for ongoing growth and higher revenue per vehicle as these programs enter production and scale. Third, we continue to deliver strong free cash flow while maintaining our focus on disciplined capital allocation. We believe that our business model supports debt reduction, balance sheet strength, inorganic growth, and the strategic and operational flexibility necessary to make key decisions like our stock repurchase program.

Brian Krzanich
Brian Krzanich
CEO at Cerence

Fourth, our expansion outside of automotive and our IP enforcement efforts provide additional sources of potential long-term value. Now, with that, I'll turn it over to Tony.

Tony Rodriguez
Tony Rodriguez
CFO at Cerence

Thank you, Brian. Good afternoon, everyone, and thank you for joining us today. We appreciate your continued interest in Cerence. Today, I'll review our third quarter fiscal 2026 results, highlight the key drivers of the quarter, then provide guidance for our fourth quarter and the resulting full fiscal year. For the quarter, total revenue was approximately $70 million within our guidance range of $68 million-$72 million, and up 12% from $62 million in the prior year period. The increase was led by higher license revenue, including the timing of fixed license contract execution and a positive shift to recurring Connected Services revenue. Total license revenue was $41.6 million, up 22% year-over-year, reflecting the higher fixed license contribution this quarter.

Tony Rodriguez
Tony Rodriguez
CFO at Cerence

Fixed license revenue was $12.5 million this quarter, compared to no fixed license revenue in the prior year period, and above the approximately $10 million contemplated in our Q3 guidance. As we've discussed, fixed license revenue can vary quarter-to-quarter based on the timing of contract execution. We do not expect any additional fixed license revenue for the remainder of the fiscal year. Variable license revenue for the quarter was $29.1 million, down 15% year-over-year. Two factors drove the decrease. First, the comparison was against an exceptionally strong prior year quarter that benefited from higher than normal production as some manufacturers built ahead of anticipated tariff impacts and from favorable foreign exchange rates. Second, our unit volumes came in below the broader market this quarter. Production of vehicles with Cerence technology was down 8% year-over-year, while global light vehicle production declined roughly 2%.

Tony Rodriguez
Tony Rodriguez
CFO at Cerence

Based on the customer production data available to us, the difference relative to the broader market primarily reflects our specific OEM and regional mix. Much of the global market's relative resilience came from regions where we have limited presence, such as South America and South Asia. While the OEMs in regions that represent the majority of our volume saw softer production. This was compounded by a period of program lifecycle transition, with some programs winding down faster than their replacements are ramping. That said, we have not seen a change in pricing or economics to our existing programs, and we have continued to experience recent design win activity. Connected Services revenue was $15.5 million, up 20% year-over-year, driven by continued expansion of our connected install base and a higher attach rate.

Tony Rodriguez
Tony Rodriguez
CFO at Cerence

We believe that this growth underscores the increasing importance of Connected Services revenue within our business model and provides improved visibility into future performance. Professional Services revenue was $12.5 million, down 18% 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. Gross margin for the quarter was 76%, compared to 74% in the prior year period and in line with the high end of our guidance range of 75%-76%. The improvement over prior year was driven primarily by favorable revenue mix, including the higher fixed license contribution, along with continued discipline across cost of revenue. Adjusted EBITDA for the quarter was $13.5 million, an increase of $4.5 million or 51% year-over-year, and ahead of our high end of our guidance range of $8 million-$12 million.

Tony Rodriguez
Tony Rodriguez
CFO at Cerence

With revenue finishing near the midpoint of our range, this outperformance was driven by favorable margin mix and operating expenses below plan. A portion of the expense variance was timing related and is expected to normalize in the fourth quarter, while the remainder reflects our continued cost discipline. Total non-GAAP operating expenses were $43 million compared to $40 million in the prior year period. Non-GAAP R&D expenses was $26.5 million, up from $24.4 million, reflecting lower capitalization of internally developed software rather than an increase in overall investment. Total technology spending remained stable. Non-GAAP sales and marketing expense was $4.6 million, down year-over-year by about 8%, but consistent with continued investment to support our customer base and long-term growth initiatives.

Tony Rodriguez
Tony Rodriguez
CFO at Cerence

Non-GAAP G&A expense was $11.5 million, up from $10.1 million, reflecting normalized general operating costs as well as additional legal expenses associated with our ongoing efforts to protect, enforce, and license our IP portfolio. Excluding the one-time legal costs incurred in Q1 to secure our patent license agreement with Samsung, we expect full-year fiscal 2026 IP-related legal costs of approximately $9 million. From a GAAP profitability perspective, Q3 net income was $1.5 million, with diluted EPS was $0.03, versus a net loss of $2.7 million and a net loss per share of $0.06 a year ago. On taxes, the Samsung-related withholding tax is spread across the year through our estimated annual effective tax rate, so it isn't confined to the quarter in which it incurred.

Tony Rodriguez
Tony Rodriguez
CFO at Cerence

That front-loaded our tax expense in Q1 above the expected full-year total and impacts taxes even in quarters with little or no pre-tax income, like here in Q3. We continue to model full-year tax expense of approximately $20 million, consistent with our prior projection range, with a significant tax benefit expected in Q4. During Q3, we generated $20 million of cash from operations and $20 million of free cash flow, continuing our strong cash conversion performance. We ended the quarter with $128 million in cash and cash equivalents, which we believe provides significant flexibility to invest in our strategic priorities while further strengthening the balance sheet. As we evaluate capital allocation, we continue to maintain a strong financial position and invest in the business while deploying excess capital toward opportunities that offer the highest risk-adjusted returns.

Tony Rodriguez
Tony Rodriguez
CFO at Cerence

In the current environment, that may include discounted debt repurchases, share repurchases, and selective strategic investments that support our long-term growth objectives. Putting that framework into action, earlier this fiscal year, we repurchased a portion of our 2028 convertible notes at a discount to par, reducing interest expense and leverage. Building on that, as Brian mentioned, today we announced that our board has approved our first share repurchase program, authorizing the repurchase of up to $30 million of our common stock over the next 12 months. We intend to execute through open market purchases funded from cash on hand and free cash flow while preserving the flexibility to keep investing in the business and to address our remaining outstanding convertible notes. The program does not obligate us to repurchase any specific amount, and we expect to stay disciplined as we consider our capital allocation priorities.

Tony Rodriguez
Tony Rodriguez
CFO at Cerence

From a metric standpoint for Q3, production of vehicles with Cerence technology totaled 11.4 million in the quarter compared to 12.4 million a year ago. Connected cars shipped increased 4% on the trailing 12-month basis, while recurring Connected Services revenue grew 20%, reflecting higher attach rates and per-unit economics. Adjusted Total Billings were $240 million, up 6% year over year. Pro forma Royalties were $38 million compared to $43 million in the prior year period, reflecting the lower production volumes. Fixed license consumption within that quarter total was $8.7 million. Before turning to guidance, let me put the xUI wins Brian discussed into financial context. From an accounting perspective, we recognized revenue as licenses ship and as Connected Services are delivered. So new program wins flow through our reported results in stages rather than all at once.

Tony Rodriguez
Tony Rodriguez
CFO at Cerence

For multi-year platform transitions such as xUI, that cycle plays out over several years. As a result, the wins we've announced are not fully reflected in our current revenue run rate and for Connected Services, the near-term impact will show up first in billings with more meaningful revenue contribution phasing in during FY 2027 and beyond. These programs carry attractive per-unit economics that we expect to support both revenue growth and margin as they scale. Also, consistent with Brian's comments, our current outlook continues to assume only modest initial contribution from non-automotive programs as we exit FY 2026, with the larger opportunity remaining primarily a FY 2027 and beyond growth driver. Turning to the fourth quarter, with respect to the sequential progression, there are two dynamics to keep in mind. First, our third quarter results included $12.5 million of fixed license revenue.

Tony Rodriguez
Tony Rodriguez
CFO at Cerence

Consistent with the timing-driven nature of these arrangements, we are not contemplating any fixed license revenue in the fourth quarter. Second, we expect a normal seasonality, with production volumes often stepping down a bit from the third quarter to the fourth. Together, this means we expect fourth quarter revenue to be lower on a sequential basis. For the fourth quarter, we expect revenue between $61 million and $65 million, gross margin between 72% and 75%, expected EBITDA between $1 million and $5 million, net income in the range of $1 million-$5 million and diluted EPS between $0.02 and $0.10. I want to be clear that this guidance reflects the timing of fixed license revenue in ordinary seasonal patterns, not a change we see in the health of the underlying business.

Tony Rodriguez
Tony Rodriguez
CFO at Cerence

Excluding the fixed license revenue recognized in Q3, the midpoint of our fourth quarter revenue outlook is higher than our underlying Q3 revenue level. Our per-unit economics have remained intact, our recurring Connected Services revenue, up 20% year-over-year, has continued to grow, and our design win momentum is expected to support future volume. A couple of further notes on the fourth quarter. First, because the fourth quarter does not carry the high margin contribution from fixed license, we expect gross margin to normalize below the 76% we reported in the third quarter. Second, as we discussed previously, the Samsung IP license resulted in an unusually high tax expense earlier in the year, particularly in the first quarter. The expected fourth quarter benefit is incorporated into our Q4 and full year outlook.

Tony Rodriguez
Tony Rodriguez
CFO at Cerence

Taken together with our year-to-date results, this Q4 outlook is contemplated within the full year guidance I'll walk through next and reflects the same disciplined execution we've delivered through the first three quarters of the year. For the full fiscal year, we now expect revenue of $310 million-$314 million, gross margin of 78%-79%, GAAP profitability in the range of net loss of $1.1 million to net income of $2.9 million. Diluted EPS of a loss of $0.02 to an income of $0.06, Adjusted EBITDA of $66 million-$70 million, and free cash flow of $76 million-$82 million, an increase from our prior outlook of $66 million-$76 million. In closing, we delivered solid execution this third quarter, with growth in total revenue, gross margin ahead of guidance, continued strength in our recurring Connected Services, and year-over-year profitability growth.

Tony Rodriguez
Tony Rodriguez
CFO at Cerence

As we look to the remainder of fiscal 2026, we remain focused on disciplined execution, strong cash flow generation, and maintaining the financial flexibility to support long-term profitable growth. On our next call, we expect to provide our initial fiscal 2027 guidance and an update on our strategic priorities. With that, I'll turn it back to Brian.

Brian Krzanich
Brian Krzanich
CEO at Cerence

Thanks, Tony. In closing, we're proud of our performance as we approach the end of fiscal 2026. We believe that our results reflect strong execution, solid cash generation, and continued customer momentum, together with a disciplined approach to capital allocation. We believe the underlying trajectory of the business remains strong. Connected Services continues to be our expected growth engine. The economics of our recent have attracted, and the xUI and Agent programs discussed today are expected to position us well for growth as they scale. The story of fiscal 2026 has been one of execution. We believe that the story of fiscal 2027 will be one of growth, powered by the foundation we've built, the customer commitments we've delivered, and the opportunities we see ahead with xUI and outside of automotive. We remain confident in our strategy and execution, and we're excited about the path ahead.

Brian Krzanich
Brian Krzanich
CEO at Cerence

With that, we'll open up the line for questions.

Operator

Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Mark Delaney with Goldman Sachs. Your line is now open.

Mark Delaney
Mark Delaney
Managing Director and Senior Equity Research Analyst at Goldman Sachs

Yes, good afternoon. Thank you very much for taking the questions. Congratulations on the xUI win with Stellantis. I am hoping to better understand the financial implications of the xUI backlog, including the recent win, and now I think you have six in total. I understood the comments around that taking time to ramp up, but maybe you can help investors to better understand what those existing wins will mean for the business for both revenue and profits when they do fully ramp, and how long that may take to occur.

Brian Krzanich
Brian Krzanich
CEO at Cerence

Sure, I can start. This is Brian, then Tony can jump in probably with some of the more high level detail of the finances. We said there is about 100,000 vehicles on the road right now with xUI, and that is really pretty good considering really started production was just a little over a month ago. You know, for me, the ramp is off and going. We have several more OEMs that should do start of production, say, at the end of Q4, beginning of Q1. We do not actually control exactly when, and there is a lot of partners that have to come together to deliver the on-time launch. I really think that number is going to go up significantly as we go into Q1, Q2, Q3, fiscal of 2027.

Brian Krzanich
Brian Krzanich
CEO at Cerence

If I looked at 2027 in total, I think you should see a couple million cars on the road with xUI versus the 100,000 that we have today. Financially, what that'll mean is we get paid the same way we do with the prior products, where we get the license fee when the car is shipped from the factory, and then the connected fee over the life of the connection. What we're seeing is these licenses for connected vehicles are actually going longer. We said in the past that our average was like three-ish years. The average of the xUI deals would be more close to seven years. We're seeing much longer times for those. For 2027, xUI and Connected will be the growth engines in automotive for us.

Brian Krzanich
Brian Krzanich
CEO at Cerence

We haven't forecasted 2027, I expect it to still be relatively minimum, as they ramp up in Q4. As we go into 2027, it will fuel the growth along with Connected. All the xUI models are connected, it kind of has a double whammy. You get paid more for xUI, and they're all connected. We haven't given an exact price for what the xUI deals are, the price per unit, but it is significantly higher than the current price per unit that we quote in our earnings calls for our current products. We haven't given him an exact number for that. Part of that's because it varies depending on the features that everybody chooses and some of that, but all of them are significantly higher than what we're quoting today.

Tony Rodriguez
Tony Rodriguez
CFO at Cerence

Just to summarize that, I think it's exactly right. The impact of xUI is that it's a growth driver both to revenue and to profitability. It does take time to ramp the old programs down, ramp the new programs up. It will result in higher PPU over time as those ramp up. With the higher PPU, it creates the operating leverage that we've talked about. Brian and I've always talked about that our goal is to have a growing business that's increasingly profitable. We've shown that over the last probably eight quarters now that we've been together. xUI means again, revenue growth and increasing profitability growth.

Mark Delaney
Mark Delaney
Managing Director and Senior Equity Research Analyst at Goldman Sachs

Very helpful context. My other question was about the revenue trajectory into next year. Very much recognize your comments around needing to wait for next quarter for the quantitative guidance. I do think last call, the company suggested that revenue next year could grow high singles or low double digits. If you could just speak a little bit qualitatively on how you think about the top line trajectory into 2027, if you have any early thoughts there and any key puts and takes. Thank you.

Brian Krzanich
Brian Krzanich
CEO at Cerence

Sure. I can start again. Tony again can give you kind of the breakdown with a little more financial detail. Again, we tried to give you a little bit of a grounding this quarter by giving you, "Hey, there's 100,000 xUI vehicles on the road, and I expect non-auto to be $7 million-$9 million." That kind of gives you the baseline for this year for where we're at, right? By the time Q4 ends, expect the xUI number to be significantly higher than that 100,000, right? We'll probably give you the number again at the end of the year just to, again, kind of set the baseline. If I look into FY 2027, yeah, I think overall, you'll see us in the high single to low double digits overall growth.

Brian Krzanich
Brian Krzanich
CEO at Cerence

Again, what I think you'll see is strong growth in connected because the xUI vehicles will be the driver of a lot of those connected vehicles. You'll see strong growth in PPU as xUI continues to grow more into the product base. We plan on having significant growth in the non-automotive space for next year. We haven't given you the forecast for that, but you can think of it as my expectation is non-automotive will grow faster as a percentage than the automotive space for next year. You put those together, and that's how you get to that, well, it should be high single digits to low double digits. It's going to be increasingly better as we go through the year.

Brian Krzanich
Brian Krzanich
CEO at Cerence

I expect it's going to be growing much faster as we exit FY 2027 because more and more of it will be connected and more and more of it will be non-automotive. It'll be a nice steady ramp as we go through that year. We haven't given the numbers yet. I'd love to give you what we're thinking right now, but I'm held to my forecast process. Yeah, that's what's going to drive it and fuel the growth.

Tony Rodriguez
Tony Rodriguez
CFO at Cerence

Yeah. A couple caveats, of course. When we talked about those growth rates that we see in our core business, it was for the technology growth, again. I think we've said before that Professional Services, as they become more efficient, will decrease as a percentage in the mix. We still think there's a strong base in Professional Services, but certainly, we don't believe that that's growing. We think that's kind of a base number and that it's important to the business, but it lowers the percentage of the mix. As Brian mentioned, the non-automotive will kind of be the real growth from a percentage standpoint growth engine in the future, albeit at a smaller base out of the blocks.

Brian Krzanich
Brian Krzanich
CEO at Cerence

Just remember, none of those forecasts include anything about IP monetization. We've said that we have currently efforts going with Sony, TCL, Apple, and Amazon in that space. We don't forecast those because we can't absolutely predict their schedules. If I miss by a month because of court dates or whatever, I need to be careful. Those would all be on top of that. We have a couple of those that are due to go to the court before the end of the year, this year, and then some more into next year. I see that as on top of everything else we've talked about from our core technology.

Mark Delaney
Mark Delaney
Managing Director and Senior Equity Research Analyst at Goldman Sachs

Thank you. I'll pass it on.

Operator

Thank you. Our next question comes from the line of Itay Michaeli with TD Cowen. Your line is now open.

Analyst at TD Cowen

Hey, great. This is Justin on for Itay. How's everyone doing?

Tony Rodriguez
Tony Rodriguez
CFO at Cerence

Good.

Analyst at TD Cowen

A couple quick questions. Tony, maybe the first one for you. Appreciate you highlighting the Q4 seasonality. Anything outside of normal seasonality that you might be seeing, at least in current production schedules, volatilities, that may be hitting kind of Q4 on the licensing side? Have things been relatively stable? Obviously, the second half production environment's a little bit more volatile at this point. Just trying to get a better understanding of what you might be seeing there.

Tony Rodriguez
Tony Rodriguez
CFO at Cerence

I think we kind of highlighted that a little bit in the call. Again, from a volume standpoint, Q3 over Q3 a year ago, I think we saw some volume declines primarily because, again, there was some volume ramp-ups in a Q3 a year ago, given the tariff oppositions. As we think about Q3 to Q4, I don't see really any movement off of those volumes other than potentially, we've looked back in history and there is oftentimes a slight decrease in our Q4 in timeframe with regard to volumes. Not anything really material that we're seeing. You got to remember that ours is, again, a volume business on the license, the variable license side. We think about the broader market and our specific piece of the broader market. Volume is always important.

Tony Rodriguez
Tony Rodriguez
CFO at Cerence

I don't see anything really changing much from Q3 to Q4.

Analyst at TD Cowen

Perfect. Appreciate the color there. Brian, maybe a couple for you. Maybe any update or that you could share on the BYD xUI launch, how are things progressing? What's going on there? Maybe double-clicking a little bit on that Stellantis win, kind of what are the key parameters and benchmarks that you were comped against and maybe how the competitive environment was within that business quoting?

Brian Krzanich
Brian Krzanich
CEO at Cerence

Sure. When we said 100,000 vehicles on the road, BYD is a part of that. There's another OEM that is a part of that as well. There's more than one OEM in that 100,000. What happens is they ramp these things by geography and by language, and sometimes by model, especially in some of the larger OEMs where they have maybe 10 different models of vehicle. They'll launch them kind of sequentially. From a BYD perspective, though, it's going well. We're continuing to add more geographies and more languages. We're up to 20, we said now. We add them as they require, based on their production ramp. The feedback's been really good. The feedback's been very positive on xUI from an end-user standpoint and just the production capability of being able to build a vehicle and develop the software into the vehicle.

Brian Krzanich
Brian Krzanich
CEO at Cerence

For us, we think the ramp's going quite well.

Analyst at TD Cowen

Very helpful. Appreciate it.

Operator

Thank you. As a reminder to ask a question at this time, please press star one one on your touch tone telephone. Our next question comes from the line of Jeff Van Rhee with Craig-Hallum Capital Group. Your line is now open.

Daniel Hibshman
Daniel Hibshman
Associate Analyst at Craig-Hallum Capital Group

Hey, Brian, Tony, this is Daniel on for Jeff. One, maybe sort of if you want to characterize how the typical sales cycle for xUI looks like, how long are these conversations? What's the competition like? Maybe you could use Stellantis as an example, but typical xUI sales cycle.

Brian Krzanich
Brian Krzanich
CEO at Cerence

Boy, the sales cycle, they're not short. You typically, it starts with the OEM producing an RFQ. Oftentimes, especially if we are already involved with that OEM, we help them generate what the RFQ should look like as far as what kind of features they want to look for and what's the technology out there capable of. That starts the process. From there, you usually have to come in with a proposal that includes what the technology is, what your hardware requirements are. What we often do is bring in vehicles that are actually running the technology, and bring them, for example, we went into one large OEM back in the spring with the vehicles to their headquarters and brought their whole board of directors to the meeting to sit in the vehicle and actually see what was capable.

Brian Krzanich
Brian Krzanich
CEO at Cerence

Then you start kind of getting into the pricing and features and timing, and oftentimes what's really important is the amount of support you're willing to give because the integration of the software, it's not a simple download like you do on your phone or your PC. There's a great deal of integration with the OEM, the tier one, hardware providers, other software providers that you all have to do to get to that point. It's the amount of support you're willing to give. We oftentimes have engineers sitting in the OEM to really help develop the product. That all takes probably on average, six months at least. I've got some that are going well beyond that now. Then you're kind of waiting for their process.

Brian Krzanich
Brian Krzanich
CEO at Cerence

From a competitive standpoint, what usually happens is kind of like everybody shows up at the beginning, and they usually narrow it down to one or two, usually two of us, at the end. Then it's kind of a runoff. What's interesting to me is it's not been a price war. It hasn't been, well, we need another dollar out of this or something like that. It's really been more about features and support. Can you support all of the interconnects they want, the connections to other third-party products that they're trying to do to personalize the vehicle, and then the amount of support you'll give in launching the vehicle and getting this thing to production. That's really been more what's kind of the debate at the end. Then, yeah, there's a little bit of price. I'm not going to say there's nothing.

Brian Krzanich
Brian Krzanich
CEO at Cerence

We haven't gotten to a point where we think it's a race to the bottom. Like I said, the prices we're getting right now are quite a bit higher than what we currently quote for our PPU.

Daniel Hibshman
Daniel Hibshman
Associate Analyst at Craig-Hallum Capital Group

Great. That's helpful. Then on Q4 and just what's implied, as I look at it in our model, I think the Q4 uptick, ex fixed license, it looks like it sort of implies a rebound in variable license and Pro forma Royalties, maybe something like a 10% jump in variable/Pro forma. Just your thoughts on Q4, what's your visibility? Are you expecting a rebound in unit volume, sort of in end customers or maybe in percentage of cars shipped with? Just what are you thinking to get you to that Q4 number?

Brian Krzanich
Brian Krzanich
CEO at Cerence

We always have pretty good insight into the numbers and we're already a little bit into the fourth quarter, right? We have some insight into this number set. What you're really just seeing, like Tony said, was we see kind of a return to the typical seasonal Q4 output numbers from a production vehicles. We're seeing more and more connected. We saw 20% year-over-year growth in the third quarter in connected. We're going to see similar kinds of growth in the fourth quarter for connected as well. We just continue to see, or kind of we're back to seasonality, we're back to a normal Q4, and we're seeing more and more connected, and that kind of gets us to our Q4 number. Tony, if there's anything else.

Tony Rodriguez
Tony Rodriguez
CFO at Cerence

Yeah. The only other thing I would add is we think about some of our non-automotive areas. We see some activity of that I really won't get into specifically or into details, but there's some non-automotive increase in the output number as well.

Daniel Hibshman
Daniel Hibshman
Associate Analyst at Craig-Hallum Capital Group

Okay, that's helpful. Thanks, guys.

Operator

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

Brian Krzanich
Brian Krzanich
CEO at Cerence

I just would like to say thank you, everybody, for coming to our third quarter earnings call. We really look forward to our fourth quarter, where we can present our 2027 roadmap and forecasts. We're excited for the work we're already doing lining up to that. Like we said, it's the year of growth for 2027, where Cerence xUI really helps fuel that growth. The connected vehicles percentage will continue to increase, as we said. Then it's going to be a year where we will see more and more of the non-automotive space growth. We expect that space to grow at a rate much faster than the automotive portion of our business as well. We look forward to seeing you in December for the fourth quarter results and our forecast into 2027.

Brian Krzanich
Brian Krzanich
CEO at Cerence

Thank you for joining, and I'd just like to thank the whole Cerence team for a great quarter. Really great execution, and great results. With that, I'll say good evening.

Operator

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

Executives
    • Kate Hickman
      Kate Hickman
      VP of Corporate Communications and Investor Relations
    • Brian Krzanich
      Brian Krzanich
      CEO
    • Tony Rodriguez
      Tony Rodriguez
      CFO
Analysts
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