Cerence Inc. (CRNC) on Q2 2021 Results - Earnings Call Transcript

Operator: Good day and thank you for standing by. Welcome to the Cerence’s Q2 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's call is being recorded. I would now like to hand the conference over to your speaker today, Richard Yerganian. Please go ahead. Richard Yerganian: Thank you, Sharon. Welcome to Cerence's second quarter fiscal year 2021 conference call. Sanjay Dhawan: Good morning. Thank you Rich. Welcome to everyone on the call and thank you for joining us to discuss our second quarter fiscal 2021 earnings. It always amazes me how many companies call their quarterly reports earnings calls when they aren't producing any earnings. For Cerence this is truly an earnings call. For our call, I will first review our strong financial performance in Q2, followed by a review of our first half bookings. This will be followed by a few comments on some notable events that took place during the quarter. Next I'll update our key performance indicators and then hand the call over to Mark to review the detailed financial results. In Q2 at $98.7 million, we once again delivered record revenue, representing 14% year-over-year growth. Our performance was driven by strong growth in our license and connected services product line with both up approximately 20% year-over-year. As you can see these are -- there was minimal effect on our revenue from the semiconductor shortage affecting the auto industry, although our Q3 guidance does take into account a modest impact. While revenue growth is a key part of our story, we believe profitable growth is also important. Our relentless focus on cost and efficiency led to a non-GAAP gross margin of 77%, adjusted EBITDA of approximately $39 million or 40% margin, and very strong non-GAAP EPS of $0.69. Mark Gallenberger: Thank you, Sanjay. I'll first review another strong quarterly performance, and then I'll provide guidance for our third quarter and an update to our full year guidance. Once again, we achieved record revenue as results came in stronger than expected. Revenue came in at $98.7 million, which is almost $4 million above the high end of our guidance, and is a 14% increase from the same period last year. Our profitability metrics were also very strong and exceeded the high end of our guidance range. The non-GAAP gross margin was 77%, non-GAAP operating margin was 37.6%, adjusted EBITDA was $39.3 million or 40% margin, and non-GAAP earnings per share was $0.69. Due to exchange rate fluctuations, we had a foreign exchange gain of approximately $0.08 per share, which is accounted for in the other income line item. During the quarter, we generated more than $16 million of CFFO and our balance sheet remains strong with total cash and marketable securities at $137 million. Operator: Okay. Your first question comes from the line of Chris McNally from Evercore. Chris McNally: Hi, Sanjay. Hi, team. Thanks so much. So the first question is around the booking detail you gave for the new applications really appreciate that the $30 million. And it sounds like there's some short lead times from the prepared remarks. Could you just add some qualitative data around is it interest in life pay Cerence look? And then anything else kind around of the overall demand for these new areas maybe RFP interest because clearly this is the added extras on the connected business? Sanjay Dhawan: Sure. So that $30 million that we mentioned comes from two customers one of them we announced which was Xevo that works with a number of OEMs; and the second one is a direct contract with another European OEM. And for the first one its -- the Cerence Pay is the main product. For the second one there are multiple products included in that bookings would be -- which is the one with the OEM directly. The -- in terms of the momentum since the -- since Q2 into Q3 we have one more OEM that has signed up with our -- for our apps products, and that one is for the -- travel guide product basically and that is included in -- we mentioned in our remarks that there is over $100 million of bookings in Q3 that has already happened which is a very strong start. And there is one more OEM, which is going to launch the travel pro app. The pipeline remains strong. I can -- there are probably half a dozen to 10-plus RFP/core conversations going on with a number of OEMs right now. Chris McNally: That's great. And then to lead into the question around overall bookings. You gave a first half number. You had such a big year last year without knowing the full pace of second half. It's sort of an internal target or a goal to keep up that sort of absolute level of bookings $800 million-plus? I know timing is always -- it's hard to call because the last month of Q4 will matter a lot. But just high level can we try to sustain that high level of bookings for the year? Sanjay Dhawan: Yes. I think we do think, we will -- we don't guide our bookings number, Chris, as you know. But our internal goals definitely are to meet or beat last year's bookings number. We do have the pipeline to achieve that, so it's not just a pipe dream. It's supported by facts and a strong pipeline and a strong start to Q3. Like I said in my prepared remarks, in last year, Q2 was a big -- first half was bigger than second half. This year -- this fiscal year, it all appears that it will be reversed. The second half will be a bigger bookings half as compared to first half. And the timing of that as you all know, it's totally driven by kind of OEMs and their cycles and so on and so forth right? So we don't control that. It's a big -- very important decision that OEMs have to take. But to summarize pipeline is there and we surely hope that will meet or exceed last year's $800 million number. Chris McNally: That's great to hear. And then if I could just squeeze in one real auto techy potential on new opportunities. Sanjay, thus far Voice HMI has really not been a focal part of active safety and we're seeing a huge push across the industry and politicians are getting involved about basically safety and Level 2+ driver monitoring and DMS. Just a high-level question, do you see a lot of opportunities for Voice to be a part of ADAS going forward, particularly in things like heads-up display and interaction around driver monitoring? Sanjay Dhawan: Yes. We're definitely seeing more and more interest to bring these technologies together, right? And it's not just for basic simple voice prompts and all that stuff right for your DMS system that comes from the voice AI platform. It's more deeper integration to create more safer driver experiences. And that's the reason, Chris, we're very focused on creating and expanding our platform beyond voice AI to kind of bring vision into it and tie them tightly together not just for a better driver experience that is also important, but more so from a safety and security standpoint, right? So that's more to come on this. But yes, we're definitely seeing OEMs getting more and more interested to tie the two together. Chris McNally: Thank you very much. Sanjay Dhawan: Thank you. Operator: Your next question comes from Colin Langan from Wells Fargo. Colin Langan: Great. Thanks for taking my question. Just to start any clarity on what your assumption is for the semi impact into Q3? Because I mean it looks pretty benign in your guidance. I thought your comments said that, it's like 30% to 35% of your sales are impacted by auto production, but about 50% is license revenue. So I would have thought it would be a bit higher. Yes, any color there, what's the underlying assumption seems? Some pretty awful headlines coming out of the auto companies for this quarter. Mark Gallenberger: Yes. So Colin, the 35% to 40% that really kind of focuses more on the variable portion of our license. So we do have the fixed portion of our license as well. So those can be lumpy, those can vary from one quarter to the next. And so that's kind of how we get to that 35% to 40%. In terms of answering your first question on auto production, we are getting a lot of the same information that you guys are getting in terms of what the OEMs are saying. Things look like they're a little bit worse than expected. This is getting a little bit longer than people expect in terms of rightsizing, the supply chain, and correcting it. We also look very closely at HIS, third-party report information and that information, I believe is down as well a couple of points. I think when we initially went into the year we were thinking around 13% I think. And now I think that's down around 11% or 12%. And so we factor all that in. But offsetting some of that is the secular part of the story right where we are seeing increasing penetration of this technology. And so that does help offset some of those short-term downward issues as it relates to the semiconductor supply chain. And we try our best to try to factor that in as well into our guidance which does provide to some degree an offset to some of the short-term issues. Colin Langan: Got it. And you mentioned a win in the two-wheeler market. Any color on the size of that market opportunity I guess I'm not as familiar versus light vehicle? Is it any sort of framing of how big the opportunity is and how much momentum you might have there? Sanjay Dhawan: So, let me -- Mark, yes, let me start and Mark you can jump in. So, the win in the one -- we talked about two wins one in China one in U.S. The one in China we can mention the name now. It's a company called CFMoto which is one of the largest two-wheeler company in China. The US, one, we cannot mention the name yet. And -- but it's a name like I said in my remarks all of you will recognize, right? So, the -- we will -- we are working on quantifying this from a TAM standpoint in the upcoming analyst meeting so we will provide more clarification for the TAM assumptions and so on and so forth. But needless to say the -- almost -- between 60 million to 80 million two-wheelers are shipped slightly about the same size slightly lower than the automotive market. So, it's a huge space in itself although quite different in terms of its requirements and all that stuff right? But safety is driving the need for voice to be more integrated onto these two-wheelers. We have -- we had announced earlier one Xiaomi 70 Mi -- 70Mai company as our first win. With this announcement today we're adding a couple of more OEMs. And then our sales team is working with many, many -- almost all of the other OEMs to kind of look at basically what to showcase our products and get design wins into those opportunities as well. So that's the scope for now. And like I said, the exact kind of TAM assumptions and all that stuff we will share in our -- this year analyst conference. Mark anything else you want to add? Mark Gallenberger: No, I think you covered everything. The only thing I would highlight is also in terms of the TAM. A large portion of that volume is in Asia where there is just more of the two-wheelers being sold in that part of the world. And so that's why we are focusing -- we're focusing globally of course but we are really focused on the Asian market for two-wheelers. Sanjay Dhawan: Yes. Yes, I think Japanese OEMs ship almost 50% of the volume of the world in two-wheelers. So, that's a very important geography for us. Chinese OEMs are very important. Indian OEMs are very important. And clearly, we're focused on European and US OEMs as well. Colin Langan: Perfect. Those are my questions. Operator: Your next question comes from the line of Daniel Ives from Wedbush. Daniel Ives: Yeah. Thanks. Can you hit on with electric vehicles in terms -- especially what we're seeing coming out of China? I know you can't talk about model wins, but can you just maybe talk about activity there? Sanjay Dhawan: What? For the EV market in China you're asking Dan? Daniel Ives: Yeah. Sanjay Dhawan: Yeah. So the EV market is clearly a key market for growth. Today, it really doesn't drive much business for us today, just because the volumes are not there. But in terms of growth opportunities, we are clearly very focused. Our sales organization is clearly focused on winning those accounts, because we do see many of these companies gaining significant traction in the foreseeable future. And so from our perspective, it's something that we simply -- we're not going to ignore that part of the market just because the volumes are low because we do think that's going to be a significant secular trend. And so we are focused on winning business in those -- with those customers and we've already have evidence of some of that. So clearly, yes, it's not a big market today, but it will be in the future. Daniel Ives: Thanks. Operator: The next question comes from Joseph Spak from RBC Capital. Joseph Spak: Thank you. Good morning everyone. How are you? Sanjay Dhawan: Great. Thank you, Joseph. Joseph Spak: So one of the things I like to look at is the variable revenue growth in licenses compared to production, because that is sort of the part that's right more tied to production. And you had some good outperformance here again this quarter, despite really that regional mix right hurting you because you mentioned you're making more progress in China, but you're still underweight in that region and that's been the bigger part of the growth. So I guess a, that sort of supports Sanjay your comment about good progress in China. But what I'm curious about is that dynamic obviously flips this quarter right where the outgrowth -- or the industry volume growth is going to be much more weighted towards North America and Europe even if it's maybe a little bit lower than we thought a couple of months ago. So I'm curious given that dynamic, how should your performance hold up relative to production? Because if your growth is coming more from China, it would seem like you might -- if the content growth is coming incrementally from China, it would seem like just the sheer math of it might make it a little bit more difficult this coming quarter? Sanjay Dhawan: Yeah I think... Mark Gallenberger: Go ahead, Sanjay. Sanjay Dhawan: No. No Mark, please, after you. Go ahead. Mark Gallenberger: Yeah. I was just going to say one of the things that I am seeing going into this quarter is some new SOPs right so business that we've won historically, now those are starting to hit volume production. And so that has been factored into some of our guidance which I think should play out nicely for us. So that's one aspect that I did have factored into our guidance because of some SOPs that are hitting. And Sanjay, I don't know if you want to add anything else? Sanjay Dhawan: No. What I was going to say was that Joseph, China is for us to improve further our penetration. For North America and Europe, we have good penetration. It is to increase the further adoption and hence growing the revenue per car and so on, right? That's kind of the picture. The China we have a very strong competitor there called iFlytek as we have talked about that before. And we have a laser focus on how we are going to kind of increase our penetration in China further, right? We have very good penetration. We go head-to-head with iFlytek. This is China for China market. But there is still a lot of room left for us to win back and so on, which we are absolutely making progress no questions. And then for the rest of the world like I said, we have good penetration. We need to improve the revenue per car. And the big opportunity in rest of the world in Europe and in Americas for us is cloud services, right, to increase in cloud. So that's the expansion strategy. So, we have taken into account a number of these puts and takes for our guidance. And overall, as you saw we increased our yearly guidance from $360 million to $380 million originally to $380 million to $390 million which is almost 15% to 18% growth from last year. Joseph Spak: No, thanks for that Sanjay. Yes. I guess just while we're on China, something I'm sure you're well aware of that's been a bigger topic over recent years is, export controls with China and AI. And since you're making a lot more progress there, can you just remind us of like where does that IP actually lie? Like how much is shared between the regions? And what if any sort of protections, do you have if relations between the countries around AI gets choppier? Sanjay Dhawan: Mark, do you want to handle that? Mark Gallenberger: Yes. So, we do have a significant presence of employees in China. I think it's around 300 people. There is IP that gets developed there, but the vast majority of our IP is outside that part of the world. One thing to keep in mind is, a lot of the OEMs -- global OEMs are shipping into that region, and so a lot of our contracts are structured where their home base is. And so, I don't foresee any real issues there. A lot of the IP is based outside of China. So, I don't see any significant issues that we would anticipate. Joseph Spak: Okay. And maybe just one housekeeping. I know in the past Mark you said, the prepay line item for the year, I think would be flat to down and I know it can be really choppy and it's difficult to know in advance. But given that year-to-date, it's up mid-teens like it would seem like it'd have to be down mid-teens for that to still hold. Is that still a valid assumption for the year, or did anything change there? Mark Gallenberger: Yes. I think last quarter we were around 10-ish or so in this quarter. So, we were kind of a little bit below the run rate this quarter. We were above the run rate really driven by one customer that we had accounted for over 50% of the entire fixed amount. So that kind of drove us towards the higher portion. So, I think for the balance of the year just because of what happened this quarter, we're probably now going to be flat to up from the prior year. That would be my rough guess right now. But it's difficult to give guidance on that line item. But last year we did about 54 -- about $54 million in total. And for the full -- for the first six months we're at about $27-ish million call it. So that kind of feels like we're sort of on that same run rate as last year. And you're right we did say, we'd probably be flat to down this year. I think now it's probably going to be at the flat level and possibly up. It's difficult to predict. Joseph Spak: Yes, understood. But thanks for – for the color. Mark Gallenberger: Sure. Operator: Thank you. Your next question comes from Raji Gill from Needham & Company. Raji Gill: Yes, thank you and congrats on all the great momentum in a tough environment. Mark, on the gross margin upside, I was wondering if you could perhaps talk about some of the puts and takes there. The professional services business was down quarter-over-quarter which has a lower margin so the -- you might have benefited from a favorable mix shift to licensing and connected. But you also are kind of guiding gross margins kind of in this 76%, 77% range going forward. So, is this the true gross margin profile of the company that you want to manage too? Any thoughts on what's happening on the margin side? Mark Gallenberger: Yes. I think this quarter in particular like you said, the pro services was down, so it was a mix shift towards more of the higher revenue license business, really contributed to the better margins for the quarter. Pro services was down and so therefore the margins were down. We're actually -- we're hiring resources that are not billable yet. So that's declined our utilization rates to some degree there. And so -- and then you got the Connected Services business. That continues to really outperform. We were -- a year ago, we were probably 10 points lower. Now, we're in the -- we're now solidly in the mid-70s non-GAAP gross margins for the Connected business. And I expect that to continue. And so, I think that's going to take hold and stick with the business. For pro services, I think for the full year, we'll probably still be in that mid-teens to high-teens target that we talked about previously. This quarter, it was in the single digits on a non-GAAP basis, mainly because the revenue was down and like I said, we've been hiring recently and those resources are still going through some training, which does affect the utilization rates. But yes, all in all, license gross margins, it's going to be -- it's going to stay in that historical 97% to 98% range. I think for Connected, we've seen a nice increasing trend over the past year and that's in the mid-70s actually, 77% in particular for this past quarter. And pro services, I think will -- we're still good with the target, which is the mid-teens to high-teens for the full year. Raji Gill: Okay. That's super helpful. And in terms of the annual revenue guidance Mark the upside. So, you mentioned that the prepaid revenue is going to come in maybe flat to up slightly versus down. So that's contributing some of the upside. But wanted to talk a little bit about, what you're seeing on the New Connected revenue. It was $12 million this quarter, up 51% year-over-year. It looks like, it's on track to be doing about $50 million to $51 million for the year, so that's -- versus $34 million last year. So strong -- potentially very strong annual growth for new revenue - New Connected revenue. Thoughts about that? Also thoughts about, how to think about the Legacy Connected revenue as we kind of progress throughout the year? Mark Gallenberger: Yes. So, I think the Legacy Connected, it's going to stay at this level with mid -- around $15 million. So, I would be modeling that out flat. And then, once you get into next fiscal year -- fiscal year '22, right, that's when we would expect to start seeing declines in that Legacy Connected revenue. And then for the New Connected year-over-year, it's projected to show nice gains. We showed 51% this quarter. I think for the balance of the year, we should see a little bit more growth as well in that -- on that line item. But I think some of the upside is really going to be driven by some of the variable, right? The variable is -- even with some of the pressure from the semi-shortages, we are seeing the increasing penetration and we are seeing some new SOPs hitting in the second half of the year, which we are factoring into our models. Raji Gill: Yes. And just to follow-up on that. You do talk about the variable revenue being tied to auto production; however it is growing above the rate of auto production. And so, are you seeing kind of -- obviously, you must be seeing an uptick in the attach rate for your embedded licensing in the head unit of the vehicle growing out -- outpacing just cars being shipped off the lot. Maybe, just talk a little bit about that versus say last year. And then, just going back on the New Connected revenue, what are we seeing there in terms of the drivers throughout the year? Thanks. Mark Gallenberger: Yes. So I think, we are seeing some pretty good attach rates. We continue to have good win rates. As Sanjay had mentioned on the call, we didn't see anything -- any losses that were notable. And I think, in terms of the New Connected, we do have the investment in the One Cloud architecture, that we just released, and I think that's going to help us be more competitive in that space as well. So all in all, I think we're seeing good momentum on a lot of these fronts. Raji Gill: Thank you. Operator: Your next question comes from the line of Mark Delaney with Goldman Sachs. Mark Delaney: Yes, good morning and thanks very much for taking the question. You spoke about some of the progress the company has made with its products and the ability to work with Android automotive. And I think we've had some prior discussions on this with Ford and Google, as one example, starting to work together more closely. But maybe you can talk a little bit more qualitatively what you may be seeing now that you've made some progress with the capability of Cerence with the Android ecosystem. What other OEMs we may be seeing? And maybe what that leads you to think in terms of your thesis around being able to coexist with big tech? Sanjay Dhawan: So Mark the thesis – we believe in the thesis. Our customers most importantly believe in the thesis. And it's a thesis that we built based on customer feedback, right? And I think, we have always said that there is – what the consumers and the drivers want is a seamless experience from their life – digital life outside the car to the digital life inside the car. And a core part of the thesis is that no single big tech company can provide the full bridge to the complete digital life of a consumer because the consumer digital life includes multiple different big tech experiences. And finally, the reason OEMs believe in this thesis is because they want to own the brand experience. You can't outsource the core brand experience and voice and voice AI is an integral part of that core brand experience. So the thesis is we believe in the thesis and we are working with various different big tech companies, including on the Google platform with Android automotive and so on. I think, reason we highlighted this in our earnings is because we released our – the GAS coexistence on Android Automotive, as a product in Q2. And so we wanted to basically make sure that we highlight that. But the core thesis we're making progress on that. Mark Delaney: That's helpful. Thanks. And for my second question, Microsoft is planning to acquire your former parent company Nuance, and I realize, there's a field of use restriction around mobility. Can you remind investors when that expires? And what's your current thought process this transaction is completed? Did you think over time that there's going to be increased competition? And does it change at all how you think about trying to go to market? Thank you. Sanjay Dhawan: No. We're firstly very happy for Nuance and Nuance shareholders and our ex-colleagues for this partnership with Microsoft. Makes a lot of sense and it's very clever of Microsoft to acquire Nuance. So very happy to hear that announcement. It once again kind of strongly outlined the importance of the technology that both Nuance and Cerence are working on. Our field-of-use agreement with Nuance is for five years from the date of spin. That basically means, we're getting close to ending the second year now. So there are three more years left onto this field-of-use agreement. And under this agreement, Cerence has to stay within transportation and mobility with its technology and Nuance has to stay within health care and enterprise and – just so that the two companies don't compete and step on each other for five years. And the second year is almost over. So there are three more years to go. In terms of our understanding of Microsoft acquisition of Nuance, we don't expect any more competition for Cerence because this acquisition is purely driven and was focused around health care. Mark Delaney: Okay. Operator: Thank you. Your next question comes from the line of David Kelley from Jefferies. David Kelley: Hi. Good morning everyone. And thanks for taking my questions. Maybe a first one for Sanjay, realizing the KPIs are skewed a bit by a unique last 12 months here, but you did see another step-up in average contract duration you've ramped from, I believe five years to six and now 6.5 in the last year plus or so. Can you talk about some of the drivers of that? And then, maybe, how you are thinking about the longer-term opportunity, as the market continues to shift to cloud connectivity? Sanjay Dhawan: Yeah. So David, that's -- you said it, totally right. That's purely driven by more cloud contracts. Cloud contracts are for longer duration and as a result kind of moves that KPI. We're definitely seeing a strong progress on the cloud in the Connected Services side, including in the bookings that you mentioned, including in the current quarter, $100-plus million of bookings that you mentioned. Cloud is playing more-and-more important role. And we're very comfortable with our offering there, because we have revamped our One Cloud -- Cerence Drive 1.0 initiative which we launched it as Cerence Drive 2.0. And we also strengthened our Connected Services portfolio. And we also added apps. So the core platform is -- the new version is out there which is very robust and competes extremely well on accuracy and latency and so on, and a very rich Connected Services portfolio which is -- which goes across multiple different big tech as I mentioned earlier. And the third piece is the apps piece. So we continue to -- I do think that we will continue to see more progress in that KPI. David Kelley: Okay. Great. Thank you. That's helpful. And then, maybe one for Mark, Mark I was hoping you could give us a sense of the cost action benefits in the quarter. And I believe you're lapping about $12 million in temporary cost reductions into the back half of this year, assuming some of that is embedded into the second half margin outlook. But could you also talk about some of the puts and takes, as we think about the margin guide go forward? Mark Gallenberger: Yeah. So we are adding back those expenses. And we're essentially right on plan from what we said we would be doing. And we said that, we'd be adding a couple of million per quarter. This quarter, I believe, we've got modeled about another $3 million of operating expenses, and a large component of that is going to be hitting the R&D line. And then, once we get into Q4, I think that's probably about another $2 million to $3 million. And so that's been factored in. But basically, what we said, we were going to do in terms of feathering back in these expenses that we cut last year, we're pretty much -- we're very, very close to being right on our plan, for the first six months. And so that plan is unchanged. We're going to continue to add those expenses back. We're seeing the projects to support those investments. And we do watch it carefully. So if something happens, where either projects, get pushed out or what have you we would make adjustments accordingly. But things are playing out, as we expected. David Kelley: Okay, really helpful. Thank you, Mark. Operator: Thank you. Your next question comes from Jeff Van Rhee from Craig-Hallum. Jeff Van Rhee: On the RFPs, just wonder if you could expand a little bit. I'm kind of curious, how the finalists in terms of the RFPs over the last six, 12 months have changed. It sounds like your win rates have remained extremely high. But I'm just wondering about the variance and who you believe was your finalist in those key deals. And then also as – again, as you kind of look in the rearview mirror and you look at the pace of RFPs and the aggression within those RFPs for Connected Services it met your expectations. Any surprises in the kinds of services that the customers are looking for in those RFPs? Sanjay Dhawan: So the RFPs in terms of competition, very similar landscape that we have shared with you and the investors previously. There are the companies like iFlytek, SoundHound, Sensory and others that we run into. And then in many of these discussions, how the big tech coexistence will work around kind of enhanced CD experience for CarPlay or Google experience or Amazon Alexa experience and all that stuff basically comes in. The multiple big tech coexistence is there. I'm referring to, for example, there are two main RFPs going on right now, as we speak. And when I look at kind of, what the OEMs are wanting in those and the experiences that they want to be addressed. What I just said is what they're asking for. So, yes, a very similar landscape. In terms of what other new things they're thinking about, I briefly touched it in response to Chris' question earlier, which is more and more discussion about kind of combining voice AI with vision AI, something that we are experiencing more and more mostly around kind of safety functions. Jeff Van Rhee: Fair enough. And then, as it relates to renewals, I think you may have had a few on the connected side. But just curious, when you'll start to get glimpses, as you're lapping some of those deals to see what renewals look like on connected? Sanjay Dhawan: Mark? Mark Gallenberger: Yes. So I think it's still a little ways out. We did have one in particular. But I think you probably won't be hitting those until 2022 -- calendar 2022 and 2023. And I think that's when we'll start to see more of those coming up for the renewals. So we still don't have the data points that we were looking for, in terms of being able to give specific guidance on economics and so forth. But I think, as time goes on, we can -- we'll be gathering more of those data points. Jeff Van Rhee: Got it. Fair enough. Great quarter, guys. Thanks. Mark Gallenberger: Thank you. Sanjay Dhawan: Thank you. Operator: Thank you. Your next question comes from Michael Filatov from Berenberg Capital. Michael Filatov: Thanks for taking my question. Just a quick one on the billings KPI. So it increased 10% again per car. And I'm just kind of curious what sort of drove -- what's driving that? Is it a mix impact, OEMs focusing on more sort of higher-end models, trying to focus on more profitable models? Does that help you in some sense, or is there any sort of pricing leverage you're getting on maybe new features? So maybe just a bit of detail around billings growth. Mark Gallenberger: Yes. So I think a big driver for that, obviously, would be -- well, its two things. One is, we are getting more content per vehicle. And so, more bells and whistles allow us to price accordingly. In this business, you don't get price increases with the same products. You've got to basically continue to outperform on new product introductions and that would provide the offset to any sort of pricing pressure. The other element to keep in mind is, in that billings per car, as more and more cars get connected that creates that layering effect or a compounding effect to that metric. So we would like to see that continue, because when more and more cars get connected, then we're not only selling the license, but we're selling the connected component as well. So that creates the other compounding effect. So those are the two elements. Michael Filatov: Sure. That makes sense. And just one follow-up here on the gross profit margins in connected. What's really driving that sort of step change that we've seen over the last year or two in the gross profit margins for that business? And I mean, what do we think about sort of the -- where does it plateau in terms of this business in terms of gross margins? Where does this top out do you think? Mark Gallenberger: Yes. So I think you got two pieces, right? The first piece is, we really had the team focused post-spin from Nuance on this line item and to try to get the best deals that we possibly can with some of our contracts. And so, those were renegotiated. And then, of course, you are going to get some economies of scale as this business ramps. So those are the two key drivers. Personally, I think, we're probably getting up to that level in terms of plateauing. I think it's going to be being at the mid to -- like 75% to 77% range. I think it's going to be a bit of a challenge to get another 10 points, for example. We saw the big improvement last year and it far exceeded all of our expectations. And so, I think -- for modeling purposes, I think, we're probably close to that point where things are starting to level off. Michael Filatov: Understood. Thanks so much. Operator: Okay. This concludes your Q&A session. Richard Yerganian: Well, thank you everyone for joining us on the call this morning and we look forward to engaging with you with upcoming virtual events. Thank you and have a good day. Sanjay Dhawan: Thank you. Mark Gallenberger: Thank you. Operator: This concludes today's conference. You may now disconnect.
CRNC Ratings Summary
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Cerence Inc. (CRNC:NASDAQ) Q2 Fiscal Year 2024 Financial Results Overview

On Thursday, May 9, 2024, Cerence Inc. (CRNC:NASDAQ) unveiled its financial outcomes for the second quarter of the fiscal year 2024, which concluded on March 31, 2024. The company disclosed an earnings per share (EPS) of -6.66, significantly trailing the anticipated -0.23. Despite this shortfall, CRNC's revenue for the quarter stood at $67.83 million, outperforming the forecast of $62.15 million. This result demonstrates a mixed financial picture for Cerence, with a notable EPS miss but a commendable achievement in revenue generation.

Cerence's success in surpassing revenue forecasts, as noted by Zacks Investment Research, is attributed to its effective adjustments with Original Equipment Manufacturers (OEMs). This revenue success, despite the reported loss, underscores the company's potential in the competitive AI for automotive applications sector. The reported revenue exceeding guidance range tops reflects positively on Cerence's operational efficiency and market demand for its offerings.

However, the quarter presented its challenges. Cerence reported a significant Goodwill impairment charge of approximately $252 million, contributing to the substantial loss per share. This charge is a pivotal consideration as it affects the company's financial health and investor perceptions. Despite this, Cerence remains optimistic about its future growth, especially with its new generative AI products, which have secured six design wins, indicating early market acceptance and potential for future revenue growth.

The strategic adjustments mentioned by Stefan Ortmanns, the Chief Executive Officer of Cerence, underscore the company's proactive stance in addressing its challenges. Following a comprehensive review of its backlog and initial royalty reports indicating some downward trends, Cerence has made strategic decisions aimed at stabilizing and growing its business. These decisions, including lowering its fiscal year 2024 guidance and withdrawing its multi-year plan, reflect the company's commitment to adapting its strategies in light of market and operational realities.

Financial metrics such as the price-to-sales ratio (TTM) of approximately 0.83 and the enterprise value to sales ratio (TTM) of about 1.38 provide additional context to Cerence's valuation. These ratios suggest that investors are valuing CRNC at a level that reflects its sales performance, albeit with a significant valuation in terms of its operating cash flow, as indicated by an enterprise value to operating cash flow ratio (TTM) of approximately 373.78. The debt-to-equity ratio (TTM) of roughly 0.63 and a current ratio (TTM) of about 2.18 further provide insights into the company's financial structure, indicating a moderate level of debt and a good ability to cover short-term liabilities with its short-term assets.

Cerence CEO Resigns, Shares Down 14%

Cerence Inc. (NASDAQ:CRNC) shares were trading more than 14% lower Wednesday afternoon following the CEO resignation announcement.

According to the company’s announcement, Sanjay Dhawan has resigned as CEO of the company and Dr. Stefan Ortmanns has been promoted to President & CEO.

In the short term, analysts at Berenberg Bank see risk that the new CEO could use the current volatility in the share price as a chance to pull or lower management’s long-term financial targets in order to set a less ambitious bar. That said, the analysts are already modeling below management’s target numbers for 2024 and believe that the current valuation is baking in that risk.

Berenberg Bank estimates a 19% revenue CAGR (management’s target is 22%), around 37% EBITDA margins, and around 40% annual FCF growth through 2024.

Cerence 20% Drop is a Buying Opportunity

Cerence Inc. (NASDAQ:CRNC) share price dropped more than 20% on Monday following the company’s Q4 results, which raised concerns around New Connected Services growth after a 34% quarter-over-quarter decline. Analysts at Berenberg Bank think this significant decline in share prices is a good opportunity to buy the stock. The analysts advised investors to keep the following key point in mind:

(1) management has a track record of conservative guidance,

(2) Management reiterated 2024 targets, with $700 million revenue and 37% EBITDA margins,

(3) 2024 targets include $155 million from nascent New Connected Services/Apps and markets,

(4) The order backlog offers line of sight to a meaningful portion of targeted New Connected revenue.

Cerence Upgraded to Outperform at RBC Capital

Analysts at RBC Capital upgraded Cerence Inc. (NASDAQ:CRNC) to outperform from sector perform, lowering their price target to $110 from $112.

According to the brokerage the company’s stock sell-off from its 8/11 high, which is mostly macro concern related (auto concerns and SaaS/software decline), looks overdone. The analysts see little change to the long-term story and believe the path to 2024 targets of $700 million in revenue and $260 million in EBITDA is there and see potential upside to the targets. As such, they view the current level as attractive for long-term investors.