Cerence Inc. (CRNC) on Q4 2021 Results - Earnings Call Transcript

Operator: Good day and thank you for standing by. Welcome to the Cerence's Fourth Quarter 2021 Earnings Call. Please be advised today's conference may be recorded. I'd now like to hand the conference over to Rich Yerganian, Vice President of Investor Relations. Please go ahead. Rich Yerganian: Thank you, Liz. Welcome to Cerence's fourth quarter and fiscal year 2021 conference call. Before we begin, I would like to remind you that this call may involve certain forward-looking statements. These statements are subject to risks and uncertainties as described in the press release preceding today's call. Cerence makes no representations to update those statements after the date hereof. In addition, the company may refer to certain non-GAAP measures, key performance indicators and pro forma financial information during this call. Please refer to today's press release for further details of the definitions, limitations, and uses of those measures and reconciliations of non-GAAP measures to the closest GAAP equivalent. Joining me on today's call are Sanjay Dhawan, Cerence's CEO; and Mark Gallenberger, Cerence's CFO. As a reminder, the only authorized spokespeople for the company are Sanjay, Mark, and me. Before handing the call over to Sanjay, I'd like to announce a few upcoming investor events. The conferences include the Credit Suisse 25th Annual Technology Conference on November 30, in Scottsdale, Arizona, and several virtual events including the Goldman Sachs Global Automotive Conference on December 2. Raymond James Virtual Technology Investors Conference on December 6; and the 24th Annual Needham Growth Conference on January 11. Please visit the Events page in the Investors section of the Cerence website for the most up-to-date information on our participation at these conferences. Now on to the call, Sanjay? Sanjay Dhawan: Thank you, Rich. Good morning, everyone. Welcome to everyone on the call. And thank you for joining us to discuss our fourth quarter and fiscal year 2021 financial results. For our call, I'll first review our strong financial performance in the fourth quarter and full fiscal 2021 followed by a review of some of the key products introduced during the year, awards recognizing our leadership in conversational AI and notable events that took place during the year. Next, I'll update our key performance indicators, and then hand the call over to Mark to review the detailed financial results including our outlook for fiscal 2022. We're pleased that we have been consistent in delivering strong results on key profitability metrics throughout the first two fiscal years as an independent company. We're still in the midst of our customers production constraints due to the semiconductor shortage, yet we were able to deliver year-over-year growth of 7.5%. Our revenue came in just about the midpoint of the range was aided by strong year-over-year growth in our fixed licenses contract, which was up 54% from the previous year. The degree that the semiconductor shortage will continue to impact our customers' production plan is still an open question as we start the new fiscal year. For the full fiscal year, I'm especially proud of our results given the challenges due to the semiconductor shortage impact on auto production and some lingering effects due to COVID. Top line growth was up 17% compared to fiscal 2020 and nearly all of the other profitability metrics were significantly above our original guidance provided at the beginning of the year. Bookings at $590 million came in very strong, including nearly $120 million for our new products and services, which will provide strong, solid foundation was a revenue target for these products in our 2024 model. We believe these booking will allow us to maintain market share for our license product and gain share for our connected services. These bookings led to a record backlog for the company of approximately $2 billion. What I'm most proud of was a win back from a competitor with the European OEM. This was business loss when the business was still part of Nuance and the win back represent validation of the effort that the team has done to continue to innovate and elevate our products to a level, the competition will find hard to match. For those of you I have had the pleasure of speaking with, you have heard me talk about the three key principles that drive the company; innovation, speed of execution, and cost. As a tech company, it is imperative for us to continue to innovate and bring new products to market that enhance our existing technology or provide new features or capabilities. This is how we will maintain our technology and market share leadership. I'm very proud of our R&D team that has delivered so many new products this year. In some cases, such as Cerence's Browse or Extend, the products were introduced during the year. In others, such as Cerence's Look, Swype and EVD, they were in production for the first time; I am especially excited about our Cerence's Browse products, Browse fits perfectly with our core and extend it with the common digital life ecosystem. Browse literally allows the driver to search the web for any information by using their voice while driving. Cerence's Browse is also a good example of our speed of execution, as the product went into inception --from inception to start a production with one of the top customers in just eight months. I'm also excited about our EVD or Emergency Vehicle Detection products; we are the first company to provide emergency vehicle detection in the car, and to be able to alert the driver so that they can safely get out of the way. This is an important safety feature that we expect will be adopted by more and more automakers. This capability is now in production. Two of our new products, Cerence's Ride and Building Mobility leverage our core technology for the car into the adjacent market of two wheeled vehicles in elevators. We have now one business and both of these adjacent markets and believe they can be significant generators of revenue in the future. As a company we're laser focused on transportation and mobility space. This focus allows us to work very closely with our customers to make sure we're meeting their needs for their next generation infotainment system. You can expect and another steady stream of enhanced AI technology and new products from Cerence in fiscal year 2022 as well. Of course, as CEO, you would expect me to be excited about the new products we have brought to market. But it's always great to get independent acknowledgement of what we have accomplished. You can see from the slide, our AI technology leadership is recognized by companies and organizations from around the world. The Baidu award is especially pleasing because in some ways they could be considered a competitor. They also rarely recognized non Indigenous Chinese Company. The automotive News PACE award for Cerence Pay is another one, we are especially proud since it recognize one of our newer application, Cerence Pay. These awards recognize not only the leadership we offer in conversational AI technology, but also our ability to execute and deliver these new products to our customers. Cerence is dedicated to our customer success, and we work extremely hard in collaboratively with our customers. Several of these awards are representative of that. While fiscal year 2021 was a good one from the perspective of our financial performance, there were also several important accomplishments we expect to keep that momentum going. Firstly, we had several wins in two wheeler markets, one with the leading global provider of two wheeler motorcycles, and four wheels ATV. We expect the first product to hit start production with our tech -- without technology in calendar 2022. Second, we have been talking about the potential of our technology in the elevator market for some time now. I'm excited to report that we have won our first business. It is with one of the top manufacturers in the world and we are excited to help them create the elevator of the future using conversational AI. We expect to expand further in this market during this fiscal year. We have also won our first piece of business in another adjacent market that we have not yet disclosed. You will hear more about this in the near future. We had approximately $112 million in bookings for our new products and services, which is roughly 20% of our total bookings for the year. The interest in these new products has been very high and bookings in fiscal year 2021 was what gave us confidence to raise our revenue target for these products in our fiscal 2024 model we shared with you last quarter. While the adjacent markets and new apps and services are key to our future growth, we still have a laser focus on strengthening our core business. To that end, we have added 14 new logo wins during the year, meaning 14 distinct pieces of business we did not already have. This included five competitive takeaways including three in China. At 174, we have record number of SoP startup production during the fiscal year. As auto production recovered, we would expect this high number of SoPs to be an added acceleration to our business. In summary, fiscal 2021 was a very good year for setting the foundation for future expansion of the business. We fully expect to build on this success in fiscal 2022. Moving on to our KPIs, the results represent continued strength in the business. While auto production may be down due to the semiconductor shortage and COVID, We continue to ship our technology in more than one of every two cars produced on a global basis. More importantly, we saw an increase of 20% in the number of cars produced with our connected services, compared to the total auto production growth of 9% over the same time period. Our strong growth is likely due to a combination of the penetration of connected car technology and market share gains. Our average billings per car increased to solid 8% year-over-year, the average contract duration continued to expand primarily due to the increasing mix of connected contracts with longer subscription period. While still on positive trend, the data on KPIs shows a slowdown in monthly active users. We believe this is attributable to the lack of availability of new cars and COVID-19 residual impact on car usage in different parts of the world. I want to close my remarks by reminding you of our long-term vision for the company. Our goal is to be the central AI brain of the cost, essentially becoming a driver trusted copilot. To that end, we will see significant opportunities in the combination of vision and voice AI with application in driver monitoring as well as road and cabin monitoring. This is an area you will hear more from us in 2022. Finally, before turning the call over to Mark, I'd like to acknowledge the launch of our inaugural ESG report this past Thursday. We believe we are good stewards of the principles of ESG and this report is a significant step in sharing that with all of you. You can download the full report from our website. I'd like to now turn the call over to Mark so he can review with you the details of the quarter and full fiscal year and provide Q1 guidance and our initial guidance for fiscal year 2022. Mark? Mark Gallenberger: Thank you, Sanjay. I'll first review another strong financial performance for our fiscal Q4 and then I'll provide guidance for our fiscal Q1 as well as fiscal year 2022. We delivered another solid quarter of top line growth and even stronger bottom line performance. Revenue came in at $98.1 million, which met our original guidance of $97 million to $101 million and is a 7.5% increase from the same period last year, despite very difficult auto production conditions due to the semiconductor shortage. Most of our profitability metrics remained very strong and exceeded the high end of our guidance range. The non-GAAP gross margin was 78.1% mainly driven by favorable product mix. Our non-GAAP operating margin was 37.2%, adjusted EBITDA was $38.8 million or 39.6% margin, and our non-GAAP earnings per share of $0.66 exceeded the high end of our guidance by $0.5. During the quarter, we generated more than $23 million of CFFO. And our balance sheet remains strong with total cash, cash equivalents and marketable securities for approximately $166 million. Now, let's review a detailed breakdown of our revenue. Our strong revenue growth compared to last year was driven by three factors. First, our total license revenue was up 11% year-over-year, while our variable license revenue was down 13% from the same period last year, due to the semiconductor shortage, we outperformed auto production, which declined by 16% for the same period. Our variable license revenue is where you would see the most direct impact from lower auto production, which is partially offset by the continued increasing penetration of embedded AI technology getting designed into autos. Our fixed license contract revenue increased 53% year-over-year as a result of two larger than normal deals that closed in the quarter. Second, while our connected services revenue was basically flat from last year, it includes a one time adjustment of $1.7 million to correct an amortization schedule on a hosting contract. Without the adjustment, our new connected services revenue would have been up 18% year-over-year. And lastly, our professional services revenue was up 9% year-over-year, due to the increase in the number of customer projects and activities that we have going on. Moving on to a summary of the full year, we delivered excellent results that were significantly higher than the original guidance that we provided at the beginning of the fiscal year. Despite the challenges our customers have had to face due to the semi shortages, we delivered better than expected results on nearly every metric. On the top line we achieved 17% growth year-over-year, which is approximately $70 million higher than the midpoint of our original guidance. We also delivered strong year-over-year growth in every profitability metric, including adjusted EBITDA growth of 34% and non-GAAP EPS growth of 49%. Additionally, we generated over $74 million in CFFO, which is an increase of 66% versus last year. All-in-all, our second fiscal year as a public company continued to demonstrate the company's capacity for growth and the ability to deliver strong bottom line results. Now let's review a detailed breakdown of our revenue for the full fiscal year. All three product and service areas contributed to the sequential growth. License revenue was up 23% over the prior fiscal year, due to growth in both variable and fixed licenses. Despite the impact of semiconductor shortages on auto production, our variable license grew 19% year-over-year, which is about 10 points higher than the auto production growth of 9% for the same time period. As previously mentioned, our variable licenses the portion of our business most directly impacted by changes in auto production. Yet we were able to deliver growth due to the continued penetration of conversational AI technology being designed into more autos as well as the number of SoPs we had during the year. Our fixed contract licensed grew 31%. The amount of fixed contracts is difficult to predict, and while this year, they totaled $71 million, and we expect that number to come down in fiscal '22. Our total connected services revenue was up 12% for the year driven by growth in our new connected services, which was up 31%. However, excluding the one time amortization adjustment that I previously mentioned, our new connected services growth would have been 36%. With or without the adjustment, our growth in new connected revenue was quite strong. In our professional services, revenue was up 9% year-over-year. While that growth is important, it's also worth noting that our non-GAAP gross margin improved from 12% in fiscal '20 to 21% in fiscal '21, as we continue to make sustainable improvements to our service delivery model. Due to the strong bookings during the year, our ending backlog increased by $200 million to a record of approximately $2 billion. The biggest driver of growth in our backlog was due to our new connected services business, as more and more vehicles get connected. Backlog for our professional services also grew nicely, which is consistent with the increasing need for our engineering resources to support our customers on a global basis. And as expected, our legacy connected backlog continues to bleed off over time, as we continue to provide the connected services to the legacy installed base. Speaking of our legacy connected business, as a reminder the legacy connected business is a one off connected contract that was part of an acquisition that Nuance did back in 2013. We have already explained how this legacy contract would be a cash flow headwind to our CFFO for fiscal years '20 and '21 because most of the cash associated with the revenue that we are now reporting was collected by Nuance prior to the spin. The cash flow headwind attributed to this contract is now behind us. And now our deferred revenue is expected to return to be a source of cash starting in fiscal '22. However, the revenue amortization has peaked in fiscal '21 and is expected to wind down starting this year. You can see from this chart, the annual revenue contribution for the duration of this legacy contract, with the largest drop of $23 million occurring this fiscal year. So as we provide guidance for fiscal '22, the $23 million decline in legacy revenue will have an impact on our year-over-year growth rate. Turning to our full year guidance, our fiscal '22 revenue growth is expected to be in the range of plus 3% to plus 10%. This assumes using the most recent IHS auto production forecasts of zero growth for the same period. However, after adjusting for the $23 million drop in our legacy connected revenue; our pro forma growth would be in the range of plus 9% to plus 16%. Keep in mind, this guidance also assumes an expected decline in our fixed license revenue after our record setting amount of $71 million last year. Our market share remains steady and the revenue guidance reflects this assumption. As we previously talked about, we generally expect to grow about 10 to 15 points above auto production, which is expected to be flat this year, according to IHS and so our pro forma adjusted growth of plus 9% to 16% is generally in line with our expected growth rate above auto production. Additionally, the adjusted growth rate for this year is consistent with last year's growth of plus 17% and the year prior plus 10%. As we did last year, we'll update our fiscal '22 guidance throughout the year has more clarity about the semi shortage environment and received. Recall that last year due to COVID, we initially provided guidance of $360 million to $380 million and continue to increase our estimates throughout the year and ultimately delivered $387 million in revenue exceeding the high end of the original range. We believe it's prudent for us to factor some level of conservatism into our guidance due to the ongoing semiconductor shortage plaguing the auto industry. And the continued uncertainty of the timing of when the semi supply chain will ultimately be corrected. Regarding our EBITDA guidance, we're continuing to make investments in our business, particularly in R&D, so that we keep extending our technology lead and translate those investments into higher top line growth. Although our EBITDA guide of 37% is down from our record setting margins of 40% last year. Recall that we cautioned investors a year ago that our margins were temporarily inflated due to the COVID cost reductions, and that we plan to add back those expenses throughout fiscal '21. Despite our increase in R&D, we still expect to deliver strong EBITDA margins in the mid to high 30s. We continue to improve the cash flow conversion of the company with CFFO to EBIT DA conversion increasing from 39% in 2020 to 48% last year, and now projected to be over 51% this year. Moving on to our guidance for Q1; our revenue guidance of $91 million to $96 million reflects a year-over-year change of down 3% to up 3% or essentially flat, while according to IHS auto production is forecasted to be down 21% for the same period. We've taken into account not only the IHS forecasts, but also the current risks and uncertainties of the semiconductor shortages impacting auto production. The good news is the auto production appears to have trough in the August-September timeframe, and is starting to pick up again, keep in mind that about a third of our business is directly impacted by auto production in any given quarter, which shows up in our variable license revenue. We expect to generate between $31 million and $35 million of adjusted EBITDA, and between $0.47 and $0.53 earnings per share on a non-GAAP basis. So this concludes our prepared remarks. And now we'll open it up to questions. Operator: Our first question comes from Chris McNally with Evercore. ChrisMcNally: Hey, team, okay; see where to start maybe if we could start on the big picture. Just we're getting a lot of questions would just love to have your reiterated outlook of 2024. Has anything changed since you initially gave that outlook for $700 million a couple months ago? SanjayDhawan: So let me start then I'll -- Mark to add in, Chris. So from my standpoint, no, nothing has changed, we stand by our guide for fiscal '24 and feel good about it. As you heard in my prepared remarks, the new products contribute a lot towards that guide and 20% of our bookings about $120 million was that from a booking standpoint, we also have been -- will be announcing some new aftermarket products, we have received an award letter for one of them already, which is not part of our booking yet, they will be part of our in a fiscal in a quarter one bookings. So from that standpoint, I feel good, that our new products are, further contributing toward the contribution. And lastly, for the -- once again, on the new product side, the elevator piece, you saw me mentioned that we have won one of the top manufacturers of elevators as our customer in fiscal '21. Having said that we have decided not to take any bookings from that contract yet because, we want to be cautious about, what bookings we report to the street and so on and so forth. And but the contract is won; we will be shipping for revenue in this current fiscal -- in the new fiscal year fiscal '22. But, we have not taken any bookings yet, because we want to be cautious about, it's a new market for us and we want to see sort of the volumes and trends and so on and so forth from that customer. So the net-net, basically is in the fiscal '24 model, the core business is going strong, and we stand behind the growth that we have projected in our core business, whether it's license or connected services, or professional services, and the new business of new apps and devices piece, we're making very good progress. So, from my standpoint, no change to the fiscal '24 model, Chris. Mark, anything you want to add? MarkGallenberger: Yes, I think the only thing -- the only other thing I would add is the fact that the secular tailwinds are still there as it relates to more and more penetration of this technology getting designed into automobiles. IHS has increased their projections for penetration rates. And so, I think that provides a nice offset to some of the downward effects that not only COVID provides had on auto production, but also on the semi shortages. And so that gives us also confidence that even though auto production is down over the last year and a half or so, offsetting that is the increasing penetration rate. And the other thing I'll mention is the fact that, a lot of these new products that that we've designed and are now starting to get wins for, that revenue will be backend loaded. And so, the bookings that we're seeing today give us that level of comfort that the revenue will come into that 2024 target model. ChrisMcNally: Okay, super clear, appreciate on '24. So if we maybe then talk more about the up a new term and really the potential for your Tam, Sam or orders, right? It was only about a year ago, you talked about almost 80%, 90% win rate, and it seems like there's at least a $2 billion core market out there for voice AI. Sanjay, without putting a timeframe on it, like, could we -- is the proposals that you're going after whatever share, you get 80% plus, is there a potential order number over the next couple of years where we could start to move into the sort of the $1 billion plus order range just maybe talk about the size of business that's out there for bidding on over the next 12 to 24 months? SanjayDhawan: Clearly, we're, Chris, happy with the booking that we recorded of $590 million, this is pushing our backlog to $2 billion. Last year, we recorded $835 million in bookings but our normal run rate used to be in the $400 million to $450 million per year. This last in fiscal '21 there was one European contract with a large European OEM that is going through some internal kind of restructuring of their purchasing and other departments, which basically, move the contracts out from fiscal '21 into fiscal '22. Otherwise that again, we're very confident we're going to get back and further add into our bookings towards the goal of crossing $1 billion in bookings. As you all know, Chris, that bookings are lumpy in nature, it's very hard to predict. But, as long as we're making good progress and adding to our backlog, I feel very confident about, the prospects of the company in the future, we work really hard to secure our core business wins, we work really, really hard to kind of, expand with into our adjacent market. You heard me earlier, talk about some of those -- some of the progress there as well. So overall, yes, am I happy with the $600 million bookings? Yes, would I like to see more, heading towards the $1 billion that you mentioned here? Absolutely. No question, right, the TAM expansion and the TAM opportunities is clearly there. And you've heard me say that, especially on the connected services side, right, so, fingers crossed, we'll keep marching towards that goal. ChrisMcNally: But that's great. And I'm going to be greedy. This is a third question, because I know this question will be asked by everyone else, so I apologize for people behind me in the queue, but on the connected revenue, we understand the legacy comes off. But when we think about the new Q3 to Q4, we had a move sequentially from $14 million to $11 million where we tend to think about that as an installed base. So sequential positive business, could you just talk about the quarter-over-quarter moving new connected and any seasonality that affected that number? Thanks so much. MarkGallenberger: Yes, the majority of our revenue is simply an amortization schedule, but there are some contracts that are usage based and those will ebb and flow from one quarter to the next. And then also, we did have that one time adjustment to correct an amortization schedule in Q4 so that entire amount did hit Q4 new connected revenue. Operator: Our next question comes from Mark Delaney with Goldman Sachs. MarkDelaney: Yes, good morning. And thank you very much for taking the question. So can you talk a little bit about how to think and contextualize through the December quarter revenue guide, you commented on how your outlook is outgrowing HIS' view of auto production on a year-on-year basis, but the industry production rates are starting to pick up sequentially. And I think just expecting that as well. And your December quarter revenue guide is for revenue to be down quarter-to-quarter. Maybe you can talk a little bit about some of the puts and takes that are leading to that. MarkGallenberger: Yes, so we, you have to look at what we are sort of modeling internally for our Q1 revenues. And if you look at the Q4 revenues, we did have a large amount of fixed contract revenue, which we don't expect to repeat to that same level. And so in last quarter in Q4, if you look at the slides, we had $25 million of fixed revenue, fixed license revenue that is, and so that's a pretty substantial number. And we don't expect that to repeat. So when you factor that down, that number down quarter-over- quarter, that's really what's driving it. But we do expect, variable licenses, which is most tightly coupled to auto production, we expect that number to increase sequentially. MarkDelaney: Got it and in terms of the number of vehicles with Cerence's technology installed, I mean you did talk about good competitive win rates and the five competitive wins. But the percentage of vehicles produced with Cerence's technology I think has been moving sideways and you commented at I believe 53%. Can you talk a little bit more on that maybe what's constraining the attach rate of your technology, making it that's one of your KPIs. Thanks. MarkGallenberger: Yes, so I think I think some of that is driven by the fact that we are using trailing 12 month data. And I think, some of the COVID impacts are still, being factored into the TTM results. If I'm looking at some of the data that we don't publish on a quarterly basis, we are seeing that trend increasing. So I think as we get further into this fiscal year, and we drop off some of those older quarters, that should probably help that KPI. SanjayDhawan: Just also to add, Mark, we put a press release out last quarter, and then you heard me mentioned 174 SoP that happened in fiscal '21, 174 startup productions is a record for our company. So, feel like Mark rightly said that number is TTM. And but, we're making good progress there. Operator: Our next question comes from Luke Young with Baird. UnidentifiedAnalyst: Good morning, thanks for taking the question. First, question, EBITDA margin guidance and just hoping we could put a finer point on bridging to the midpoint as we look at some of the big moving pieces here between mix, R&D and other factors. And really, the question here is if I look bigger picture versus what you've said, for the 2024 targets, should we interpret the current year is sort of the biggest step function change in those dynamics relative to where you were in fiscal 2021? And we're going a couple years down? MarkGallenberger: Well, yes, because fiscal 2021, as we've been mentioning, for over a year, now that, '21 is going to have inflated margins throughout the year, as we brought a lot of those COVID expense reductions back into the P&L. And so, even though we benefited short term from those COVID expense reductions, and we delivered record setting margins, going into '22, we are factoring in the fact that all of those COVID expense reductions are now back into the P&L. And that we're also going to continue to invest in our R&D to continue to innovate, and to continue to extend our technology lead, and so, you will start to see increases in R&D both on dollar basis and as a percent of revenue, that's going to be probably the single biggest driver. And so back to your point, I think '22 is probably going to be the year in which you'll see the most year-over-year change to some of the margin assumptions. However, the targets that we have laid out for '24 in the target model, we expect to be able to hold those margins, even with these more expenses that we're building into the R&D expense line for fiscal '22. MarkDelaney: Okay, great, thank you. That's helpful color, Mark. Maybe a question for Sanjay, bigger picture, multiple conquests awards mentioned both in the release. And going through the commentary today, and I'm just wondering, you mentioned three of those were in China, is there anything that we can glean competitively about sort of where the industry is going or what competitors are looking for that, essentially, where competitors are going, that made those customers choose your solution versus peers? SanjayDhawan: I just returned from my second Europe trip in UK, France last week, I was in Germany a few weeks before, now that with COVID, opening, I started traveling with, and going and seeing the customers after almost 18 months of virtual sort of interactions with the customer customers. And one thing that I'm consistently hearing from our customers, and by the way, I've also been to Detroit as well, myself. And one thing that I'm consistently hearing from the customers that the roadmap that we have put together as over the last couple of years, as an independent company is a solid roadmap, we're creating the best in embedded AI technology, which is coupled with the best of connected services, and apps portfolio, which basically allows the customers to bring, multiple big tech, and the digital life of a consumer in the car. So, I feel very good about our product positioning. And this is coming firsthand, me sitting in the rooms now, over the last month, month and a half with the top 10, top 15 OEMs around the world and getting their, very direct feedback, with regards to our product portfolio. I think, we're -- we just need to work, keep working hard on and continue the journey of winning the new designs of the vehicle architecture, and continue to deliver the products that we have been discussing with our customers. Operator: Our next question comes from Colin Langan with Wells Fargo. ColinLangan: Oh, great. Thanks for taking my questions. Just wanted to follow up on the quarter- over-quarter decline in connected services. You mentioned the amortization adjustment, which I think it was still be down sequentially even including that. You also mentioned usage base contracts might be down quarter-over-quarter. Why would that fall? Is that a seasonal reason? Or is there something else I'm missing? I just I kind of I guess I think like many people thought that was more of a kind of steady rise with the adoption. MarkGallenberger: Yes, we've had some prior quarters, Colin, where that the usage just simply ebbs and flows. And I think it also ties back to the one slide that we've got in the presentation deck where things have slowed down a bit in terms of monthly users and so forth. And so I don't have a specific reason for why the decline has happened. But, part of it could be, just fewer cars COVID related, so forth, but we don't view that as any trend, or anything concerning it's just sometimes these usage contracts will ebb and flow from one quarter to the next. And that's the piece that could move some of the revenue up or down from one quarter to the next but I think the key take is, if you look over a four quarter, eight quarter trend, we continue to see continued growth in our new connected revenue line. That's really the punch line is that trend is continuing to grow. ColinLangan: Okay. And then just say I'm sure you saw last week, SoundHound announced a SPAC, I know they're in the vast majority of your comp set, I am sure questions are going to come up, I mean, can you just remind us sort of how you compete against them, and how your technology might be different in some ways, as people might start lining both companies up against each other? SanjayDhawan: Sure, I always respect our competitors, and SoundHound is a great company to compete against, competition brings the best out in all of us, and we welcome it. I was surprised as hell on the valuation and I let you guys sort of do the math there. But, at $20 million revenue and we are 20x their revenue piece and the company has been out there for 16 plus years, right. So that revenue piece aside, on the product side, two, three years back, when I first joined as the CEO of Cerence, one of the areas that I felt, the area that we were very strong was embedded AI, embedded AI in the car, our cloud portfolio needed a refresh, from my standpoint, my assessment, and I brought in a CTO, which was focused is not an auto guy is the cloud guy. And his charter was our product management team was to strengthen our cloud portfolio. Today, I felt two, three years back that our cloud portfolio was weaker as compared to our competition. And our R&D team under our CTOs guidance worked amazing wonders in terms of putting together absolutely market leading cloud portfolio. And again, don't take my word on it, take the word of our customers, and our customers recognize this and as I said, to you in our press release as well, that we're winning back some of the customers, there was a European customer, who was lost to our competitor here before my time before Cerence was found out as a independent company. And we have won that -- we have won the next generation of that customer back with a complete embedded in cloud portfolio that we have as a company, so and the feedback, like I said, from my trip, touching OEM very directly over the last couple of months in Germany, in Detroit, in UK and France and so on, gives me the confidence to make the statement here on this call. Operator: Our next question comes from Raji Gill with Needham and Company. RajvindraGill: Yes, thanks for taking my questions. Question, Mark, on the fixed prepay/ license fee revenue business, $25 million in the quarter, it looks like that's going to be up about 31% in fiscal year '21 getting to that $71 million. While we're looking at fiscal year '22 and as you factor in your overall guidance, how do we think about the prepay revenue? I would assume that line of business would drop fairly precipitously and then it will be offset by higher growth and licensing variable and new connected and other new applications but just wanted to get an extent of the drop off in fiscal year '22 for prepay given it's so high. And what drove the above average growth in prepay in the September quarter because it was quite significant. MarkGallenberger: Right, yes. So as I mentioned on my prepared remarks, it was driven by two larger than typical deals that we had closed in the quarter. And if I look at historically, we may have maybe one large deal in any given quarter, which tends to, as I mentioned before, it tends to swing those numbers around. And they're difficult to predict the size of those deals. And so it's very unusual to have two happen at the same time. And that's really what sort of drove the spike in Q4. Typically, like I said, typically it's one customer, or it's a series of customers on smaller deals, which typically will keep us in that $10 million to $15 million type of range. And so that was just -- it was just that timing which drove it. I think if you look into fiscal '22, we do expect it to recede, we certainly don't think it's going to be a repeat of last year, where we had a set for $71 million record. And if you look at our historical range, we've typically been in that low 40s, to mid 50s type range, if you go back three or four years, that's typically been the range from one year to the next. So this past year did exceed our historical ranges. And I think I've also mentioned to you in the past that if we deviate from those historical ranges, on the upside, that's good for short term, but it also does create a little bit of a pressure on our next year, and sometimes the year after growth, because we have to consume or the customer has to consume those licenses. So because we were outside that range, that does put a little bit of a damper on growth rates for next year, and possibly into fiscal '2 as well, as those licenses get consumed. Right now, it's hard to predict exactly where that number is going to be. But I would say that it's going to be down $12 million to $13 million, $14 million or so year-over-year. So that kind of gets you back into our historical range. But at the higher end of the historical range, that's what I'm anticipating. RajvindraGill: Got, I appreciate that. And when you're thinking about your fiscal year '24 target of $700 million and you're reiterating that. It does imply a fairly significant ramp reacceleration in revenue growth in fiscal year '23 and then kind of continuing into fiscal year '24. I'm just curious what gives you the competence of that visibility given that we've seen; prepaid being a bit lumpy, we've seen some of these kind of changes in the usage case for the new connected revenue. Is it just the kind of the new applications and new mobility markets that are adding it? Or are you seeing something in the attach rates for new connected that giving you confidence, to hold that target of $700 million as you look at these new cars that are going to be being produced, including your cloud connected voice revenue? Is that giving you kind of confidence that you can get to that $700 million? Thank you. MarkGallenberger: I think, yes, I'll start and Sanjay may want to jump in as well. But I think really the bottom line is that the secular tailwinds. And the digital car is not slowing down in any way, in some ways, it's actually accelerating. And so those penetrations of this technology are continuing to be pretty strong. And auto production, I think is a speed bump; things are kind of, because the auto production is being lowered, because first because of COVID and second because of the semi supply chain. Ultimately, if the demand is still there, the on demand is still there, and the penetration rates continue to grow even above expectations, then we're in a very strong position competitively, we continue to maintain our dominant share on the embedded side. And we do see growth potential in market share gains on the connected side, not to mention some of the good progress we've already been able to talk about with some of these new markets. SanjayDhawan: Yes, thanks, Mark. And this from my standpoint, I think, if you look at our model, and the four categories of revenue that we break the model down to, there is edge AI, which, Mark just commented on, so feeling good about, the target of $300 million there. For connected AI, the biggest piece that I'm focused on is new apps and service so we're expecting a contribution of about $90 million there, if the single digits in 2021. And this is where sort of the booking that we're making is extremely important for this new business. And you heard me say, we have booked $120 million in fiscal '21 some of these new products. And then lastly, for the new book, new mobility market, once again in the -- in fiscal '21, single digit millions going to about $65 million, as you sees in the model. That is, once again, for two wheelers and elevators, we've started making good progress there with a major win that I mentioned to you, we have not even taken any booking against that yet, although we expect revenue in fiscal '22 on that. And the reason is we're being cautious to since that's a brand new market for us, we want to understand it better, before the sort of come back and share more details, but feel good about that $65 million target that we have set out for fiscal 2024. On the last item is the professional service. I don't see any problems at all, going from $75 million in fiscal '21 to $110 in fiscal '24. So yes, we're all as I break down the model, and kind of go line by line; and so on I think the team is working hard to do achieve our goals. Operator: Our next question comes from David Kelley with Jefferies. DavidKelley: Hi, good morning, team. Maybe just starting with the contract duration step up, that some mix shift contribution that really is a meaningful uptick, even from last quarter, I think a year plus and I believe a trailing 12 months metric. So curious if there was, or you're seeing some meaningful duration step up with some of the recent wins you've had. And if there's anything else, maybe we should be thinking about strategically that's been a driver and could continue to be a driver of that uptick. MarkGallenberger: Yes, so in terms of that metric, I did look at as well, because it looked like there was a pretty nice uptick quarter-over-quarter. And actually, it has to do with it the TTM effect, right; the trailing 12 months where in a year ago, there was a different concentration of our bookings. And there weren't as many connected contracts, so a year ago, with that one quarter, it had a shorter duration. And so that quarter has now dropped off from the TTM. So this is naturally increased for this quarter, because that last quarter dropped off a year ago. So that was just more from a formulaic point of view. But I think when you look at the trend, overall, we are seeing more and more of our customers willing to commit to longer contract periods. I think a lot of that has to do with the fact that the connected car is here, it's here to stay, and it's going to continue to grow. And they see the real value in making sure that those cars on the road stay connected. And they are willing now to commit to longer periods than they have historically. And so I think that's starting to show up in our results. DavidKelley: Okay, got it. Thank you. That's helpful. And then maybe Sanjay question strategically, some competitive wins in China, we tend to think of that market as being a bit faster to production so just curious as to how you view Cerence's broader China momentum into next year and then maybe one quick follow up on that. I know you don't break out '24 targets regionally. But could you give us a sense of how you've been thinking about China as a contributor to some of the longer term targets? SanjayDhawan: Sure. So I think, Chinese OEM, in a very competitive space for sure. We have one major in a competitor in iFLYTEK there and I think you have heard me say, we share roughly or slightly higher in the independent reports that I saw a few months back our market share China for China OEMs, in the car ship in China, were a little more than 40% in market share, our competitor is also roughly 40%, slightly below us. And then 20% is everybody else, we're very focused on growing our share there. And some of the competitive wins you saw three of them were in China, which supports my statement that we're making, progress against our competitors as well. And once again, our full portfolio is the main reason because embedded AI, we were always been, very strong as a traditionally as a company. So, overall, I see us making progress there and continue it's difficult to forecast what that actual market share would be next year, following the year and so on and so forth, right. But in terms of looking at the competitive base in and our progress there, I think, I feel good about taking this 41%, 42% in a market share and crossing the 50% in the very near future. That concludes today's question-and-answer session. I'd like to turn the call back for closing remarks. Rich Yerganian: Thank you, everyone for joining us on today's call and we hope to see you at upcoming investor events. Thank you and have a good day. Sanjay Dhawan: Thank you. Mark Gallenberger: Thank you. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
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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.