Good day and thank you for standing by. Welcome to the Cerence's Fourth Quarter 2021 Earnings Call. [Operator instructions] 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.

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?

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…

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…

[Operator Instructions] Our first question comes from Chris McNally with Evercore.

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?

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?

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.

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?

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.

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.

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.

Our next question comes from Mark Delaney with Goldman Sachs.

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.

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.

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.

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.

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.

Our next question comes from Luke Young with Baird.

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?

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.

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?

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.

Our next question comes from Colin Langan with Wells Fargo.

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.

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.

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?

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.

Our next question comes from Raji Gill with Needham and Company.

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.

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.

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.

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.

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.

Our next question comes from David Kelley with Jefferies.

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.

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.

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?

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.

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.

Thank you.

Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.