Good morning, and thank you for standing by. Welcome to the Cerence Second Quarter 2023 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. [Operator Instructions] As a reminder today's conference is being recorded. And I would now like to hand the conference over to your speaker today, Rich Yerganian, Senior Vice President of Investor Relations. Rich, please go ahead.

Thank you, Eric. Welcome to Cerence's second quarter fiscal year 2023 conference call. Before we begin, I would like to remind you that this call may involve certain forward-looking statements. Any statements that are not statements of historical fact including statements related to our expectations, estimates, assumptions, goals, targets and plans should also be considered to be forward-looking statements. Cerence makes no representations to update those statements after today. These statements are subject to risks and uncertainties which may cause actual results to differ materially from such statements as described in our SEC filings, including the Form 8-K with the press release preceding today's call, our Form 10-Q filed on May 09, 2023 and our Form 10-K filed on November 29, 2022. 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. The press release is available in the IR section of our website. Joining me on today's call are Stefan Ortmanns, CEO of Cerence; and Tom Beaudoin, CFO of Cerence. As a reminder, the only authorized spokespeople for the company are Stefan, Tom and me. Before handing the call over to Stefan, I would like to mention that we have 7 Investor Conferences in the next few weeks. Please refer to the upcoming events section of our IR website for specific dates and conference information. Now onto the call. Stefan?

Thank you, Rich. Welcome everyone and thank you for joining us to discuss our second quarter earnings. We delivered solid results with revenue just over $68 million coming in above the high end of our guidance. In addition, our strong focus on operational excellence contributed to most profitability metrics performing better than expected. This includes generating free cash flow of over $5 million in the quarter. Our core auto business continues to perform well with our global auto penetration rising to 53%, that means that 53% of total new global light vehicle production includes some level of technology from Cerence. Tom will provide the details of our performance in a few minutes. We continue to maintain a strong competitive position against both niche players and consumer tech. Bookings for the first half of the year included multiple strategic wins with a solid pipeline of identified opportunities, we expect a strong second half of bookings. Cross Cerence remain in the macroeconomic environment, while semiconductor shortages for the auto industry are incrementally better, the uncertain effects of rising interest rates and the slowing global economy on auto demand remain in place, offsetting any likelihood for a near term significant ramp of production aligned with our fiscal year IHS is forecasting 4% growth. This is slightly better than our original assumption of 3%. Accordingly, we have raised the low end of the range for our full fiscal year revenue guidance from $275 million to $280 million. While it is a recent event and not part of our Q2 results, I'm excited to announce Iqbal Arshad as our new Chief Technology Officer. Iqbal will lead Cerence global technology and platform organization responsible for providing leadership for our technology vision building innovative user experiences and accelerating our roadmap. Iqbal's impressive career in technology leadership includes…

Thank you, Stefan. I'll come back to guidance for Q3 in a moment. But first, I want to share more on our Q2 results. With a strong Q2 results, we are providing another positive data point and our goal to consistently deliver on our commitments. Q2 revenue came in at $68.4 million above the high end of our guidance. This is due to a combination of better than expected strength in our core business with higher than anticipated contributions from license, connected services and professional services. New fixed contracts and consumption of existing fixed contracts in the quarter was in line with expectations. Based on the higher revenue, we exceeded most of our key profitability metrics we guided for the quarter. Non-GAAP gross margin was 65.3%, non-GAAP operating margin was negative 0.1%. Adjusted EBITDA was $2.5 million or 3.6% margin and non-GAAP loss per share was $0.04. With the exception of non-GAAP operating margin and adjusted EBITDA, these metrics came in above the high end of our guidance including a $3.8 million reserve for bad debt with a specific EV customer. Both metrics, non-GAAP operating margin and adjusted EBITDA were at the midpoint of the range. During the quarter, we returned to positive cash flow as expected. Cash flow from operations was approximately $6.6 million. Our balance sheet remains strong with total cash and marketable securities of approximately $123 million. There is a breakdown of revenue for the quarter. Variable license revenue was up 30% from the same quarter last year and essentially flat quarter-over-quarter. The increase compared to last year were due to lower consumption of fixed licenses, slowly improving auto production and increasing penetration. New connected services revenue was down 5% from the same quarter last year, and up 6% from last quarter. The year-over-year decline was the…

[Operator Instructions] And our first question comes from Jeff Van Rhee with Craig-Hallum Capital Group. Jeff, your line is open. Please go ahead.

Great. Thanks for taking the questions. Guys, real nice quarter. It looks like everything is tracking well and connected units, a bunch of things to like here. In terms of the billings per car TTM, I think that's decelerated last couple of quarters. Cerence [indiscernible] very few going the wrong way. What's going on with the billing per unit?

Thanks, Jeff. It's - a little bit of it is mix and how the OEMs are reporting each quarter. We also noted that there was an FX impact this quarter. And some of that is also the implementation of new projects and programs, which as we've talked about previously some of the new ones do carry a higher PPU. Those are really driven and dictated by the OEMs. So some of that is how quickly they're getting those programs into production and therefore the billings and the royalty reporting flowing through the financials. So a bit of it is mix, a bit of it is FX and then a bit of it is, slight delays in some of the newer programs.

How do you think about that number maybe over the next still a little longer duration over the next year or two?

Well, it's critical. I mean as we talked about in Investor Day and as we continue to drive stronger bookings, particularly with some of the new innovation in the technologies that that Stefan talked about, we still have expectations for growing PPUs on both embedded and the connected side of the host.

Great. And then just one other, obviously at the November Investor Day, you had talked about sort of projections or target models for the out years, not formal guidance, but gave us a sense of pretty dramatic EBITDA growth in FY24? But is that a hinged and start of production and particularly both on the two wheeler side as well as you were just talking about some of these price uplifts come in the new contracts that have yet to go to start of production. So I guess the question is starts of production both on the key automotive platforms as well as the two wheelers. Just talk about how those are tracking?

Well, we continue to drive those implementations with the core OEMs. I mean, we're not updating any of the future year period. But this client will do that at the end of the fiscal year. And then as Stefan talked about, we continue to have strong win backs and program wins kind of as reflected in the bookings?

So let me add a few things. Good morning, Jeff here Stefan.

Good morning.

I think we are making both progress here with all OEMs, you heard also with this leading Chinese OEM right, but also with European North American OEMs. On the two wheeler side, we have in total now seven wins, that's great here. Two wheelers went live in Q2. We are expecting another big SOP in India, one of the top three two wheel manufacturer and then a legendary brand will go live also next - in Q3 in North America.

Okay, all right great. And last one then, just you commented several times about the strength of the pipeline, and what it's looking like at this point. Maybe just expand a little bit any particular geographies products, kind of coexist environments. What do you notice in that pipeline other than that obviously sounds like the magnitude has got you pretty excited?

So I think, we have just launched just talk that was also presented by Ola Kallenius, CEO of Mercedes. This is a noble feature. As you can imagine, we see a great appetite for our new car knowledge with generative AI. Yes and we have also created a very cost sensitive approach here. We all know that ChatGPT is quite expenses, yes but we're doing this also for a couple of years now working with large language models here. We see also a new appetite here for EBD emergency vehicle detection. We are progressing from my point of view in an excellent way with our new Cerence Assistant, right., We had also various strategic design wins, again, big tech. So we are on track in my view.

Great. Thanks so much.

Okay. Standby for our next caller and the next question comes from Colin Langan from Wells Fargo. Colin, your line is open. Please go ahead.

Oh, great. Thanks for taking my questions. Just a lot of follow-up on the bookings, I think you reported $263 million the full year last year was I think $648 million. So if I annualize the first half pace, it does seem like a step down from what you were doing full year last year. Any reason for the moderation are some of these contracts getting sort of pushed into the second half? How should we think about that?

Yes, hey good morning, Colin, and thanks for the question here. So, the bookings are lumpy and difficult to predict the timing here. I think when comparing this first half of 2023 with the second half of 2022, we see a growth of 11% which is not bad at all. We have a very strong bookings pipeline, with identified solid opportunities for the second half. And we are quite confident that we will also convert this opportunities in very strong bookings.

Okay. I mean is the thought that bookings this year will still grow or is last year just a tough comp, because it's so high?

We don't provide guidance on bookings here, but also here we are on track what we also said at the earnings day.

I would just add that - bookings is the estimated value of the length of the entire contract. And the length of those contracts can vary quite widely by OEMs. Sometimes they're five years, seven years, we've seen 10 year contracts. So some of that lumpiness we can still be winning significant amount of platforms. And as we've talked about, we've had a number of win backs. We haven't had many losses at all. And that's why at the end of last year, we tried to move to this kind of five-year backlog model, which we will update along with our guidance at the end of the year, which I think is a good indicator of kind of the medium to the visible revenue over the next two, three, four, five years. But I think as Stefan alluded to, there was growth above the second half of last year in this first year, and we have a strong pipeline for the second half.

Got it, that's helpful color. Just a quick question, you raised sales guidance and gross margin slightly, why either than operating income are still unchanged? Is there sort of SG&A inflation or it's just sort of rounding?

Well, we did have to take a $3.8 million - bad debt reserve against the specific EV customer. We believe that customer is also having issues with other vendors. That goes into G&A. We made up some of that in the bottom line, because we had some FX impact, we had some better interest income and a couple of other factors. So that's why you see a little bit of a shortfall. We're still in the middle of the guidance level, but then we kind of made it up in OIE and other activities.

Got it, all right. Thanks for taking my questions.

Standby for our next caller and the next question comes from Mark Delaney with Goldman Sachs. Mark, your line is open. Please go ahead.

Yes, thank you very much for taking the questions. You mentioned a handful of win backs that were achieved in the quarter and you spoke on some of the technology capabilities that led to it. But could you elaborate a little bit more on the pricing behind some of these win backs? And did you have to price more aggressively perhaps in order to bring customers back to Cerence? And how does that fit into the PPU commentary you previously articulated of that trending higher in the coming years?

Okay. Good morning, Mark yes. I think it's all about a rock solid technology as you can imagine right most of the OEMs doing also on the continuous - faces evaluation and benchmarking. In Q2, that was actually where we beat some niche player here, right? And now we are again back into North America for connected services. It has nothing to do with the pricing theme. It's all about our expertise with AI with a very improved cloud AI stack, what I also said in some of the last earnings. And we're bringing also more and more our vertical expertise. And I mean, it's all about performance here, right.

Okay. So when you kind of look at these win backs overall, that is still consistent with the view of increasing PPU?

Yes, yes.

Okay, okay. And then, so thank you that's helpful. And then - my other one was around the revenue cadence 2Q, 3Q. Tom, you mentioned some movement around when some of these fixed contracts will be signed, if I heard correctly, what was going to go in the fiscal third quarter is now fiscal 4Q. Why is that moving around? Is there anything you guys are trying to do around getting better margins? It was just sort of normal timing or anything else you can share on - and the reason for the step down in the third quarter, but then comes back in 4Q? Thanks.

As we've talked about, we have a pretty -we have pretty good visibility to the pipeline for fixed contracts as we've stated consistently, this is a small group of Tier 1 customers. And so we kind of know when they would be up for doing either a new fixed contract as one expires or other activities. And as we look at that pipeline for the rest of the year, we feel that with a couple of these opportunities, we'll be in a better position to negotiate those. We really do want to control the discount levels on these. And I think Stefan and I, it's much more important to do that because as we've talked about these are already one deal. So we're already achieving revenues on these. The customer may be under a current fixed contract that's expiring. So I think it's important to really line up with the sales organization, line up with even the customers in some respects around the timing of those and what's an appropriate win-win discount levels on those that gives them some of the cost reductions that they're looking for but also provides the effective cash flow but not too high a discount that affects the consumption level on a go forward basis. So that's the only real reason.

Thank you. All right. Please stand by. Our next question comes from Rajiv Gill with Needham. Rajiv, your line is open. Please go ahead.

Hi, this is Nick Doyle on for Rajiv Gill. Just wanted to ask again about the win back I guess there were two this quarter and one last quarter. Just if those affect your long term targets, if it's incremental or already included in the model you provided at Analyst Day? And then if you could just talk a little bit more about how you won this back and if there's any difference between winning back from the niche player versus the kind of big tech player? Thanks.

Let me -- I'll handle the first part and then Stefan, you can talk about the actual win back. Just from a financial modeling standpoint, we have bookings expectations to drive the medium and long term goals and sometimes they come from extensions and sometimes they come from new platforms and models and some cases, they come from win back. So I mean, all of these factors help us to drive towards the longer term models which will roll out in November.

And when looking at the technical stuff of our solution, right, the win backs were driven actually by our new steering assistant. And we could convince that this new solution is easy to integrate. We could also show on OEM's platform the benefits in terms of user experience in terms of accuracy and also in terms of fast response time behavior, right? And we addressed all the vertical needs for the OEMs. With this full flexibility for customization on top of our steering assistant and also offering the so called coexistence.

Thanks. And then for my follow-up, what are your assumptions for the autos in '23 and '24. And was the entirety of the raise really driven by the kind of IHS's increase? Thanks.

I assume you meant '23. So, yes, we had originally modeled in about 3% which at the time was significantly less than with IHS. So I think they were like 7%. The expense moved up to 4%. So as we've looked at our royalty reporting, I think we're back in line with them at about 4% and our raise is really some portion of that plus as you saw, we've increased the penetration by a point over the trailing 12 months. So it's a combination of those factors.

Thanks.

Great. Thank you all for joining us this morning, and we will be in touch and hopefully see you at some of the upcoming conferences and investor events. Thank you and have a good day.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.