Good day, and thank you for standing by. Welcome to the Cerence Quarter Three 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] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Rich Yerganian, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Brittany. Welcome to Cerence's third 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 August 8, 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; Tom Beaudoin, CFO of Cerence and Iqbal Arshad, our Chief Technology Officer. 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 will be presenting at the Goldman Sachs Communacopia Tech Investor Conference in San Franciso on September 6, in a Raymond James Virtual Lean, Mean and Green Vehicle Investor Conference on September 18. Now onto the call. Stefan?

Thank you, Rich. Welcome everyone and thank you for joining us to discuss our third quarter results. There were several important developments in the quarter I’d like to highlight. First, we delivered solid results with revenue of approximately $62 million come in at the high end of our guidance. In addition, our strong focus on operational excellence contributed to all profitability metrics, performing better than expected, except for GAAP net income, which included a charge associated with our convertible debt financing. Operationally, we delivered on everything we committed to invest on our last call. I'm extremely pleased with the progress the company has made in the last 12 months creating an organizational structure committed to three key principles. First, continue to lead innovation in AI for the transportation space. Second, delight our customers with on time and quality products. Third, win strategic accounts that support our long-term growth. At the core of our commitment to innovation are the enhancements we are making to several Cerence products using large language models and generative AI. Iqbal will detail these important product updates in his remarks. At a high level, our deep expertise in AI for automotive and strong OEM relationships put us in a unique and favorable position to partner with our customers, to deliver game changing application of these technologies. Bringing us one step closer to our future product vision, the immersive companion. As a result, Cerence remains well positioned to capitalize on the transformative trends within AI incorporating new inputs into our prototype mobility AI platform as we continuously strive to enhance customer experience, and expand product functionality. Our core auto business continues to perform well with our global outer penetration rising to 54%. That means that 54% of total new global live vehicle production includes some level of technology…

Thank you, Stefan. With decades of extensive vertical expertise in the automotive industry and a rich history of leading AI innovation, Cerence is uniquely positioned to bring the latest advances in AI into the car. We bring unmatched experience and knowledge to the application of generative AI and large language models in transportation, as well as a strategic methodical focus on creating groundbreaking user experiences. As we envision the future of in car experiences, we are keenly focused on solving user problems by harnessing transformer base foundational AI models. These models enable us to develop intuitive voice and multimodal user interfaces, as well as generative AI applications that empower our customers to deliver high value user experiences. These new capabilities seamlessly extend our existing AI based product portfolio. At the core of this offering is a next generation Cerence Assistant powered by generative AI. Through the implementation of large language models in our architecture, we are taking significant strides towards realizing our vision of an immersive companion. The Next Generation Cerence Assistant is optimized to provide users with more natural, intuitive and accurate interactions. Cerence Assistant, it deftly handles complex queries and multi-step tasks within a single request. The assistant’s deep customizability cares to both our automaker customers and end users, effortlessly adapting to their preferences as it learns. Please allow me to show you some of Cerence Assistant’s new generative AI powered capabilities. [Video played] Designed to be friendly, helpful and enjoyable. The Next Generation Cerence Assistant adds meaningful value to drivers daily journeys. These capabilities will be available to our existing Cerence customers who will greatly benefit from these new generative AI powered features. In addition to Cerence Assistant, we continue to gain traction for a generative AI powered car knowledge product discussed during our last quarter's earnings call. Cerence car knowledge offers users real time contextual answers to all car related queries. We are engaged with customers globally to adopt and expanded car knowledge product that leverages large language models and the specific data associated with a car supplied by the OEM. This is just the beginning. We are expanding our architecture with fine tune LLM based on our curated transportation data and leveraging our industry leading edge technologies like audio AI, automatic speech recognition, neural text to speech, biometrics, emotional AI and in car communications to create the future of automotive user experiences. I will now turn it over to Tom to review the Q3 results in more detail.

Thank you, Iqbal. I will review our guidance for Q4 and the full fiscal year in a moment. But first I want to share more details on our Q3 results. Our Q3 results continue step on my commitment to consistently deliver on our guidance. Q3 revenue came in just shy of $62 million at $61.6 million at the high end of our guidance. This is due to strength in our core business. As we guide it on our last call, we closed a new fixed contract in Q4 originally planned for Q3. Consumption of fixed contracts was higher than expected. I will explain why in a few minutes. As revenue came in at the high end of the range, combined with our focus on operational excellence. We exceeded most of the key profitability metrics we guided for the quarter. Non-GAAP gross margin was 66.5%, non-GAAP operating margin was a positive 0.05%, adjusted EBITDA was $2.8 million, or 4.5% margin and non-GAAP loss per share was $0.04. Except for GAAP net income, which was impacted by the refinancing of our convertible debt. Most key financial metrics came in above the high end of our guidance. During the quarter, we had negative cash flow, as expected, cash flow from operations was approximately negative $8.2 million. We expect positive cash flow in Q4 and for the full fiscal year. Our balance sheet remains strong with total cash and marketable securities of approximately $116 million. Here's our breakdown of revenue for the quarter, variable license revenue was dropped 16% from the same quarter last year, and down slightly quarter-over-quarter due to a higher than expected level of fixed contract consumption. As you will see, in a few moments, our penetration of global auto production rose to 54% as we continue to maintain a strong…

[Operator Instructions] Our first question comes from the line of Colin Langan with Wells Fargo.

Oh, great. Thanks for taking my questions. Just want to follow up on I think you made some comments on billings they were down again year-over-year. I think at your Investor Day, you talked about kind of going from 380 to 480 in ‘23 to ‘24. How are you tracking now? I mean, is the ‘23 actually lower, cost of billings is coming in lower? And is there risk to 2024 sales targets if some of these launches get pushed out too much?

Yes, so first of all, the metrics are related but different. So the numbers that you talked about were the embedded TTE use, and as we've talked about, we have seen some production delays across the OEMs. And we'll provide updated -- will provide our guidance for ‘24 in November. With respect to billings per car, which includes both embedded and connected, it's a factor of that which some of those higher TTE use and get delayed. It's also a factor of I think this is a trailing 12 month metric. And I think during some of the supply chain shortages, some of the OEMs were leveraging to the higher cars, which have more of our technology. And that as we just pointed out, some of our highest penetration is driven by winning new opportunities in emerging markets where they start out with one or two of our components, and therefore it has a relatively lower billings per car, but does provide an opportunity for accelerated penetration for winning additional business with those OEMs in those markets. And then adding additional components and features over time in association with those OEMs.

Got it. Thanks for the caller. Just a second question. The other KPI that sort of stood out as the contract duration was 6.4 years, I think it was in Q4 it was seven years. What is causing the contract, average contract to shrink? What is driving them?

It's just a mix issue of deals and how those deals play out. I mean, it's still it depends on how OEM sign up for production schedules. It's still a quite a long commitment level for OEMs.

Our next question comes from the line of Luke Junk with Baird.

Good morning. Thanks for taking the questions. I wanted to start with a follow up question on the Billings per car metric again really through the lens of what you're expecting from content per vehicle standpoint in fiscal 2024. And specifically, I'm just wondering to what extent, the single component solutions that you've spoken to today, were already contemplated in outlook or just how they impact the outlook for fiscal ‘24 in general, for starters, thank you.

Thanks, Luke, I really can't comment much on FY24, will provide our ‘24 guidance. And we'll take a look at the longer range plans when we do the Q4 guidance in November. But I think if you look across almost all the KPIs, it does show that we're continuing to win new business, we're continuing to get more active users that connected and embedded are continuing to grow. And the billings per car I think is just a factor of all the things that I mentioned. And it does provide some growth opportunities for us with some of these newer OEMs and some of these emerging countries. And so I don't think it's a bad thing. Got it.

Got it. And then for my follow up, maybe it just a bigger picture question, a question of revenue models going forward. So the press release discussed the idea of positioning Cerence as an enabler for large language models and consumer tech in the car, sitting on top of the white label proposition that we all know. Just wondering to what extent you think you can get paid for that incrementally? And just any thoughts you can share on what that revenue model might look like? Are you conceiving as something that's more license like that would be one time? Or can we see more connected, like, sort of subscription models come out of this? Thank you.

Maybe let me take this question and put volume , OEM. So and I think what we just said and what Tom mentioned right, so overall, we have a very high penetration rate. That's our foundation, we have a strong IP for conversational AI and the rock solid business model, and also good relationship with OEMs. And now, how we can further improve the quality of our products, right? And what you have seen also in the video, I think that's based on the integration of large language models and generative AI, we are working across the globe was all big OEMs on our new applications, for example, car knowledge, right, we are prototyping with them. And we are also in discussion on the business model, right. I cannot go into the details here. But we have huge opportunities. And also the ChatGPT is quite expensive. And Iqbal and team are working on a very efficient, cost efficient solution. Also covering privacy topics. Maybe Iqbal , do you want to add a bit from your side on the technology here?

No, I think you've covered for the most part. Unless there's any other specific questions. I'll be more than happy to answer that.

Our next question comes from the line of Nicholas Doyle with Needham.

Hey, guys, thanks for taking my questions. I wanted to ask how you're thinking about the two wheeler contributions next year. You had talked about production, total production, around 50-60 million units and kind of making up the difference in your longer term assumptions. Those differences coming from these transportation adjacencies. So just wondering what -- how big are these three models? Do they make up a decent portion of that -- of those units? And then also, you talked about seven design wins, I think in the first quarter. This year, are these three wins coming out of that pipeline? Thanks.

Yes, so with -- Stefan, let me land on it, hand it over to you. Yes, we've had a number of design wins. I think it's a, you had some go in production in Q3 and we have some more going in Q4. The two wheeler market is about half the size the auto. And this is a new market for us. So we'll have to see how this wrap. As we said in some of the comments here, it's not going to be a big contributor to FY23. But as these go into production, and they start ramping, and we get royalty reports, and these are kind of hybrid solutions. So some of it'll get, some of it, the connected side of it will have to get amortized over the service life of the agreement. Then again, we'll provide some updates on this particular transportation adjacency market in November.

And maybe let me also just add here that we have in total eight design wins, four went live so into production in last quarter. I think it's also distributed across the globe, in China, in India, there's mass volume, right in Japan, North America, and also Europe. And I expect that we will see also revenue growth in FY24 as Tom mentioned.

Got it. And then for the emerging market wins, they're adopting one or two components. Is that related to the two wheelers like side question? And can you just tell us more maybe what the one or two components are? What customers are really liking taking to and then how they're working with the software component and how much of that is related to the immersive containing. Thanks.

So overall, I think that was actually a contribution to this high penetration right in the emerging markets here. That's cars in the mid to low range cost range. They're starting with typical audio AI, let's say for speech signal enhancement for enabling third party opportunities, like car play, but that gives us also the huge opportunity for bring in our future solution for creating results, new OEMs also OEM branded compensation AI solutions.

Our next question comes from the line of Daniel, I'm sorry, I can't pronounce your last name.

Hey, this is Daniel on for Jeff, Craig-Hallum. Just on the connected units really strong performance, I see it up 50% year-over-year, the number of units. Just wondering, would you view that sort of as lumpy numbers or indicative really of a larger trend there in terms of the strength of connected? And in terms of if that is more of a larger trend, more success than we've been seeing in a while? Do you view that as a change in buyer behavior? Is that the product sort of reaching a critical mass on the capabilities is how would you see that momentum.

So let me start for us and then I will hand it over to Tom. So overall, we reported over the last three, four quarters, a couple of design wins, and win back also on connected services, and again, this is our foundation. And also across the globe, I think we have clearly improved the quality for connected services. And also, we are in discussion for more because we have, as I said, also in the last call this order opportunities. And we're driving quite a lot of new innovation, especially on the connected side. And clearly this our advantage also in various benchmarks was way across the globe. Tom?

Yes, I mean, as we said, I mean connected as a great opportunity for us because it sits on top of our embedded and it provides some of the key elements of our destination next and immersive cabin, you do have to adjust a little bit the previous quarter where we had a $700,000 true-up from a customer that underreported, but even when you adjust to that you're right, we're starting to see growth there. And that's Stefan said that some of these programs going live. We've also talked about over the last few quarters that there were some older contracts that were coming to the end of their amortization schedule, and they weren't up for renewals, they're just older programs that's separate from the legacy one that we split out separate. And for the most part, we probably replaced newer technologies on newer platforms going forward. So as those continue to wind down that kind of tailwind gets minimized, and the effect of the newer platforms start to take effect. So, we're pretty excited about the connected opportunities, and a lot of it plays to what Iqbal was talking about, around the enhancements there, that are being made to the products.

Thanks for that. And then just one follow up for me on the -- actually jumping back to the press release that you guys had out in July talking about working with a partner on IoT use cases, can you just refresh us reiterate what the nature of the agreement with nuances what the freedom is to enter adjacencies? And is this just sort of tech development? Or is there an ability to really go in actually to customers or where we're at in that kind of timetable?

So also here, I think, no, we have a restriction here. The field of use restriction, was [inaudible] Microsoft, and this FOU expires in a year from now, October ‘24. And as you can imagine, we already planning here are the areas where we can go in. There was also recently a press release from us, that we have also optimized the embedded AI stack for new devices. And we see huge potential for us also in the future beyond ‘24.

But in the short term there's two or three technologies that were developed and owned by Cerence that we can play. Some of it's in our audio, our audio stack. Some of its in our text to speech. We also have developed our own voice biometrics technology, separate from what came over at the time of the spin. So there are opportunities that we're pursuing in those particular areas that are exempt from the FOU for the next year. And then as Stefan said, pretty much a year from now there are no restrictions.

Yes, and we have also established a team fully dedicated on non-transportation opportunities for us, business development and R&D people.

Thank you. I am showing no further questions at this time. I would now like to turn the conference back to Rich for closing remarks.

Thank you, Brittany. And thank you everyone for joining us on the call this morning. We look forward to having further discussions. Enjoy the rest of the summer. Thank you.

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