Good day, and thank you for standing by. Welcome to the Cerence First Quarter 2024 Earnings Conference Call. [Operator instructions] I would now like to turn the call over to your speaker, Rich Yerganian, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Michelle. Welcome to Cerence's first quarter of full fiscal year 2024 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, strategy, goals, targets, and plans, should 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, and our Form 10-K filed on November 29, 2023. 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 will be presenting at the Baird 2024 Vehicle Technology and Mobility Conference on February 29, and the Raymond James 45th Annual Institutional Investors Conference, and the Morgan Stanley Technology Conference the week of March 4th. Now onto the call. Stefan?

Thank you, Rich. Welcome, everyone, and thank you for joining us to discuss Cerence’s first quarter results. Over the next few minutes, I will update you on the highlights from our first quarter, and provide an update on our AI product strategy and the exciting interest we receive from OEMs, partners and press at CES. But first, a review of our Q1 highlights. As we have briefed you on previous calls, the R&D and product teams at Cerence have been working at full speed, integrating the latest developments in Generative AI and large language models into our automotive and adjacent transportation-focused solutions. We believe our enhanced products and future roadmap represent an industry-leading inflection point for the in-cabin experience for drivers and passengers. Not only are existing customers showing interest in deploying our new solutions as quickly as possible, but we have also seen interest in deploying our new innovations from OEMs that had previously chosen alternative solutions. Discussions with these OEMs and customers gained momentum during Q1 and post CES, resulting in a greater pipeline of business opportunities as we progress through the fiscal year. Notably, we made steady progress during the quarter in aligning our product strategy with key partners. We announced major engagements with NVIDIA and Microsoft leading up to CES. The hardware and tool chains available to us through these partnerships are important contributors to fulfilling our vision of creating the ultimate AI-based immersive in-cabin experience. In December, we introduced the Cerence Automotive Large Language Model called CaLLM. CaLLM is an automotive-specific large language model leveraging NVIDIA’s computing and hardware capabilities for the training of generic and OEM-specific models. Cerence is working with NVIDIA to solve several key challenges, including shortening time to deployment by moving at true AI innovation speed, the collaboration with Microsoft, focusing…

Thank you, Stefan. Let me first discuss our Q1 FY ‘24 results, followed by our guidance for Q2 FY ‘24. Our Q1 results included several one-time events. One was the acceleration of the revenue associated with the legacy contract that we had previously communicated. We came in above our revenue target primarily due to the net effect of two additional one-time events. Another was with a customer whose contract with Cerence provided additional services to the Toyota legacy solution. This customer notified us of the decommissioning of their service in Q1, resulting in acceleration of the deferred revenue associated with their service in Q1 in the amount of approximately $9.9 million. Additionally, a separate customer notified us in Q1 that they had determined they had been overreporting royalties for a period of time. This resulted in a negative one-time true-up of $4.8 million to our license revenue. As we have reported in the past, and as recently as Q4 of last fiscal year, we do get notifications from customers when they realize they have either been under or overreporting royalties to us. While the updates we usually get are positive true-up, in this particular case, the customer determined they had been overreporting royalties, and therefore we took a reserve as part of our Q1 results. Q1 revenue came in at $138.3 million, approximately $6 million above the high end of our guidance, primarily due to the facts mentioned above. Adjusting for the items I noted earlier, our Q1 revenue still would've delivered a solid financial performance. Revenue for Q1 included no prepaid contracts as communicated during our Q4 conference call. The results in the quarter were driven by our core transportation business. As revenue came in above the high end of our guidance range, combined with our focus on operational…

Thank you. [Operator Instructions] And our first question is going to come from the line of Jeff Van Rhee with Craig-Hallum Capital Group. Your line is open. Please go ahead.

Great. Thank you for taking the questions. A couple, just maybe start with the customer that left with Toyota that was apparently in new connected, and just maybe a little more color. Was that a surprise given they were correlated to Toyota? Was there a vision that somehow they were going to stay excluding Toyota, and then just again, a little more color on what exactly they were doing?

So, Jeff, thank you. So, they had a separate contract, so they were kind of a tier two to that overall solution. I don't think we truly expected them to also cancel that. I mean, we certainly had to wait for them to understand what their relationship was and what their activities and contractual obligations were with Toyota. So, they actually notified us a little bit after we got the notification from Toyota on our legacy contract, and that's a little bit why we didn't include it in Q4 because we hadn't been informed at that time.

And so, was the explanation that they were leaving because they simply had to, because that partner was going away, or because they were changing product direction and you were no longer a fit? What was the logic to leave, if it wasn't a foregone conclusion that they had to leave?

It was pretty much the same logic with our Toyota legacy. They got informed by Toyota. We don't know exactly what their contractual arrangement was with Toyota, but they were also told that Toyota was ending that service, and therefore they came back to us and informed us that they were also canceling the service associated with that solution.

And maybe as a reminder Jeff, good morning, Jeff, the Toyota Legacy program started in 2011, right? So, it's a very old, old-fashioned program compared to nowadays solutions, especially when looking at CES, right? And they have been informed actually in parallel and then came back to us here. Nevertheless, we have an excellent relationship with Toyota and we're focusing on new programs, for example, model year 24 and upcoming programs. And they have invited also us to discuss new opportunities beyond model year 24.

Okay, helpful. Then if I could just sneak two other quick ones. In the - you referenced, Tom, I think in the script that you had headwinds remaining from some other old contracts in connected. Can you just put some bounds around how much of a revenue headwind that is on an annual basis?

We haven't split out the exact amount there because some of it is programs end and sometime there's a ramp delay. So, I think there's some other indicators on the positive momentum we're seeing in connected services. And I think we'll start to see that growth in the next couple of quarters in 2024. And again, a piece of it is some delayed production starts and ramps by some of the OEMs.

Yep. Okay. And then just maybe last, Stefan, on the - very high level question here, but I guess if you look at the overall landscape, how do you as a company best gauge the satisfaction of the end users that are using your technology versus the alternatives? And obviously you quote this 54%. So, your share in the in-car systems is steady, but folks can use Apple CarPlay, Android Auto. There are a lot of avenues that they have to consume or interact with the vehicle while they're in the vehicle. So, two questions. Just how are you gauging end user satisfaction of your solution versus the other solutions? And then any commentary about market share within actually what's getting used in the car? Because I think some of those, Apple CarPlay, Android Auto, might not be measured in that 54%. Thanks.

So, maybe Jeff, there are, in our view, in my view, actually three key pillars. First of all, we have a very diversified strong customer base with strong engagement. That was crystal clear at CES and also post CES, right? And we are getting also valuable feedback from lead OEMs across the globe. Secondly, I think also with the opportunity for market and OEM-relevant brand customization, we have some huge advantages over the big tech giants, right, because all OEMs understand now that they need to drive the immersive in-cabin experience, their digital cockpit experience, right? And they are heavily engaged also with their users, right, in sharing this information with us. But equally, or even more important is - I mean, you know, at our last Investor Day, we said, okay, we are moving ourselves from a component supplier, technology supplier, to a full solution innovation partner. And really, I can say we have achieved this important goal for the company, right? So, we are providing actually now a leading innovation computing platform, now providing really a compelling incoming experience with, yes, you can say commercialized hybrid large language model architecture, right? And that was one of the best products at CES and the demand from other OEMs is just amazing and terrific, right? And with this huge penetration rate of 54%, right, we have now huge opportunities in upselling those solutions in the short term, but also in the mid or long term, bringing in our new hybrid large language model, Generative AI solution. And therefore, we are partnering also with NVIDIA for accelerating the rollout. I mean, languages is still a key topic, right? We are a global player compared to others in the market here, right, and our promise to the market is that we have by end of this calendar year, 20 languages supported hybrid. That means embedded in cloud base. So, overall, I think we are on a very, very good track.

Okay, great. Thank you.

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Quinn Bolton with Needham & Company. Your line is open. Please go ahead.

Hey, this is Nick Doyle on for Quinn. Your adjusted total billings growth decelerated slightly from 6% last quarter to 4% this quarter. Can you expand on that data point? It sounds like it might be impacted by the additional program delays that you're talking about. And then maybe you can touch on the key reason you think you've seen these delays, how the OEMs are thinking about SOPs this year while auto production and auto sales remain relatively strong lately. Thanks.

Yes, Quinn, I'll take the first part and then maybe Stefan can talk about the second piece. I mean, again, we saw growth in billings. I think we'll see accelerated growth in billings over the next few quarters. I think it's just a little bit of a timing and seasonality in that billings number.

And looking at delayed SOPs, Quinn, here, also here have also some positive messages. Just been informed that one of the program which has a delay for more than two years, will go live in calendar week 12 of this year. That's great, because here we see higher PPU and it's a mass volume OEM, right? And there was also another big OEM who had also some delays of nine months, and they will also go live within the next two months, which is really great for us. And then as said, we have this diversified customer platform. You have also heard about BYD. They're becoming more important for the European market. And as you know, we are their preferred partner here when it comes to the in-cockpit experience leveraging conversational AI. So, we are on a good track, but we have still some dependencies on the OEMs. And as you also said earlier, right, the OEMs defines start of production, and they will also let us know when they're doing this kind of software updates over the air.

Okay, thank you. And then what part of your technology stack drove the AIoT win? I guess why wasn't this piece limited by the FOU? And can you talk about the size or timing of the win. You had - I think you had about a $5 million win with a big tech company in the fiscal one quarter, 1Q ’22. It's bigger than that?

So, over the last couple of months, we have made great progress also in the non-transportation space. We have in Q1 four product launches, yes, one in Korea that's for home, one in China, and two in North America with well known companies, industrials here, right? And we had also another big design win in North America for wearables. We are still under the MOU, so we are selling technologies which are applicable, for example, audio AI-embedded solutions and text to speech.

Yes, so just a little bit on that. I mean, we've said all along that there were certain elements that we were able to advance prior to the expiration of the FOU. Those were clearly defined in the contract with Nuance, now Microsoft, and that's what we - in the short term, that's what we've been pursuing. And then as of October, there will be no restrictions.

And our focus, Quinn, is on industrial IoT variables, also health, well-being, and we are also in discussion with big companies, especially North America and smart home and office.

Yes, some of those will have to wait until October, but we're getting ready.

Thank you.

Thank you. [Operator instructions]. And our next question comes from the line of Mark Delaney with Goldman Sachs. Your line is open. Please go ahead.

Yes. Good morning, everyone. This is Will O'Brien on from Mark Delaney, and thank you for taking my question. Can you give us some additional color on OEM feedback to Chat Pro, which you featured at CES, and how broad-based is the OEM interest, and any color you can give on the PPU opportunity?

So, good morning again. Yes, it was really amazing feedback from all OEMs from North America and big OEMs, European OEMs, OEMs in Korea, Japan, and China. I think that's clearly a game-changer with Chat Pro, but we are also going beyond Chat Pro. Maybe not sure whether you have seen also our Cerence Assistant with NLU plus here, right? So, we clearly have changed the dynamic in the market here. Feedback was amazing. Some of the OEMs told me actually, hey, when can we have it in our car? We have various discussions also with our sales force and OEMs. I think they want to have it ASAP, as soon as possible here. Really, there are huge opportunities, and it goes far beyond Chat Pro. When looking at the PPU, I mean, I cannot share everything here, as you can imagine here, but also here we hope that can also drive our future revenue. And as you also mentioned earlier, right, we are going to address also cars on the road. And what we can share is, I mean, you saw also the press announcements from both VW and Skoda. They're trying to bring it in also on cars on their own, which will also drive revenue on our side.

Thank you for that. And then if I can sneak in one more question. So, with the added company focus on Gen AI, what does that mean for the company's OpEx for the business? And any additional color you can give there on kind of the gross margin opportunity for some of these new Gen AI opportunities or applications you all are working on.

You know we are very sensitive to costs here, right? So, there are actually no incremental OpEx required. You have heard also about our partnership with NVIDIA. This is also part of our story here. A very important partner now to us. Yes. And we expect gross margin, as mentioned by Tom here, right? So, overall, we are very sensitive to costs here, right? And with our partnership engagements, right, we are on a very, very good track. It is also worth to mention here that we are using a hybrid solution, meaning embedded and cloud. And we are doing also quite a lot on the embedded side - edge side, not just for privacy reason, but also for cost efficiencies.

Thank you.

Thank you. And I would now like to turn the conference back over to Rich Yerganian for any closing remarks.

Well, thank you to everyone for joining us on the call this morning. We look forward to seeing you at some of the upcoming conferences or at other times. Have a good day. Thank you.

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