Good day and thank you for standing by. Welcome to the Cerence’s Third Quarter 2024 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 first speaker today Richard Yerganian, Senior Vice President, Investor Relations. Richard, please go ahead.

Thank you, Felicia. Welcome to Cerence’s third quarter of 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, beliefs, outlook, strategy, goals, objectives, 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, our Form 10-K filed on November 29, 2023 and our most recent Form 10-Q. 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 Tony Rodriquez, Interim CFO of Cerence. As a reminder, the only authorized spokespeople for the company are Stefan, Tony, and me. Now onto the call. Stefan?

Thank you, Rich, and good morning everyone. To begin, I would like to briefly comment on our third quarter results. Our financial performance was as expected with revenue in the middle of our guidance. Due to the decline in our stock price, we performed a goodwill assessment following completion of the quarter that resulted in a goodwill impairment charge of approximately $357 million, negatively impacting our GAAP profitability. With the exception of gross margin, which was within the range, all other non-GAAP profitability metrics were above the guidance we provided on our last call. Additionally, we had a strong quarter for cash flow from operations, which came in at $12.9 million. We remain substantially on track to achieve the full year guidance we provided our last conference call and Tony will provide the details later in the call. We recognized that some of you may be listening to our call for the first time and thought it would be helpful to provide a high-level overview of Cerence and our business. Cerence creates AI and voice powered user experiences across the transportation industry, primarily for automobiles. We were among the first to bring voice interaction to cars and today we count nearly all the world’s leading OEMs and tier 1 suppliers as our customers and partners. More than half of cars that roll off the production line globally includes Cerence solutions. So as many of you have interfaced with Cerence as the company behind the audio and voice technology in your cars, whether it be Mercedes-Benz, Volkswagen, Stellantis, Toyota, or many others. In fact, we recently surpassed half a billion cars shipped with our technology. As the automotive industry faces an incredible transformation, we believe Cerence is well positioned to partner with automakers to deliver what drivers want and need from…

Thank you, Stefan. I will now talk through our Q3 results, Q4, and full year guidance and continue the revenue framework discussion for fiscal year 2025 that was introduced last quarter. For Q3, our revenue was $70.5 million, landing in the middle of our range of guidance of $66 million to $72 million. This represents an increase of $8.8 billion, or 14% over last year’s Q3 revenue of $61.7 million. At $12.5 million, our Q3 adjusted EBITDA for the quarter was $9.7 million, higher than a year ago and above the higher end of the guidance range. This quarter’s revenue and profitability benefited from increased fixed license revenue as compared to prior year. Our cash flow from operations for the quarter was $12.9 million and our balance sheet at the end of the quarter included total cash and marketable securities of $126 million. As to what Stefan mentioned a few minutes ago, our GAAP results were negatively affected by a $357 million goodwill impairment. This is a non-cash impairment charge that only affects our GAAP results. Turning to our detailed revenue breakdown, variable license revenue was $23.1 million, down $2.7 million, or 10% from the same year – same quarter last year. Fixed license revenue came in at $20 million for the quarter compared to a Q3 last year where we had no fixed license revenue. This brings our fiscal year-to-date 2024 fixed license revenue total to approximately $30.4 million, and we do not expect additional fixed license revenue in Q4. Connected services revenue was $10.9 million. This was slightly higher than last year’s connected services revenue of $10.2 million. When excluding $8.4 million of revenue from the legacy contract that we will discuss again in a little more detail later. Our professional services revenue was down 4% year-over-year. As…

Thank you, Tony. As we close out the fiscal year, we have three main priorities. First, accomplish our fiscal fourth quarter and full year financial objectives. Second, execute on our transformation plan while minimizing any disruptions to our ongoing customer operations. And third, deliver on our AI innovation roadmap. That concludes our prepared remarks. And we will now open the call up for questions.

Thank you. [Operator Instructions] The first question comes from the line of Jeff Van Rhee of Craig-Hallum Capital Group. Jeff, please go ahead.

Great. Thanks for taking my questions. Just a couple for me. First Stefan, on the AI wins, maybe just talk to what you’re seeing early understandably, but what are you seeing in terms of the actual usage on an apples-to-apples basis? I think you got a slide in the deck that talks a little bit about that, but wonder if you could quantify it a little more precisely. And then also along those same lines, any quantification around average revenue per unit or user, however you want to dial it in, what you’re seeing on revenue impact there?

Hey, good morning, Jeff, and thanks for your question here. Yes. So I think it’s too early to quantify all the details here. I think in the near-term there’s not a significant impact on the revenue and billings as the programs are just launched, yes, and have been rolled out. Feedback from the OEMs directly are very positive, yes. There is also a good growth potential, but still, as said at the early stage and this depends heavily on the user adaption and user subscriptions. And as a reminder, our business is B2B. Nevertheless, what you can see from the graph in the deck is that it’s not just about Chat Pro who sees a tremendous improvement for general questions. It’s across all domains here, from navigation up to simple command and control calling mom and so on, so forth. And that shows actually or is a proof of concept that we’re doing the right thing here. What we said also earlier, right, this kind of ChatGPT or Chat Pro is heavily integrated in the OEM assisted OEM branded assistant and the assistant has full control about the solution. And also by feeding the system with our own automotive data, we see less hallucinations, right. And overall, it’s also a very cost effective approach for the OEM.

Got it. As you think about the usage of in car sort of engagement systems, if you will, and you’ll look at the broad landscape, obviously you’ve dominated the – what I would call the in car systems, but then you’ve got people Bluetoothing in CarPlay, Android Auto, when you do your studies on the market and the TAM, so to speak, how are you seeing the evolution of the percent of users that are opting for which of those solutions? I’m talking like over time. But do you have any sense of how many people are opting for just simple Bluetooth versus embedded in car systems? And if they are, which brands are using, how that’s playing out?

I mean, I cannot disclose all information, but when referring to Mercedes, clearly they want to see a higher boost in their solution with respect to CarPlay and that’s indeed what they are achieving now. For us, it’s much more than just bring in large language models, right. It’s all about AI computing platform with multi-seat capabilities, right, and full interaction with the car, right, and also bring in general knowledge, right, so overall, I think that’s a trend that is really appreciated by OEMs and I’m pretty sure also with their end consumers.

Okay. Great. I’ll leave it there. Thank you.

[Operator Instructions] The next question comes from the line of Colin Langan of Wells Fargo. Colin, please go ahead.

Great. Thanks for taking my questions. The comments are now, I thought last quarter you mentioned 25, you expected mid-single-digit growth and now it’s flat to low. Is that right? And what sort of – if I’m right, what drove the slightly softer outlook into next year?

Maybe let me start first, Colin, and good morning to you as well. And then I will ask Tony to share his view. So overall, I think we have this significant reduction in costs, right. And we assume also there will be a modest impact on the revenue side, as we said, okay, we are – with this kind of product rationalization, right. And we believe that also some products with lower margin, we are going to downsize and – but Tony, what’s your view on this?

I think that’s exactly right. As you think about the guidance at single-digit growth year-over-year last quarter, really, it’s the impact of the cost restructuring. As we take a significant amount of cost out of the business to realign our cost, it will have an impact to the top line. So we’ve brought that down slightly.

Got it. And in your comments, you mentioned the debt coming due next year. What are the options? It sounded like you were alluding to potentially maybe issuing equity to pay that down. But also, I look at the balance sheet, I think you have over $100 million. I mean, can you fund a lot of that repayment with the cash on the balance sheet? And are the debt markets open to refinance it?

Yes, that’s exactly right. I think we’re looking at all options. Certainly, as we mentioned, 3% notes are beneficial at the company at this point, but we want to address the liquidity concerns of it coming due in June of 2025. So we’re looking at all options, including refinancing using our existing cash as well, and looking at that, the benefit of the liquidity from a lower coupon rate, which would be adjusted higher on refinancing and certainly the conversion price would be lower than currently in the notes. So we’re looking at all those. But yes, the markets are open to refinance.

Got it. All right. Thanks for taking my questions.

[Operator Instructions] The next question comes from the line of Nick Doyle of Needham & Company. Nick, please go ahead.

Hey, guys. Good morning and thanks for taking my questions also. You had – we just talked about, the lower OpEx will impact revenue, and you talked about it a couple of times in your script. Could you just be a little more specific on which product streams are impacted or at least which segment? And then that adjusted net cost savings of $35 million to $40 million, would that put you in the $140 million a year range for 2025 or is still too early? Thanks.

Yes, so I’ll take that. Yes. When you think about the impacts of the cost reductions, it will be primarily related to professional services revenue. So that’s where Stefan had mentioned that if that mix is a bit lower than prior expectations, we’d expect higher gross margins overall. So – and then, I’m sorry, I missed the last question about the $140 million.

Just asking if that, the adjusted net cost savings number of $35 million to $40 million would put you around a $140 million a year in total OpEx.

Yes. Well, there’s – when you think about it, there’s – there’s a combination of things. We got run rate from 2024, but that’s entire year we also have increases in 2025. And so we’re looking at really run rate off of Q4 run rate, and the expenses would be off of that number.

Got it. Thank you. And then on the fixed contract consumption, you’re saying you hope to normalize by 2026, and the consumption should go lower over time as that normalizes, and that all makes sense. But do you have a specific number that you’re looking at for the fourth quarter? And maybe what we’re thinking of through 2025 is that 10 million a quarter number. I get that, it moves up and down?

Yes. I don’t have specifics that I can speak of now on consumption rates, other than what we’ve said, that we expect that to be lower in fiscal 2025.

Okay, thank you.

[Operator Instructions] The next question comes from the line of Luke Junk from Baird. Luke, please go ahead.

Good morning. Thanks for taking the questions. Stefan wanted to start with maybe just a higher level question and understanding the approach to the R&D organization going forward. Clearly, it sounds like there’s going to be some impacts in terms of the pro-services element of R&D. I think you also mentioned sort of a unified product and core technology team in your prepared remarks? Maybe could expand on that, and I know you’re not breaking out the cost reductions into individual buckets right now, but R&D is going to be an important part of that, clearly. So maybe just at a high level, if you could come in on R&D opportunities on cost? Thank you.

Yes. So, as said, our focus is clearly on our Gen AI roadmap, including the new AI computing platform. We have recently unified our product and core technology teams. We believe that we will see some efficiency here, and also this will help us to accelerate innovation and again, drive efficiency to meet also the demands of our OEMs, that’s very important. Overall, what I said is that our solution – our new solution is well received by a couple of OEMs across the globe. I think we are doing the right things here also with respect to cost optimization, finding synergies between the two teams, right. And Nils Schanz, who joined us one-and-a-half-year ago from Mercedes, who was also essential for various launches over the last couple of weeks here. He is extremely qualified, and he will run both R&D and product and professional services.

[Operator Instructions] The next question comes from the line of Mark Delaney of Goldman Sachs. Mark, please go ahead.

Yes, good morning. Thanks very much for taking my questions. First, I was hoping to better understand how you’re thinking about professional services going forward. I think in the past you’ve used that as a lead generator and you’ve described it as part of your investments that helps with your longer term traction and revenue growth. It sounds like you want to make some cuts there and understand the lower margins, but maybe help us better understand the implications for revenue growth and why you’re making some of the cuts in that part of your business?

So first, I mean, professional services is a very important tool for us for enabling licenses, whether it’s be embedded or cloud services, right? So don’t get us wrong here. We see some optimizations in professional services and also for streamlining our products. We see also efficiencies in deploying our new products. To give you also an example, a POC so proof of concept can be done within a car within less than two-and-a-half-weeks. And then of course for doing the fine tuning and optimization and customizations with respect to the OEM demands, like Brandon and so on so forth, it takes us between four to six months. Compare this with the past where it took us 12 to 18, 24 months, right? And of course then PS [ph] revenue goes down. But nevertheless, PS is the enabler for the licensed business, and that goes also hand-in-hand with the expectations from OEMs, right. What we said also in the earnings call earlier is that, I mean, there’s clearly a demand for more flexibility and a faster deployment and also keeping the system fresh and up to date, and we’re supporting these new requests from the OEMs and finally from the consumers.

Understood. Thank you. My other question was just better understanding your commentary, Stefan, around how to think about monetization for the new Gen AI types of subscriptions. You mentioned your revenue is going to depend on usage and what the OEM customers are seeing in terms of how often these services are being used. Can you elaborate a little bit more on how your revenue will flow through? Is there some piece of it that is more committed in terms of the subscription rates you’re seeing? And then how much is maybe based on usage rates of your products in the car themselves, and just is it more tilted towards usage rates more? You guys have more guaranteed subscription fees? Just trying to better understand that dynamic, if I could, please? Thanks.

So again, we are currently at an early stage with those OEMs and our new products. We see an uptick in usage of about 50% to 70%. We see also nice increase in our price per unit per year. Most of the services are cloud services. So we should also focus in the future a bit more on billings. Then you asked about monetization of the data here. We are still in discussion with OEMs what we can do together. And as said before, right, we are still a B2B partner of the OEMs, but nevertheless we see for those deals really a significant increase in price per unit.

Thank you.

[Operator Instructions] I see no further questions at the moment. So I would now like to hand the call back over to Richard Yerganian, Senior Vice President, Investor Relations. Richard, please go ahead.

Thank you, Felicia, and thank you for everyone joining us on the call this morning, and we look forward to further discussions. Thank you and have a good day.

This does conclude today’s conference call. You may now disconnect.