Good day, and welcome to Cerence’s Fourth 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] As a reminder, this call may be recorded. I would now like to turn the call over to Jason Gold (ph), Investor Relations at Cerence. Please go ahead.

Welcome to Cerence’s fourth quarter and 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 Brian Krzanich, CEO of Cerence; and Tony Rodriguez, Interim CFO of Cerence. Please note that the slides with further context are available in the investors section of our website. Now, on to the call. Brian?

Thank you, Jason, and good morning, everyone, and welcome to the Q4 2024 Cerence earnings call. I'm excited to talk to you this morning as Cerence's new CEO. While Tony will walk you through the details of our Q4 and fiscal year ‘24 earnings, I'm very proud of what the organization has delivered for Q4. The top line revenue of $54.8 million and adjusted EBITDA of negative $1.9 million, both exceeded the high-end of our guidance. I couldn't be more proud of what the team has accomplished and the head start this gives us for 2025. Before I give you our forecast for 2025, I'd like to spend a few minutes now to talk to you about my vision for Cerence, which also gives you insight into why I chose to come to the company. So Cerence is at the forefront of the revolution that is occurring in the automotive industry, as AI specifically generative AI and large language models, grow in use and importance. Cerence already has a large footprint in the automotive space with a broad range of products that bring voice assistance to the vehicle, including 28 design wins in fiscal year ‘24. Our vision moving forward is that every product in our solution portfolio will have artificial intelligence and specifically large language models built into them to bring simplicity and convenience to in-car interaction. This is not a transition that will happen far out in the future, but rather one that has already begun in earnest. This is evidenced by the strong momentum we've seen for our generative AI solutions with 10 customer wins and six program launches for these products in fiscal year ‘24, including Volkswagen, Renault, Skoda, Audi and Smart. And importantly, more Gen AI programs shipped than any of our competitors and key…

Thanks, Brian. Today, I'll be covering three major topics. First, I'll review our Q4 and full year 2024 results. Then I'll go into some details of our restructuring. Lastly, I'll provide some guidance for fiscal Q1 and the full fiscal year of 2025. Let's get into the Q4 and full year 2024 figures. At the top, we achieved Q4 revenue of $54.8 million, which exceeded our high-end of our guidance range of $50 million. Revenue ahead of guidance this quarter was aided by approximately $5 million in license royalty true ups for two of our OEM customers. Our customers self-report royalty volumes that approximate their auto shipments that include our technology each quarter and periodically true up to actual. This is not uncommon and we will call this out whenever we believe it is meaningful to the numbers. Our gross margin of 64% in Q4 also exceeded our high-end of our guidance of 60%. Approximately 4 points of this were due to the drop through benefit of the noted revenue true ups. Moving down our income statement. Our adjusted EBITDA loss of $1.9 million, well exceeded our guidance of a loss of $13 million. This was driven by the improved gross profit from the higher than expected revenue and decreased operating expenses from the accelerated restructuring efforts during the quarter of approximately $6 million. As compared to prior year, Q4 revenue declined by $26 million or 32%. This highlights some of the noise in our P&L that makes year-over-year comparisons somewhat difficult. The two biggest drivers of the year-over-year decline were that in Q4 of last year, we signed $12.8 million of fixed license revenue during quarter and had $9.2 million of revenue associated with the legacy Connected Services contract with Toyota. You may remember that this contract was acquired…

Thanks, Tony. In closing, we're happy with and motivated by this quarter's results. We remain focused on execution, business process improvement and cost reduction, and advancing our generative AI roadmap. We take our commitments to The Street seriously and we are committed to streamlining our reporting so that investors can understand the trends in the business. We believe in our ability to deliver on our fiscal ‘25 guidance and fueling in our growth for fiscal ‘26 and beyond. We look forward to continuing to share our progress. We'll now open it up for questions.

Thank you. [Operator Instructions] Our first question comes from Jeff Van Rhee with Craig Hallum Capital Group. Your line is open.

Hey, guys. Thanks. Thanks for taking my questions. Good morning. A few for me. I wanted to start on the AI side. You touched on the economics of AI being more compelling. Just curious on the margin because that was one of the questions coming in. Just how the margins compare on AI related deals? And then you also referenced pricing uplift, I mean, without being -- well, be as precise as you're willing, but give us a sense of magnitude of the pricing uplift related to AI?

Yeah. I can start and then Tony can -- it's Brian, Jeff. And then Tony can add in some of the details. In general, we don't really give out absolute pricing. But in general, we're seeing a price uplift. And most of the AI models, the generative AI models actually have an equal -- relatively equal cost of development and operations as our current models. So the margins are improving with those applications. So we are seeing a margin uplift with those products. Now it's early as we said, and these are the first kind of deals and POCs that we've started with the product, but it's promising from that perspective. People are seeing the value, being able to just speak naturally, hey, my seat is cold. Well, the thing realizes that you want the seat heat turned on. Hey, crack open the window. It goes in 10% increments and opens up your window and it just knows how to interpret natural language much better and people see that value and you can build assistance and they can build onto the product. So in general, we're seeing a better margin and more importantly or as importantly, we're seeing a strong demand for the product and interest by our customers. Tony, can you help?

Yeah. I mean, a couple of things on the margins. Yes. They're improving. Remember that these are our Connected Services products. You'll see that the margin that we're anticipating next year is higher than our margin for 2024 overall, primarily, when you take out the legacy revenue, and that's really a product mix for next year, more licenses and less professional services. But the connected service and these bookings that we're looking at now with higher margins really won't come into play until the latter half of ‘25 and into ’26 that we'll start seeing connected service margin increase. So we'll really see that benefit in the ‘26 year and beyond.

Okay. And I guess just Brian on -- then on that same topic as it relates to connected, as you inherited the business, obviously connected has been talked about for years. A lot of bookings have been pointed to, backlogs have been pointing to, but the revenue stream just hasn't lifted. And I heard your comments about, look, these contracts take time, totally understood. I get the rev rec on it. But over the last several years, the lack of growth in that line suggests something deeper about the competitive landscape, share loss, functionality, maybe just a little deeper sense of what you think your competitive position is in connected and your right to win. And I get it, you just touched on AI, like going forward, you think that's going to be a part of it. But curious beyond that, how you would frame the connected opportunity and competitive position?

Hey. This is Tony, and I'll start first with a comment on growth and then Brian can take the other second part of that question. But if you look at our -- I mean, we've talked about it in the script and we've mentioned it before in calls that there's a little bit of noise within our P&L as we compare year-over-year. So -- but if you look fourth quarter of last year and take out the Toyota legacy non-cash legacy revenue from connected last year, a year ago quarter, we actually grew the connected business 12% year-over-year. So we see that growing in fiscal ‘25 as we move forward and then growing beyond that with the new bookings that were -- that are happening -- that happened in the fourth quarter of this year – third and fourth quarter of this year and as we go into the fourth quarter. So that business is growing and we anticipate it to be a growth area of the business.

Yeah. And Jeff, let me answer kind of your -- the second part or another part of your question, which was, what's our right or position to be in that business. And it's really around one, our product is quite strong. It's designed and we understand the automotive space. So there's -- for example, 23,000 different instructions you have to be able to understand and manage and put through those large language models to operate the car, right. Everything from windows and seats and charging ports and all kinds of very automotive specific functions that we work with the OEMs to really introduce and that partnership is very strong. Second is our willingness and our ability to customize and really create the experience that the OEM wants, that is very different than most of our competitors, especially the big guys. They tend to come in with one answer, one structure, one product. It's connected all the time. We have the ability to be connected to be local. We will customize around their feature set. Sometimes, for example, they want to go and look at any kind of a call out to an LLM model and say, they want to not have it go to the public LLMs. They want to go to their own private LLM that they have that for whatever business strategy they have, they want to use those models to guide the instruction set that comes back. We have the ability to structure that so that we can architect where the request goes to, whether it goes to the public search or whether it goes to a private search at the OEM. And our competition tends to only go to the public or where they're preferentially treated. So it's all of this customization, the number of languages we can deal with that really gives us much more of a customized experience for the OEM. And that's really where we are strongest and where we perform and why they typically want us for their experience.

Understood. And one last brief one, if I could, Brian. As it relates to the -- you coming in and taking the reins here and I realize this is somewhat unfair because you just got in and you're getting your hands around what the business is and where we're headed. But if you look over the last handful of years, the pro forma royalty number, which adjust for all the prepaids and everything else, should have been relatively flattish. And clearly, some things have worked, many have not, but you're sizing up the business. Essentially, why would you -- why do you think if you look at the last five years as a company not been able to grow? Is this fundamentally a product market fit? Is it a go-to-market sales function? Is it something else? Just your early takes on kind of the brief history lesson of what hasn't worked and what you think you can get working?

Well, I'm still kind of digging into the past and I've been a little hesitant to think too much about the past because if you take a look at, as you said, where it came from, it was a very different kind of model and experience where they were really focused on driving, bookings and just really trying to grow at any cost and rather than -- really focusing on what are the products and how do we really differentiate ourselves relative to the competition. So as I look forward, the large language models and the whole AI application and how -- there's really two things that are changing. One, you're seeing large language models go into the end user experience, right? So we've talked a lot about that. What we haven't talked a lot about is how those models are going into actually, how we create the product. And so there's -- our speed of how fast we can put a product into a customer's hands, into their product themselves, into their vehicle has shrunk now from like eight to 12 months down to four months of development work on our part to customize and focus our product to the customer. So those are the things that are really changing the business, right, that we get paid more for that. We can produce the large language models that make the end user experience much better, but also by driving those models into our own product and how we develop the product, it makes it quicker, it makes it faster, it makes it less expensive for us to develop them and to customize them around what the customer needs are. And those are the things that are really shifting now versus the old models, which were using the standard software where it's much harder to differentiate and speed up the time to production and all for the customer. And so when I look at this, we've already seen price increasing and getting paid for these products. And we're seeing our costs go down over this kind of time period as it's much quicker and simpler for us to develop the product. So that's what's really changing in my mind.

Got it. Great. Thanks for the thoughtful answers. I appreciate the detail.

Thank you. And our next question comes from Colin Langan with Wells Fargo. Your line is open.

Great. Thanks for taking my questions. Maybe just to kick it off, if I look at the KPIs, shipments were down actually double-digits year-over-year and quarter-over-quarter. What is driving that and sort of, what -- I think if I sort of scrub out some of the fixed contracts and the exit of some of the professional services, underlying growth still seems to be up maybe 5%-ish. What's driving the underlying growth if your shipments are actually underperforming the market?

Yeah. So yes, it's really, as we think about this, it's kind of more average PPU. So if we think about our -- if we strip out fixed out of our license year-over-year, we are down in the license business year-over-year, so that kind of falls in line with some of the volume decreases. But what's interesting is that connected is up. So one of the last questions is, again, where are we going in growth? I think that a couple of things. One is that the license business will grow in ‘25 primarily, because of that -- more -- that we have less of the fixed license consumption in ‘25. So we're shipping our cars, but more of that will drop down, so there's growth there. And then the Connected Services business, the volumes are up with those cars that include our Connected Services business, so there's a growth there. So as we think about overall volumes being down, it's really kind of that if you average out the growth in connected and the higher PPU in connected, that provides the growth there in total dollars with volume down.

Got it. And trying to frame the last time you updated the five year backlog, but I think it was something like $1.1 billion last time, that you did the analysis. Is that right? And then that backlog is shrinking. When should we think about that as inflecting and that pressure? And I guess, Brian, from your perspective, I mean, what are your priorities? Is it right now just get the costs in line and then focus on revenue or yeah, I mean, how do we think about that?

Yeah. So, as we looked at our backlog, yes, it's close to $1 billion in backlog. You got to remember a couple of things, backlog. It is -- represents our current contracts that are in place, the prices that we have in those contracts with expected volumes through either a contract term or in certain cases where we have a long contract, it could be a particular program of a car and when we expect that, that particular program will cease. So it doesn't really reflect the true relationships over time. And there's kind of an arbitrary close of a program where we anticipate that the next program we will pick up. So -- and then, so accordingly, it denigrates over time a little bit because as those dates hit, whether that's contract terms or program end dates, so I think it's still extremely healthy at close to $1 billion. And if we look at our ‘25 numbers, most of all of our revenue for 2025 is represented in backlog. So it's effectively baked as long as we hit the volume expectations that we have. But the next growth of that backlog will be in the next generation connected billings bookings that we anticipate going forward.

Yeah. And those I mean just to add to Tony's and I'll answer your other question, Colin, about priorities, is you got to remember that's trying to estimate out five years the volume of any car model and when car models are going to stop and start. And that's just so I look at that with kind of a bit of a grain of salt. It gives us insight into what our revenues and billings will be, but it's not a perfect number. So as long as it sits around that $1 billion number, I'm okay. What's more important is we have to really look at what are the actual deals that we're signing and what are the prices that we've signed up for and that's really gives to me an insight and then the volumes will be what they are. To your question on priorities, when I look at ‘25, we mentioned in the speech that ‘25 is really a return to profitability. And to me that means execution. And there are, as Tony mentioned in his talk, there are still some things we need to do to continue to cut costs out of the organization. Most of those plans and items have already been identified. And it's just a matter of finishing out the execution and continuing to hold those costs in line, not let things creep back in. It's finishing the generative AI work. Our first-gen model brings Gen I to the end user. Our second-gen model, which is targeted towards the end of our fiscal year, which is really kind of like the end of third quarter of the calendar year of next year brings the generative AI, large language models all the way through our product. And as I mentioned earlier, that really simplifies our work and reduces the workload that we have. It's critical that we finish that work. And then the third priority that I'm really starting to focus on with the organization, so right, first is execution, finish our products, get the Gen AI -- second one is to get the Gen AI products across the board. And third is, we have some usages outside of automotive. We're just launched with Garmin 2 brand – two models of the Garmin Watch. We've been working with LG on TVs. Voice and these products can go into other products, other usages. We're starting to go and ask ourselves where can that go and beyond. Now that's not going to really be a ‘25 impact, but ‘25 is where we really need to go and figure out, the one or two spaces we want to move into beyond automotive as well to continue to grow this company in voice activation.

Got it. That's very helpful. Thanks for taking my questions.

Thank you. Our next question comes from Nicholas Doyle with Needham. Your line is open.

Hi, guys. Thanks for taking my questions. The first one, Professional Services was up quarter-over-quarter. I know you mentioned it was down year-over-year. But that comes despite the cuts over the last couple of quarters. And then you mentioned 5% to 7% -- I was just wondering, if you could explain what's driving that kind of change quarter-over-quarter? And then you mentioned the $5 million to $7 million headwind in fiscal “25. Is that off the fiscal ‘24 number? Thanks.

So, yes, there is a reduction anticipated in PS (ph) $5 million to $7 million in PS in fiscal ‘25 over ‘24. So as we look at it, yeah, year-over-year, it was down. We did have a slight uptick from Q3, but we anticipate that with some of the cost cutting that we've done and headcount reductions, there's really a deeper focus within PS that we really are looking at driving those teams to the relationships that are driving most meaningful results to us. So we anticipate that, that number will be down year-over-year, and -- but remember those some of those cuts really were Q4. So we really didn't see a lot of that. We saw $1 million of that headwind in Q1, but as we think about it again year-over-year. But looking at it going forward, it will be a more focused effort.

Okay. Just clarifying, so just asking, I guess, again is it was up quarter-over-quarter, and I guess we expected it to be flat to down. So any explanation on what drove the strength there this quarter?

It's just -- this is Brian, Nicholas. It's just going to be a little bit lumpy from quarter-to-quarter. It's really, as Tony said, we're focusing more on where do we actually add value and where do we get paid for professional services. And so when we looked at the business, we said this thing should go down and we went ahead and let some people go and shrunk the organization in Professional Services to kind of right-size it to where we thought the quality business was. Now that said, we've told them, hey, if there's good business and we can get paid for the work, we'll do it. And so you're going to see kind of a lumpiness. And as projects come in and somebody wants the professional services, because they don't want to do the work or they cannot do the work themselves either way, and they're willing to pay us to go do it, we'll do it. And so you're just seeing a little bit of that lumpiness of, hey, there's some more work. And some quarters, it may be a little bit less than that quarter-over-quarter or year-over-year trend. But when we look at the long-term, the full year guidance, we think we've right-sized the organization and right-sized the amount of work relative to Professional Services. So that the margin and getting paid for what we do is right. Does that help answer why? Like, I wouldn't worry about one quarter.

Yes. Got it. Just a little lumpy and I know splitting hairs, it's like about $1 million change here.

Yes. I think it's a good question. Go ahead.

Okay. Thank you. Second question, I think the license average PPU jumped to the highest level since fiscal '22. Did those gen, those six gen-AI rollouts this year or the past one or two quarters really drive that much of a change or just any detail on what drove the strength this quarter in the average PPU and thoughts on fiscal ‘25? Thanks.

Yeah. And again, it's hard, right? And we're trying to -- Brian and I both have an effort as we go forward to try and simplify kind of how we describe the business and try to get to a P times Q (ph) model. But as we do disclose some of the shipments, it is kind of difficult. One is, from a license standpoint, yes, that drops down. You'd have to take out the fixed, but then if you take out the fixed and then drop that down and look at our volumes, you can kind of see calculate an average PPU because those do get recorded in GAAP revenue on shipment. Connected is a little harder because we will build for something and that's one thing we need to continue to highlight is, as a leading metric is our billings, which were $80 million this quarter compared to GAAP revenue of $54.5 million. But those billings then are deferred and then amortized into revenue over a subscription period. So it's really hard to look at those connected volumes and try and do an average PPU because you really have some legacy stuff from deferred that's going in there and then the higher PPU for the new next generation products, you really won't see any revenue until future periods. And then, from a license standpoint, you got to -- it's really trying to understand how much of a license or components of a license are being built within that number. So do we have volumes, what are we shipping and do those shipments have more of our license components, so effectively an average higher PPU for those components and/or weighted PPU, if you will, for the components that we're actually selling there. But that's -- the short answer is that -- in the license area is that we have higher PPUs because of effectively higher components within that license that are being built.

Thank you.

Thank you. [Operator Instructions] Our next question comes from Mark Delaney with Goldman Sachs. Your line is open.

Hi. Yes. Thank you for taking our questions. You have Aman Gupta on for Mark Delaney. First, I guess, last quarter, you guys provided a framework for fiscal '25 of kind of a flat to low-single digit decline for revenue year-on-year, excluding the legacy business and midpoint now is showing growth year-on-year. Can you kind of speak to maybe some of the puts and takes that drove that and what's driving some of that strength you're seeing?

Yes, certainly. I think we're fairly close. We took out the legacy business. I think at that point, we were looking at a framework of mid-guidance of $238 million and right now, we're doing our guidance is $236 million to $247 million, so we are seeing some growth. It's as we look at a couple of things. One is, on the license side, looking at our volumes and making sure we right-size that backlog and the expectation of what will be shipped within the quarter. As we mentioned, Professional Services will be down, but in line with what we were kind of providing the framework, we said that it was going to be down. And then Connected Services actually being slightly up than what we were thinking about in the framework. So but overall, I think it's actually very close to what we had guided in the framework last quarter.

Thank you for that color. I appreciate it. And then maybe kind of a higher level one on the AI product and appreciate the context for the first-gen versus second-gen. Given that you have kind of the second-gen product that that's supposed to be a little simpler to make, how should we think about both AI kind of launches and pipeline going through the year? Are you kind of waiting to get more of that second-gen product before you pursue kind of a higher level of AI wins or how should we think about that pipeline?

No. What's nice is that all of these products from -- for the most part, Chat Pro through [indiscernible] through NextGen 1 through NextGen 2 are backward compatible. So we can upgrade people to those products. So we don't slow this down at all and I wouldn't want to do that. So if a customer comes in and they see our -- whether they want to look at Chat Pro or whether they want to look at the NextGen 1, whether they want to do Chat Pro and then skip Gen 1 and go to Gen 2, we are able to manage all of those with them. We show them the various products and where we're headed with them. And then, we help guide them through that selection process, right? And there's a series of things we kind of go through with them as they're going through that. What are the features they want? What is the experience they want? Some of the customers just want a really good operational experience. You can do things in a natural language. Some others want a true assistant in the car. Renault is a good example of that. We just launched with them, where they have their avatar called Reno and that really helps, it becomes like an assistant and they have plans to move that assistant all the way through their product line and much further beyond even just the auto. In that case, we're working with them to go from what we can do today to looking out at Gen 2. So you're going to see it's going to be a kind of like a continuum for people as they go through these products. And so it's going to be kind of seamless. You're not going to see breakoffs or we don't have to make a decision of, hey, stop selling Chat Pro because we want everything Gen 1 or stop selling Gen 1 because we want everything Gen 2. We can seamlessly move between those and we can upgrade people even upgrade their cars with down the wire upgrades, if they want to upgrade everybody's experience later on. So we have all of that ability in these products. Does that help you understand kind of the product portfolio?

Yes. That was super helpful. Thank you very much.

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Brian for any closing remarks.

Okay. So, I just want to thank everybody for attending the call this morning. I thought the questions were excellent, and I really appreciate the interest in our business. I hope you see from Tony and I's remarks that we're really excited about where the business is headed. For 2025, our priorities, as we said, one, it's execution. Execution in order to achieve the numbers we talked about this morning, to return the company to profitability. Tony mentioned that we're -- have plans in place to work through the debt and we think we'll have answers for you by the next quarter's update. And I think the organization overall, we've made through this transition and we're all really excited about our next generation products. So that's the other real focus for 2025 is execution of those and really getting our customers to see and feel the experience that we're able to generate. And so with that, I just want to thank everybody again for attending this morning, and we look forward to seeing you at the end of the next quarter and showing you the progress we've made so far. So thank you very much.

Thank you for your participation. This does conclude the program and you may now disconnect. Everyone have a great day.