Hello everyone and welcome to Cerence's Second Quarter 2025 Conference Call. I'm Kate Hickman, VP of Corporate Communications and Investor Relations. I've been with the company for nearly eight years leading Communications and I'm excited to now be leading Investor Relations as well. I look forward to getting to know all of you. 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, anticipation, intentions, estimates, assumptions, beliefs, outlook, strategies, goals, objectives, targets, and plans are 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 and expectations, as described in our SEC filings, including the Form 8-K, with the press release preceding today's call, our most recent Form 10-Q and our Form 10-K filed on November, 25th, 2024. 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; and Tony Rodriquez, CFO. Please note that slides with further context are available in the Investors section of our website. Before handing the call over to Brian, I would like to mentioned that we will be presenting at the TD Cowen Technology, Media, & Telecom Conference on May 29th and Evercore ISI Global Automotive OEM Dealer & Supplier Conference on June 10th. Webcast details will be provided soon. Now, on to the call. Brian?

Thank you, Kate. Good afternoon, everyone, and welcome to the Q2 2025 Cerence earnings call. I'm really excited to speak with you today. Now, while Tony will walk you through the details, we're very pleased with the strong results the team delivered this quarter, exceeding the high end of our guidance with a revenue of $78 million and adjusted EBITDA of $29.5 million. Importantly, we generated strong free cash flow of $13.1 million, marking our fourth consecutive quarter of positive free cash flow. As a result, we are raising our full year guidance for adjusted EBITDA and free cash flow, and Tony will provide further details on this. I'm proud of our team and what it has accomplished despite ongoing macro challenges and uncertainty facing the automotive industry. We're focused on the future and believe that we remain well-positioned to support our customers. Cerence continues to be differentiated by our unique combination of technology innovation, our diverse and expansive customer base, and our deep automotive expertise. Our experienced management team and deep bench of talent are keenly focused on delivering to our customers and executing against our road map. As we anticipated and stated in our last earnings call, we did not see a meaningful impact from tariffs on this quarter's results. For Q3, we believe the impact will remain limited. However, we are seeing some pressure from our customers on pricing and some changes in their program time lines as they work to understand the true impact that tariffs will have on their businesses. We're working cooperatively with our customers to find ways to optimize our partnership to best support them during this time, while also maintaining favorable conditions for Cerence. Based on what we can see today and on currently available information for fiscal year 2025, we continue…

Thank you, Brian. Today, I'll be reviewing our Q2 results for fiscal 2025 and providing some guidance for our third quarter and full fiscal year. Let's get into the Q2 operating statement. At the top, we achieved Q2 revenue of $78 million, which exceeded the high end of our guidance range of $74 million to $77 -- as projected, the revenue this quarter included $21.5 million of fixed license revenue contracts. With Q2 behind us, we expect no material fixed license revenue to be signed during the remainder of the fiscal year. As compared to the prior year, Q2 revenue increased $10.2 million, primarily related to the year-over-year increase in fixed license revenue of $11.1 million. This was offset by a decrease in professional services revenue. Additionally, as compared to our expectations, revenue was negatively impacted this quarter by the euro to dollar exchange rate. This fluctuation was neutral to profitability as it had a corresponding positive impact to our operating expenses for the quarter, and the euro has rebounded to our forecasted rate for April. Our gross margin for the quarter, of 77%, also exceeded the high end of our guidance range of 74% to 76% as our technology revenue constituted a larger percentage of the revenue mix than forecasted. Moving down the operating statement. Our non-GAAP operating expenses were $34.1 million for Q2 compared to $50 million for the same quarter last year. This decrease of $15.9 million or 32% represents savings from the restructuring efforts conducted at the end of last year. As compared to our forecast, we also continued to delay some planned R&D hiring until Q3 and had lower translated operating costs in our European subsidiaries with the euro to dollar exchange rate for the quarter. Additionally, the company received notice of acceptance of another…

Thanks, Tony. In closing, we're happy with our Q2 results and are feeling confident in our outlook for the full year while also recognizing that there are macro risks and uncertainties. We remain focused on execution and customer delivery, business process improvement and cost reduction and advancing Cerence XUI, while also accelerating the diversification of our business. Based on the current available information, we continue to believe in our ability to deliver on our Q3 and fiscal year 2025 guidance. We look forward to continuing to share our progress with you. I'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, this is Daniel Hibshman on for Jeff Van Rhee. Thanks for taking my questions guys. Just on the metrics, maybe if we can walk through a little bit of the puts and takes. Billings deceleration towards 0%, but connected cars, sort of real nice uptick, acceleration from 5% to 10%. Maybe just puts and takes on the metrics, what are driving those and sort of which of those you see as sort of pointing to the future trajectory?

Hey, thanks for the question. Yes, when you look at it, you look at our overall volumes, they're in line with -- effectively in line with our expectations, maybe a tick up compared to what we thought for the quarter overall in volumes. And then the connected rate, what it shows again is that more and more cars are being connected within our overall volume that is done. So that's good to see. Remember that as we -- as more connected cars ship, it doesn't have an immediate impact on revenue, right? We get the billings in quarter as they ship, but they -- those billings are recognized over a period of time. So, it's good to see the increased connected rates. It's good to see those billings, and we know those revenues will come as we amortize that over the subscription period.

And then it looks like new connected revenue, if you back out some of the one-times that you were speaking to, Tony, it looks like new connected is up about $1 million sequentially, which is one of the larger jumps that's taken. And generally, that's from SOPs going live that take time to ramp. Is that fair to say then that whatever is ramping there, it would be fair to expect to continue to ramp into Q3, Q4 and drive some similar sequentials? Or is there anything onetime there? Just kind of walk me through the progression of new connected and the underlying business aspect.

Yes, sure. No problem. Yes, you're right. We're up about 8%, which is good to see. And again, remembering that, that revenue that's recognized this quarter is from previous billings that are now amortizing into revenue. So, as we think about our revenue going forward, we do believe, of course, that given the past billings that we would expect increased Connected revenue as we go forward.

Just to give you a flavor, it takes a quarter or two, right? Because we get paid on the connected when the car sells and the dealer and the consumer basically connect the car. And that's when that contract starts. So that -- how long is the shipment out and lot time, things like that. And then before we actually see the revenue can be a little bit of time, too. So, I always look at it as like it's a quarter or so, maybe slightly more, depending on the vehicle and the geography before we see that revenue.

Yes. And then just in terms of -- another one for you, Brian, in terms of AI and where that's landing, I assume that, that's going to be showing its head in connected more so than in variable. So, in terms of that connected kind of the sequential uptick and as you're looking through the rest of the year, what's driving that the most right now? Is that units? Is that the AI functionality, other functionality getting in, in terms of impacting the PPU? Just sort of what are the drivers -- the key drivers behind connected -- and what -- if anything you can quantify either qualitatively or quantitatively in terms of the AI impact to-date?

Sure. So, what you have to remember is that large language models, and so let's just call it AI is in almost everything we do. And so even the embedded, as we call it, or the nonconnected vehicle is -- has a large and this is what our Cerence Assistant large language model, the call embedded version is. It's sitting on the vehicle and even for just vehicle controls. You want to turn your floor heat on, you want to change the colors in your car, you want to turn on adaptive cruise control, you want to adjust the temperature, whatever those directions are, you no longer need to use a key phrase. You no longer need to say a specific set of words. You can just say, hey, my feet are cold. Hey, could you crack the window? It's able to then translate that to a large language model and do the car function. So, that has already penetrated the vehicle and doesn't require connectivity. The next place is where it does call outs. If you want to know, hey, where is the nearest restaurant, where is the -- what was the score of the football game last night, who won the hockey game against the Oilers and the Vegas nights last night, whatever that is, that's a connected car. And so all of those things are AI, right? They are driving consumer demand. They are driving PPU increases. And the more of those things that people want to do outside of the vehicle, things like scores or temperature, weather or drive connected and why we're seeing the connected increase. But AI is driving usage of the voice in the vehicle across the board, whether it's connected or not. Does that help?

Yes. Yes, that does help in terms of, obviously, when I think about the opportunity generally with calm and embedded, I don't think you could first intuitively think of that as the opportunity, but that makes sense in terms of how that is a component as well in the edge. So, a good thing to call out. And then just last question for me. In terms of how -- because a lot of people are going to be asking and wondering in terms of macro, where, if anywhere, would we be seeing that if it was showing its head? Would that be in the IHS units as in just sort of total units shipped in the industry trickling down to you? Would that be in pricing with your customers? Where, if anywhere, would we be seeing impacts?

So, you'll see a little bit of it with both of those as and if those kick in, right? So, I mentioned in the call that we are starting to see some requests from OEMs, a few of them to talk -- have discussions about price reductions as their cost structures and all are getting pressured, right? We're going in rather than just saying, okay, we're going to give them an X% price decrease. We're trying to go in and say, hey, we think we can save you even more money. We think we can take some of your software offload. We can consolidate some of your software needs and give you a better price. And by the way, yes, we'll get some increased revenue and -- but save you money over the long run. And so we're trying to take it as a win-win. So that will be that standpoint and how we try and deal with pricing. volume-wise, we'll be, I'll basically say, victims of whatever occurs there around volume. So, if volumes decrease dramatically, we would be just directly impacted by that. Remember, we ship worldwide. So, a large number of our cars are shipped outside of the U.S. So even if there are tariffs and impacts in the U.S., it may not be directly correlated to what we'll see. If it's down X% percent, we may not be down as much because we sell a lot of cars outside or sell in a lot of cars outside the U.S., right? So, -- but that's where you would see it.

And that’s it from me. Congrats on the quarter and thanks Brian, thanks Tony.

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

Hey guys. Thanks for taking my questions. The first one, keeping the fiscal 2025 guide unchanged, you talked about a little bit coming out of the professional services and more coming from the higher tech revenue. Could you just be a little more specific on what that is and kind of why it's a little bit higher? I know you gave kind of some -- a lot of metrics around the Connected Services, but it sounds like it might not be coming from that just because of the lags, but any commentary there? Thank you.

Yes. No problem. Yes, as we've talked about the last -- this quarter and last quarter, we're seeing a little bit of headwind in the PS. But as you mentioned, we did not adjust guidance for the full year. We still think we'll hit that range. And so if we're not hitting there, where is it coming from? It's the tech. We are up probably a little bit more than our original plan on the connected side. But the other piece is really from the license volume that we're seeing. We saw a little bit of uptick in -- compared to expectation in license volume in Q2. Maybe some of that had to do with some of the production levels for getting prepped for tariffs, but we did see that. So, it's really coming from the license business.

And don't forget, one of the key factors that we're doing very differently than a year ago and was especially evident this quarter is we're really limiting the amount of prepays or as it's called in the discussion, fixed contracts. And by limiting those, we're also getting less of a discount in those spaces because we're being able to be more competitive in that space. And we're not giving as many discounts, right? So, we did $20 million-ish, I think it was like $21.3 million this quarter, and that will be it for this year. Prior years, the numbers were quite a bit higher, and those came with even bigger discounts. So, by just reducing that, it increases our effective price. But it's really because we're not doing as much of this pull-in of contracts with big discounts.

And it makes sense. I think we could see that a little bit in the gross margins coming through. You had a press release last month with MediaTek for your Edge solution. I guess what was the -- if there is, what was the missing piece that MediaTek is the partnerships bringing to you with that Edge solution? Thank you.

Well, it's really a three-way relationship. It's NVIDIA, MediaTek, and Cerence. And what we're working together, so MediaTek and NVIDIA are working together on cores that are directly related to automotive that have the right pricing and go-to-market within the automotive space. So, they're building those SoCs. And we're helping them and they're helping us by integrating our software and making sure we optimize together for performance, right? There's a lot of things we can do around latency, around overall performance, power, amount of memory required, all of those kinds of things that if we work with the SoC providers, we can optimize that, and that then makes it lower cost for the OEM and the Tier 1 integrator, also makes it simpler, right, part of why we don't need as much professional services. So, that relationship is really a three-way relationship. NVIDIA and MediaTek working on the SoC and then us working with the combined group there to really deliver the software stack.

Thanks. And then if I could just ask one more. On the lawsuit, I guess, what are you really trying to achieve going into Microsoft who are also a partner to you guys. So, I'm just wondering if it's trying to set a bit of a precedent here as other start-ups are moving into these voice assistant space. And I understand that it's specific to text to speech. Thank you.

Yes, I mean, what are we trying to achieve? I mean we're protecting our intellectual property, right? We you as a shareholder are investing with us on the development of this technology and text to speech and wake-up word and a lot of those IPs were foundational to Cerence, and we continue to advance those and really drive those. And so we're really -- we're protecting those. And so our goal is nothing more than that. We don't have some other goal around other companies where we can only manage a certain number of these because we don't have infinite funds. And we're going with the ones that we feel like are the clearest to us that allow us to clearly state our position. But it's all about protecting our IP and protecting your investment.

Understood. Thank you.

Our next question comes from Mark Delaney with Goldman Sachs. Your line is open.

Yes, good afternoon. Thank you for taking my questions. Price per unit increased on a TTM-to-TTM basis, and you talked about some of the potential positive drivers such as AI in the vehicle, but then you also spoke on some pricing headwinds that have emerged in your prepared remarks. I'm hoping you can help us better understand how these various puts and takes will lead to PPU and where you think PPU may go over the next 12 to 24 months overall.

Hey Mark, Kate here. So, we just lost the connection to Tony and Brian briefly. They're dialing in, in one second. So we'll just have you repeat the question when they get back on.

Okay. Thanks. [Technical Difficulty]

Ladies and gentlemen, please stand by, your call will resume momentarily.

Can you guys hear us now?

Yes, we can hear you now. Can you hear me? Yes, we can hear you. One moment.

So, they can hear me. I can't hear you.

Can you hear us now, Tony? Are you back on -- it looks like you're back online?

We can.

Ladies and gentlemen please stand by.

Kate, can you hear us now?

Yes, we have you.

Ladies and gentlemen, please stand by, your call will resume momentarily.

Can you hear us now Kate?

Yes, we can hear you.

And can you hear us now Tony, looks like you're back online?

We can.

Mark, could you go ahead.

We had technical difficulties on this side.

No problem. Mark, could you continue with your question?

Yes. Thank you. It's Mark Delaney with Goldman. A question on pricing. So, PPU increased on a TTM to TTM basis, and you have potential positive drivers tied to AI in the vehicle. But you also mentioned some pricing headwinds have emerged in your prepared remarks. I'm hoping you can help us understand the size of some of these puts and takes. And overall, where do you think PPU will go over the next 12 to 24 months?

Well, let me give you a little background on that on PPU. So, yes, there are puts and takes within there. So, -- and I think we're not going to give guidance on a go-forward basis. As we really work this metric, we will get, I think, better at our last call, we said, hey, we know that it's important to you guys and to us. And so we've developed this metric. So, the puts and calls would be this. So even if there is pricing pressure in the future, what Brian is saying is, hey, if you have more, let's say, a take rate on the technology stack or something, we can give that at a discount. But overall, that would still may drive a higher PPU. It could be plus or minus based on those two aspects of a bit of pricing pressure, but maybe an uptick in the take rate of the amount of technology. And then the other driver, too, is the overall volumes and then the amount of connected cars within that because, again, on average, over a period of time, if we have more connected cars, that price per that individual car will go up. So, we believe that there are pluses and minuses in this. And at this point, I'm not willing to give any guidance going forward. But again, it's a positive trend over the last trailing 12 months.

And remember, we're reporting here an average number, right? So, this number is going to incorporate variance over time. And it's -- we're trying to learn ourselves how to use this to look at our operations and look at our overall business. So, we're trying to share this as quickly as we can with you guys, and you're going to have to give us a little bit of time to really start doing things like projections and forecasts and understanding it much beyond this. But we wanted to share it with you because we've been talking about it and promising.

Understood. And thank you for the disclosure that you did have on GPU. It is helpful. I also wanted to ask around the situation with Microsoft. Can you help us better understand what led to the lawsuit? You spoke to an earlier question, Brian, around trying to protect your IP. But I want to understand, are you seeing Microsoft start to compete more with you and have they moved into the vehicle space?

Yes. So, it's an active lawsuit. I'm just not allowed to talk about much detail beyond this other than it's really about protecting our IP. And like we said in the earnings call, we have one and have had one with Samsung for some period of time. That's going through the court process. And these things take some time to go through this process. So, that's going through. There are some events that occur this year and into next year for that case, the Microsoft one has just started, but it's really about use of our IP and Cerence getting paid for it. And we're just protecting that, and that's what the suit is about. But I can't go into much other detail beyond that just because it's active lawsuit.

Okay. Understood. Separate from the court case, you did have an announcement you're working with them to bring ChatGPT to vehicles. Are you still able to work on a business basis--?

Companies have disputes about contracts and legal issues all the time. And yet they're able to still work together. So we absolutely are continuing to work with Microsoft. The lawsuit is one separate issue. you're always having issues along with progress when you're working with other companies. And so we've had meetings even over the last day or so with Microsoft on some of the technical items. And so the technical teams are still heads down on bringing innovation and capabilities between the 2 companies. And the lawsuit is a separate issue that is really not affecting that side of the work together.

Understood. Thank you.

Our next question comes from Itay Michaeli with TD Cowen. Your line is open.

Great. Thank you. Good afternoon everyone and congrats on the quarter. Just maybe a question on customer interest in some of your latest offerings. And I ask because as the automakers struggle with tariffs and all the disruptions to their new vehicle production business in the last few years, they're looking to shift, as you know, more towards earning revenue from their installed base through various services. And I'm wondering if maybe the tariffs could actually increase interest in your go-forward offerings and whether you're already having or seeing some of that in your latest conversations? That's my first question.

We -- I don't know if you can tie to tariffs, right? I guess I'm too much of a technologist and believe that it's the technology itself. I mean we talked about multimodal, and we demonstrated this live in actual production. at the Shanghai Auto Show. I mean, it's really cool when you can pass by a street sign or an advertisement and ask a car, hey, what did that sign just say? And was there a phone number to call? Hey, was that the turn off for exit 23 and -- or did I miss it? And the system uses cameras and it can tell you exactly what's going on, right? So, we are seeing uptake. We have some really cool proofs of concept and development work going on with our OEMs that is slated to come out, I'll say, like late this year, early next year that starts to use this both in cabin and outside of cabin capability, this multimodal, things like, hey, I'm noticing you're blinking a lot, you're tired. Would you like me to find a coffee place to stop? Or would you like to rest? Those kinds of -- all those kinds of capabilities are really kicking in. Consumers like it. The OEMs like it. We're able to do a lot of this over the air because on the connected version, it's easy for us to connect it into the cloud-based supply. With new hardware, we're able to do it embedded on the vehicle. So, those will be the cars that are really delivering in 2026. So, I don't know if tariffs are really driving this. I do think, though, companies are -- if they're going to have to increase prices, they're going to have to find an effective way to provide more capability for that price, too. People aren't just going to accept pricing and price increases. And so I do think there's an opportunity for that. I don't see it right now. We're not reflecting any of that. But I think it's something I'm hoping we'll see as we move forward in this. And right now, everyone prices change on a weekly basis or tariffs change on a weekly basis and what's in and what's out. And people are just trying to absorb what's there and figure out how to work together. The good thing is the industry is working well together. Everybody is communicating. Everybody is talking, everybody is trying to help each other out through this process.

That's great to hear. Thank you. And just as a follow-up, I was hoping maybe you could expand a bit more on some of the non-automotive opportunities you alluded to before, maybe size some of the opportunities for the companies and kind of how long could it take to see some kind of meaningful revenue emerging from these verticals? Thank you.

Sure. So, we're looking for verticals where we can take the software expertise and capabilities and innovation that we already have and apply that over to applications that we think consumer demand will be there. So, one of the ones you saw or the ones we talked about here was with Code Factory and the VoiceTopping. So, this is taking what we can do in a car already around the large language models, both embedded and connected and applying that to kiosks, so -- and using a partner like Code Factory to go to market. So, I don't want to build a sales force that has the ability to go to 5,000 malls and airports in the world. I want to use a partner to go do that. So, we're trying to do this very cost effectively, which means we may grow a little slower than we possibly could if we did it guns of blazing, but I think is a smart way to do it. So imagine you're in a mall and rather than trying to find where the lululemon is or the whatever restaurant you want to find is, you just walk up and say, hey, can you point me to the lululemon or to the Tommy BAHAMA RESTAURANT or whatever or you're in the airport and you just -- you see a kiosk with a map and you go, where is C12. And it just shows it on the map and shows your walking path. Those are the kinds of applications, real-world applications that we think end users will appreciate and will deliver capability. And what's nice is if the lay in the mall changes, the stores change, we're able to -- we'd be able to do that over the air rather than having to come in and update the software directly. And so we can do those kinds of things as well and continue to increase the capability. So, that's really where we're starting. We're looking at some other verticals, but they're very nascent right now, just making sure understanding does our technology apply, do we think there's real demand for it, things like that.

Terrific. That’s all very helpful. Thank you.

And I'm not showing any further questions at this time. And as such, this does conclude today's presentation. We thank you for your participation. You may now disconnect and have a wonderful day.