Good day, and thank you for standing by. Welcome to the Cerence Inc. fourth quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, Kate Hickman. Please go ahead. Hello, everyone, and welcome to Cerence's Fourth Quarter 2025 Conference Call.

I'm Kate Hickman, VP of Corporate Communications and Investor Relations. 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, anticipations, intentions, estimates, assumptions, beliefs, outlook, strategies, goals, objectives, targets, and plans, are forward-looking statements. Cerence Inc. 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-Ks with the press release preceding today's call, our most recent Form 10-Q, and our Form 10-K filed on 11/25/2024. 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 Investors section of our website. Joining me on today's call are Brian Krzanich, CEO, and Tony Rodriguez, CFO. Please note that slides with further context are available in the Investor section of our website. Before handing the call over to Brian, I would like to mention that we will be participating in the Raymond James TMT and Consumer Conference on December 8 and the Needham Growth Conference on January 13. In addition, Cerence Inc. will also be exhibiting at CES in Las Vegas from January. Now on to the call. Brian?

Thank you, Kate. Good afternoon, and welcome, everyone. I'm excited to speak with you today and reflect on my first full year as Cerence's CEO. It's been a great year for the Cerence team and our customers. And I couldn't be happier with the performance. Over the past year, we strengthened the financial and operational foundation of the company and significantly increased positive cash flow generation. Beating nearly every metric and putting us on solid ground for executing on our future growth plans. We've made significant progress with our XUI platform, including meeting all our technology milestones while driving strong customer interest and adoption. We paid down $87.5 million of our debt using cash on hand while maintaining our cash position for the future. And we secured our first successful outcome in our efforts to protect and monetize our intellectual property. As a result, we believe that Cerence Inc. has the right foundation for long-term sustainable growth in fiscal 2026 and beyond. All of this has led us to posting strong results for this quarter. Again, delivering above the high end of our guidance range. With revenue of $60.6 million and adjusted EBITDA of $8.3 million. And importantly, we generated strong free cash flow of $9.7 million. For the full fiscal year, revenue was $251.8 million. Adjusted EBITDA was $48.1 million, and free cash flow grew almost threefold year over year to $46.8 million. And PPU increased to $5.05 for the trailing twelve-month period, up 12% from the same period last year. Tony will provide further details on our results later in the call. As you've heard us discuss in recent quarters, we are deeply committed to monetizing our intellectual property and protecting it against infringers. Last month, we resolved our suit with Samsung, which, among other things, resulted in…

Thank you, Brian. Afternoon, everyone, and thank you for joining us today. Appreciate your time and continued interest in our company. Today, I will walk you through our Q4 and full year results, highlight the key drivers behind our performance, and provide guidance for the upcoming quarter and full fiscal year 2026. We ended fiscal 2025 on a strong note, delivering results that exceeded expectations and reinforcing the momentum we've been building all year. As Brian mentioned, Q4 total revenue was $60.6 million, surpassing our projected range of $53 million to $58 million. For the full fiscal year, revenue reached $251.8 million, exceeding our earlier expectations. This performance reflects broad-based strength across our business, disciplined execution, and continued progress in driving growth during the year. Variable license revenue for the quarter was $31.6 million, up 25% year over year, fueled by strong customer utilization, solid in-period shipments, and a tailwind from favorable euro exchange rates. We had no material fixed license deals in the quarter or Q4 of last year. Importantly, we believe this continued shift toward recurring scalable usage-based models strengthens our revenue quality and visibility. For the full year, total license revenue grew 13%, a healthy expansion considering that we had lower fixed license contracts in the current year by about $8 million. Q4 connected service revenue came in at $14.2 million, up 17% year over year, reflecting a continued expansion of our connected installed base. For the year, connected services revenue was $53.4 million, which compares to $133.4 million in fiscal 2024. Though that prior year figure was an anomaly as it included a one-time $86.6 million noncash benefit from a decommissioned legacy contract. Excluding that, connected services actually grew 14% year over year, which we believe shows a steady demand and growing recurring scale. Professional services…

Thanks, Tony. In closing, we are pleased with our results this quarter and incredibly proud of what our team accomplished in fiscal year 2025. For fiscal year 2026, we are focused on three key priorities: driving top-line growth, advancing XUI, and maintaining cost diligence. We believe we have an exciting path ahead and we look forward to sharing more on our Q1 progress in next quarter's call. We'll now open it up for questions.

Thank you. As a reminder, if you would like to ask a question, please press star 11 on your telephone. If you would like to remove yourself from the queue, press star 11 again. We also ask that you please wait for your name and company to be announced before proceeding with your question. The first question that we have today is coming from the line of Jeff Van Rhee of Craig-Hallum Capital Group. Your line is open.

Great. Thanks. A couple. Maybe you start with the IP side. Congrats on the win there. Just to be clear, was that flowing through at a pure profit? And then I'd probably get back into it, but I want to avoid any mistake. What is the assumption for '26 in terms of legal expense?

Hey. It's Tony. Hey, Tony. Thanks for the question. Yeah. A couple things on that IP side. So, yes, you know, we expect that to flow through revenue so that yeah, at a gross the gross amount of $49.5 million. This first one that really we closed in our ongoing process to monetize, you know, our IP outside of automotive, we did this on a contingent basis with the attorneys, so those costs will be recorded in Q1 as well. And I'll give you some numbers in there. It was actually, I think, in our 8-K as well. But so and, you know, it was the international customer. So there was also some withholding tax within Korea. So at the end of the day, that payment will flow through down to the bottom line. And the net amount would be minus roughly again, anticipating that that would be in revenue in Q1. 24, called $24 million of legal cost and a bit of withholding tax as well.

Okay. Yep. And then your second question Yeah. And I was the ongoing legal. Yep. Yeah. Yeah. And so the way we're looking at this now is that you know, we have an option of how we pursue these. Right? And we believe that we will utilize our external legal costs to do it more of an hourly basis to get a higher return kind of on these type of events. And, accordingly, we're looking at the kind of midrange of guidance of about you know, 7 to 8 million of additional legal costs this year.

Okay.

And that's in our guidance. Yes.

Yep. Very helpful.

And then, you talked about the ramp in interest in XUI and some ramping in the proof of concepts, the POCs. Can you just put a little finer point on that? Any quantification, any scope you can put around the degree of increase in interest for that?

We have about this is Brian Jeff We have about half dozen POCs going on with different OEMs. In various levels of the XUI platform, whether it's kind of a continuum XUI that has a variety of options and capabilities. And so that's kind of the number of companies that we're working with or partners that are looking at XUI right now. And you saw we also announced several more ChatPro and certain subscriptions add-ons this quarter and implementations.

Mhmm. Great. Just two last, if I could sneak them in. One on the, connect Connected, nice sequential pickup there. Any if I recall, there are several ways you can take that revenue. I could be mistaken there, is there anything in there that is pull forward, true up, or what I would call sort of an unusual way of taking connected, or is that a clean number?

No. There's really only one way that I know of. And maybe Tony has more But it is always over the life of the contract. And so there's no pull forwards or unique accounting that's being done here. We take a look at the total value of the contract. We look at the lifetime, they're anywhere from one to ten years. There's some that are as long as ten years. The average we've said in the past has been about three. Stays that way still. And so we would break that revenue then out over that three-year period.

Yeah. And so, yeah, definitely, it's clean. I think you're right. You follow us enough to know that, you know, in the case of where we get a billing where we, you know, we continue to monitor activity within the connected side. And if we believe that we work with our OEM and there was any potential underreporting, if we get catch-up billings within connected, we will you know, the relate to past services, we will recognize some of that. But, this quarter was, was rolling out of that.

Okay. Great. Congrats on that. That's not unique about connected. Those true-ups are just it's volume related. Right? And sometimes, takes a while for us to get all of the volumes correct. Between the OEMs and ourselves. Correct.

Yeah. No. Totally understood. And maybe last then, just on the, you talked about sort of the non-automotive opportunities. Ramping in the out year. Maybe spend a second there and sort help us rank order top one, two, three, in the nonautomotive bucket.

Sure. You know, I again, I put our IP monetization in that bucket as well. Right? We set in here. We have other suits going on. And you know, we have a multiyear large list of opportunities in that space. And you really have to take a look at that Those are mostly us getting paid for our technology in nonautomotive space. And in fact, it's all of that. Right? Including the Samsung one. It's nonautomotive revenue. So I do want to clarify that. That is using our technology in a nonautomotive space that we are getting paid for and should have been paid for. We'd always prefer to just do a standard license. But we'll defend it in other words. The other spaces for the nonautomotive I tell you, the first one is the kiosk space. We actually did an implementation this last quarter in South America with a bank. Implementing voice into the kiosks. We have several other POCs going on with kiosks and various types of applications moving forward. So I'd say that's the first priority. Or the first opportunity that's coming due. Then we have we've talked about it in the past. What we call Vinnie. Which is our phone answering chat service. That can be implemented. We're targeting again, spaces that we know. So we're looking at dealerships and automotive space. Basically, you can answer phones, make appointments, do things for the, like, just for your CRM or your service space. There's also other applications in with OEMs in that space as well. Answering a lot of their calls since we already ingest all of the owner's manual. So those would be the first, like, two that I'd tell you that are near term and the products are ready. In fact, those will be at CES in demonstration mode. You'll be able to come see those at our booth in CES.

Mhmm. Thanks so much. Appreciate it.

Bye.

Thank you. One moment for the next question. Our next question will come from the line of Mark Delaney of Goldman Sachs. Your line is open.

Good afternoon, everyone. This is Will on for Mark Delaney, and thank you for taking our questions. So my first one is for the 8% growth in the core business fiscal 2026 that you expect, how does that break out between unit and content step up?

Hey, Will. Thanks for the questions. So, you know, again, a couple of things to think about as, know, in that percent. When we think about that 8% core technology, we're thinking that that core license revenue and core connected. Right? And as we think about the latter, they're connected. You know, we think about, you know, the additional billing Billings for connected has been growing over the last, you know, year and a half, two years. And then that gets amortized over the subscription period. Right? So we're seeing those increased billings continue to amortize and grow that number, and we expect that growth related to increased billings in 2026. And then the amortization of the previous billings that are in deferred revenue. So we've been growing deferred revenue and then amortizing that. So that's you know, you know, roughly the eight or 9% in the connected side. And similarly, a similar percentage in, license. So it's a little bit different. As we've discussed in the past, you know, we've continued to decrease the fixed license revenue over the last two years or so. And what that means is more of the variable licenses actually drop down into revenue in periods. So because of those decreased fixed life over the last couple of years, what we're seeing is that overall, pro forma revenue will likely be fairly flat, but more of it will be in period revenue for those shipments. That's about half of that growth. And then the other half would be coming from, you know, additional price and volume out of the licenses.

Alright. Thank you for the color there. Just no. That was helpful. Thank you. And just one follow-up question, but so can company share an update on the competitive landscape, especially with new AI systems coming to vehicles as illustrated that, that you saw with GM and Gemini. So if you just give us an update on what you're seeing across the competitive landscape. Thank you.

Yeah. I say, you know, the competitive landscape hasn't necessarily changed dramatically. From the standpoint of who our competitors are Right? You know, there aren't we're not seeing anything new or unique What we would say is that you know, more and more of the technology is becoming large language model based. And you're seeing more and more agentic AI in the products. And that's driving you know, the competition more than, I'd say, new players or new additions. So it's the same ones, and I tell you, you know, it's we've talked about them in the past. Google is there. Amazon's there. Those are the big two that we're usually competing against. Thank you.

Thank you. At this time, if you would like to ask a question, please press 11 on your telephone. And I'm not showing any more questions in the queue. So I'd like to turn the call back over to Brian for closing remarks. Please go ahead.

Yes. Thank you. So, again, I would just like to thank everybody. Those were great questions, and I appreciate everybody's time. We're really excited about the results we had for both Q4 2025, but full year 2025. And we're feeling like we really have set the foundation for growth as we go into 2026. And we look forward to talking with you guys at the end of the first quarter here and, you know, showing you great results again and laying out more and more of our strategy for 2026 as we move forward. Thank you very much for the call today. And we look forward to talking to you again later on.

Thank you all for participating in today's conference call. You may now disconnect.