Good day, and thank you for standing by. Welcome to the Cerence Inc.'s First Quarter 2026 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, we will open up for questions. To ask a question during the session, you will need to press 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press 11 again. Please be advised that today's call is being recorded. I would now like to hand the conference over to your speaker, Kate Hickman, Vice President of Corporate Communications and Investor Relations. Please go ahead.

Hello, everyone, and welcome to Cerence Inc.'s First Quarter 2026 Conference Call. I'm Kate Hickman, VP of Corporate Communications and Investor Relations. Before we begin, I would like to remind you that the 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, priorities, 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-K with the press release preceding today's call, our most recent Form 10-Q, and our Form 10-Ks filed on November 20, 2025. 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 Investors section of our website. Before handing the call over to Brian, I would like to mention that we will be participating in the 38th Annual ROTH Conference taking place in March. Now onto the call. Brian?

Thank you, Kate. Good afternoon, and welcome, everyone. I'm excited to speak with you today following another strong quarter of performance for Cerence Inc. We are pleased with our results this quarter, with revenue of $115.1 million and adjusted EBITDA above the high end of guidance at $44.6 million. Importantly, we generated record quarterly free cash flow of $35.6 million, demonstrating continued profitability. Tony will provide further details on our Q1 results later in the call. As I mentioned on last quarter's call, we have three key priorities for 2026. They are advancing our business through leading technology, including our next-gen platform, XUI, maintaining cost diligence, and driving top-line growth. First, we made important progress in driving our business through continued innovation, especially as we geared up for the CES in early January. On the ground in Vegas, we showcased the latest advancement to Cerence XUI, highlighting new LLM palette experiences spanning both edge and cloud. We demonstrated our Calm Edge small language model running across multiple chipsets, enabling faster performance, lower latency, and reliable in-car interactions, even when connectivity is limited. Plus, we showcased XUI running live in a Geely vehicle, marking the first public demonstration of a near-production car powered by XUI. And we showed off our Audio AI suite, including advanced multi-speaker and multi-zone capabilities. Importantly, within Q1, we completed the development of several of our new AI agents, which are now fully integrated into XUI but can also be implemented in non-XUI platforms. At CES, for the first time, we demonstrated our mobile work agent developed in partnership with Microsoft. This agent turned your car into a trusted device with voice-first access to Microsoft 365 Copilot, Teams, Outlook, and OneNote. This was incredibly well received, and we have significant customer traction and active commercial negotiations coming…

Thank you, Brian. Good afternoon, everyone, and thank you for joining us today. We appreciate your continued interest in Cerence Inc. I'll walk through our first quarter fiscal 2026 results, highlight the key drivers of the quarter, and then share our outlook for Q2. For 2026, total revenue was $115.1 million, up $64.2 million or 126% from $50.9 million in the prior year period. We believe it's important to start by highlighting the continued positive progress in our core technology business, including variable and fixed license revenue, our recurring connected services revenue stream. Excluding the impact of patent license revenue, our core technology lines delivered solid growth and stability, reflecting steady customer utilization, continued adoption across our programs, and the increasing importance of our recurring revenue base. Variable license revenue for the quarter was $30.59 million, up 34% year over year, driven by steady customer utilization, more in-period shipment recognition, and continued adoption across our core programs. Fixed license revenue was $7.8 million in the quarter. These fixed license deals were not present in Q1 of last year, as they were primarily reported in Q2 of the prior year, creating a timing difference. Importantly, for the full fiscal year, we continue to expect fixed license revenue to be comparable to the prior year, and we view this as a time shift rather than a change in underlying demand. Connected services revenue was $14.5 million, up 6% year over year despite a $2 million true-up benefit in the prior year quarter. Without this prior year true-up, connected services revenue would have increased over 20% year over year. This connected services revenue line represents a recurring revenue stream driven by continued expansion of our connected install base and remains a key pillar of our long-term growth strategy, providing high-quality, predictable revenue and…

Thanks, Tony. So in closing, we're pleased with our results this quarter and incredibly proud of what our team accomplished as we start 2026. We remain focused on the three key priorities: driving top-line growth, advancing our business through leading technology, including XUI, and maintaining cost diligence. We believe we have an exciting path ahead and we look forward to sharing more on next quarter's call. We will now open it up for questions.

As a reminder, to ask a question, you need to press 11 on your telephone. Wait for your name to be announced. To withdraw your question, please press 11 again. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question will come from the line of Jeff Van Rhee from Craig Hallum Capital Group. Your line is open.

Great, thanks. Thanks for taking my questions, guys. A couple for me. On the Connected side, I'm curious about the mobile work agent. Just, you know, where does that rank in terms of the agents in XUI other capabilities as you're layering in a lot of sort of AI-centric capabilities? Is that top of the list in terms of what customers are most enthusiastic about? It sounded like you were sort of messaging extremely strong demand there or interest there. And then along those lines, just any sort of framing around the impact that can have on your ARPUs going forward?

Sure. So this is Brian. Jeff, I can start. The Microsoft Outlook or Office 365 does not require XUI, and that's the good thing. It's a cloud-based solution that actually just makes the car a trusted device and then puts our LLM on top of that. So we manage the request. So when you put a request in that says, for example, "Hey, I only want to get messages from Jeff while I'm driving to work because he's the most important person I need to talk to this morning," it will filter all that and manage so you're not distracted while you're driving. What's good about that, the fact that it is cloud-based is it can go on existing vehicles that are maybe two to three years old that have a connected capability as well. So what we're seeing is the interest is not only in the future forward-looking XUI systems, but we have OEMs coming to us and saying they'd like to put this on vehicles back two and three years. So it's quite positive. We haven't talked about pricing yet, but it will be an additive, and it will add to our PPU. Did that answer your question, Jeff? I mean, I want to make sure I got it.

It does. It does. In terms of an existing car, if you make it available to an existing vehicle, is that a revenue event? Or is that just getting people addicted to the technology and you get the revenue down the road? How does that work?

It would be a revenue event for us.

Okay. Got it. And then on the numbers front, you called on a number of interesting bookings or signings, including this major volume global automaker in Q2. I'm curious in terms of TTM billings, is that going to show up? Are we going to start to see TTM billings growing in Q2? And maybe even just a preview of backlog that's going to be reported at the end of Q2. Are those going to step in there where we should see some meaningful uptick both in backlog and TTM billings when we wrap up Q2?

So I'm going to let Tony talk about how it'll see in the in the a in a profile. But if I take a look at that, we talked about JLR and the Volkswagen Group vehicle coming in late summer, let's call it. The other ones are we've said the other ones are all going to come in this calendar year. But that's really started production, and they'll ramp. Right? So remember, we get paid both when the car ships out of the factory and then for the connected portion when the car drives off the dealer lot. So the revenue from a pure revenue stream won't start until late summer. And will start to ramp, right, as the vehicles kind of go through their normal ramp in both geography and volume. And then a lot of it will really happen at the back end. So I was trying to do by showing all five is that, you know, we've I've gotten a lot of questions in the past. Hey. I said, you know, we have six RFQs out, and we're, you know, got two guys already signed up with JLR and the Volkswagen Group. Company. I wanted to give you guys an additional update that we're continue now we're actually, you know, signing more deals and seeing good growth. And good PPU growth out of this technology. And so those those six RFQs are turning into actual deal side. Yep. How does that loop for you guys?

Got it. Got it. Then maybe the other part of the question, just maybe for Tony, is the should we expect are these signings that you're putting up and that you're talking about here big enough that we should assuming continued trend and continued strength in Q2 that we should start to see backlog and TTM billings pop by the end of Q2?

Yeah. These will be reflected in a five-year backlog, of course, because, you know, once the contracts are signed and then as you know, you've been familiar with this, that we project the volume over a contract period or at least it's over five years in the five-year period. And, apply the contract price to the to that volume, and so you will see it in in backlog next quarter.

Okay. And just last for me, and I'll let somebody else jump on. Also on the connected side, just curious, based on the metrics that you're watching, how is usage of the existing in-car connected systems trending? I think back in the day, you used to hear some metrics around how frequently people were interacting with the system. Just what trends and what learnings with respect to sort of apples to apples usage of a person who has connected in their car over time are you seeing?

Yeah. I'd tell you that if you have one of the older systems, the usage is, you know, pretty good early on when you first get the vehicle, and then it kind of drops off. That was before LLM's really available. If you look at vehicles from, say, let's say, the Cerence Assistant and onward, we're starting to see more and more usage. We don't publicly talk about, you know, what's the percentage and all, but what we're seeing is as functionality has increased, and ease of use has increased, we're absolutely seeing stronger usage of the product. And we think as you add things like the Microsoft Suite, the Office 365, and all of that, it's just gonna, you know, really massively increase the usage rate of these products.

Got it. Great. Thanks for taking my questions.

Thank you.

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

Hey, guys. You have Aman on for Mark. Thanks for taking the questions. I guess, sticking with the XUI and AI product front, thanks for the updates on the pipeline there. Maybe if you can help parse out the interest from, you know, more of the western OEMs versus, you know, you talked about getting two wins, one with Geely and one with another China OEM for overseas business. You know, how is that pipeline relative to the Western OEMs? And are you seeing any difference in time to market from when you sign one of these agreements and actually start of production? And EPPU as well would be helpful. Thank you.

Sure. So let's see. So as you just described, three of the five are, I'll call them from Western or more classic OEMs. And so we're seeing, you know, strong interest. We still have, you know, several other OEMs we're talking to in negotiation and deal preparation that tend to be more Western as well. I'd tell you, you know, if I take a look at the JLR and the Volkswagen one, they're running about as fast as the Chinese ones. So I don't see a huge difference. I'd say the western OEMs are becoming especially kind of the lean ones are becoming more and more aggressive about their timing and bringing this stuff to production. So I'd tell you right now, three to five West or more classical OEMs versus the two Chinese brands. We're seeing additional Western OEMs with interest from a TPU standpoint. All we've said publicly is that, you know, the prices we're getting for XUI on these deals is significantly higher than what our current listed PPU is that we've talked about, which is around $5. I think it's $5.05, if I remember correctly. Tony can correct me if I got that off. That we published last quarter. So we're seeing a good significant increase in PPU from these deals. And they're all a little bit different because they all, you know, they take different features and stuff like that. So they're, you know, you'll see, as Tony said, you'll start to see it in backlog. And then you'll start to see it in revenue in the back half of this year. Into fiscal 2027. It'll be more and more significant.

Understood. Thank you for that color. And then maybe one a little more on the financials. I think EBITDA came in a couple million above the high end of your Q1 guide, but you maintain the full-year guide. Are there any, you know, puts and takes or things we should be thinking about through the balance of the year? Is it, you know, how should we think about the full-year guide being maintained relative to the Q1 guide beyond some of those metrics?

Yeah. And a couple of things. One is, you know, yes, we did overachieve on EBITDA, and that was good. We're one quarter in, though, right? So what we want to look at is as we think about the rest of the year, we typically wouldn't change guidance unless there was some significant movement, you know, that would guide us that way for the full year. So what it does is provide us really confidence. Q1 certainly provides us much confidence in achieving the full-year EBITDA estimate, which we've reaffirmed. So, you know, and I would think that some of that is, you know, a little bit of deferral of some expenses in Q1 into the other three quarters. So we're still, I guess, like we reiterated that, you know, reaffirming guidance for the full fiscal year, and this just gives us, you know, good confidence in that range.

Thank you very much.

Thank you. Once again, that's star one one for questions. One moment for our next question. Our next question will come from the line of Itay Michaeli from TD Cowen. Your line is open.

Great. Thanks. Good afternoon, everybody. Just to follow-up on the EBITDA question, can you just dimension what kind of allowed you to beat the range in fiscal Q1? And then to just clarify perhaps what the EBITDA was excluding the settlement in the quarter?

Sorry. Sorry, guys. Yeah. Let's talk a little bit about the beat first. So a couple of things. One is we had some good news with regard to legal costs associated with the Samsung settlement. So as I think we've discussed in the past and certainly in Q4 when we talked about it is that the patent license agreement part of that was that the legal fees were on a contingent basis. And we were able to look at that agreement and achieve about $4 million better in legal costs associated with that. So that was part of the beat. The other one related to compensation. So, looking at a couple of R&D projects that have got deferred, so that's assisted in OpEx in the quarter. It's really two main areas.

That's helpful. And then maybe secondly, on the new win with the major volume global automaker, maybe just walk us through maybe, Brian, just how the competitive process went and kind of what you think kind of led to your win there? And maybe going forward, how you think about your win rate going forward just given some of the recent traction you've experienced?

Yes, sure. This is Brian. You know, I'm excited by the progress we've made, right, to have the five deals signed considering we really, you know, officially launched the XUI product in the back half of last year, calendar year. It's significant. And all of the competitions, it's coming down to there's usually just a couple of us left in the running at the end. And it becomes less about things like price and all. You know, price is always a bit of a part of the negotiation. But, really, at the end, it comes down to a couple of things. One, capability of the technology. Do they have belief that you're going to deliver what you say you're going to deliver? And for us, we're able to show up with a vehicle like we did at CES, fully functional, with the XUI fully operating and including things like the Microsoft Outlook Office 365 fully functioning, running in the vehicle live. So that gives them confidence that the technology is there. It can go. It can do what we say. So that's the first thing. And then it's about the confidence in the team's ability to actually work with the OEM. And we have a long history of that with our team. And then just the overall technology capability of your product. Right? What can it do? And we have a lot of things that differentiate us, everything from, you know, some of the agents we've added, like the Microsoft one, the audio technologies we've added. So it really comes down to the end. It's more about the technology and the team and less about the price. And that's really how we win. And then it's oftentimes around customization. They'll have things that they want that are unique to their brand or to the product they're trying to deliver. And our ability to be very flexible in that space and deliver those customizations in a timely manner is oftentimes a differential too. That was in some of the earlier ones a clear differentiator.

Terrific. That's very helpful. Thank you.

Thank you. And I'm not showing any further questions in the queue. I'd like to turn it back over to Brian for closing remarks.

One thing before Brian probably kicks in too that we should probably clarify a little bit because we talked about the EBITDA beat. Which was great, you know, as we've said, we were very successful profitability quarter and cash flow quarter. And as we think about the GAAP financials, if you look at the earnings release and look at the pre-tax income compared to a year ago, it was a pretty dramatic improvement year over year. And we beat EBITDA. We actually beat our we didn't we don't put guidance out for pre-tax income, but the pre-tax income was actually better than anticipated similar to EBITDA. That said, you can see in our materials that we had an effective tax rate of 117%. And what's a little bit wonky about these taxes is many of you know, the analysts aren't called, but understand FIN 18. And that fact that what you do each quarter is you project your anticipated tax rate for, you know, for the full year you put into each quarter. So the fact that and you can see that this quarter was 117%. So what that really says is for the full fiscal year, we expect a tax rate of about 117%. That said, we still, like, we've mentioned, we've reiterated or reaffirmed our net income guidance of negative $8 million to positive $12 million. But what's a little bit wonky about that is that we have a certain amount of tax that we are going to pay this year. Part of it is the withholding tax associated with the patent license agreement that we did this year with, you know, in Korea. So that'll be a big chunk with foreign withholding tax. We also have other entities that we pay for and withholding tax. So there's…

Okay. Thanks, Matt, Tony. That was very helpful.

I know that that whole tax situation was a little bit confusing for everyone. To close, I just wanna say, you know, it was a great Q1 and start of our fiscal 2026. You know, we're really happy with the deals we've signed on XUI. I think they're clear indicators of the power of the technology and our ability to compete in this marketplace against, you know, whoever our competitors are at the time. And so I'm really proud of what the team's both delivered and accomplished this quarter. You saw the great earnings, the great results that we've had, record free cash flow. And we're set up for a great Q2. And so I just I look forward to talking to everybody at the end of this quarter. You know, I think you'll be happy with our results, and with that, I'll talk to you all during the quarter and look forward to talking to you on this call at the end of Q2. So thank you very much.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.