Cerence Inc. Q1 FY2025 earnings call

• Q1 results: Revenue of $50.9 million and adjusted EBITDA of $1.4 million exceeded guidance; strong free cash flow of $7.9 million. Moved towards profitability earlier than forecasted.
• Product roadmap: Cerence XUI Gen 1 reached milestones like delivering five proof of concepts and kicking off a major customer program; XUI Gen 2 to be available by end of 2025.
• Business growth: Secured six new design wins and two generative AI wins; six major customer programs and two generative AI programs started production.
• Cost management: Non-GAAP operating expenses decreased by $10.4 million due to restructuring efforts; delayed R&D hiring; received $2.5 million international tax credit benefit.

In Q1 2025, Cerence Inc. achieved top line revenue of $50.9 million. Gross margin was 65%, exceeding the guidance range. License revenue was $22.7 million, up 9.1% from the same quarter last year. Connected services revenue was $13.7 million, up 34% year-over-year when excluding legacy roads. Professional services revenue was lower than anticipated but had a higher gross margin. Pro forma royalties were $36.7 million, in line with expectations. Consumption of previously fixed contracts was $14 million, lower than the same quarter last year.

Q2 2025 revenue expected $74M-$77M, GAAP net income $1M-$5M, adjusted EBITDA $18M-$22M; full-year confident in upper end of guidance for revenue, adjusted EBITDA, free cash flow

• Tariff impacts: Potential impact on unit volume if tariffs were applied, affecting car sales and shipments. However, tariffs are currently paused and no meaningful impact expected on Q2.
• Geopolitical/market challenges: Ongoing challenges like cost pressure, slowdown in EV and car sales, and complex geopolitical landscape affecting OEMs' ability to invest in technology.

Q: How big can the first major customer program with Cerence XUI be and how does it impact PPUs?

A: The first major customer program is with a European auto manufacturer, with several million units over the contract life, roughly a million in the first year. PPU upgrades are expected, and details on PPU to be provided next quarter.

Q: Can the conversion of pipeline billings get to the $290 million talked about? And why take in all fixed contracts this quarter?

A: Trailing twelve months adjusted billings are $227 million, and billings are outpacing revenue. Taking in fixed contracts this quarter is due to right customers, great discounts, and lower than ever achieved discounts, being opportunistic.

Q: What's the competitive landscape for digital assistance and market share outlook?

A: Competitive landscape includes various players; Cerence is agnostic, can use latest LLMs, customize user experience, and offers strong embedded capabilities. Market share in western OEMs is relatively flat, with focus on gaining share in typical participating OEMs and progressing in China.

Q: What were the outliers in Q1 that led to exceeding guidance?

A: Outliers included $2 million of royalty true-ups and a $2.5 million international tax credit benefit, which were better than expected.

Q: How quickly can XUI ramp and drive pricing higher?

A: XUI has embedded and connected versions. Contracts for connectivity are typically 2-3 years. The majority of cars are connected within these contract periods, and adoption can drive pricing higher over time.