Financial Data and Key Metrics Changes - The company reported Q2 revenue of $78 million, exceeding the high end of guidance, with an adjusted EBITDA of $29.5 million, marking a significant improvement from a net loss of $278 million in the same quarter last year [4][20][21] - Free cash flow for the quarter was $13.1 million, representing the fourth consecutive quarter of positive free cash flow [4][20] - The gross margin for the quarter was 77%, surpassing the guidance range of 74% to 76% [18][20] Business Line Data and Key Metrics Changes - Variable license revenue increased by $4.8 million or 19% year-over-year to $29.9 million, while fixed license revenue rose to $21.5 million from $10.4 million in the same quarter last year [21][22] - Connected services revenue decreased by $1 million or 7% year-over-year, but the decline was attributed to a revenue true-up in the previous year [21][22] - Professional services revenue was down approximately $4.8 million year-over-year, reflecting a trend towards more standardized solutions requiring less integration [22] Market Data and Key Metrics Changes - The penetration of global auto production for the trailing twelve months was 51%, with approximately 11.6 million cars equipped with Cerence technology shipped in Q2, flat year-over-year [25] - Worldwide car production increased by 1.3% year-over-year but decreased by 10.9% quarter-over-quarter, with a notable decline in production outside of China [26] - The average price per unit (PPU) increased to $4.87 from $4.51 year-over-year, driven by a higher attachment rate of connected services [27][28] Company Strategy and Development Direction - The company is focused on expanding its partnerships and diversifying its offerings beyond automotive, including a new solution for self-service kiosks in collaboration with CodeFactory [9][10] - Strategic investments are being made in IP protection, with ongoing lawsuits against Samsung, Microsoft, and Nuance to defend its intellectual property [10][64] - The company aims to enhance its hybrid agentic AI platform, Cerence XUI, with new features and capabilities, including multimodal functionalities [11][12] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's positioning despite macro challenges in the automotive industry, noting strong customer interest and ongoing partnerships [5][6] - The impact of tariffs on business remains limited, with expectations of minimal effects in the upcoming quarters [6][7] - The company anticipates continued growth in connected vehicle demand and is optimistic about revenue and profitability in fiscal year 2026 and beyond [9][12] Other Important Information - The company has a five-year backlog of approximately $960 million, consistent with previous quarters [28] - Guidance for Q3 revenue is projected to be between $52 million and $56 million, with no material fixed license revenue expected [29][30] - Full-year revenue guidance remains unchanged at $236 million to $247 million, with expectations for improved profitability and free cash flow [30] Q&A Session Summary Question: Insights on billing metrics and connected cars - Management noted that overall volumes were in line with expectations, with an increase in connected car shipments indicating future revenue growth [36][37] Question: Drivers behind new connected revenue - The increase in new connected revenue is attributed to previous billings amortizing into revenue, with expectations for continued growth in Q3 and Q4 [38][39] Question: Impact of AI on connected services - AI is integrated into both connected and non-connected vehicles, driving consumer demand and increasing PPU [42][43] Question: Macro impacts on pricing and volume - Management acknowledged requests from OEMs for price reductions due to cost pressures, but emphasized a collaborative approach to find win-win solutions [47][49] Question: Clarification on fiscal year guidance - The company remains confident in achieving its fiscal year guidance, with higher technology revenue offsetting headwinds in professional services [55][56] Question: Details on the lawsuit against Microsoft - The lawsuit is focused on protecting the company's intellectual property, with ongoing collaboration with Microsoft on technical projects [64][94]

Financial Data and Key Metrics Changes - Revenue totaled $4.8 billion, down 1% year-over-year due to lower vehicle production in North America and Europe and negative customer mix [5][21] - Operating income reached a record $572 million, an increase of over 5%, reflecting strong operating execution and ongoing cost reduction initiatives [5][21] - Earnings per share hit a record $1.69, a 46% increase from the prior year, driven by higher operating income and share repurchases [5][23] - Operating cash flow totaled $273 million, positioning the company to accelerate its deleveraging plan [5][31] Business Line Data and Key Metrics Changes - Advanced Safety and User Experience (ASUX) segment revenues were flat, with Active Safety revenues increasing by 9% and User Experience down 14% due to the roll-off of legacy programs [25][13] - Engineered Components Group (ECG) revenues increased by 1%, driven by 24% growth in China, offsetting declines in North America and Europe [26][16] - Electrical Distribution Systems (EDS) revenues declined by 3%, primarily due to lower light vehicle production, but bookings included over $1 billion in new business awards [27][18] Market Data and Key Metrics Changes - In North America, revenues were down 2%, while in Europe, revenues decreased by 4% year-over-year [24] - In China, revenues grew by 2% year-over-year, driven by growth with local OEMs, despite significant production volume declines with a specific EV customer [24][26] Company Strategy and Development Direction - The company is focused on the transition to electrified, software-defined, and connected solutions, positioning itself to enable this transition across multiple end markets [7][35] - The separation of the EDS business is on track, expected to create two independent public companies with unique product portfolios and financial profiles [35][19] - The company is proactively adapting its business to evolving trade policies and customer needs, leveraging a localized supply chain and flexible cost structure [10][9] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the long-term growth drivers of the business, despite current uncertainties due to rapid changes in global trade policies [8][9] - The company is closely monitoring demand changes and plans to update its full-year outlook when visibility improves [8][9] - Management highlighted strong cash flow generation and a robust balance sheet, providing flexibility to execute strategic initiatives [31][32] Other Important Information - The company completed a $3 billion accelerated share repurchase program, reducing its share count by 18% [6] - Bookings for the first quarter were nearly $5 billion, with strong traction in China and across various segments [11][12] Q&A Session Summary Question: Outlook and Tariff Impact - Management confirmed that the second quarter guidance is based on current visibility, with a focus on vehicle production schedules and customer pricing strategies [37][41] Question: High-Value Production Relocation - Management indicated that high-value production could potentially move back to the U.S., but this does not include the wire harness business [42][44] Question: Advanced Content Bidding Launches - Management noted that activity levels remain robust, although customer award timelines have been extended due to macro uncertainties [48][49] Question: EDS Spin and Macro Uncertainty - Management affirmed that the plan to separate EDS remains unchanged, focusing on growth and cost minimization [50][51] Question: Volume Decline and Guidance - Management clarified that the guidance reflects a volume question for the second half of the year, with no direct tariff impact expected [54][60] Question: China Market Performance - Management acknowledged strong growth in China, despite being impacted by a significant global EV manufacturer [62][63] Question: Tariff Commentary - Management confirmed that 99% of goods imported are USMCA compliant, implying minimal tariff costs [78][79]