Cerence (NasdaqGS:CRNC) Q1 2026 Earnings call February 04, 2026 04:30 PM ET Speaker4Good day, and thank you for standing by. Welcome to the Cerence First Quarter 2026 earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, we'll open up for questions. To ask a question during the session, you will 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 ...

Financial Data and Key Metrics Changes - For Q4 2025, the company reported revenue of $60.6 million, exceeding the guidance range of $53-$58 million [17] - Adjusted EBITDA for Q4 was $8.3 million, significantly above the guidance range of $2-$6 million [21] - Full fiscal year 2025 revenue reached $251.8 million, reflecting broad-based strength across the business [18] - Free cash flow for Q4 was $9.7 million, marking the sixth consecutive quarter of positive free cash flow [22] - The company reduced total debt by $87.5 million during fiscal 2025, ending the year with $87 million in cash and marketable securities [22] Business Line Data and Key Metrics Changes - Variable license revenue for Q4 was $31.6 million, up 25% year-over-year, driven by strong customer utilization [18] - Connected services revenue for Q4 was $14.2 million, up 17% year-over-year, indicating continued expansion of the connected install base [18] - Professional services revenue for Q4 was $14.2 million, down 18% year-over-year, as the company streamlined custom projects [19] Market Data and Key Metrics Changes - The number of connected cars shipped increased by 14% on a trailing 12-month basis, indicating strong momentum in vehicle connectivity [23] - 52% of worldwide auto production included Cerence technology, consistent with historical penetration levels [23] Company Strategy and Development Direction - The company is focused on three key priorities for fiscal year 2026: driving top-line growth, advancing the XUI platform, and maintaining cost diligence [28] - The company aims to monetize its intellectual property and has ongoing legal actions against several companies, including Apple and Sony [7][8] - The company plans to showcase innovations at CES in Las Vegas, including new AI agents for vehicle services [10] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's foundation for long-term sustainable growth in fiscal 2026 and beyond [5] - The company expects fiscal year 2026 revenue to be in the range of $300 million to $320 million, representing a 23% year-over-year increase at the midpoint [15] - Adjusted EBITDA for fiscal year 2026 is anticipated to be between $50 million and $70 million [25] Other Important Information - The company resolved a lawsuit with Samsung, resulting in a one-time payment of $49.5 million, which will be recognized as revenue in Q1 [7][34] - The company initiated a restructuring plan to reduce operating expenses and position itself for profitable growth [13] Q&A Session Summary Question: Clarification on IP monetization and legal expenses - The $49.5 million payment from Samsung will flow through as revenue, with anticipated legal costs of approximately $24 million [34][38] Question: Interest in XUI and proof of concepts - The company is currently engaged in about half a dozen POCs with different OEMs for the XUI platform [40] Question: Connected services revenue and accounting practices - The connected services revenue is recognized over the life of the contract, with no unusual accounting practices applied in the current quarter [42][44] Question: Non-automotive opportunities - The company ranks kiosk implementations and phone answering chat services as top non-automotive opportunities [48][50] Question: Core business growth breakdown - The expected 8% growth in the core business is attributed to increased billings and amortization of previous billings [53] Question: Competitive landscape update - The competitive landscape remains stable, with a focus on large language model-based technologies and existing competitors like Google and Amazon [56]

Financial Data and Key Metrics Changes - For Q4 2025, the company reported revenue of $60.6 million and adjusted EBITDA of $8.3 million, exceeding guidance [5][17] - Full fiscal year revenue reached $251.8 million, with adjusted EBITDA of $48.1 million, and free cash flow grew almost threefold year-over-year to $46.8 million [6][21] - The price per unit (PPU) increased to $5.05 for the trailing 12-month period, up 12% from the previous year [6][24] Business Line Data and Key Metrics Changes - Variable license revenue for Q4 was $31.6 million, up 25% year-over-year, while connected service revenue was $14.2 million, up 17% year-over-year [18][19] - Professional services revenue for Q4 was $14.2 million, down 18% year-over-year, reflecting a shift towards standardized offerings [19][20] - Total license revenue for the full year grew 13%, despite a decrease in fixed license contracts [18] Market Data and Key Metrics Changes - The company shipped approximately 11.7 million units in Q4, an increase from 10.6 million in the prior year [22][23] - The number of connected cars shipped grew by 14% on a trailing 12-month basis, with 52% of worldwide auto production including Cerence technology [23] Company Strategy and Development Direction - The company is focused on three key priorities for fiscal year 2026: driving top-line growth, advancing the XUI platform, and maintaining cost diligence [28] - The strategy includes expanding partnerships with Microsoft and NVIDIA, and continuing IP monetization efforts [12][15] - The company anticipates fiscal year 2026 revenue in the range of $300 million to $320 million, marking a 23% year-over-year increase at the midpoint [15][25] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's foundation for long-term sustainable growth, with expectations for continued strong performance in fiscal 2026 [4][15] - The competitive landscape remains stable, with increasing competition from large language model-based technologies [58] Other Important Information - The company resolved a lawsuit with Samsung, resulting in a one-time payment of $49.5 million, which is expected to contribute to future revenue [7][34] - A restructuring plan was initiated to reduce operating expenses and position the company for profitable growth [13][14] Q&A Session Summary Question: Clarification on IP monetization and legal expenses - The $49.5 million payment from Samsung will flow through as revenue, with anticipated legal costs of approximately $24 million [34][38] Question: Interest in XUI and proof of concepts - The company is currently engaged in about half a dozen proof of concepts with various OEMs for the XUI platform [40] Question: Connected revenue and accounting practices - Revenue from connected services is recognized over the life of the contract, with no unusual accounting practices affecting the current quarter [42][44] Question: Non-automotive opportunities - Key non-automotive opportunities include kiosk implementations and a phone answering chat service targeting dealerships [48][50] Question: Breakdown of expected growth in core business - The anticipated 8% growth in core technology is driven by increased billings and amortization of deferred revenue [54] Question: Update on competitive landscape - The competitive landscape remains consistent, with major players like Google and Amazon continuing to drive competition through AI technologies [58]

Financial Data and Key Metrics Changes - For Q4 2025, the company reported revenue of $60.6 million and adjusted EBITDA of $8.3 million, exceeding guidance [5][16] - Full fiscal year revenue reached $251.8 million, with adjusted EBITDA of $48.1 million, and free cash flow grew almost threefold year-over-year to $46.8 million [5][20] - The price per unit (PPU) increased to $5.05 for the trailing 12-month period, up 12% from the previous year [5][23] Business Line Data and Key Metrics Changes - Variable license revenue for Q4 was $31.6 million, up 25% year-over-year, while connected service revenue was $14.2 million, up 17% year-over-year [17][18] - Professional services revenue for Q4 was $14.2 million, down 18% year-over-year, reflecting a focus on higher gross margins [18][19] - Total license revenue for the full year grew 13%, despite lower fixed license contracts [17] Market Data and Key Metrics Changes - The company shipped approximately 11.7 million units in Q4, an increase from 10.6 million in the prior year [21] - The number of connected cars shipped grew by 14% on a trailing 12-month basis, with 52% of worldwide auto production including Cerence technology [22] - Adjusted total billings were $236 million, an increase of 8.4% year-over-year [22] Company Strategy and Development Direction - The company aims to monetize its intellectual property and protect it against infringers, with ongoing actions against major companies [6][7] - A multi-year roadmap for IP monetization is in place, expected to support non-automotive business growth [8][12] - The company is focused on advancing its AI roadmap, growing its business with new and existing customers, and continuing transformation and cost management initiatives [8][12] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the foundation for long-term sustainable growth in fiscal 2026 and beyond, with expected revenue in the range of $300 million to $320 million [15][24] - The anticipated growth reflects an 8% increase in the core technology business and a focus on increasing adoption of Cerence XUI [15][24] - Management highlighted the importance of maintaining cost diligence while driving top-line growth [26] Other Important Information - The company resolved a lawsuit with Samsung, resulting in a one-time payment of $49.5 million, which is expected to contribute to revenue in Q1 [6][27] - A restructuring plan was initiated to reduce operating expenses and position the company for profitable growth [12][13] Q&A Session Summary Question: Clarification on IP monetization and legal expenses - Management confirmed that the $49.5 million payment from Samsung will flow through as revenue, with anticipated legal costs of approximately $24 million [27][28] Question: Interest in XUI and proof of concepts - Management noted ongoing POCs with about half a dozen OEMs, indicating increased interest in the XUI platform [28][29] Question: Connected revenue and accounting practices - Management clarified that connected revenue is recognized over the life of the contract, with no unusual accounting practices affecting the current quarter [29][30] Question: Non-automotive opportunities - Management identified kiosk implementations and a phone answering chat service as key non-automotive opportunities [32][33] Question: Core business growth breakdown - Management explained that the expected 8% growth in core technology is driven by increased billings and amortization of deferred revenue [34][35] Question: Competitive landscape update - Management indicated that the competitive landscape remains stable, with a focus on large language models and agentic AI driving competition [36]

Financial Data and Key Metrics Changes - The company reported revenue of $62.2 million for Q3 FY 2025, exceeding the high end of guidance which was $52 million to $56 million [22] - Adjusted EBITDA for the quarter was $9 million, significantly above the guidance range of $1 million to $4 million [25] - The company generated positive free cash flow of $16.1 million, marking the fifth consecutive quarter of positive free cash flow [5][28] - The full fiscal year revenue guidance was raised to a range of $244 million to $249 million, with the low end above the previous midpoint [5][30] Business Line Data and Key Metrics Changes - Variable license revenue was $34.2 million, up 48% year over year, reflecting solid utilization across the customer base [22] - Connected services revenue increased to $12.8 million, up 17% year over year, driven by growth in the connected installed base [24] - Professional services revenue was $15.2 million, down 8% from the prior year, reflecting a lower mix of custom work [24] Market Data and Key Metrics Changes - The company shipped 12.4 million units in Q3, an increase from 12.1 million in the prior year [26] - The number of connected cars shipped grew by 12%, indicating continued momentum in vehicle connectivity [26] - The company captured 52% of worldwide auto production, consistent with historical penetration [26] Company Strategy and Development Direction - The company is focused on advancing its AI roadmap, growing its business with new and existing customers, and continuing transformation and cost management [6][18] - Cerence XUI, the next-generation hybrid agentic AI assistant platform, is being developed with a strategic multi-year roadmap [6][7] - The company is expanding partnerships with chip providers like ARM to enhance performance and speed [7] Management's Comments on Operating Environment and Future Outlook - Management noted that while there are projections of a 2.5% decline in vehicle volumes for Q4, they believe the impacts will remain limited [19] - The company is optimistic about its strong customer interest and ongoing opportunities, particularly with new design wins and program extensions [12][13] - Management emphasized the importance of maintaining favorable conditions for the company while supporting customers [19] Other Important Information - The company has filed actions against Sony and TCL for infringement of its voice technology patents [20] - The partnership with LG is expected to leverage Cerence's technology across LG's global television lineup, enhancing user experience [15][17] Q&A Session Summary Question: Can you expand on what drove the increases this quarter? - Management indicated that the increases were across all three lines, with higher volume from embedded licenses and additional true-ups impacting professional services [35][36] Question: What are your customers saying in terms of auto production in the next six months? - Management noted that there was a build ahead in Q3, and while Q4 is expected to be more standard, they remain confident in the overall year-end performance [42][44] Question: Why the big move down in guidance for Q4? - Management explained that some of the Q3 revenue was pulled in from Q4 due to OEMs trying to get ahead of tariffs, leading to a more standard Q4 [51][52] Question: How should we think about your cash balance now? - Management stated that the company ended the quarter with over $79 million in cash and marketable securities and is comfortable operating at this level without adding debt [56][57] Question: Can you talk about new bookings in terms of market share? - Management indicated that the company is holding its market share and is competitive in ongoing RFQs, with several programs expected to close soon [72][84]

Financial Data and Key Metrics Changes - The company has seen a significant shift in its operational efficiency and profitability, with a focus on reducing costs and increasing cash flow [44][46][61] - The penetration rate of the company's technology is reported to be in over 50% of cars produced, with a goal to increase the price per unit (PPU) as more advanced technologies are adopted [20][21][58] Business Line Data and Key Metrics Changes - The company is transitioning to a multimodal AI interaction platform, Cerence XUI, expected to be completed by the end of the calendar year, with implementation in vehicles anticipated in early 2026 [61][62] - The company is also focusing on enhancing its technology stack within existing vehicles to increase revenue opportunities [21][61] Market Data and Key Metrics Changes - The adoption rates for AI and voice interaction technologies are similar across European and US manufacturers, with a notable demand for these features from consumers [29][30] - In China, the company faces challenges selling within the domestic market but performs well with Chinese manufacturers exporting to Europe and other regions [28][29] Company Strategy and Development Direction - The company aims to leverage its trusted relationships with OEMs and tier-one suppliers to enhance its competitive position against big tech companies [13][26] - There is a strategic focus on expanding into non-automotive sectors while maintaining profitability and cash flow [34][35] Management's Comments on Operating Environment and Future Outlook - Management acknowledges the complexity of software integration within vehicles as a challenge for automakers, which may delay the adoption of new technologies [16][17] - The company is optimistic about the future, emphasizing the importance of AI advancements and the growing demand for connected vehicle technologies [19][22] Other Important Information - The company has established partnerships with key SOC providers like NVIDIA and ARM to enhance software performance and execution [26] - The company is exploring opportunities in non-automotive sectors, including transportation and consumer electronics, while ensuring high margins and profitability [33][34] Q&A Session Summary Question: What are the most important metrics to track for the company and the industry? - Key metrics include overall IHS volumes, penetration rates, connectivity rates, and adjusted cash flow, which provide visibility into future connected revenue [57][58][59] Question: How is the company addressing operational efficiencies? - The company has undertaken a successful restructuring to rationalize expenses, focusing on improving efficiency across all departments [44][45][46] Question: What is the company's approach to pricing discussions with automakers? - The company is engaged in discussions to help manufacturers reduce costs while also aiming to increase revenue through a broader adoption of its technology stack [50][52]

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 - The company reported Q2 revenue of $78 million, exceeding the high end of guidance which was $74 million to $77 million [4][17] - Adjusted EBITDA for the quarter was $29.5 million, surpassing the guidance range of $18 million to $22 million [4][20] - Free cash flow was $13.1 million, marking the fourth consecutive quarter of positive free cash flow [4][20] - Net income for Q2 was $21.7 million, a significant improvement from a net loss of $278 million in the same quarter last year [20][21] Business Line Data and Key Metrics Changes - Variable license revenue increased to $29.9 million, up 19% year-over-year [21] - Fixed license revenue was $21.5 million, compared to $10.4 million for Q2 last fiscal year [21] - Connected services revenue decreased to $12.6 million, down 7% from $13.6 million in the same quarter last year [21][22] - Professional services revenue declined by approximately $4.8 million year-over-year, attributed to increased standardization of solutions [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 using Cerence technology shipped in Q2 [25] - Worldwide IHS production increased by 1.3% year-over-year but decreased by 10.9% quarter-over-quarter [25] - The number of cars produced using connected services increased by 10% on a trailing twelve-month basis compared to the previous year [26] Company Strategy and Development Direction - The company is focused on technology innovation, expanding partnerships, and diversifying its business beyond automotive [5][9] - Cerence is strategically investing in IP protection, with ongoing lawsuits against Samsung, Microsoft, and Nuance for patent and copyright infringement [10][60] - The company is enhancing its hybrid agentic AI platform, Cerence XUI, with new multimodal capabilities and partnerships with major automakers [11][12] Management's Comments on Operating Environment and Future Outlook - Management noted ongoing macro challenges in the automotive industry but expressed confidence in the company's positioning and customer support [5][6] - The impact of tariffs on business remains limited, with expectations of minimal effects for the fiscal year [6][7] - Management is optimistic about the future, citing strong customer interest in new technologies and solutions [13][33] Other Important Information - The company plans to repay $60.1 million of convertible notes due in June and maintain a cash balance above $70 million for the rest of the fiscal year [30] - The five-year backlog metric is approximately $960 million, consistent with previous quarters [28] Q&A Session Summary Question: Can you walk through the metrics and what is driving the changes? - Management indicated that overall volumes were in line with expectations, with an increase in connected car shipments expected to drive future revenue [35][36] Question: What is driving the sequential uptick in new connected revenue? - Management confirmed that the increase is due to previous billings amortizing into revenue, with expectations for continued growth in connected revenue [37][38] Question: How is AI impacting connected services and pricing? - AI is integrated into both connected and non-connected vehicles, driving consumer demand and increasing pricing per unit [41][42] Question: Where are macro impacts being felt? - Management noted some pricing pressure from OEMs and potential impacts on volume due to market conditions [46][48] Question: Can you elaborate on the unchanged fiscal year guidance? - The guidance remains unchanged due to higher technology revenue offsetting headwinds in professional services [52][53] Question: What is the goal of the lawsuit against Microsoft? - The lawsuit aims to protect the company's intellectual property related to foundational technologies [60][88] Question: How is the partnership with MediaTek enhancing offerings? - The partnership focuses on optimizing automotive SoCs for better performance and cost efficiency [56][57] Question: What are the non-automotive opportunities being explored? - The company is leveraging its technology for applications in kiosks and other verticals, aiming for cost-effective market entry through partnerships [102][103]

Financial Data and Key Metrics Changes - The company reported Q2 revenue of $78 million, exceeding the high end of guidance which was $74 million to $77 million [17] - Adjusted EBITDA for Q2 was $29.5 million, surpassing the guidance range of $18 million to $22 million [21] - Free cash flow for the quarter was $13.1 million, marking the fourth consecutive quarter of positive free cash flow [4] - Net income for Q2 was $21.7 million, a significant improvement from a net loss of $278 million in the same quarter last year [21][22] - Gross margin for the quarter was 77%, exceeding the guidance range of 74% to 76% [19] Business Line Data and Key Metrics Changes - Variable license revenue was $29.9 million, up 19% year-over-year [22] - Fixed license revenue for Q2 was $21.5 million, compared to $10.4 million in the same quarter last year [22] - Connected services revenue decreased to $12.6 million, down 7% from $13.6 million year-over-year [22] - Professional services revenue was down approximately $4.8 million year-over-year, reflecting a trend towards more standardized solutions [23] 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 using Cerence technology shipped in Q2 [25] - Worldwide car production increased by 1.3% year-over-year but decreased by 10.9% quarter-over-quarter [26] - The number of cars produced using connected services increased by 10% on a trailing twelve-month basis compared to the previous year [27] Company Strategy and Development Direction - The company is focused on expanding partnerships and diversifying its offerings beyond automotive, including a new solution for self-service kiosks [9][10] - Strategic investments are being made in IP protection, with ongoing lawsuits against Samsung, Microsoft, and Nuance [10][62] - The company aims to enhance its hybrid agentic AI platform, Cerence XUI, with new features and capabilities [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 [5] - The impact of tariffs on business remains limited, with ongoing cooperation with customers to optimize partnerships [6] - Future revenue growth is anticipated from new verticals and increased demand for connected vehicles [9][27] Other Important Information - The company plans to use cash on hand to repay $60.1 million of convertible notes due in June, maintaining a cash balance above $70 million for the rest of the fiscal year [31] - The five-year backlog metric is approximately $960 million, consistent with previous quarters [29] Q&A Session Summary Question: Can you walk through the metrics and what is driving the changes? - Management noted that overall volumes were in line with expectations, with an increase in connected car rates indicating future revenue potential [37][38] Question: What is driving the sequential increase in new connected revenue? - The increase is attributed to previous billings amortizing into revenue, with expectations for continued growth in Q3 and Q4 [39][40] Question: How is AI impacting connected services and pricing? - AI is integrated into both connected and non-connected vehicles, driving consumer demand and increasing pricing per unit [42][44] Question: Where are macro impacts being felt? - Management indicated that pricing pressures from OEMs are emerging, but they are working to provide value through cost-saving measures [47][49] Question: Can you elaborate on the lawsuit against Microsoft? - The lawsuit is focused on protecting intellectual property, with ongoing collaboration with Microsoft on technical projects despite the legal issues [92][94] Question: What are the non-automotive opportunities being explored? - The company is leveraging its technology for applications in kiosks and other verticals, aiming for cost-effective growth through partnerships [106][107]