Cerence(US:CRNC)2024-11-21 16:52Financial Data and Key Metrics - Q4 2024 revenue was $54.8 million, exceeding the high-end guidance of $50 million, driven by $5 million in license royalty true-ups from two OEM customers [20] - Adjusted EBITDA loss of $1.9 million, significantly better than the guidance of a $13 million loss, due to higher-than-expected revenue and $6 million in cost savings from restructuring [22] - Full-year 2024 revenue was $331.5 million, with adjusted EBITDA of $80.6 million, but excluding legacy revenue, adjusted EBITDA would have been negative $6 million [25] - Free cash flow for Q4 was $4.7 million, and the company ended the quarter with $130.4 million in cash and marketable securities [24][25] Business Line Performance - Variable license revenue was $25.3 million, down 17% YoY, but up from Q3 [31] - Connected Services revenue (excluding legacy) was $12.1 million, up 12% YoY [31] - Professional Services revenue declined 6% YoY, with further reductions expected in fiscal 2025 [31][30] - Pro forma royalties were $42.2 million, flat YoY, with fixed license consumption totaling $16.9 million, up 9% YoY [33] Market and Competitive Landscape - The company shipped 10.6 million cars with Cerence technology in Q4, down 14% YoY, while global auto production declined 5% [35] - The penetration rate of global auto production for the trailing 12 months declined slightly to 52%, primarily due to weaker production volumes among top customers [34] - The company secured 28 design wins in fiscal 2024, including 10 customer wins and six program launches for generative AI solutions with automakers like Volkswagen, Renault, and BMW [9][10] Strategic Direction and Industry Competition - The company is focusing on integrating generative AI and large language models (LLMs) into its product portfolio to enhance in-car voice interaction [8][9] - Cerence launched CaLLM Edge, the first LLM running on automotive Edge, in collaboration with Microsoft, enabling advanced voice interaction even without connectivity [11][12] - The company aims to streamline operations and reduce costs, targeting $35 million to $40 million in net savings, with $16.3 million in one-time restructuring costs [26][28] Management Commentary on Operating Environment and Outlook - The company issued fiscal 2025 revenue guidance of $236 million to $247 million, with adjusted EBITDA of $15 million to $26 million and free cash flow of $20 million to $30 million [16] - Management expects a return to profitability in fiscal 2025, driven by cost reductions and strong market positioning [16][18] - The company plans to transition from broad cost-cutting to simplifying and streamlining its organization to improve speed to market [17] Other Key Information - The company has $87.5 million in convertible notes due in June 2025 and is exploring refinancing options to strengthen its balance sheet [43][44] - Gross margins for fiscal 2025 are expected to be in the range of 67% to 69%, driven by a shift toward higher-margin connected services and licenses [42] Q&A Session Summary Question: AI-related deal margins and pricing uplift - Management noted that generative AI solutions command higher unit economics, with improved margins compared to the rest of the portfolio [10][51] - While specific pricing details were not disclosed, the company highlighted strong demand and interest from customers for AI-driven products [51][52] Question: Connected Services growth and competitive position - Connected Services revenue grew 12% YoY in Q4, excluding legacy revenue, and is expected to continue growing in fiscal 2025 [56][57] - The company emphasized its strong product customization capabilities and deep automotive expertise as key differentiators in the competitive landscape [59][60] Question: Historical growth challenges and future priorities - Management attributed past growth challenges to a focus on bookings rather than product differentiation and speed to market [63] - Priorities for fiscal 2025 include execution, cost reduction, and advancing generative AI products, with potential expansion into non-automotive markets [78][80] Question: Professional Services revenue trends - Professional Services revenue was down 6% YoY, with a $5 million to $7 million headwind expected in fiscal 2025 due to reduced focus on low-potential projects [30][85] - The company noted that Professional Services revenue can be lumpy quarter-to-quarter, depending on project demand [86][87] Question: License average PPU and AI product pipeline - License average PPU increased due to higher-value components in the license mix, with generative AI rollouts contributing to the uplift [91][94] - The company plans to seamlessly transition customers between AI product generations, with backward compatibility ensuring no slowdown in AI-related launches [101][103]