It is time to start our investor day this morning. Thank you all. My name is Rich Yerganian. I'm the vice president, senior vice president of investor relations for Cerence. We're very excited to have you all with us here today to hear about for us to share our growth strategy with you, to show what we're talking about in terms of our Destination Next, where we expect to take the company in moving into the future. Next slide, please. Let's see. From a forward-looking statements perspective, as always, you know, we will be making some forward-looking statements throughout this presentation. We caution you to take into account, as you should for any investment, the risk factors associated with those comments.
You can find them in our 10-K, the ones associated with Cerence. The official spokespeople are myself, Stefan Ortmanns, our CEO, and Tom Beaudoin, our CFO. As I said, we will be making forward-looking statements throughout the day today. You know, we're not obligated to update those statements as you are aware. Please refer to our 10-K for any review of the risk factors that we have associated with our business. We will also be re-referencing certain performance indicators. Again, those are explained in the glossaries in the back of the investor deck and as well in the press release that we released this morning of our Q4 and fiscal 2022 earnings.
There is the investor presentation that is available for download that we're using here today. It is available right on the overview section of our investor website at Cerence.com. If you'd like to download that and follow along, please encourage you to do so. For today's event, we have a agenda that I'll go through now. The one thing I want to say up front is that we are holding questions and answers till the end of the presentation. Please write down your questions, and we'll be happy to take them once we conclude the prepared remarks. We're gonna start out with Stefan will be coming up and kicking off the event with a few comments to start off.
Following that, Tom will, Tom Beaudoin, our CFO, will come up here and review our Q4 and fiscal '22 results. Stefan will come up and lay out what Destination Next mean for Cerence moving forward and, you know, from a market strategy, from a product strategy at a high level, you know, where does he expect to drive the company into the future. Our, one of our newer executives that's joined the company is Nils Schanz. Some of you may remember him from being a guest speaker here on behalf of Daimler, when we had our first analyst conference. I guess he liked us so much he decided to join the company, and we're very, very excited to have him with us here today, so he'll be saying a few words.
Prateek Kathpal will go into the level of the technology beyond the strategy that Stefan lays out for everyone. Tom will come up and talk about the financial plan, which I'm sure is probably all you'd like us to skip to. He'll come, he'll start, he'll talk about the multi-year plan and how we see things progressing for the business moving over the next several years. Finally, Stefan will come up with a few closing remarks, and then we will move to Q&A. With that, we will move to the next part of the agenda, and I'm gonna invite Stefan to come up to the stage.
Stefan, as you may know, has been CEO for under a year but, you know, helped the company go through very significant change that we're all excited about. He, his background, he's, you know, very steeped in the product technology, has great relationships with our customers, and as employees, we're very excited to have him leading the company at this point. With that, I will welcome Stefan up to the stage.
Good morning, everyone, and a warm welcome. It's really a pleasure having you all here, and I'm really excited also to share our new journey, Destination Next. Destination Next is much more than a strategy or a plan for growth. It's a philosophy and a mindset in terms of how are we working together? How are we going to delight our customers and the market? We have made tremendous progress over the last couple of quarters. For example, we have established our strategic plans to optimize the structure, processes, and our product portfolios, hence driving huge savings. Also with respect to product, you know, we're making a big move, namely transforming the interaction with the digital vehicle. What does this mean? We are evolving from a voice-only, driver-centric solution to a truly holistic in-cabin experience. That means expanding from conversational AI to mobility AI.
conversational AI is all about voice, yeah? Mobility AI is a superset, meaning it includes gesture, for example, vision. It includes also functionalities like wellness sensing, yeah. It includes also audio interaction and also the link with the surroundings of a vehicle. That's very important. Innovation matters. Yeah. As you heard from Rich, I have a strong background in products, technology and innovations, right? I'm also very well connected with most of the OEMs across the globe, including the Chinese OEMs. When talking to all of them, I think we have fully aligned our strategy with their needs in the future. Destination Next implies also that we are moving from a component supplier to a fully trusted innovation partner of our OEMs. That means in the past, we shared some components. In the future, the OEMs will adapt to our complete solution.
It was Cerence Assistant, Cerence Co-Pilot, and now it's the so-called Immersive Companion. This means with more innovation, and also going into adjacent markets like two-wheelers, recreation vehicles or trucks, we are expanding actually also the addressable market. We're creating actually more value for the cars, leading to an increase in price per unit. To give you also a concrete example, based on signed deals. By the way, we had a great quarter with huge bookings. You know, year-over-year growth was 16%. When looking at those bookings and comparing FY 2023 with FY 2024, there is an increase of about 25% for PPU. Nevertheless, FY 2023 remains a transitional year for us as we cut back the number of fixed license deals. On the other hand, as said, we had a strong new booking years.
We had also an all-time high in professional services revenue. We have a strong backlog. I think also with the new strategy, we are in a prime position to expand our leadership in mobility AI and to drive long-term revenue. Let me also share a quick update on my leadership team. As you know, we had some hiccups over the past, but now I'm pleased to tell you that I have a really experienced, great leadership team in place with a absolutely fantastic team spirit. You see, for example, over there, Jennifer. Then we had two important new members for my ELT, namely Nils Schanz, who is the new Chief Product Officer, and Bob Ligon. He is also over there. Bob. He is the new Chief Revenue Officer. Maybe some of you already know Nils.
He was here at our first Investor Day in February 2020, yeah, as a guest speaker from Mercedes. He is responsible for the great quality of MBUX. Nils joined us after 15 years at Daimler and Mercedes. Most recently, Nils was responsible for the digital user experience, including, among others, conversational AI. You know, it's hard to find those talents with this kind of expertise and deep OEM knowledge. I'm very proud that Nils joined Nuance. Secondly, Egon Jungheim, he will retire by the end of this calendar year. I worked with him for more than 2 decades, yeah. We have a great working relationship, and I'm also excited to have now Bob Ligon with us as the new Chief Revenue Officer. Bob brings in a lot of experience. He was the SVP of sales at ZF.
ZF is also a well-known first-tier supplier, providing solutions, platforms for passenger vehicles, commercial vehicles, and industrial applications. Yeah. I think with Bob, we have now a great leadership team. Bob, Nils, with a very experienced team, I'm actually now feeling much, much better, and I think we are set up for success now. You know. Overall, I'm very thankful now being in this position here, and I think we have really a great future in front of us. With that, I would like to ask Tom to join me here, and Tom will walk you through our Q4 and FY 2022 results. Thanks, Tom.
Thank you, Stefan Ortmanns. First of all, thank you for joining us today. This has been a long-awaited opportunity to share some of the things that Rich Yerganian and I have been talking to many of our investors about and put some real numbers behind some of those conversations. Since I joined Cerence Inc. as the CFO in early May, I've been focused on developing, in partnership with Stefan Ortmanns and the executive team, a strong strategic and financial plan to guide the company. I'm really excited to share this today. What we'll go through is our Q4 earnings, which was at the high end of our guidance, our FY 2023 guidance, which reflects our transition year associated with the strategic change to fixed contracts, and our multi-year targets for FY 2024-2026, which leads to very strong growth, profitability, and cash flows.
We'll go into that later on in the morning. With respect to Q4, we had FY22 revenues at $327.9 million, with, as Stefan said, very strong bookings, 16% growth year-over-year at 684. We achieved above the high end of our Q4 guidance in many of the key financial metrics with revenue at $58.1 million. As committed, we did not do any fixed contracts in Q4 and remain committed to managing the level of fixed contracts to $40 million annually. GAAP net income includes a goodwill impairment of $213.7 million in Q4. This goodwill is associated with pre-spin acquisitions, while the auto business was still part of Nuance.
Q four was and this is a chart that we've been providing to help give transparency to the elements of revenue. Q four was another strong professional services quarter. As we've talked about, professional services revenue is a good indicator of the deployment of our solutions on OEM platforms, which leads to license and connected services revenue as autos begin shipping on these platforms. I'll get into the breakdown of the license revenue on the next slide. New connected service revenue was $9.6 million, and I'd like to point out that it's impacted by two big factors from a growth perspective. One is a couple of older deals that are at the end of their amortization schedules and are not opportunities for renewals.
Two, the impact of lower auto production over the last two years, and therefore the resultant loss of amortization revenue from those cars. We are confident in the growth of connected services, which I will show you when we get to the go-forward plans later on. The legacy contract remains at about $8.5 million per quarter through Q1 FY26, where it then is finished. To get into some of the details around license revenues, and again, this is the format that we've been providing the last couple of quarters. Again, I'd point out there were no fixed contracts in Q4. Pro forma royalties remains quite strong.
Just so everybody understands, this represents the royalties from in-quarter auto production without the impact of fixed contracts or the consumption from previous fixed contracts. You can see that the consumption was continued to be higher than previous quarters, and we'll talk a little bit about how that rolls out in future years. I think it's important to note that cars with Cerence technology tracks quite well to the overall auto production. If you look at the blue line, we're always about around 50%, sometimes a little higher. It depends on model deployment by the auto industry, but, you know, very consistent at just over 50%. We took a look at how we correlate to industry production.
Cars with Cerence technology, which is that kind of magenta line, is the cars that are produced each quarter with our technology. The red line is the overall auto production. We indexed this back to kinda Q1, FY 20, and you can see that we're slightly above the line in most quarters, which I think is quite positive. You know, we remain, as Stefan talked, we remain a preferred solutions provider to all the OEMs and tier ones, and I think that's represented by the continued strong performance in our KPIs. I would like to note one area that was in the press release this morning, and that's the change in the number of Cerence-connected cars shipped.
That's a trailing 12-month, year-over-year metric that was down 13%. This metric is impacted by the volatility in auto production during the trailing 12-month periods. On a Q4 FY 22 to Q4 FY 21 basis, we were actually up 15%. I think the trend is quite positive. With that, I'll turn it back to Stefan.
Thank you, Tom. As you can see, we have a very strong foundation, and I'm pleased now to share with you our new strategy, which is called Destination Next. Innovation excellence remains a key driver for our future success, and many of you may be familiar with Cerence. We started with great technology, evolved to Cerence Assistant, from Cerence Assistant to a Cerence Co-Pilot, and now we are defining a completely new holistic solution which we call the Immersive Companion solution. That means we are completely transforming the way of users, passengers, drivers can interact with the future of the digital car. This is important aspect because as I said at the beginning, we are moving or expanding also from conversational AI to mobility AI. It spans actually the entire cabin, so from cockpit to cabin, and the surroundings of a car. Right?
You have already heard that we had some functions like look, you're driving and say, "Oh, tell me more about this bridge or that castle here," and you will get the information. We already launched also the detection of emergency vehicle with interior microphones, even when music is playing. We are building all this stuff together and bringing a really immersive, truly immersive in-cabin experience to the world, to our OEMs. We have already signed deals about this. When looking at the new feature set, right. It's much broader than, for example, a Cerence Assistant, right. This will also advance us to generate a higher ASP and also to participate in a much, much broader addressable market. This is the way we lead. It's with a global reach, global footprint, that's very important, with strong vertical expertise.
We know the automotive market, we know the transportation market, and we know what the OEMs are expecting from us. Yeah. More than 450 million cars are using already Cerence technology, yeah, on the road. More than 50% of all newly produced, newly built cars are leveraging also Cerence solutions. You see also that our innovation is also reflected in a very extensive patent portfolio. Yeah. Our team, R&D, and professional services is distributed globally to work locally with all the OEMs, so in China, here in the States, in Europe, in Japan, obviously, and Korea. Yeah. That's the foundation. What you see here is actually our, I call it, ecosystem.
There is a strong need for conversational AI, we all know this, there's a huge appetite also for new AI-based application driving the so-called new user experience in the car. You see here various circles. The inner circle here is all about the new EV makers. Yeah. It's really amazing what those guys are driving with respect to the in-cabin experience. Yeah. You will see it also later on in some customer testimonials, right, where we have asked some of our customers and great partners to help us. Yeah. In the next circle, in the next ring, you see the traditional OEMs. They are also important to us because they bring in the mass volume here, right? Finally, we have the circle with all of our, let's say, first-tier suppliers and partners. Yeah.
What you see, we have a very diversified network of customers, yeah, and our deep engagement with OEMs, with first-tier suppliers and other partners, right, brings many innovative opportunities and also a very balanced portfolio of OEMs. Yeah. You see here also on the left-hand side, some of our partners. They are also important to us because also the deployment cycle in auto is going to be much, much faster than in the past. For example, with NVIDIA and Qualcomm, NXP, and others, we have so-called pre-integrated solutions from us. If you give us a chipset, we can do it within a few days, actually. Yeah. It's a complete Cerence Assistant. Yeah. We are working, for example, also with Infineon on exterior microphones. Yeah. Just think about doing the communication from outside the car, yeah.
Open the window, open the door, yeah, secured by my voice, by voice biometrics, yeah, or face recognition, yeah. We are working also closely, for example, with Sirius XM, improving their models here, their underlying knowledge models here. Overall, I think we are also in a prime position again to drive long-term sustainable growth because we have this huge partner network across the world. This is our first testimonial from NVIDIA, yeah. We're actually a strong partner. You know, these semiconductor guys are also important for the automotive world. One of their key customer is, for example, Mercedes, is also one of our key customers, right? Qualcomm is working, for example, with Volkswagen, so we need to be flexible, and therefore our solution is platform-agnostic. First of all, let's listen to Ali Kani from NVIDIA.
Of our time. It's transforming virtually every industry from healthcare and scientific research to energy and manufacturing. The breakthroughs in AI are nothing short of science fiction, and nowhere is this transformation more significant than in the automotive industry. NVIDIA provides end-to-end intelligent solutions for the industry to develop safer, more efficient transportation from the car to the cloud. As driving functions become more and more automated, the in-vehicle experience has become a key place for innovation and differentiation by manufacturers. For immersive, interactive cockpit technology, we're collaborating with Cerence, who has decades of automotive AI voice expertise. Cerence is integrating its conversational AI technology with the NVIDIA DRIVE platform to deliver next-generation multimodal vehicle cockpits. Working together, NVIDIA and Cerence are providing the industry with a flexible, high-performance in-vehicle infotainment platform to bring new, intelligent user experiences to life.
Again, it's a very important partner such as Qualcomm, NXP, and others. As also said, our solution is platform-agnostic, meaning independent of the underlying hardware and operating system, you know, so that we have all the flexibility. Since the spin-off, we have made a lot of innovative products in our core segment, yeah. I'm not going to through all of these here, right? The typical process with an OEM is, we have some discussions. We're doing joint road mapping with our key partners, yeah. We are creating together a prototype, introducing our new features, our new innovation, and then we are supporting the OEMs up to their SOP, start of production, and even beyond.
It's really essential to bring innovation, new innovation with high-quality products on time, which will drive also incremental revenue for Cerence because now we have all the opportunities with SOTA, software-over-the-air updates, to bring in new features for cars being already on the road. This is just one example. This is our so-called Cerence Co-Pilot, yeah. We have signed last fiscal year various deals with key OEMs, yeah. For example, Renault, Toyota, and others. You know, I cannot share everything here, but this drives also our revenue, which will be shared by Tom in a bit. What is super important is that we have now also conversational AI in combination with digital twin and proactive AI and also this kind of multi-seat intelligence. That's a feature which will go from the luxury cars but into all cars.
Just think about karaoke in the car. Yeah, you need to have these cool features in the future, yeah. With the so-called facelift and SOTA opportunities, we are driving additional revenue streams, yeah. A good example is, for example, Volkswagen, yeah. This is actually Axel Heinrich, who is running electronics at Volkswagen, and I'm going to meet him next week, Monday and Tuesday, together with the CTO of Volkswagen, where we have also some strategic sessions, right? They made a clear commitment to Cerence where they said, okay, in the past, they used some of our components, yeah, and they did the dialog somehow on top, yeah. Now they said, "Okay, your solution is much, much better with respect to accuracy and also real-time behavior," because it has to be snappy. Less than two seconds, it should be the response time, yeah.
What they did, they actually started with their ID.3, that's their EV car, and said, "Okay, we need to improve the solution." We did it for them, and they're using also the same platform across other cars, right? Yeah, just listen to him.
Strategy, we are focusing even more intensively on the digitization of our vehicles and of the entire company. We will have invested more than EUR 18 billion in electric mobility, hybridization, and digitization by 2026. Volkswagen will stand for fascinating digital customer experiences, new business models, and for autonomous driving across the market. Our ambition is to link up the automotive and digital worlds to the benefit of customer, company, and society alike. The digital user experiences and hassle-free customer experience are elemental for our products. Our voice control function uses pioneer technology from Cerence. It recognizes voice commands more quickly and precisely, thus improving the level of operating and ride comfort. Responses are delivered in just a few seconds. We are looking forward to continue our collaboration to deliver premium level performance today and tomorrow.
That video was done by Volkswagen marketing, right? But, I think I like the video very much, but he said also it takes a couple of seconds, right? Or a few seconds, right? It has to be in 1 to 2 seconds at max. Yeah. But, other than that, right, that's again, a great partner of ours, and I'm really thankful working with Volkswagen, but also with Audi, with Porsche, and others. Now coming to the future, and as you can see, we are well-positioned to support our OEMs globally, and we are already at the next inflection point here. That's all about software-defined cars, immersive entertainment, and in-cabin experience, and there's a huge appetite for AI, for AI-driven user experience solutions. Yeah.
Especially the new EV makers, what I said also at the beginning, they are setting, in my view, a new de facto standard for conversational AI, mobility AI in the car. Their speed and commitment to innovation is putting us in a prime spot to grow. We learn from them, they learn from them, and then we bring it to all the other OEMs. Coming now to this immersive in-cabin or companion experience. We worked together with a well-known consulting firm. They did for us more than 50 interviews with OEMs, first-year suppliers across the world, here in North America, Europe, Japan, and also China, which is a very important market for us. You see here a high-level diagram architecture, and what you see here on the bottom is actually the gray boxes here. This is what we don't do. We don't create hardware.
We're not creating another operating system or middleware. This is actually the functionality which is needed for having this so-called immersive in-cabin experience, and we are focusing actually on the organic growth. That's the red part here. The blue one, for example, a cabin gaming platform, we need A, a strong partner, or B, we need to think about M&A activities. Yeah. For the next couple of minutes, we are just focusing on organic plays here. Yeah. Again, you see also that it's an evolution. Yeah. With a lot of cool stuff on top of it. We are starting actually with a so-called scalable AI assistant. Scalable means that we're using the same technology in the cloud and on the device.
Equally or even more important is that we can use this scalable AI assistant or stack for adjacent segments like two-wheelers, trucking, or recreation vehicles at more or less no costs. We are also expanding this solution by teachable AI. Teachable AI means that we are learning from users and then also updating the system on a regular basis. Regular basis means here our KPI is once a week. I've mentioned already digital twin, multi-sensory input. You will learn much more from Patrick in his session about this. What you see here is, right, that we have really 6 players, organic plays, which are important to us. There is actually a 7th one. That's development tools because also some of our OEMs want to add some new features to it. We're sharing also our platforms with them.
That's the foundation. Again, we are focused here on these 6 organic plays. What does it mean for our business in very concrete terms? We have also assessed the addressable market. Just let me focus here on the serve market. 2023, $3 billion. This includes also the adjacent markets, so the two-wheelers and trucks and so on. We have just started here, and it doubles by 2030 to $6 billion. We have also established a new team for AIoT. AI stands for artificial IoT, with business development and also an independent R&D team leveraging our current AI stack. We have already signed deals, but this is not covered here in our sum. Just to be clear. Core to this growth is the creation of the Cerence Immersive Companion.
You see here that's really an evolution. Yeah. We started here actually with core technology. We said, "Okay, that's fine, but we need to move towards the Cerence Assistant." We have much more control about the behavior and about the excellence of the experience. Yeah. We launched already the Cerence Co-Pilot. You see here NOMI, that's a solution from NIO. Yeah. As I mentioned also, and also Tom, that we've signed a couple of deals based on these new technology stack. From here we are moving actually to a smart living space in motion. Yeah. Here we're adding all the new features and technologies, and Patrick will talk later about it. This experience will be pure, intuitive, and sophisticated. It's really a new novel solution which we are sharing with all the OEMs.
We are not talking about futuristic prototypes, right? In fact, this will go live in the next few years. Now, this is actually our strategy. We have 3 pillars. The first one is scalable AI. Underneath we have all the technology. We have the platform. I call it, actually, this is a multi-sensory experience platform, having access to sensitive data in the car and outside the car, and then learning from the customers, from the users, so that we can always improve the solution. In the middle, we have this immersive cabin experience. To give you also some ideas what we're doing here, it includes external and internal communication. It includes also wellness sensing, acoustic zoning, just to name a few. This is actually the basis. Let me also introduce you NIO. Yeah. Most of you know NIO.
I've met William Li, CEO of NIO, and Mark a couple of weeks ago in Germany. It was September when they had their European launch event. It was a big event. They created really a well-designed car. Yeah. Very flashy. Yeah. We had four or five hours. We had a test drive together through Berlin. It works perfectly with multi-seat capabilities. It was so snappy, right? You said it and you saw open the window, it was open, and you were sitting on the co-driver seat. The window was open there. Yeah. We have really a great relationship with NIO, and they have the same view. We discussed, for example, our strategy, and they say, "Okay, that's exactly what they need." Yeah. I had a similar discussion also with the CSO of Mercedes, and they said also, "We need this." Yeah.
Let's listen to Mark.
On NIO. NIO was founded in November 2014 with a mission to shape a joyful lifestyle. At NIO, we're passionate about our users' emotional experiences. Back in 2015, we expected that in-car AI, especially the voice recognition related technologies, would grow at a phenomenal speed. It is much more than voice recognition. Our vision was to turn the car into a true companion. This had led us create the world's first tangible in-car AI, NOMI. Our technical partner, Cerence, plays a significant role in turning NOMI into a global product. With both onboard and cloud-based integrations of Cerence technologies in conversational AI and natural language understanding, NIO is able to deliver fast, accurate, and intuitive interactions with our users, even when with limited connectivity. With our SOTA and the FOTA platform, our products are constantly evolving.
With our latest smart systems, NOMI is now able to communicate in English, German, and Norwegian. Danish, Swedish, and Dutch are on the way. All of this is powered by Cerence's in-depth know-how in languages and local dialects. Together with Cerence, we will continue to bring experiences beyond our global users' expectations. Thank you.
Okay. as you can see, the future of the car is nearer than you can think. the basis for this is actually our Co-Pilot, right? I told you a couple of minutes ago, that was innovation for Co-Pilot. Now we are focusing on the next generation of innovation. Yeah. also here, I think we are clearly the innovation leader in the automotive market. Yeah. the OEMs, they trust us that we deliver new innovation, and they trust us also that we deliver high quality products on time. It has to be in line also with their production roadmap. we never missed an SOP. let's take a look at this.
What's on your mind? What you gonna do next?
Cerence has long been the known industry leader in conversational AI for mobility, advancing innovation in partnership with the world's top automakers and mobility OEMs.
What you gonna do next? Let us dive into the night.
From the dawn of the in-car assistant to the introduction of the mobility co-pilot, Cerence has led the way in creating unique experiences that go far beyond voice control. Now, the experience has evolved even further with the introduction of the Immersive Companion, an incredibly intuitive, proactive, deeply integrated experience that transcends command and control.
Welcome, Adam.
Hey, Cerence. What does my day look like?
You have four meetings today. Would you like me to automatically dial you into your 2:00 P.M. meeting? I've reserved a parking spot for you at the marketplace garage.
Hey, Cerence, open the trunk.
Cerence Companion makes every journey safer, more enjoyable and more productive for everyone.
Authorize the payment.
Payment authorized.
From the leader in mobility AI.
I can't describe it. Feel like I'm flying. Ooh, oh.
Cerence, AI for a world in motion.
Out, out.
As you can imagine, all of this new innovations gives us a lot of opportunities, right? Clearly, I think we are increasing the value for OEMs, yeah. We are also expanding our leadership in mobility AI. Also thirdly, I think we are participating in a much, much broader addressable market as you have seen before. I can just reiterate what also Tom said, and we increased actually already the ASP by 25% when comparing 2023 with 2024. Let me also wrap up here my first part. We said, okay, we are going to lead with organic place. Yeah, we are expanding from driver to all occupant interaction within the vehicle. We have scalable AI for going after new transportation adjacencies at more or less no costs. Yeah.
Before I hand over to Nils, I would like to emphasize a few things. We need to have a razor-sharp focus on innovation and execution. As said before, this fiscal year 2023 is a transition year for us. Yeah. Nevertheless, we have a great strategy in place. We have a great leadership team in place. We have deep engagements with our OEMs, yeah, and we have a strong booking. Overall, I think we are in a very good shape, and even more, this shows also our competitive strengths, yeah, that we are also winning against the big tech giants across the globe, in China and also rest of the world. That's very important. Yeah. Now I would like to hand it over to our Chief Product Officer, Nils Schanz.
Thank you, Stefan, and good morning, everyone. Warm welcome also from my side. It's a pleasure to be on Team Cerence and great to speak to all of you today live and virtually. For those who are not familiar with my background, I most recently served as Global Head of User Experience and Voice AI at Mercedes-Benz and Daimler, and my team developed the MBUX system. I know from my firsthand experience how critical the user experience in cars today has become, and I know from my 15 years at Mercedes-Benz what critical role Cerence has played in an extensive ecosystem of partners when we developed together the MBUX system.
I have now only been for a few weeks with the company, so I've not brought an extensive presentation with me, but I thought I wanna share with you why I have joined Cerence and what critical role Cerence has played when we developed the MBUX system together. What you see here is the Mercedes-Benz EQS. It's a fully electric flagship of Mercedes-Benz and one of the latest additions to the portfolio from Mercedes. If you enter this car, you get automatically identified via voice and face recognition, and the system welcomes the user with a personal greeting, so it feels like coming home. It's not only the voice, the gesture and the touch as input modalities. In this car, we paid a lot of attention to design it in a way that the whole interior is playing together.
It's about the ambient lighting, it's about the sound effects, it's about the seats and of course, all the graphics on the display. The technologies you're seeing here on the left side are all coming from Cerence. We have from ground up designed the system together and deeply integrated these technologies into the stack of this car. You might ask yourself why I've joined Cerence now, and I wanna explain it with a simple example from my side. I think today, every OEM when designing such a car, such a digital cockpit, will come across the question with who to partner, and every OEM needs to make this choice. There are two options, basically. One is they take a predefined package from one of the tech giants with all its limitations. B, they partner with Cerence to build such unique and branded experiences.
I believe only if they take option B, the OEMs will have the opportunity to have the full access to the data and learn how the system is being used by their customers. They can learn out of that, they can improve the system based on that, and then this is strategic for OEMs. They can build digital products and services on top of that because they wanna monetize their data. I believe the OEMs who miss that, they will end up as just being a hardware manufacturer. It's really strategic and key for the OEMs, and I know this firsthand looking at the roadmaps from Mercedes-Benz. I think this is just a starting point. We will see a lot more personalized in-car experiences with a clear focus on voice and AI-first interactions.
This is clearly the field where OEMs wanna try to keep their users in their ecosystem and where they see customers coming back if they like the system, which will of course then will increase the loyalty amongst their users. Second, it's a key differentiator to their competition. So I see a lot of opportunities, and I think Cerence is in a perfect position to support the OEMs worldwide with its great technologies. With that, I hand already over to our CTO, Pratik, who will talk more about how Cerence is powering the Immersive Companion experience. Pratik.
Thank you, Nils, welcome to the team. As Stefan mentioned, we're well on our way to Destination Next. I'm Pratik Katpal. I'm CTO at Cerence. I've been at Cerence for about three years, my background is voice AI, ML, connected cloud. In the past, I've worked for companies like Polycom, EMC, Chase, very much into the high volume transaction environments, I've also founded companies which were successfully acquired. In the last couple of years, a lot of investment has been made, we have done a lot of progress, both in terms of technology and building relationships with the customers.
A decade ago, if you, if you think about voice, we've all seen those Star Trek movies, the sci-fi fiction series, and talking to the humans talking to the machines has always been very fascinating, right? It has not been possible in the past. Today, with the advancement in the voice technology and the artificial intelligence, it is becoming a reality, and voice interactions is becoming a part of our daily lives. Now, it is only poised to grow from here as we move to a more connected and autonomous future. Cerence journey began several years ago with a voice assistant. At that time, the core technology being used as part of the voice assistant or this interactive voice assistant was natural language understanding.
The machine learning was not really available and not really feasible at that time. The drivers, they needed more. They needed an assistant which could interact with them, an assistant which was intuitive, which could converse. That led to what we call as conversational AI-based Cerence Assistant. The conversational AI-based assistant was much more intuitive. You could wake it up by using a wake-up word like, "Hey, Mercedes," like Nils mentioned, but it also had the knowledge about the user. It knew about the user, it knew about the user's journey, so it could use that information to provide a much more intelligent and intuitive experience for the user.
Cerence Co-Pilot took it to a whole next level, where it used a proactive AI-based technology to bring together the user and the car and the user's preferences all together to create a more personalized experience for the users. Proactive AI, what does that even mean, right? Think about this. You are driving on a street, and you stop at a stop sign, right? You don't stop at a stop sign for the designated 3 seconds. You do a rolling stop and move on. The proactive AI, the Cerence Assistant over there, will actually self-invoke itself. It knows about the car, it knows about the location of the car, it knows the speed, the acceleration, and the fact that you did not stop 3 seconds on that location.
It'll invoke itself, give a certain nudge to you and say, "Hey, probably you should have stopped a little bit longer there," right? If you're on a phone, let's say, at that time, you're having a phone conversation or a meeting or something else, then it can actually queue it up. Next time when you are not busy at that time, it can just simply say, "Hey, you should have stopped at such and such intersection for a little bit longer." It helps you proactively become a much more safer driver, but at the same time keeps you informed about the vehicle, the data around the vehicle, and also becomes much more personalized over time as it learns about you. Today, we're introducing what we call a Cerence Companion. A Cerence Companion uses teachable AI.
It is very much human-like interactions and uses biometrics along with a lot of digital data insights to not only learn about you, but then at the same time provide you a much more integrated experience. The companion knows about the surroundings, it knows about the environment, it knows about your profile, your preferences, and it uses all that to create a very integrated experience. What does teachable AI mean, right? Think about this, you are, for example, you say in the car, "Hey, tell me, turn on a relaxation mode," or, "I wanna relax, so turn on relaxation mode for me." The system can respond by then saying, "Teach me.
Tell me what does a relaxation mode means for you, or what does really relaxes you?" You could respond by saying, "Turn on the ambient lights, put some slow music, roll up the windows," anything that relaxes you, right. Next time when the assistant learns about this, next time when you say the same thing, the assistant can go ahead and perform that action on your behalf. That's what is teachable AI. It's an advanced neural network-based technology which deeply integrates with the car, the surroundings, and provides you the personalized experience to both the drivers and the passengers. An Immersive Companion can play many different roles, right.
It could be an executive assistant for some who could help you while you're taking your daily calls or, empowering you to connect to the colleagues while on the go, right? For some, it could be a butler, which could actually go and make certain reservations for you. It could be a restaurant reservation, it could be your doctor's appointment or a haircut appointment. It could also be a smart home connected assistant, where it could help you control your smart home devices, at home, your IoT devices at home through the car.
It could even be a karaoke assistant to help you make your journey fun while you're driving, or even a vehicle expert, which could actually, which knows about the vehicle, which knows about the conditions of the vehicle, and it can predict and inform when the car needs to run more smoothly or help you do vehicle command and control. Let's hear from Renault, who's one of the automakers, who's bringing this companion experience to life. Let's hear from Luc Julia, the CTO at Renault.
Avatar basically is more than just a voice assistant. It's going to be really the little cricket on your shoulder, right? It's going to be with you more than just in the car, it's going to learn more about yourself over your life. We need to have technology that is going to be much more going towards artificial intelligence than than just recognizing the words. It's really a big step towards something that is going to be more than just a voice assistant.
Because of the experience that Cerence has, you know, for the last, you know, few years in natural language and analysis, you know, of the, the goals of what people, you know, want to do, I mean, it's more than just recognizing the words, right? It's also recognizing the intents and all this natural language piece and all the experience that Cerence now has, you know, for the past years in doing this piece is really a big help for Renault that is putting that into our cars.
The voice over here in the video was a little bit hard to hear. If you didn't get the concept, basically what Luc Julia over here was referring to was the avatar, the digital avatar that Renault is adding to the car, very similar to what Stefan was talking about, the NIO avatar. How Renault is combining the Cerence Companion along with the avatar to provide a much more intuitive and integrated experience in the car. Voice in the past has been a very disjointed experience, right? It has been very reactive. You will ask assistant a question, and the assistant would respond. The future of the voice is actually a very proactive and teachable AI-based multi-modal experience.
It combines the voice, the gaze, the gestures all together, and it also, the assistant knows about you, the vehicle, the surroundings, your home, your office, your preferences, and provides you a very, very connected experience in itself. The assistant also, at the same time, not only knows about you, but as I said before, you can teach the assistant as well to have that great personalized experience. The Cerence architecture, it's actually on one side very flexible, but at the same time, the technology is platform-agnostic and it's portable code which can run on any combination of SoCs and operating systems.
This, what this means is that, whether you are choosing the NVIDIA platform or a Qualcomm or Arm, or whether you're choosing the Automotive Grade Linux or Android or any other operating system like QNX, we actually support all of them. The AI models itself, from Cerence, they're 16 times more compressed than any other market competing algorithms. And they can run both on the edge and the cloud, at the same time, which means that, it results in lower compute needs, it's much more faster while deployment, and it's faster in performance as well. Cerence also offers the OEMs the flexibility in this architecture to choose any components that they need. One of the components, in automotive while you're driving, well, navigation is the maps, right?
We integrate with all the leading map providers out there, which includes the Google Maps, the Here, the TomTom, Baidu and all. Now let's hear it from Steve Basra, who's CEO and President of Toyota Connected, on how they are using Cerence technology to provide a much more connected experience in the Toyota cars.
President and CEO of Toyota Connected. Now, Toyota Connected was a company that we started about 6 years ago, and our core mission was to build amazing experiences for our Toyota and Lexus customers. Now, we pride ourselves on building technology in-house, but one of the things that we've realized is that we still need to work with key partners to build these amazing experiences. Now, Cerence and Toyota have a long history of building voice technologies for our vehicles, and I'm proud to say that this partnership will continue into the future. The great thing about Toyota Connected is that our solutions are now not only being used in North America, but they are moving to other regions around the world. To achieve that, we need a strong partner like Cerence who can provide that voice technology for those different regions.
With that, I'm looking forward to the continued partnership between our two companies and the continued success.
Okay. As we provide the value-added services to automotives across the world like Toyota, the adoption for Cerence continues to grow, and the proof is really in these numbers. In fiscal year 2022, we shipped 41 million vehicles with the Cerence technology, which is a 51% penetration rate as such. Post-COVID, our cloud transaction volume has also started to increase, so we're seeing up to 22% year-over-year increase in our monthly cloud transactions. The active users are up 16% year over year. If you look at the Cerence architecture, it's a rich portfolio product comprising of voice, vision, gaze, and handwriting AI stacks with configurable algorithms and a very, very flexible stack in itself.
There is a hybrid, the stack is hybrid in itself, which means it could be deployed on the edge as well as the cloud and provides a very connected, personalized and humanized experience for the users. At the back of this is extremely complicated set of technologies, AI models, and algorithms. When we were looking at Cerence Companion, it required us to rethink this whole architecture. What it required us to do is look at each and every level of this architecture and add multimodal capabilities of the teachable and proactive AI at each and every level. There is the input and output layer, which at the very bottom over here, which consists of the natural language understanding.
It consists of the speech signal piece, as well as the speech recognition layer. There is the connected vehicle platform layer, which acts as a glue between the cloud and the edge. Also what it does is that it gathers all the data from all the different components and puts that into what we call as a digital twin, which allows you to run analytics and insights on all of this. We provide a lot of package solutions and applications on top, which includes things like productivity or so you can, for example, take your Teams meeting in the car or sing or karaoke or ability to open your garage, so what we call as a garage connect.
All those applications and package services are available as a part of that to provide you a one singular solution, which could be deployed in so many different ways across a different set of vehicles. Whether you are choosing, whether the OEM is building a high-end hardware application or a low-end head unit, the Cerence stack can actually fit all of those different architectures all at the same time. Another key component as a part of this is the Cerence Audio AI stack, which includes Speech Signal Enhancement, In-Car Communication, and at the same time, what we call as Emergency Vehicle Detection, which is a must-have for level 3-plus cars. If you think about in a car, there's a lot of different kinds of noise that you get, right?
There could be a road noise, there could be a engine noise, a traffic noise, or even the fan noise. What the Cerence Speech Signal Enhancement does is that it cancels all this unwanted noise, so you can have crystal clear communications as a part of the car. The multi-seat intelligence allows you to have that personalized experience in the car, while at the same time, the multi-zone offers you a multi-zone capability, so you can be sitting in any seat, but be able to still talk to the assistant or have those crystal clear phone calls that you would do. Let's look at the next video on how Cerence Audio AI technologies, they accompany the drivers through their daily journeys.
Voice assistants are known globally for the value they bring to drivers and passengers. Now we're extending our reach, bringing the in-car experience we're known for to the world outside.
Hey, Cerence, open the trunk. Hey, Cerence, open the front right window.
Cerence Speech Signal Enhancement removes unwanted noise from microphones and improves the speech quality, making your phone calls and conversations with Assistant clearer.
Good morning, Cerence.
Good morning, Dave. Your next meeting is Evaluate Johnson's Residence Value.
Hey, Cerence.
I want to place an order at Starbucks. Make it a venti latte with soy milk, with an extra shot, and with caramel drizzle on top.
Sure. Pick up at Cottle and Coronado, right?
Right.
Want to order now and pay with your card ending in 2423? The total is $4.95.
Yes, please.
Success. Your order will be ready for pickup in 10 minutes.
Cerence In-Car Communication improves the speech quality and intelligibility of in-car conversations between the driver and passengers through an intercom system.
The traffic has been horrible today.
Sorry, I couldn't hear you. Can you say that again?
Let me turn on ICC. I was saying that the traffic is horrible today.
I can hear you much better now. Cerence Emergency Vehicle Detection alerts drivers of approaching emergency vehicles so they can adapt their driving, and helps ensure that drivers remain safe and informed on the road.
The future is now.
Cerence Sing, a brand-new voice-enabled karaoke experience.
Hey, Cerence, lyrics, please.
It's time to be someone I want to recognize.
Okay, got it. Let me give it a try.
Three, two, one.
It's time to be someone I wanna recognize.
Great job.
The future starts right now.
for a safer, more enjoyable journey.
The future is now.
Cerence, AI for a world in motion.
As Stefan mentioned, the Cerence Companion foundation stack, it inherits the key attributes from the Co-Pilot. Obviously we use the Co-Pilot as a basis as we started looking at the Companion. The OEM-branded experience is actually the front and the center of this, which means that the OEMs can customize the experience, for example, a customized wake-up word, like, "Hey, Ford," but at the same time, they get a deeper integration into the vehicle as a part of the Companion experience. The data ownership, which is one of the key differentiators of Cerence, retains with the OEM themselves, so they have access to the data which they can monetize. They can build contextual applications on top or bring the data back into the car to create a much more immersive experience within the car.
Finally, there is 70-plus languages that the Companion supports, which is, I think, one of the biggest rich set of languages that is available today in the world as compared to any other AI stack which could do that out there. The same foundation stack over here is applicable to what we call as adjacencies as well, so adjacent markets. It is available obviously for automotive, but then for two-wheelers, the trucks and the RVs as well.
They could all use the same foundation experience to create an intuitive experience for their drivers, who just focus on their vision on the road, but at the same time, they can keep their hands on the handlebars but get a very connected experience for controlling the navigation, the media, the music, or any other command and control of the vehicle. Companies such as TVS, Harley-Davidson, even Mercedes-based sprinter vans, and Daimler Trucks, they've all adopted the Cerence solutions and the Cerence platform to elevate the experience of the drivers.
Well known for creating intuitive conversational experiences for cars, Cerence also lends its expertise to other areas of mobility, like two-wheelers, trucks, and even RVs.
Send a message to my group that I'm five minutes late.
What is the weight load in the bed of my truck?
Hey, Cerence, open Inspections to report a technical problem.
The five-story Martinstor is one of the three still-existing city gates of the city of Wangen im Allgäu.
Advancing the two-wheeler, truck, and RV experience through the power of voice, for a safer, more enjoyable journey for everyone.
Cerence, AI for a world in motion.
A multimodal HMI that is becoming the, I would say, the trend today. It uses all the different input modalities like the voice, the gaze, the gestures, handwriting, to create a very connected and a personalized experience for the users. It also has the ability to reduce the cognitive load on the brain. As I said before, there's a lot of different data which is coming in in the cars. You could have your data coming in from your phones, your profiles, from your apps that you're using. At the same time, data is coming in from the, obviously the vehicle, the hundreds of the sensors in the vehicle, the traffic information, the information about the road, the conditions, the weather information, and several other third-party sources as well.
What we do is when we take all this different information into the Cerence, what we call as knowledge graphs and the home graphs, so you might even be controlling your smart home systems and all, we take it through the Cerence AI models and then provide you the right information at the right time, but then also allow you to control and use this information through a magnitude of different, I would say, modalities, which could be a voice interaction, could be a gaze tracking, or even emotion detection as a part of that. The Cerence AI technology is improving to a level where our AI engines can even do real-world conversations, right? We've all received those mortgage loan calls or the sales calls, and we can immediately tell it's a pre-recorded, computer-generated voice.
What we're gonna show you today is a glimpse of our AI technology, which can not only have a real-world conversation, but it can also perform some real tasks for you. The Companion that you're gonna hear, right now, it makes the conversational experience as natural as possible, the human on the other side, can speak normally, like you would talk to any other person, and have that very effective and a normal conversation without adapting to a machine. What you'll hear next is Cerence AI Companion making a call. It's a recording. It's making a call to a restaurant here in New York, which was done few days ago. The call originates from the Cerence cloud.
The Companion converses very naturally with the person on the other side and gets a booking for a restaurant as a part of that.
How may I help you?
Hello, I'm the Cerence Companion calling on behalf of Brian to make a reservation for today at 9:00 P.M.
Brian at 9 P.M. How many people?
Yes, 9:00 P.M.
How many people?
There will be two of us.
Okay. This is actually really cool. The phone number, please.
You can use 4079005141.
Got you. 40790... Can you repeat that, please?
You can use 407-900-5141.
Got you. The name?
It's Brian Rubin.
Brian Rubin. For two guests at 9:00 P.M. on tonight?
Yes, 2 people at 9:00 P.M.
Inside or outside?
Anywhere in the dining area.
Got you. All right, you're good to go.
Wonderful. Thank you for your help.
No problem.
Isn't that amazing? Now the Cerence Companion have real-world conversations and perform even real tasks like booking your restaurant reservation or haircut appointment or a doctor's appointment, and that's the level of the humanization that the AI technology at Cerence has reached now at this point. Apart from the AI technology, one of the key reasons that we win is because the flexibility in our delivery models. Now we can provide this technology out of the box for the OEMs who are looking at a faster go-to-market, a faster time to market. At the same time, we also give them the flexibility for the traditional OEMs like Nils mentioned Mercedes, to actually take our individual components and customize them and integrate them based into their operating system or some of the investments that they have already done.
At the same time, there is those new OEMs who could take the out-of-the-box experience and extend it using the APIs and SDKs to create a much more intuitive and integrated experience as a part of the cabin. Now, it's these relationships and the flexibility of the architecture that we have, that's what enables us to win. Now, the feedback that we have gotten recently from all the OEMs is that the consumer tech, it's very rigid, and it's not flexible and doesn't have the deeper integration into the cars. What they've been trying to do is take the smart home speakers and trying to put that smart home technology into the cars, which isn't that simple.
An example is Renault, which you heard from today, who had chosen one of the big tech solutions, but they decided to move back to Cerence for the conversational AI technologies and also realizing that how important it is to have a technology which is much more deeper and tightly integrated into the vehicle. Not only do we offer the solution flexibility, but we also offer the OEMs the capability where the data ownership resides with the OEMs. Data, as they call today, is the next fuel in the car, right? The OEMs have already realized this as well, they could use this data to further monetize on that.
They could use the data to bring it back into the car and improve the experience of the users in the car, but also share it with third parties to build contextual applications outside the car as well. As you can see, the technology, the deeper relationships that we have with the OEMs, and the deeper expertise in the AI sets Cerence on the path to Destination Next. With this, I'll invite Tom to come over and talk about the financials.
I think what you've all been waiting for...
Excellent
How do we take all of this great technology and these great relationships we have with the OEMs, and how does that translate to our financial models over the next couple of years? As most of you know, we made a strategic decision to limit our fixed contracts to about $40 million a year. FY 2023 represents a transitional year as we consume a lot of the previous fixed contracts. For FY 2023, we've modeled in $40 million of fixed contracts, and there will be approximately $75 million of consumption from new fixed contracts plus prior fixed contracts. The impact on consumption to our revenue models will reduce in the second half of FY 2023, and then we'll have a minor impact as we head into FY 2024 and beyond.
Managing fixed contracts to $40 million allows us to support mostly a small number of Asian tier ones who have contracted this way for many, many years. We remain confident we can manage to this level and that these customers understand our plans. We have continued to provide transparency on this to help you with your understanding the core underlying strength of the business. As we go through the revenue transition, we are focused on cost management and operational effectiveness, as Stefan alluded to in some of his opening comments. We are working with a major consulting firm. We have previous experience with this firm, they also understand our business.
Along with this effort and an effort that we drove internally as we developed our FY 23 plan and multi-year plans, our plans include driving organizational effectiveness, aligning to the executive leadership team that Stefan presented earlier. Additionally, we are making improvements to how we work across the organization to drive efficiency and to accelerate our innovation, product development, and time to market. The resulting savings from these projects is included in our FY 23 plan. I'd first like to get into our FY 23 guidance, and then we'll get into the multi-year plan in a couple of minutes. Our FY 23 full year guidance is $270 million-$290 million, with Q1 revenue guidance of $75 million-$79 million, which includes approximately $18 million of fixed contracts.
As we have noted, the revenue from fixed contracts will be lumpy as we manage to the committed $40 million level. We have strong visibility to our FY 23 full year guidance at approximately 95%. A significant percentage of our revenue in FY 23 is for cars that are currently shipping with our solutions, revenue from amortization of connected services revenue from cars previously shipped and will currently ship in this fiscal year, and a very strong professional services backlog. Adjusted EBITDA % guidance is 10%-12%, as we must continue to invest in our R&D and customer support activities and as we manage through the revenue transition in FY 23. As noted, our plans do include cost realignment and reduction projects that we've already begun to implement.
As we get through the FY 23 revenue transition year, we are targeting strong revenue growth with good visibility. Our targeted core auto growth is a 12% CAGR from FY 22 to FY 26 and is driven by the strength of our current penetration, implementation of the solutions already sold, and a very strong pipeline of bookings as our customers adopt the solutions that were presented today. Revenue targets for transportation adjacencies and non-transportation, which is primarily the AIoT market that Stefan talked about, are based on mostly deals won that will go into production over the next few quarters and a balanced plan for new opportunities. I would just like to point out that revenue from transportation adjacencies and non-transportation markets contribute approximately 3% in FY 24, about 6% in FY 25, and less than 10% of overall revenue in FY 26.
We continue to drive focus on these markets that may lead to further revenue opportunity above these targets. FY 2024 targeted licensed revenue growth is enhanced by strong visibility to previously won deals that will launch over the next 5 quarters, and that include many of the advanced features and functionality that Pratik alluded to in the last presentation. These large deals will lead to an estimated 26% growth in price per unit. To provide a little bit of visibility and confidence in our 2024 numbers, this chart shows 5 of the largest deals that will come online. They will SOP over the next 5 quarters. The estimated program launch date is in the column to the right.
As you can see, quite significant growth in PPU as those autos start to ship after those launch dates, leading to almost a $1 increase on average from FY 2023 to 2024. That's one of the big drivers as long as additional volume from those programs kick in, you know, starting even in FY 2023 as we launch those. We've done a lot of work to try to help our investors understand our bookings to revenue cycle. Assessing the largest bookings deals since the spin, our approximate bookings to revenue is about 18 months. Program extensions are much shorter at approximately 1-3 months. We are moving to reporting 5-year backlog, which we believe provides investors with better visibility to our backlog conversion process.
Our five-year backlog at the end of FY 2021 was about $1.3 billion. The FY 2022 five-year backlog was $1.1 billion. I want to point out that the decline was really driven by a couple of OEMs that made the decision in FY 2022 to enhance and redesign some programs we had previously won and were included in prior bookings and backlog. We adjusted our ending FY 2022 backlog to reflect these changes. I would point out that we are in final negotiations with these OEMs and expect to be awarded the redesigned programs in FY 2023. I would also point out that we have concurrent funded professional services projects related to these projects, which gives us, I think, a high confidence that we will win those redesigns when they're awarded in FY 2023.
To provide a little bit of, again, more support and visibility and to try to help all of you with your models, we are providing the expected rollout of our FY 22 backlog through the multi-year planning period. This is four years, and then there's a fifth year, which would get you to the $1.1 billion at the end of FY 22. This backlog, combined with expected program extensions, which we have a long history of understanding with our OEMs, provides us good visibility to our revenue. In FY 23, additional visibility, so from the 95% to what we expect to achieve, really comes from new professional services requests. Again, we have a long history of those, and they're very quick. The OEMs will come, and they'll ask for additional work.
We'll create an SOW that will result in a booking, and then as that goes through POC, percentage of complete, that will add to our revenue in FY 23. Additional to additional professional services requests, when you get to the out years of 24-26, the enhanced visibility comes from new bookings and, in the case of some of the adjacent markets, more experience with our customers in those adjacent transportation and non-transportation markets. I would just point out that we've made a decision on the AIoT, because that market is new to us, that we will not book those deals because we don't have enough experience to understand the value that we should be booking. Those will only become a booking as revenue is generated on those particular AIoT deals.
As we get more experience in that market and we understand how to value those bookings, we will include that at some point in the future. For now, our bookings will only include our transportation markets, auto and adjacencies. This is my favorite chart, not for FY23, but for the future. You know, post FY23, we return to a real nice growth company yielding very strong margins and cash flow. We get to double-digit growth. We get to mid to high 70% gross margin. We get to low to mid 30% adjusted EBITDA and very strong and growing cash flows. I won't go through this a lot. You have it in your presentations.
This is the 6-year financial model, 2 years of actuals, our FY 2023 midpoint guidance, and then our targets for FY 2024 through FY 2026. We spent a lot of time aligning our strategic plans with our focus on operational excellence and our strong market position to develop these financial plans. Based on the information presented today, we are very confident and committed to achieving these plans. Thank you.
As we're now coming to the end of our presentation, I hope you have gained a firm understanding of our new strategy Destination Next and how this is linked also to long-term revenue potential. We believe that we are in an excellent position for expanding our category leadership in mobility AI. Our talent, our expertise, and also our deep engagement with the OEMs and our focus on what matters, namely innovation and execution, position us well for future success. We have made tremendous progress in setting up the company in the right direction, on a path for long-term sustainable growth. We also understand it will take time to build your trust in us. As Tom already mentioned, we are committed to deliver long-term financial performance with double-digit growth and an operating margin 30%+.
If I can leave you with some takeaways, it would be these: long-term sustainable growth, innovation and delivery excellence, led by an experienced team. This is actually Destination Next. With that, I would like to open the floor to questions. Thank you. Rich?
Thank you, Stefan. We're just gonna set up a little bit here. For those of you online, you can submit a question via the online portal. The question will be given anonymously, so you don't have to worry about your name. If you have a question, please submit it through the online portal. Also for those in attendance, you know, following the Q&A period here, we will be having lunch served. If you're available and you have the time and you'd like to mingle with some of the executives, we'll be having lunch served for everyone also. With that, let me just see if we have a question online first. Yes.
The first question is, and I'll start with Stefan on this, and then you can, you know, pass it around as you see fit. Can we talk about the macro environment and its impact on our business?
Yeah. I mean, we had this discussion in all of our earnings call, right? When looking at pre-COVID and without supply chain issue, right, we lost roughly over the last two years, 40 million cars. You know, 51% of our newly built cars are leveraging technology, so it has affected us actually. On the other hand, looking forward, we have made a plan, and I think Tom will talk a bit about, that we have also considered those effects in our long-term plan. Maybe Tom.
Yeah. For FY 2023, we took about a 3% reduction to what IHS is predicting for FY 2023. For 2024, 2025, and 2026, we actually, in our original planning, had also taken a haircut, but then they came back down, and they're pretty close to the assumptions that we used in the out years. For 2023, we're a little bit more conservative than they are right now.
Okay. Do we have any questions from the audience? Okay. There's a microphone that'll be, so it will be coming around there.
Yeah, thank you. Rajvindra Gill from Needham & Company. Thanks for the presentation. Really good details. Just if I could dig a little deeper into the fiscal year 22 to fiscal year 26, 12% CAGR, you know, post-fiscal year 23. You talked about kinda current penetration, implementation of kinda services already sold and kind of a new pipeline. I'm wondering if you can maybe break out that a little bit further in terms of what assumption are you making in terms of new connected or cloud connected as a percentage of the total SAR? What percentages are you assuming in terms of market share in some of those new markets? Lastly, you talked about kind of a 26% increase in the price selling unit.
I'm wondering if you could kind of maybe balance the revenue growth between kind of the price increases versus kind of the unit growth, either driven by market share or by attach rate or by just better SAR rebound.
Yeah, there's probably 2 or 3 factors that really lead to that significant growth from FY 2023 to 2024. First of all, there's a much smaller impact by consumption being higher than the $40 million of fixed contracts. Second of all, the big driver is the chart we showed where the price per unit is significantly higher than the average for FY 2023. We haven't made any significant adjustments to our penetration rates. We do see, I think, some incremental volumes from some of these new programs that are launching over the next over the next few quarters. You know, we've given you the data that we've assumed on the adjacent transportation and the AIoT/non-transportation markets.
It's, it's a little bit less negative effect from fixed contracts, and a big piece of it is the growth in those OEMs and across the board. I would say that for professional services, as Prateek talked about, some of our solutions are becoming a little more out of the box. In the entire model from 2023 to 2026, don't expect a significant amount of growth. Actually, it might even be down a little bit because we had significant SOPs in FY 2023. As we've always talked about, it isn't our objective to grow and have a very, very large professional service organization. Our objective is to use it as the differentiated tool that it is with our OEMs, but it's not a growth driver. We're a software company, right? That's what we wanna be.
Yeah. I don't know, Tom, if you wanna comment on our view of how we use third-party forecasting data in terms of how we're looking at the plan.
Yeah. We use a couple of things. Of course, we use IHS, but they haven't been overly predictable the last couple of years. Not necessarily their fault. We have a couple other sources of external data. Then I think really importantly, you know, we're getting royalty reports from all of our OEMs across all their platforms every quarter, right? Wei Zai, who's in the back, leads our financial planning organization. He's been with the business for over 12 years. He's got a ton of experience in this, and he works closely with our sales operations team, and we have very detailed databases around the trends over years with our OEMs. We kind of pull all of that together and make an assessment.
As I said, for 23, we're, I think, like, about 3%, I think, less than IHS at this point.
Okay. Mark, you too.
Mark Delaney from Goldman Sachs. Thank you very much for doing the presentation. Maybe first on the content opportunity per vehicle and how that evolves going forward, can you clarify a bit how that trend starting with what you've seen historically with the assistant capability as you go up to Co-Pilot, what does that mean in terms of content per vehicle? As you think about that immersive experience in the intermediate to longer term, what does the revenue opportunity per car look like?
Thanks for the question, Mark. Maybe let me start first, right, Prateek, I hand over to you. Actually, that's actually also our roadmap, right? As I said, we started with technology. We moved to the Cerence Assistant. Now Co-Pilot means we bring in more capabilities. It's not just embedded, it's hybrid with a focus also on cloud first. We're adding more and more domains to it, but also novel features, right? What we're seeing, think about wellness sensing, right? I mean, based on Audio AI. This puts everything into one big box now, right? This drives also the ASP. That was just a snapshot, but Tom mentioned the 26% based on signed deals.
I think, the content per vehicle is definitely increasing as we move from Co-Pilot to Companion. Obviously, as we collect more and more data, with respect to the surroundings as well as the profile, the personalization, and all, as Stefan was saying about the users. What we're not doing today, because data, one of the key differentiators what we put together is the data is owned by the OEMs. The OEMs do have the capability to go and monetize on the data and build other applications. We at Cerence are not doing a true monetization at this point of time on data.
Yeah. Mark, I would also point, there's a couple little pieces of data throughout the presentation that you can probably look at. One is the chart that Prateek showed on the evolution from cockpit to Companion. At the bottom of that, it kinda showed what's shipping today, what's coming online, and what's kind of the future. If you, if you look at that, and then you look at the chart we provided with the 5 large OEMs and the PPU increases, that's being driven by really people starting to put into production that Co-Pilot and all of the features that are associated with that. As you can see, the prices are different by OEM, and that's what we talked about, where they decide how much of that technology, but some of them were quite high. That's just the license piece.
There's a connected piece to that. I think maybe to go back to the last question, you know, it's today we're a little better, over 20% connected on top of our fixed solutions. That will grow a bit. Remember, that all ends up on a 5-year amortization schedule, so it takes longer for that to kick in on the connected revenue growth. Although I think we see good growth, as a couple of those factors that I talked about don't impact 2024 going forward as much, and we start to deploy some of these new technologies, and that amortization schedule starts to build 2024, 2025, 2026.
Yeah. Let me also add to this, right? We started actually as a technology component provider, right? Then we moved up the stack to a really trusted innovation partner of OEMs, right? Was also mentioned in this testimonial from Volkswagen, from VW, where they said, okay, they have now also this OTA capabilities. Means also that we can bring more, more domains and new features.
A follow-up on that. If I look at slide 61, I believe, where you show that PPU in 2023 and 2024, it looks like it was $380 in 2023 going up to $480, I believe, in 2024. In the past, the company spoke about the embedded opportunity being $4 to $5 per vehicle. Maybe you can help us reconcile that $4 to $5 with what we're seeing at that $380 going to $480. Is it the fixed license consumption that's causing the delta there, or is there something else going on? Thanks.
As you say, there's a spread of prices, right? I think what we were talking about is that was kind of the spread of pricing within a brand. There was some higher, there was some lower. What we provided today was more the overall average, right? You can see it was, it was about, you know, $4, and it's moving closer to
Yeah. Yeah.
... to $5, right?
Exactly.
I mean, there's a lot of programs.
Yeah
... that are using some of our older technologies that are still shipping today that have lower ASPs. It does affect the average, 'cause these production sizes, it's the beauty of our model, right? You get designed on a platform and a program, and they ship those programs for a long time. As more and more of the companies start to do, you know, over-the-air updates and stuff, we're gonna have revenue opportunities on top of that. Today it's much more of a fixed price over the time that that particular model is shipping.
To give you also complete example here. For example, for low-end head units, right, there maybe you have only Bluetooth communication, right? You have already a lower PPU.
Okay, next question will come from online, and then we'll get to everyone here as well. Previously disclosed fiscal year 2021 year-end connected backlog was $941 million. That figure is now cut almost in half to $487 million. Please expand on this change as the prior data suggested a very different trajectory for connected.
I think almost all of that was driven by a couple of these OEMs that had decided to enhance the solution that we had previously sold them. It all, you know, to keep transparency and to make sure we track our numbers precisely, it's not a GAAP number, but we apply standards to that. We felt we really needed to take those previous bookings and backlog out of the final numbers for FY2022. As I said, we fully expect to re-win those new programs, and our confidence is in the negotiations we're having, but the fact that they're using our professional services programs right now to advance those platforms. I think that gives us pretty high confidence.
Yeah
I think when those get recontracted, they'll go back into our bookings, they'll go back into our backlog. You'll also notice that in the comparison to 2021 to 2022, professional services, which is on kind of a smaller, shorter life cycle, right, actually went up, right? I think almost 30%.
Yeah. I think also some of the contracts extend beyond the 5 years, and so in that case, it wouldn't have been an adjustment as well. Yep.
Thank you. It's Joseph Spak from RBC. Tom, sorry, first, apologies if I missed this, but how much cost realignment is in the guidance for 2023 and maybe the cadence of that, and then what type of payback, or how long do you expect the payback on that spend to be?
Yeah, well, we're not gonna disclose the actual cost reduction numbers. They're baked into the model. Some of it's a realignment. A lot of it is, you know, slowing down investment. If you look at the model going forward, we have this transitional year which really squeezes the bottom line. We knew we had to, and we knew we had the opportunity to drive some efficiency and productivity in FY 2023. That'll actually have a bigger impact because of run rate, you know, because of run rate into 2024 and 2025. Then even within the models for 2024, 2025 and 2026, we end up with a pretty sizable investment pool in those go-forward years. We haven't determined the best way to utilize those investments, but this is a constrained year.
Recognizing that we were in a revenue transition, but also balancing the fact that we need to continue to invest in everything that Pratik was talking about to win new business, right? It drives our bookings, which drives our future revenue.
Well, maybe just to quickly follow up on that then. Like what how should we think about R&D? Maybe % of sales isn't the best metric near term. Maybe absolute dollars is better, but what is the right level of investment pool we should think about in the outer years?
I think when you look at 24, 25 and 26, and Probably before 2022, the financial percentage models, we'll probably get back to that because that's what kind of yields our 30+% margin.
Okay.
Although G&A will not grow at the same level that revenue, we have a very strong G&A function. They're able to expand. We are also investing in sales, as we continue to expand globally, as we continue to expand in the adjacent markets and the non-transportation. I think that's your best bet, is to go back to FY 2020, 2021.
Mm-hmm.
As we get through these 2 years, that model in 2025 and 2026 will look more like that, but some leverage on G&A.
Yep. I guess the second question, appreciate the slide and the color on the visibility you have over the coming years and how much of that's sort of coming from the backlog. I guess, you know, especially as you sort of get to outer years, based on the sales funnel as you currently see it, what type of win rate do you need to assume to be able to sorta get to those total revenue numbers you've laid out for those outer years?
You know, I think for 2023 and partial 2024, those are pretty much based on won deals, right? You know, we expect to continue to grow our bookings. You know, we grew 16% this year. We have put out pretty strong targets to our sales organization. We have a strong pipeline to back that up. We have a very, very high win rate. It's more driven by how much technology and functionality we can get into those particular deals to raise the price per unit, and then therefore raise the overall value of those contracts.
We have also deep insights in upcoming programs of the OEMs, right? But in some cases, we're working closely together with them also in defining the RFQ, right? What is needed actually, right? That gives us also a lot of good momentum here.
The companion product gets into the financial model by those later years or-
Yeah, more 2025 and 2026.
'25.
'25.
Yeah. Okay. Thank you.
Yeah, I mean, the other comment I'll make is I think, you know, you saw several videos here. We're very fortunate, you know, with our customers being able to provide those testimonials, you know, and they're working with us. I mean, yes, there were some smaller ones there like a NIO, but you know, very leadership from a technology position. You had some very large ones like Toyota and Volkswagen, you know, taking the time in producing these videos on their own, on their own time and very high quality and doing that as a favor to us, which they weren't required to do. We're really appreciative of their efforts of doing that. I think it also speaks to the relationships and the strength of the relationships that we have with our customers, you know, throughout the world.
An online question, and then we'll go to the next person over here. Who are our main competitors, and what comments can you make about the level of protection we get from our patent portfolio?
Maybe let me start first. The main competitors are the big tech players, right? Google, the Amazons, and then in China, we have, for example, Baidu, Alibaba. First of all, I think we are well positioned here because we have a very competitive technology speed. You know, you saw it in Pratik's session. We have also a great patent portfolio, really strong patents. It goes far beyond just algorithmics, right? It's visible. With that, I think we're in a really good situation here, right? Also to protect the OEMs, to protect us and the OEMs. We have also benchmark winning solutions here. To give you also an idea, a well-known two-wheeler OEM did a benchmark in September. They compared Amazon, Google, SoundHound with us, and we won the benchmark.
I mean, that was really different noisy conditions, right? It was not a closed cabin. Yeah. They have chosen us here, right? You see that's a proof of concept, right? That we have really great technology which is actually superior. Yeah. Next to the big tech giants, we see also some players like, for example, SoundHound and iFLYTEK or iSpeech in China, right? Here I think we are also ahead of them. You have seen here 70, 80 languages we are supporting. Yeah. We are the only one-stop shop where you can get everything from Audio AI up to conversational AI up to face recognition, voice biometrics, right? We have everything optimized for the transportation segment. Pratik?
I think, you covered it well. We continue investing. We have 800+ patents. We are, I think, another 150+ provisional patents are in the process. We continue investing and continue filing more and more patents as we improve our technology. I think the proof goes back into what I said earlier, is companies like Renault who moved back from big tech and chose us, or even when Stefan mentioned SoundHound, companies like PSA or Hyundai who were at one point with SoundHound, but we actually, they moved to the Cerence technology. I think the proof goes into that we're already seeing those OEMs now, see our technology, see the breadth that we provide and the integration that we provide as part of the car.
Rashi, let's give someone else a chance. Julian?
Hi. Yeah, Julian from Van Merk & Associates. I had a question just on maybe the revenue model for newer revenue streams. I assume transportation market will be mainly volume-based, like the core auto business. If you can talk about maybe the newer industries like AIoT, any other non-transportation markets, maybe where you've seen success so far. Will these be on, like, a one-time licensing-
So-
-fee basis or volume-based? Just maybe where you've had success so far.
Let me take the AIoT one just 'cause it's more of a financial. Then Stefan can talk about the transportation adjacencies. As Stefan mentioned, we seeded a small team, and it's a team that actually we worked with previously at Nuance that was available, and we have some dedicated resources in China. They've identified four product opportunities that leverages the technology stack. These product opportunities are not covered by the FOU with Nuance because they're in specific technologies that are excluded from that. They've had an early win in one of those products, and they have a pipeline, and they have negotiations going on in the other three. Those will be license revenue deals mostly. They will be, you know, a price per unit shipped.
The beauty of it is that we don't have to invest in a go-to-market. We don't have to invest in how that product, the supply chain. We're a technology provider to these, to these companies. Our hope is that we build that team up, they get experience, and then when the FOU expires in FY 2025, 2026?
Four.
4. 24.
Four.
When the FOU opens up, we've built a team that can then expand into other markets.
Mm-hmm. Mm-hmm.
As I said in my comments, I think we've taken a prudent approach to how we've put it into our models. We haven't assumed any expansion when the FOU expires. Particularly in the short and intermediate term, we've pretty much based it on kinda line of sight to what that team is having success with at this point. We haven't assumed any expansion beyond those 4 product lines. You know, hopefully they overachieve, and that'll provide some upside down the road.
When looking during at the two-wheeler segment, right, that's comparable to automotive. I mean, roughly 40-50 million units on a yearly basis. We have also a nice design win rate here in North America, in India, China, and Japan, and even in Germany. I think that's also a great product, where we have a lot of hope that this can drive also more revenue in the future.
I would just say again on that from a modeling standpoint, we have won some deals.
Yeah.
Those are starting to go into production. Again, I think from a modeling standpoint, we tried to model it off of the kinda short-term pipeline and some of the wins that we've already...
Mm-hmm
... had and achieved. I think that
Yeah
in some of the out years could be another upside opportunity for us. It's some of those are new markets for us. They're big markets as Stefan talked about, but, you know, we need to get more experience, particularly on how those companies are gonna roll those products out. We know how OEMs do it. We need to figure out, you know, the product life cycles. I think that's will help us to, between the work that Pratik's doing with the OEMs to shorten the auto ones and then some shorter bookings to revenue cycles in some of the transportation adjacencies, and I think that'll also happen in AIoT.
Mm-hmm.
You know, we'll have the ability to, you know, drive revenue a little bit faster from a bookings to revenue standpoint.
Perfect. Just follow up, if I may. Just for the broader financial targets you've given, and appreciate the visibility, your detailed financial model over the next 4 years. You know, you've had really good bookings the last couple of years. Seems like win rates are still very high. What's the, I guess, if you had to identify the top one or two risks to these targets, you know, would it be, I don't know, like macro, execution, competition?
I think macro is still a topic for us, right? I mean, what's next? That's a key question here, right? Do we still see some supplier issues here, right? Supply chain issues, that could be a problem for us. Yeah. On the other hand, I'm very confident that we are doing the right things here also with all of the OEMs, right? Programs which we have lost in the past, you know, four years back, these OEMs are coming back now. We had recently here a big event in Detroit. Also for a well-known OEM and say, "Wow, that's amazing what you're doing here," right? Now they're thinking, and we're working together with them on the new RFQ. That's actually also, in our favor. Yeah.
I think in the short term it really is, you know, for FY 23 it's auto production, right?
Yeah.
We're not forecasting a big economic or world event. Could happen, who knows. As I said, we did take a minor, what we think, haircut to the IHS production numbers. I think that's probably relatively true for 24. Of course hitting the implementation dates on those big contracts that we talked about. For 25 and 26 it's, you know, continued strong bookings over the next few quarters.
Perfect. Thanks.
Okay. Next online question and then we'll go there next. What kind of investment slash CapEx will need to be made to achieve these goals? Any insight on how you plan to fund investments?
I talked a little bit about what we've included from an expense perspective. I mean, we don't, we don't capitalize software. We have a very, very small CapEx plan. It's mostly facilities related, and we don't have any big facilities updates coming up, and it's some small IT related costs, although a lot of our activities are in the public cloud these days, you know. Not big investments there. You know, clearly we're still gonna be a little tight in FY 23. We've worked with all our banks and we're quite clear on all our covenants going forward with this new plan. We will be, I think, restricted on M&A this year.
As you see from the financial model, we come out of that quite strong in 2024, 2025 and 2026. Our debt come due in 2025, I think we're gonna be in a really good position and have a bunch of options in 2024 as to what we do with that. You know, we talked about the ability to have strong partnerships. Some of those could lead to M&A down the road. I think we have the opportunity to do that once we get through FY 2023.
Okay.
Yeah. Colin Langan, Wells Fargo.
Yeah.
I just had 2 questions. One, you mentioned, you're talking about, there's a chunk of connected business that's not sort of as pushed out of your backlog 'cause it's enhanced. Does that change your If you win that business or it's officially won, does that change your outlook or is that kinda already embedded, it just changes the sorta already won rate into like 2025, 2026?
We very much expect to win those redesign programs back. that's-.
Yeah
...that's in our financial model.
To give you also a bit more color on this, right? We are actually working with the OEM towards SOP, and SOP is in the first quarter of next calendar year. It's just a redesign. Yeah.
It would just improve that. I think that visibility percent would kinda move up when you. Okay. You mentioned the. Well, trying to line up your CAGR for autos is 13%. You have on one slide, you know, the top five customers, just one year going up 26% on price. Why isn't the CAGR stronger? I guess if just one year you're seeing a 26% CAGR from your largest customers, are there other offsets that are dragging that growth down or is it something I'm thinking or I'm misreading the 26?
We did the CAGR from 2022 to 2026. If you look at the growth between 2022 to 2023, right? It's much more significant. There are a couple of factors there, right? It's the lower impact on fixed contracts. To me, if you look at 2025 and 2026, that's more of the financial model on a go forward basis, right? Double digit growth, 70%, high 70% gross margins, 30%-35% adjusted EBITDA margins. I think you have to kinda look and normalize, you know, what happened in 2022, how we go through this revenue transition in 2024, how we get the big uptick in 2024, and that's a much higher growth rate. I wouldn't want people to use that growth rate on a go forward.
I think you gotta look at 2025 and 2026 as kind of our financial model, on a go forward basis.
I think, correct me if I'm wrong, right? You know, that includes pro services as well, and we don't expect pro services to continue to grow at the rate, you know, that we saw over the last year. It's been very strong, but we don't expect that to be a growth driver moving forward. You know, It's the total automotive, it's not just the license revenue that we're referring to.
It's all about license revenue and for us also faster deployment cycles, right?
Yeah.
That's all about it.
All right. Thank you.
Let's see. Well, let me get one here and then we're going back and forth, and Amrish can be next. Can you talk about what you're doing to encourage and enable end users to use Cerence developed technologies, connect all their accounts from Spotify, credit cards, details, et cetera? It seems like this could be a hurdle to more adoption of your products by the actual drivers themselves.
We have already some programs in place with some OEMs where we're launching new initiatives or new domains or whatever, right? One of those we did also recently was Mercedes, yeah.
I mean, in general, I think the customers, the end users will spend more time in their cars. There is a high demand for more services in the entertainment, in the productivity space. What we see is also that OEMs are starting to monitor that way more closer. They look into their data, they compare the markets with each other and start initiatives to increase that, of course.
That was also part of our presentation. Remember the three pillars, right? Scalable AI, then the companion, and then on the right-hand side, it was a so-called multisensory experience platform.
Okay. Amaresh, then we'll go there next. Wait for the microphone.
Thank you. Can you just review your capital structure as of the end of the fiscal year-end that you guys just reported? I think you sort of touched upon it. How are you thinking about use of sort of cash and sort of timing for the debt and how you would address that?
Yeah. We have a convert, I think it's around $250 million of debt between the two. We have a revolver that we haven't used. We've worked with our banks. We're fine on... We had to adjust some of the covenants because of the 23 financial plan. We had tremendous support from the banking group, so that's behind us. As I said earlier, our debt is due in FY 2025. If you look at the cash flows generated by the new plan, we'll be in a position which I would suspect we would start that in 2024, which is good because now is a really bad time to refinance debt. Hopefully in 2024 it'll be a little better.
Quite honestly, if you look at the plans, we could pay it off in 25 if we had to. Some of that will depend upon the pipeline for M&A that we'll start to develop this year, with a potential opportunity to maybe do something in 24 and going forward. I would also point out that, you know, from a cash flow standpoint, that legacy contract has been a drag, right? Because that's amortized revenue from a deal that was done significantly before the spin, and the money was collected by Nuance, right? We have revenue associated with that legacy contract with no cash.
That's gonna start to flip as our connected services continue to grow, where we get paid the connected license when the car is produced, and then we amortize that over the life of that car. That's gonna start to flip, particularly when that legacy contract ends in Q1 of FY 2026. I think we're in good shape.
when, in your cash position and what's sort of the, any contractual requirements on what the minimum cash you need to have?
It's part of the covenants, but we're in no risk of going below that. We don't see any reason that we'll have to use the revolver this year.
Okay. We'll alternate, like I said, so we'll go here for the next question. With aggressive nearshoring taking place and many companies choosing to distance from China, how do you navigate or handicap that risk?
That's a very good question here. We have in China, R&D and professional services teams. Yeah. We have also IP in China. Overall, I think also the Chinese OEMs, they want to go also, for example, to Europe and rural China here. Actually they need us, yeah. There is still a minor risk in my view.
Well, I can add to that. I think from a technology perspective, we have it's basically the Chinese technology built in China and deployed in China.
Yeah.
We have a research grid in China where we just train and keep the data there locally. Obviously, we have a research grid across the rest of the world, which is for North America and Europe and other regions, right?
Yeah.
That's another way where we segregate and reduce the risk. As Stefan mentioned, we have a local R&D team and a professional services team, which is geared more towards the Chinese domestic OEMs. That's how we create that line.
We have also separate hosting entities in Korea for the Korean market, in Japan for the Japanese market, in China and in Europe, and of course, here in North America.
Okay. Yeah, back there.
Hi, I'm Amit Solomon, Neuberger Berman. The 51% penetration that you were showing, you used to break it out to penetration of connected versus not connected. I'm wondering.
We have also this information, right? We can say roundabout, let's assume it's $20 million per quarter. Based on IHS data, right? We have all our royalty reports, and we see roughly then $10 million. It's a bit more than $10 million, but just let's assume $10 million is the complete staff hybrid. It's $10 million is all embedded, and maybe $2 million-$3 million has already connected. You need also to have this connectivity module in your car, right? Actually, $2 million, $3 million out of the $10 million is related to connected services.
I was just wondering if what was the connected penetration, and also if you can discuss what's in the 49% that's not Cerence penetrated competitors or.
That could be a competitor. There are still some cars on the road without having this kind of conversational AI.
Yeah.
Yeah.
Yeah. If you look at the, you know, the third-party data, right, there's about, I think it's seventy-
70%.
70% or so cars are built with some type of voice assistant in them today. That's increasing. The percentage is increasing each year, although even as we look at over the last year or so with the whole semiconductor issues, there are cars being produced that aren't getting that capability 'cause the chips haven't been available. Take that aside. If we were in a normalized business environment, you'd see about a 3% increase per year of more and more cars having that voice assistant technology. It's just over the last couple of years, the data's been all over the place because of the semiconductor manufacturing issues. On the connected side, it's a, it's a lower percentage. I think it's somewhere in the 40%-50% range-
50%.
... growing at a much higher clip or faster clip as more and more car companies see the value in having a connected car 'cause it gives them the opportunity to generate revenue throughout the life of the car rather than just at the time of purchase. There's a very strong push from the various manufacturers in that direction, and therefore, that's increasing at a faster rate. It's part of what we're seeing from some of our customers that are basically going all in in terms of their makes and models in some cases to get all their cars connected.
Yeah. Roughly 70% have the solution of which 51% of, and 51%, is served by Cerence. Is that roughly correct?
Yeah. Our, roughly our share of the cars that have a connected, embedded voice assistant in them is in the 75% range, 77.5%, 76%.
It's actually more, right? The 51% relates to all produced cars. Yeah. only 70% of all produced cars has conversational AI on it.
Got it. Thank you.
David?
Hey, good morning, guys. Thank you. David Kelley, Jefferies. Tom, maybe wanted to follow up on the earlier cash flow cadence, point you made. How meaningful is the legacy contract roll-off over the next couple years? I was just looking at, believe it was slide-
It's about $ eight and a half million per quarter-
Okay
... through Q1 of FY 2026.
Okay. It's flat through-
Flat.
Okay. Got it.
It's now on a flat-
The step up in the cash flow conversion in 2024, is that more tied to the fixed contract-?
No, that's just driven by really strong licensing connected-.
Mm-hmm
... production, us collecting royalties.
Right
on those units.
The normalization, I'm assuming, of some of the fixed contract burn as well.
Yes. That too.
... in 2024?
Right. Yeah.
I guess longer term operating cash flow conversion target kind of in line with that 2026 expectation?
Yep.
Okay. Got it. Thank you.
Mm-hmm. Yeah.
So question here online about understanding the difference in magnitude of negative impact due to softness in car sales volume versus positive impact from growing use of voice recognition cars? I think I kinda commented on that a moment ago. Let's see. It looks like a big part of the business is in China, both partnerships with big tech and new EVs. What is the revenue exposure to China as a percent of total? What is your presence in China in terms of office location, number of personnel? Is there anyone on the senior management team that is based in China or has China experience? How do you protect your IP in China? Basically anything to do with China, who wants to take it?
I'm not going to share the breakdown in terms of revenue, right? I cannot do this. Overall, we have three sites in China, Shanghai, Chengdu, and Beijing, located to the global OEMs, but also to the domestic players. I think we both have a lot of experience with China, also in China. Pre-COVID, I spent more or less every month, a week in China. Nils was also running a global team, also with a strong footprint in China.
Yeah.
Overall, I think. We have a very efficient team in China, R&D, professional services. The Chinese team is also working on Asian languages. You know, they have the skill set, and they're also extremely important to us for our Co-Pilot here and also for the Companion, right? They bring a lot of expertise to it. When looking at our site strategy, there's also a very important element of our strategy plan, is that we have also a strong side in India. Not just for best cost offshoring because they bring also a lot of talent, right? We are very proud to having them there. There's also great collaboration between the Indian team and the Chinese team.
In Europe, we have a focus on this traditional technologies like Audio AI, text-to-speech and embedded in general. In North America, we are focusing it on cloud solutions. Yeah. Yeah. That's actually also our site strategy in line also with our strategy plan. And, yeah, I'm really proud having all of the sites here, right? For us it's very important, right? We need to be very close to the OEMs, yeah. I mean, I cannot manage a team in India or in China, yeah. We built up relationships over the last five, six, seven, 10 years. We are just back from our sales kickoff, the Cerence annual sales meeting in Miami two weeks ago.
We had also, four, five months ago, a huge technology event, led by Pratik in Europe, right? We flew in all the people. Unfortunately, team China couldn't come because due to the COVID restriction over there. We have daily calls with the Chinese team and I know also most of the big players here up to the CEO of Geely, right? Where we have also regular calls with them.
Yeah. The only other comment I'll make is, you know, we do in our 10-K, which we filed today, I believe, we break down revenues by geographic region, but you know, you have to be careful...
Yeah
... in looking at that data because that doesn't account for European-based companies shipping their cars into China, right? It's just based on where the bill.
Yeah. Yeah.
the billing is taking place. It's not a true reflection of how the business is spread throughout the world. Luke?
Yeah. Luke Junk with Baird. Thanks for taking the question. I wanted to ask on your appetite for M&A and partnerships beyond 2024.
Mm-hmm
a few times in the.
Mm-hmm
... presentation. Are we right to read your posture as being a little more aggressive going forward? Maybe Stefan, if you could put a finer point on what sort of transactions...
Yeah, sure.
... you might be looking at or technology focuses.
It's a very good question, Luke. Right. I think we have already some targets in mind, yeah, which makes sense for us. Just think about vision, just think about wellness, health application in the car, right? Also for X-rating our products here. As Tom mentioned, this year is not the year for doing an acquisition. Yeah. Other than that, we have already a clear roadmap here, what is interesting to us and not.
We have various ways that we can attack the areas outside the SAM that are within the TAM. Pratik and a few of the senior technology leaders in the company, spend a lot of time trying to understand those relationships.
Mm-hmm
That can be a partnership relationship.
Yep.
It can be, contractual relationship. It can lead to an M&A. Even though we're a little bit constrained this year on M&A, it's not gonna stop us from continuing to build relationships.
Mm-hmm
that Pratik can talk a little bit more about. You know, it's important for us to continue to leverage our strengths, right? We have such strengths with the OEMs. We've got this really strong companion, and so there's opportunities to continue to build our footprint and capability. We just have to find the right return for those and the right way to enable those.
Yeah, I think, what I'll just simply add is, in terms of partnerships, obviously, it can fall into several different buckets, right? As I said, in my presentation, we partner with all the leading map providers now, right? We continue going deeper into that. There is the content partnerships that we already do. There's integration partnerships, for example, in the music and the media and all. We do that as well. We'll continue investing in those, which we'll do. When it comes to M&A from a technology perspective, I think it depends on the timing and all at this point.
A bit on the timing, we have also established a small team, corporate development under Tom.
Yeah.
Okay. Other questions? Rajeev?
Just to follow up, Stefan, on the competition, if I may. There has been, you know, more and more announcements of OEMs-
Mm-hmm
... you know, working with some of the big tech, you know, whether that's... You know, for instance, BMW-
Yeah
... talked about, you know, building a next generation voice with.
Mm-hmm
... Alexa custom assistant solution. I know you talked about kinda coexisting with big tech.
Mm-hmm.
could you elaborate what that actually means? Is it if you're in a same car as Alexa is, what part do you do? What part does Alexa do?
I cannot.
Any details would be great.
... into the details, especially not on this specific account, right? We have seen a lot of PR, especially from Amazon, right? There was also PR with JLR, a few months ago, right? We know who won the race here, right? For this German OEM, we are still developing for them all languages, for the new programs, but also press release on the seven series. They are very proud. It's more as a coexistence.
What specifically when you say coexistence? Is it you're doing specific voice technology?
That's a complete solution. Yeah.
I can answer that. If you look at the smartphone speakers, like at home, like Alexa or Google, they're very much voice-focused, right? They came from the smartphone market, which is controlling your home devices at home. That's the first key focus, right? That's how they came into that. For a coexistence in the car, they try to do that in the car as well. On our side, we go deeper into the car, integration into the car, the sensors of the car. That's one area where we differentiate. The other is we try to combine the voice with the vision and the gaze and the gesture. We're no longer a voice assistant company, right? We are beyond voice.
Mm-hmm.
That's why, if you see today, the Companion is all about bringing all those modalities together and giving you all those other capabilities. A coexistence would allow you to have your smartphone connection, probably, let's say, Alexa. I'm just saying that could be one way. But then you're still doing the deeper integration of the car, controlling the car.
Yeah.
command of the vehicle, beyond your traffic, your surroundings, how you're driving, all that experience comes from Cerence.
Okay. I have one here. What level of confidence do you have that to be successful with the strategy over the short and the longer term?
I mean, it's clear it's an evolution, right? You saw also from core technology, Cerence Assistant, Cerence Co-Pilot to the Companion, right? You see that we are already on the road with Cerence Assistant and also with Co-Pilot, right? We have signed already some deals based on Companion. Overall, I'm very confident that this is the right strategy, and we need to have a razor-sharp focus, right? What I said at the beginning or at the end, it's all about innovation and delivery excellence. If you can do this right, then it's quite simple also to secure recurring business.
Any others here before I go back online? Okay. Your previous long-term growth model broke out gross margins by licensed connected services and pro services. Are there any major changes to that in your current guidance?
No. No. Our, you know, our licensed business is a virtual 100% gross margin business. Our connected services is, you know, kind of high 70s% gross margin business. I think it's a testament to our PS that we actually get people to pay for it, and we actually make money on it. It's approximately in the 20s%, whereas in many cases, people don't even want to pay for it. That's a bit the profile between the 3 revenue lines.
Yeah.
Okay. Nothing here. All right. New connected is the key growth vector as you've described. The number backing out of customer-hosted/one-time items has been very stubbornly flat over several years. Even in light of weak overall auto units, the vision had been that SOPs were ramping quickly as prior wins came into production. Yet the SOPs haven't moved the needle. Please expand, if you would.
I mean, as I talked about, there are a couple of older contracts that are coming towards the end of their amortization schedule. That effect should go away going into FY 24. I do wanna reiterate, I mean, we lost 20 million cars over the last 2 years.
20 million cars, yep.
And, you know, twenty, twenty to twenty-five-
Mm-hmm.
% of those should've had connected services attached to them. Therefore, you lose the whole amortization schedule.
Yeah.
for all of those cars. That's had a big impact.
Mm-hmm.
The effect of those older contracts goes away. The newer platforms that are going into production all have connected services for the most part attached to those. Those are being deployed as we speak. It's why we had strong PS services revenue this year. Those amortization schedules now start to build up, and you'll start to see good growth in connected services going forward.
Most of the deals which we have signed or closing are hybrid, so having this as cloud component, right? We see also now the appetite also for cars on the road being upgraded also with this cloud component.
Okay. David.
Thanks, guys, for the follow-up. David Kelley at Jefferies. The customer relationships, the ecosystem. I think about you guys working both directly with OEMs and at times tier ones.
Yeah.
It sounds like today at least, I want to confirm with you that maybe you're pushing more in the direction of working direct with the OEM.
Yeah. Yeah.
And I guess secondarily-
Yeah.
What does that mean for revenue per vehicle, assuming that might be an incremental leverage point?
Normally, the OEM makes a decision, right? Who will be the vendor? It's not the first-tier supplier, and it's not the SoCs, right? It's only the OEM. We are positioning us at all levels, right? With our partners, with first-tier suppliers, and with the OEMs, right? In the future, I believe we are signing more deals directly with the OEMs because we are consider us also more or less as a first-tier supplier, a software first-tier supplier. Yeah.
Yeah.
What we see also is that the OEMs want to have us in the very early phase already, right?
Yeah.
When they do the ideation for the next generations to come, they wanna see our roadmap, they wanna talk with us about technology, and have us as a partner from the very beginning, and then on the way and beyond the SOP, as we said, to also monitor how the services are being used, after SOP. I think it's a more close relationship overall with the, with the OEMs.
Thank you.
Normally all cloud deals will be signed with the OEM directly.
Yeah. I just wanted to add, in the past, the cars had a lot of different CPUs and processing cards within that, right? Now they're all consolidating into a single GPU architecture, right? What that means is, as we have become more of AI modeling company, they wanna talk to us early on what is our requirement to run those AI models on the same processor, which is gonna get used by other elements on the car as well.
That's one of the reasons why we get factored in a very early stage, as a part of the design of the car and the ideation process itself, as opposed to in the past where we would be brought in at a last stage and then say, "Okay, here's the predefined architecture now that we have already agreed on, and you just go fit into that.
Benjamin Nahum from Neuberger Berman. Maybe a little bit of an oddball question here, but can you tell me as you immerse the driver, are there potential long-term risks, regulatory safety risks? How when you roll out these features, you know, can you demonstrate that we're not compromising driver integrity or distracting the driver? 'Cause, you know, we have this whole issue of talking and texting while driving, and you guys are immersing the driver in a whole set of opportunities, and I don't wanna be anywhere near those people, you know, when they're making their reservations, well, et cetera. Walk me through-
It's more than just a driver, right?
Yeah. I get it.
It's all passengers.
You're turning this thing into a complete companion.
Yeah.
Is there the potential for any type of regulatory restraint or framework as the manufacturers look to introduce new feature sets?
We have those discussions, right, with the legal departments of our OEMs, right? They know this, and they need this. Maybe, Nils, you can also share your view.
Yeah. I don't think that it's going into such a direction, right? You started your question with talking about the end user. I think there is different people out there. Some are using it more heavily and are interested in it, and some are not. In general, I think, if there is regulatory and stuff coming up, we are more supporting the OEMs in that, right? Whatever they need.
We see actually a privacy issue from time to time, right? It's important to be also on the edge, so embedded. That's very important when it comes, for example, to wake word, right, or to voice biometrics, right, or face ID, right? We cannot share this with the cloud.
Which is a big argument for us, right? Because there we are super strong in offering a technology-
Maybe I can add to that. I think the regulatory, some of the regulatory requirements are actually acting as tailwinds for us. For example, if you guys remember, few years ago, the backup camera in a car became a regulatory requirement. Now the inside camera for the driver drowsiness detection is becoming a regulatory requirement, which means that we could use that vision in the car along with the voice to even identify the cognitive load on the brain of the human and only then get him engaged in the conversation, right? As opposed to just simply going and starting a conversation. We can understand the emotions that the person is going through and then engage him, right? That's actually helping reduce the load on the driver as opposed to increasing it.
Some of the regulatory requirements, as I said, are actually just helping on that.
I think the bottom line is, you know, people that are in a car, whether it be the driver or the passengers, you know, as much as we would all like them to see focus, I mean, you drive down the highway, you see still people on their cell phone texting, you see people eating, you see people doing all kinds of things, right? When you look at our technology, it starts with the voice and certainly expands to the other modalities, but it starts with the voice and that is really, if you're going to do something with the car, that's the safest way. 'Cause I remember when I first joined Cerence, you know, the statistic that, you know, if you take your eyes off the...
If you're traveling 60 miles an hour down a highway, and you take your eyes off the road, right, for seven seconds, you've traveled the distance of a football field, right? A lot can happen in that, right? Whereas if you're using your voice, you're able to keep your eyes on the road, even if you're trying to do something else. Any other questions before we wrap it up? Going once, twice, three times. All right. Well, thank you very much, for everyone joining us today. I hope you'll stay for lunch and engage in conversations with the executive team that's here with us today. really appreciate the people online listening-
Yeah. Thank you.
and everyone here.
Thank you so much.
Hope you'll join us on Destination Next.