Ladies and gentlemen, thank you for standing by and welcome to Cerance's First Quarter twenty twenty one Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's call is being recorded. I would now like to hand the call over to Richard Ganion, Vice President of Investor Relations for Cerence.
Please go ahead.
Thank you, Michelle. Welcome to Cerence's first quarter fiscal year twenty twenty one conference call. Before we begin, I would like to remind you that this call may involve certain forward looking statements. These statements are subject to risks and uncertainties as described in the press release preceding today's call. Cerence makes no representations to update those statements after the date hereof.
In addition, the company may refer to certain non GAAP measures, key performance indicators and pro form a financial information during this call. Please refer to today's press release for further details of the definitions, limitations and uses of those measures and reconciliations of non GAAP measures to the closest GAAP equivalent. Joining me on today's call are Sanjay Dwan, President and CEO of Cerence and Mark Gallenberger, CFO of Cerence. As a reminder, the only authorized spokespeople for the company are Sanjay, Mark and me. While many were amazed by our voice call technology last quarter, Sanjay Mark will be live for the prepared remarks and Q and A.
And I challenge you to be able to tell the difference from last quarter's conference call to this one. Before handing the call over to Sanjay, I would like to announce several upcoming investor events. They are all virtual events, so the exact timing of our participation is subject to change. The conferences include this Wednesday, the twenty twenty one Goldman Sachs Tech and Internet Conference on February 10. And in March, plan to participate in the Berenberg Capital Industrial Technology Conference, the Raymond James forty second Annual Institutional Investor Conference, Baird's twenty twenty one Vehicle Technology and Mobility Conference and the Cowen Mobility Disruption Summit.
Please visit the Events page in our Investors section of the Cerence website for the most up to date information on our participation. Now on to the call. Sanjay?
Thank you, Rich. Fun to be live this time. So welcome to everyone on the call and thank you for joining us to discuss our first quarter fiscal twenty twenty one results. I'll first review our strong performance in Q1, followed by a summary of the key product introductions during the quarter. This will be followed by comments about the near term business environment and update of our key performance indicators.
And then I'll hand the call over to Mark to review the detailed financial results. After a record fiscal year in fiscal twenty twenty, we're off to a fast start in fiscal twenty twenty one as our initiatives for innovation and market expansions continue. In Q1, we again delivered record revenue of $95,000,000 representing 23% year over year growth. Our performance was driven by strong growth in our license, connected services and in our professional services businesses. While revenue growth is an important metric for the company, I'm extremely proud on how we drive the business to achieve profitable revenue growth.
Our intense focus on this led to a non GAAP gross margins of 75%, adjusted EBITDA of approximately $40,000,000 or 42% margin and non GAAP EPS was a strong $0.59 Overall, our Q1 results surpassed expectations in every key financial metrics and Mark will share the details later in the call. You may have seen our recent announcement further strengthening our professional services organization by hiring Sujal Shah to lead this group. Sujal comes to us from Harman and has extensive experience in the automotive space and in particular creating new service offerings that will lead to even more future growth opportunities in this part of our business. I want to wish Sujal I want to welcome Sujal and wish him the best. As strong as our financial results were for the quarter, there were many non financial highlights as well.
One of the key achievements in the quarter was that we were awarded a design win for a major European OEM's next generation infotainment system expected to start production in 2023. We just received the okay to share the name and the name of the European OEM is Stellantis. It's as you all know, one of the top three auto OEM that was recently formed by the combination of FCA and PSA. This win is important for two reasons. First, we won back a customer that had been lost to a competitor when our business was still part of Nuance.
And second, the deal includes many of the latest connected services and apps product offerings we announced just a couple of weeks ago at our Settings in Motion event, a true testament of the strength of our new offerings and innovative technology. Another headline event was our agreement with Xevo, a Lear company, to deliver Cerence based conversational AI powered contactless payments into vehicles via the Xevo market platform. This deal is significant because it represents a major bookings for one of our new Cerence apps. The bookings to revenue cycle for these offerings is much shorter than our standard products, so we expect to see revenue from this deal before the end of the calendar year. It is our speed of innovation and execution that allows us to retain or win new design opportunities and that capability was clearly on display at our Cerence in Motion event.
During this event, we introduced amazing technology that either represents best in class or brand new capabilities focused on extending a driver's full digital life from outside the car to inside the car. We introduced Drive two point zero, a major upgrade to our core technology. Cerence Drive two point zero features a combination of edge technology enhancements and improved and expanded connected cloud services capabilities, Whether it be the number of languages we support, the level of accuracy, the speed of response or the human like text to speech capability, we're confident Cerence Drive two point zero represents the best the very best of conversational AI technology available in the mobility market. During the Serence in Motion event, we also introduced a series of other new products. Xtend provides the ability for a driver to use their voice to control apps on their Android or iOS based smartphones.
Celence Xtend removes the limitation of using your voice for a defined subset of apps on your phone and allows you to use your voice to control apps ranging from Microsoft Teams to ordering a coffee through your Starbucks app. This product plays a significant role in extending the consumer's full digital life from outside the car to inside the car. No one else offers this technology. To truly extend one's digital life into the car also means providing a seamless way for a driver to interact with smart home and IoT systems. This is exactly what Cerence Connect allows you to do using your voice.
Supporting multiple IoT and big tech ecosystems, Connect allows the user to provide simple instructions or create custom smart home routines or rules. Even if you use different ecosystems within your home, Cerence Connect allows you to control them through one AI interface. Sedence Tour Guide is a new application that serves as a high quality professional tour guide in your car. Whether selecting a preplanned trip or using the application on the go, Tour Guide can inform the user about key points of interest and also book experiences like restaurants, museums and other attractions. Cerence Look is a new product that has the capability to leverage gaze technology and or the GPS location of the car to provide information on points of interest along the road.
The technology was recently demonstrated by Mercedes Benz as its travel knowledge product, which allows a driver to ask about the POI, point of interest outside the car, and the voice assistant responds with the information describing the POI. Look is currently in production now. Cerence Browse provides the intelligence of Internet search engines in the car using conversational AI. Cerence Browse connects to multiple sources in the real time, indexes continuously updated information from Internet sources and uses machine reading comprehension to deliver the best possible response. As I said earlier, innovation is key to our growth and competitive advantages.
But innovation alone isn't enough. It's the ability to bring those innovations to market quickly with the highest quality and meeting or surpassing the requirements of our customers. I'm happy to report we had several awards during the quarter recognizing the contributions the Cerence team has made to conversational AI technology in the car. And one from a customer recognizing the value of Cerence as a partner. While we value the recognition from customers, the one we received from Baidu is worth mentioning for two reasons.
First, Cerence was the only automotive supplier, Baidu, recognized for their twenty twenty awards. And second, it's another example of how it's a story of Cerence and Big Tech, not Cerence or Big Tech. As part of the Cerence in Motion event, we also formally launched conversational AI based platforms for two adjacent markets that we have been targeting, the two wheeler and building mobility markets. There are approximately 90,000,002 wheel vehicles produced every year and we see the opportunity to penetrate this market with a truly unique solution. As we have mentioned before, we received our first win in this space late in fiscal twenty twenty and we believe we are well positioned for additional wins this fiscal year.
In the elevator market, we have made significant progress completing proof of concept demonstrations with two of the top five elevator manufacturers in the world. The key to this business is that our product is capable of being retrofitted into existing elevators as well as incorporating into new installations. We are optimistic that we will have multiple elevator customers this fiscal year. Just the innovation, expansion and acceptance that I just discussed With the innovation expansion and the acceptance that I just discussed, our KPI continued to show good progress, and I'll highlight two in particular. The first was related to our average billings per car, which increased 20% year over year on a trailing twelve month basis.
We previously compared year to date results to the prior fiscal year, but now are reporting on a trailing twelve months basis to provide a more accurate picture of the trends in the billings per car. The other noteworthy KPI was that our adoption metrics continue to show a strong recovery following the impact of COVID in the middle part of the last year. We would expect this positive trend to continue. We continue to see excitement from our customers about our product innovations and our long term growth opportunities remain bright. In summary, the momentum created during our first year as an independent company continue into our second year.
We believe the innovation technology that we have brought to the market will keep the momentum going. Our focus has been on driver AI to enhance the experience in a safer, more productive way. We will continue to expand in cabin AI using voice and increasingly other modalities. Longer term, we look for opportunities where we can apply our AI skills into other areas like road AI. We have a long term vision for the future of transportation and mobility and I'm excited I'm very excited about the role Cerence will play.
I would like to turn the call over to Mark to review the financial results of the quarter and our guidance for Q2 and for the year. Mark?
Thank you, Sanjay. I'll first review the strong performance for the first quarter and then I'll provide guidance for our second quarter and an update for the full year. Once again, our results came in stronger than expected, leading us to another record revenue for the quarter. Revenue came in at $95,000,000 which is $5,000,000 above the high end of our guidance and is a 23% increase from the same period last year. Our profitability metrics were very strong and they all exceeded the high end of our guidance range.
The non GAAP gross margin was 75.3%, non GAAP operating margin was 39.7%, adjusted EBITDA came in at $40,300,000 or 42.4% margin and non GAAP earnings per share was $0.59 The Q1 results are still benefiting from the cost savings that we implemented due to COVID last year. As previously mentioned, these cost savings will return during the course of this fiscal year. However, we believe that some of the gross margin improvements that we have seen in our Connected Services and Professional Services businesses are sustainable into the future. And these improvements will be reflected in our long term model that we intend to update later this year. During the quarter, we generated approximately $11,000,000 of CFFO and our balance sheet remains strong with total cash and marketable securities at $127,000,000 During the quarter, we successfully renegotiated our Term Loan A with our banking partners, which is estimated to save the company $1,000,000 in annual cash interest expense.
The key changes were a lowering of the interest rate spread by 50 basis points, removing the LIBOR fixed floor of 50 basis points and extending the maturity by ten months to April 2025. Now let's review in more detail our revenue performance for the quarter. The record revenue was driven by three factors. First, our variable license product revenue was up 21% from last quarter and up 8% from last year, driven by continued strong recovery in auto production since hitting the trough in the April timeframe of last year due to COVID. Second, our new connected services revenue expanded 24% from last quarter and was up 55 year over year due to a continually expanding customer base adopting our new connected service offerings.
And third, our professional services business grew 9% from last quarter and was also up 55% from last year driven by an increase in engineering activity in order to get customers ready for their start of production. Additionally, our professional services revenue was higher than expected in the quarter due to the early completion of customer projects that resulted in an acceleration of about $2,000,000 of revenue into Q1. Moving on to our Q2 guidance. Our revenue guidance for the second quarter of '90 '2 million dollars to $95,000,000 reflects year over year growth of 6% to 10% and takes into consideration the current risks and uncertainties of the semiconductor device shortages that are impacting auto production. According to IHS Markit, the semiconductor shortage issues are expected to be resolved by mid calendar year and IHS does not expect an impact to its full year forecast, but rather a shift to the second half of the calendar year.
Due to our higher year over year revenue guidance for Q2 and the continued cost benefits from the expense reductions taken last year due to COVID, we are expecting all of our Q2 non GAAP profit margin metrics to be up by two forty to 500 basis points versus the same period last year. For the fiscal year, we are updating our guidance to reflect our stronger than expected first quarter revenue and margin performance and also considers the risks and uncertainties surrounding the semiconductor device shortages that I previously mentioned. Therefore, we are raising the bottom end of our guidance from $360,000,000 to $370,000,000 and keeping the high end at $380,000,000 which raises the midpoint of revenue to $375,000,000 Also due to our continued strong profit performance, we have also increased all of our profit margin metrics by up to 200 basis points. Specifically, we increased non GAAP gross margin to be 74% to 75%, non GAAP operating margin to be 33% to 35%, adjusted EBITDA to be 35% to 37%, non GAAP EPS to be 1.91 to 2 point 1 0 dollars and CFFO to be in the range of $67,000,000 to $72,000,000 for the year. Adjusted EBITDA for the full year is expected to be in the range of $131 to $140,000,000 which is up from our original guidance of $122,000,000 to $135,000,000 due to better than expected profitability and the updated revenue guidance.
Please refer to our earnings press release or to the appendix of this presentation for more details of our guidance as well as our GAAP to non GAAP reconciliation tables. So in summary, the business delivered another solid quarter. Our new products and technologies continue to enhance our competitive position, which is enabling us to maintain our strong market share. And the business model continues to perform well as evidenced by our Q1 results and by raising our revenue and profit metrics for the year. The combination of strength in our core business along with opportunities for new business from our new products and adjacent markets paints a bright future for Cerence.
This concludes our prepared remarks and now we will open it up for questions.
Our first question comes from Joseph Spak with RBC Capital Markets. Your line is open.
Very much for the question. Sanjay, I just want to sort of, I guess, off the bat, talk about how you see the market here for evolving because I know nothing changes on your current programs or wins. But since the beginning of this year, we saw Amazon and CS talk about selling the underlying access to Alexa, to companies including Stellantis, Ford moved to Android OS and that obviously comes with Google Voice. And then on the earnings call, they talked about integrating Alexa. So I know in both of those instances, there's nothing that precludes Cerence from being integrated.
But it does seem like on the next gen automakers might have more options going forward. So how do you view that development? And what is, in your view, the if you will, like killer feature that keeps know, CERN's with the automakers and potentially more important, the the the customers using CERN's services?
Sure. So, Joe, from my standpoint, you know, nothing new here. We have said from day one when we were formed as a company that we always see big tech, multiple big tech to coexist in the car. You know, it would be, you know, a bad assumption to say that, you know, that, you know, twenty two hours of my life I spend outside the car, and I have a certain digital life. And then when I get into the car, it's a totally different, you know, digital life, which is separate.
It doesn't work. Right? From a user standpoint, you always want kind of seamless. And and the second thing that we have always said, also is that the, the big tech ecosystem is not limited to one big tech company. You know?
And and I would challenge anyone to think through their own digital life and you'll get the answer that your digital life includes, you know, Amazon includes, Google includes, Apple includes, Microsoft and so on. And and so the big kind of, you know, reason for the coexist is that we work, you know, purely with the OEMs to provide the the big tech independent multi big tech experience ecosystem bridges basically through voice. Right? And and so that remains kind of, you know, the the the key interesting thing. And the opportunities that you talked about and others basically were, we if you look at our products like Connect, we're connecting to not just Apple IoT home ecosystems or Amazon or Google or Samsung SmartThings or LG ThinQ or others.
We we do it all, right, basically. And and and we we become kind of, you know, that that that bridge. Similarly, when you look at our, you know, Xtend product, it's not only for Android, it's for Android, and it's for iOS. Right? So that becomes kind of, you know, the the the interesting reason why the coexist story becomes strong.
Thank you for that. I guess my second question would just be on the guidance. And you mentioned the semi shortage and IHS is calling for the recovery in the second half, although it does seem like expectations there might be slipping a little bit. But you don't have the benefit of that December quarter that they're counting on in guidance. So I think it looks impressive here that you're able as you pointed out, raise the midpoint.
So can you just walk through maybe the offset there, what you're seeing more organically that's giving you that confidence?
Yes. So I think the increasing penetration rates, we see that continuing, that trend like in the past. And so that's not slowing down. So regardless of what's happening with short term auto production, those penetration rates not only on the embedded but also on the connected, those rates are continuing, to happen. So I think that gives us comfort that we are still growing above the auto SAAR.
Last year, for example, we had a phenomenal year. We were well, well above auto production, which was down 19% when we our business was up about 9% year over year. This year, we are forecasting us to be higher as well above what's happening with auto production. But I think it really comes down to the technology and increasing secular tailwind that we're enjoying in the auto space.
Great, thanks. I'll hop back in the queue.
Our next question comes from Raji Gill with Needham and Company. Your line is open.
Yes, thank you and congrats on excellent momentum in your business and in the marketplace. It's quite impressive. The growth that you're seeing in professional services, it's been kind of consistent and improving. Wondering how you think about that business line this year, but also in the future about growing that business, kind of what are the steps that you envision? I mean along those lines, how do we think about the margins in that business?
I know you talked about, you had been improving that. What are the drivers to, improving the margins on the Process Services line?
Yes, sure. I can start. And Sanjay, if you want to add some colors. I'll start on margin side. We are making improvements that we think are sustainable.
And those improvements are really around shifting some of the actual activities that are being done, into lower cost locations, specifically in India and into China. And we think those improvements or those changes are going to help us improve the gross margins of our pro services, which we believe will be sustainable. And as I mentioned earlier, we do plan to update our longer term, target model with some improved margin assumption for the pro services business in addition to the connected. We just want to give ourselves a little bit more time to make sure that the model the new business model proves itself out before we reset expectations on those assumptions. And I think Sanjay might want to talk a little bit about the revenues.
Yes.
So the main reason for our PS business is to strongly support our product integration into our customers' products. So we very we stay very focused on that. And those integrations are exist in the car and also in the cloud. And we continue to kind of expand our PS you know, footprint as well, you know, around all of that stuff. But but remember, our core, you know, focus is our product business, our our license, you know, the SaaS, you know, cloud services and and and so on and so forth.
So while I see PS contributing strongly, and I'm very happy for that, and I'm very proud of the PS team to improving the gross margins and so on and so forth, And also expanding as well because, you know, the car is getting more and more digital. So there are more and more integrations needed with not just voice. The interesting thing about voice and conversational AI is it's touching every part of of of the connected car. And so we do get involved in kind of, you know you know, you know, various different integrations including with, you know, vision and, you know, other new technologies which are coming into the car, other new sensors which are coming into the car. And we'll continue to do that.
And again, like I said, the opportunities are huge in PS, but we stay very focused on kind of making sure that the PS is very focused on our core supporting our core product integrations.
And Mark, there was a 39% sequential drop in fixed prepay. Obviously, that business is lumpy. Wondering how you're thinking about prepay, this year?
Yes. So prepays can be lumpy. It's concentrated. So as we've seen in the past, can go up and down and so forth. Last year, we did about $54,000,000 in prepays.
And we do expect prepays to be down, this year. Historically, we've been in that range of low 40s to low 50s. And I think we're going to stay in that range. So last year we were at the higher end of that range. This year I would estimate we'll probably be around in the middle of that range.
And so that's where we see it trending this year.
And last question, Sanjay. How do you think about increasing ASP growth for your services? And, you're obviously providing a tremendous amount of value to the OEM. You enable a myriad of applications, yet the ASPs are still fairly low compared to other services in the business other applications that are being offered in the vehicle. So wondering what are the steps that you're taking to improve the ASPs and when do you think we'll see that improvement?
Thanks.
So Raji, the core business model was set in a certain given way, you know, that the company had, you know, when I first stepped in as the CEO about, you know, almost fifteen months back now. Right? And what we are doing very systematically is to enhance that core business model. Overnight, we cannot change that core business model because that's been in existence for many years and OEM are used to buying in a certain way. The core to our increasing the ASP strategy is kind of new products and new innovations.
And I cannot be more proud of how our product management and R and D teams have executed over the last year. It was I hope you had seen the set ins in motion event, which was we brought all of our kind of new product and innovations out. And these are not just product announcements. As we mentioned, we're getting we already have multiple design wins on these, which will show up as kind of increased ASP and increased revenue in the coming quarters and years basically. So it's the cycle is slower given the way auto works, right?
But having said that, we're trying very hard to bring in kind of our apps business online to contribute revenue earlier, right, and faster. We're making progress and we're working very hard for it.
Great. Thank you.
Our next question comes from Mark Delaney with Goldman Sachs. Your line is open.
Yes, good morning. Thanks for taking the questions. I was hoping first to follow-up about the coexistence with big tech companies and you talked about seeing good evidence of that. But I was hoping you could elaborate a bit more and talk about how you're seeing your content per vehicle trend when you are in one of those coexistence types of situations as opposed to being more of a standalone technology. Because I think the question is about what sort of price you can get for your technology, if there's other services also being offered at the card.
I realize the company is doing a lot of new technologies and those are additional monetization opportunities. So if you could help investors sort those out perhaps with some examples, that'd be helpful.
Sure. So we have not seen any major swings from a coexistence standpoint. And Mark, you can jump after me as well. I'm just thinking loud here. Basically, looking at almost a dozen cars or so that we coexist with a big tech or not.
So we've been able to kind of maintain our pricing position with the value added by us and then by our products. And then kind of the strategy mark is to obviously expand with all the new cloud services and apps and other offerings basically. There are some new discussions happening, couple of OEMs, which are also from a coexistence standpoint and those are a little too early for me to comment on kind of what the pricing impact would be. Obviously, our goal would be to kind of maintain and enhance, right, of the core tech and also the expanded products and technologies. Mark, anything you want to add, please?
No, I think Yes. Yes, think that's accurate depiction Sanjay.
That's helpful. Thank you for the comments there. And then for my second question, I wanted to better understand the growth in billings per car, which was very nice at the 20% growth. But you mentioned you changed the calculation about how you're coming up with that figure to be a little bit of a different time period. So would you be able to provide us with how that metric would have looked last quarter if you'd reported it under this current methodology?
Thank you.
Yes, we certainly do that. The only real difference is that, last year we were using fiscal year to date versus the prior fiscal year or fiscal year 'nineteen. And the reason why we did that is we didn't have the specific data back in fiscal year 'eighteen, so we could only use fiscal year to date information and comparing it to fiscal year 'nineteen. Now that we're into the new fiscal year, we can use a trailing twelve month versus the prior, trailing twelve month period. And so now we can compare it that way.
But and so, yeah, we can last quarter was exactly the same answer because it was the full fiscal year. So we used fiscal year 'twenty versus fiscal year 'nineteen. So the actual measurement or the result would be exactly the same as what we reported last quarter because it was trailing twelve month versus the prior year trailing twelve month.
Got it. Makes sense. Thank you very much.
Yes.
Our next question comes from Chris McNally with Evercore. Your line is open.
Morning, guys. Thanks so much. Maybe two questions. One to Mark on just the model and then Sanjay, we could talk a little about the long term. I guess, Mark, what we're trying to figure out is you used to have that great rule of thumb of 10% to 15% growth above production.
It seems like with production moving around and obviously such a different growth rates in Connected and Professional, that may not be the case anymore. Is there any way that we could think about any rule of thumb for the outgrowth going forward, even if it's on an annual basis, just something rule of thumb? Because obviously, you're going to grow a lot above, but, it seems like it moves around year to year. So just would love if you guys have thought anything like that through.
Yes. That's a tough one. It does move around. Last year, we had a 28% or 28 spread, so well above the 10% to 15%. It's almost like looking at trends, right?
And if you look at the last four or five years, we've been consistently above. We still think that's the case going forward because the penetration rates are not slowing. I think last year, because we were so far above, it just makes this year a little bit tougher for compares, right? So we're probably a little bit under that spread, but still above what auto production is going to be doing. Clearly, still better than that.
But maybe not quite as high as what we've seen historically. I think it's just going to ebb and flow. There's few things to consider, right? One is prepays, we're planning to be lower this year. So that's going to have to be reflected in that spread.
The legacy our legacy connected business, that's a flattening effect this year. As we all know, that program is coming to an end. We're not projecting any year over year growth, for fiscal year twenty twenty one for that business versus fiscal year twenty twenty. It's flat. So that has an impact as well.
So it's hard to give you a specific rule of thumb if you will, because it's a combination of many different factors that will ebb and flow. But I think the underlying, fundamentals of the secular tailwinds, that remains intact. That's where the penetration rates are continuing for the embedded and the penetration rates are continuing for the connected. And so that's what I would suggest you kind of focus on is those penetration rates.
No, that makes sense. And I think going forward, we almost sort of have to think about the license business as really the only business that we can do the rule of thumbs. And even there, we'll probably have to sort of take into account the year over year compares for the prepaid. So that makes sense. And then Sanjay, I know you're going to update later in the year on 2024.
I think we're all looking forward to that as it seems things are moving in the right direction. Could we maybe just focus on sort of the longest term aspects of the 2024 guide, that 75,000,000 that you had given looking at these future drivers, things like car life and severance pay. Could you just talk about your confidence in that one sort of line item? Do we have enough visibility out so that we booked that much business out to 2024? Or the pipeline looks extremely encouraging?
Just curious, given the long term nature and the potential there, how much visibility do we have now versus sort of we still need things to unfold over the next couple of years?
Yes. So in the last quarter, we booked two deals, which will contribute revenue to that line. So these are real bookings. We don't break them down from a number standpoint, but they are significant bookings, right? So that was good.
At least it had started now, right? This current quarter, we have a strong pipeline, and I'm expecting more than two deals that will be booked this current quarter that will also contribute towards that revenue line. We expect small revenues in this year. This year, we are only assuming very little contribution from that, but then obviously kind of as more and more cars ship with the apps and the new connected services, the revenue goes up. So as of now, I'm feeling confident about the progress.
Chris, it is hard work. We're working extremely hard and very focused to kind of take work step by step with every OEM to kind of bring these new capabilities in.
Great. Thanks guys.
Our next question comes from David Kelley with Jefferies. Your line is open.
Hi, good morning, guys.
Maybe just wanted to start with the Stellantis announcement. Can you give us a bit more color on the technology relationship there and then maybe how you're thinking about the size of that incremental opportunity?
Sure.
Mark, I'll start and maybe you can jump in on the to answer the size and all that. So the opportunity was basically with the official statement that we got clearance to mention just few hours back was Cerence has extended its partnership agreement to the cars of next generation of Stellantis. I'm reading it from the email from the comms team. So that's the official statement that we're allowed to say at this stage. It's their next gen platform.
You know, I can't go into the details of it because, you know, obviously, it's for them to announce. Right? And and so that's the reason I'm having a little bit difficulties, David, to kind of, you know, go into more specifics. I want to, but I can't. Right?
But, you know, we're extremely proud and happy to be brought in because this was, one platform that we had before Cerence was formed. When Cerence was still part of Nuance Auto, we had lost it to a competitor and we're just honored and extremely proud to be brought back in in the NextGen. Mark, I don't think so we can talk much about price. Right?
Yeah. Yeah. Unfortunately, we can't get specific on any one particular customer unless we get their specific, approval or okay. And at this point, we don't. With that said though, it's a win that we feel is notable.
We feel that because it was a win back, you know, that in and of itself is notable. And just given, I think,
Okay. That's all fair. I thought I'd give it a shot. And then maybe switching gears to the Nazebo announcement. You referenced the quicker bookings to revenue cycle.
Just curious, maybe high level, if you could walk us through again, you don't have to get into specifics here, but how the revenue structure of that business would work? I'd assume it's more of a transaction basis, but just curious to get some color around that would be great.
Yes, can start. And Sanjay, I'm not sure if you want to fill in any blanks. But it's like you said, it's like a revenue sharing or transaction based approach, and it would get funneled through the Xevo platform. And so, our arrangement would be with Xevo. And so they would be managing those relationships.
They would be doing the administrative work or what have you. And then as those transactions occur out there in the marketplace, we would get we would get a portion of our piece of it. And so it's a it's a revenue sharing type of arrangement based upon transactions. And then we would get paid by, you know, from by Zevo on that transaction. Okay, perfect.
Thank you. Sure.
Our next question comes from Jeff Van Rhee with Craig Hallum. Your line is open.
Great. Thanks for taking my questions guys. Just outstanding execution here just continuing a really solid performance. A couple for me. I know you don't quantify as it relates to the bookings or you do periodically, but can you give us some color even quantitatively about the bookings this quarter?
Any observations I think about the size, scope sort of different twists to what you booked or what you thought you'd booked? And along those same lines, same thing on pipeline. Sort of talk about the pipeline composition. Obviously, you have a lot of new products. I suspect you'll have some commentary about some of these new products you already have starting to fill the pipe.
But any other observations, edge connected, places you're succeeding, things that are lagging, maybe those two critical pieces maybe a bit more color?
Mark? Yes. So yes, you're right about bookings. We don't do it quarterly. And we mentioned this, I think, last year.
And as a reminder for everybody, we give midyear update, for our bookings and then fiscal year end update to our bookings and our backlog. So we're going to stick to that because bookings can be lumpy from one quarter to the next, and we think that's the right practice. But not do it once a year, but do it twice a year. And so with that said, I think we'll defer our commentary on bookings until our next earnings call. However, pipeline remains strong as we continue to expand our product offerings, and also into adjacent markets.
And that is naturally expanding the number of opportunities that we have going into our pipeline. And so that's the color I can provide at this point.
Maybe win rates on connected deals, can you comment on that?
Yes. I think the win rates are unchanged. We're not seeing any difference from what we've seen historically.
Fair enough. Then just last one on the PS side. Obviously, very good number there and very good leading indicator for what's really going on out there. From a utilization standpoint, where are you with respect to the capacity organization?
Sanjay, I don't have that number handy. I'm not sure if you have it.
We're about running close to 80% utilization. So utilization has defined billed to billable and, you know, billed to available. These are the two numbers we track, Jeff. Right? Mhmm.
So billed to billable and billed to available, and we are in our eighties. There's there's a more few by the way, few more percentage points that they can improve. Right? So, you know, with the appointment of Sujal, who's our new PS head, you know, he comes from Harman's, PS organization and he understands this extremely well. So the trick of improving the gross margin, there are two things.
Number one, to look at the COGS. So basically, kind of use as much offshore as possible in the right mix of offshore and onshore. So improve the COGS. And the second trick is to improve the utilization. So those are the two things that he's focused on.
Okay. One last brief one, I could, COVID. What are your assumptions now? I know some you mentioned some cost return clearly when you come back to more normalized environment. What are the assumptions in the model with respect to coming back?
What magnitude of sort of back in the office do you ultimately expect? And any thoughts on timing?
Yes. So we did have some significant cost savings last year. We're starting to bring those expenses back in. I think for Q1, we were a little bit behind our hiring plan. So that was part of the benefit in Q1 as it relates to the margins.
You're going to see more incremental of those expenses coming in Q2, probably about the same magnitude in Q3 and then things are going to start to level off as we get into Q4, probably still going up, but not at the same rate. So by the time we're finished with this fiscal year, I would expect all of those COVID savings that we took last year to kind of find their way back into the P and L along with the removal of the hiring freeze, which was really a cost avoidance that we had last year. And so we will net net have higher headcount relative to last year because we unfroze that hiring freeze. However, we did say that on the gross margin line, Connected and Pro Services, some of those expenses, we think are not going to be coming back just because we're making some sustainable improvements. And we'll be giving you an update to that long term model in the coming months.
Sounds good. Congrats on the performance. Thanks.
Yes. Jeff, but I just want to add one thing that you know, I'm just extremely proud of our team of how we're executing on on profitability. I tried to say that in my comments as well. You know, mean, there is you know, I mean, you you can compare us to, many other companies and kind of delivering 42% EBITDA this year and then increasing the guidance for the whole year. Just very proud that we're able to deliver profitable growth.
That's something that Mark believes in, I believe in. And we're just proud that our team is able to deliver to that.
Yes, absolutely. Thanks.
Our next question comes from Michael Filipov with Berenberg Capital Markets. Your line is open.
Hi, good morning guys. Thanks for taking my question. Just one quick one really. I believe originally your 2024 outlook wasn't baking in much in terms of renewals on the Connected Services side. So I was just wondering if you have sort of any better visibility into sort of the expected renewal rates on the Connected side and sort of where those renewals stand today.
Maybe you could remind of when a bulk of those renewals will start to happen.
Yes. So we you're right about our model. We were conservative, and we didn't factor in any renewals in our 2024 model, mainly because we just didn't have any data points. So far, still have that one that we announced last quarter. So that's really the only update that we've got, which we provided last quarter.
I think as we get more and more over the next year or so, we'll get more comfortable as to what those renewal rates will look like. But I think with that said, the consumer is wanting the cars to be connected. So I think just the demand and the adoption rates, that KPI that you saw on our slide deck. As those trends continue, I think the consumers are ultimately going to be pushing for connected car and for that connectivity to continue. So I think that should bode well for us in terms of the future, ability for these renewals to come to fruition.
You know, I, Michael, I, just completely coincidence. You know, I, drive a twenty seventeen BMW, and, this weekend, I did personally. I, you know, paid BMW two hundred and twenty five dollars for a package to connected services package per year to provide connectivity into my car. Right? This is this weekend.
So I can, you know, share my transaction with you. And and and and, you know, if you go to connecteddrive.bmwusa.com, you will basically see kind of the packages that they have for, you know, various different connected services. And I bought the there's a $50 1. There's a, I think, hundred and 50, and then there's a $2.25. So I bought the $2.25 package because the connectivity in my car was had expired as part of the new car purchase, right?
And it's a yearly
subscription. I appreciate.
That was great color. And I know you provided some of the moving pieces around, pro services revenue and some of that was pulled forward into Q1. But maybe if you could talk about sort of the growth expectations for new Connected versus the variable revenue in Edge and what's really driving the growth in the updated midpoints of your fiscal year guidance? That would be helpful. Thank you.
Yes. So the new connective, we see that continuing. The growth trends there continue to be good. And in pro services, we had a very, very strong year last year. Year over year, it was up 55%.
Part of that was driven by an acceleration of some PS revenue into Q1. And so I would expect for Q2, the PS revenues to be down, because of that, and that's been reflected in the guidance that we had given. But I think year over year, should
be up as well.
And so I think on all fronts, whether it's the license business, connected the new connected business as well as our PS business, all of those businesses, we expect all of them to be up year over year. And so, all that's been factored into our guidance. We haven't gotten more granular on the specific revenue streams. But at the corporate level, that's how we kind of build up to our total guidance for the year being plus 12% to 15% year over year. And each one of those individual business lines we expect to be up as well.
Got it. Thank you very much.
Our next question comes from Dan Ives with Wedbush Securities. Your line is open.
Hi, this is Strecker on for Dan. So with just the recent GM headlines in electronic vehicles and then just the massive EV push overall. Can you, Sanjay, talk about how that just plays into the Cerence growth story potentially over the next couple of years? Thanks.
Yes. So as you know, we have announced many, many GM many, many EV partnerships over the last many quarters, right? And from our standpoint, the core assumption in the thesis of what we do is that the car is getting more digital, which basically means it's getting more connected, more electric, more autonomous, more shared. And the user interaction using AI is going to play more and more important role. That's the core thesis behind Cerence.
And as you saw in my slide that I presented to you at Cerence in Motion and also in the earnings today, we are really focused on driver AI, cabin AI, road AI, right? That's our focus because our core assumption is that the car is getting more digital and connected and electric. And with that, basically AI is going to be play a very important role in the driver interactions, in the cabin interactions, in the road interactions. And what we want to do is basically be a premier company focused on providing, the AI platforms for that. That's our core thesis.
Thank you.
There are no further questions. I'd like to turn the call back over to Rich Uganian for any closing remarks.
Thank you very much and thank you for joining us on the call this morning. And we hope to see you at one of our upcoming conferences over the next few weeks. Thank you and have a good day.
And gentlemen, this does conclude the conference. You may now disconnect. Everyone,