Cerence Inc. (CRNC) Earnings Call Transcript & Summary

It is time to start our Investor Day this morning. Thank you all. This is -- my name is Richard Yerganian, I'm the Vice President -- Senior Vice President of Investor Relations for Cerence. And 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 [indiscernible] into the future. Next slide please. So from a forward-looking statements perspective, as always, 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 that ones associated with Cerence. We are the spokespeople for the company are myself -- official spokespeople and myself Stefan Ortmanns, our CEO; and Tom Beaudoin, our CFO. As I said, we will be making forward-looking statements throughout the day today. We're not obligated to update those statements as you are aware. And please refer to our 10-K for any review of the risk factors that we have associated with our business. We will also be referencing certain performance indicators. And 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 '22 earnings. We are -- 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. So if you'd like to download that and follow along, please encourage you to do so. So for today's event, we have agenda that I'll go through now. The one thing I want to say upfront is that we are holding questions and answers until the end of the presentation. So please write down your questions, and we'll be happy to take them once we conclude the prepared remarks. We're going to start out with, Stefan will be coming up and kicking off the event with a few comments to start off. And then following that, Tom will -- Tom Beaudoin, our CFO, will come up here and review our Q4 and fiscal '22 results. And then Stefan will come up and lay out what is Destination Next mean for Cerence moving forward. And from a market strategy, from a product strategy at a high level, where does he expect to drive the company into the future. And then 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. And then Prateek Kathpal will go into the -- a level of the technology beyond the strategy that Stefan lays out for everyone and then Tom will come up and talk about the financial plan, which I'm sure is probably all you'd like us to skip to. But he'll come -- he'll talk about the multiyear plan and how we see things progressing for the business moving over the next several years. And then finally, as Stefan will come up with a few closing remarks and then we will move to Q&A. So with that, we will move to the next part of the agenda, and I'm going to invite Stefan to come up to the stage. Stefan, as you may know, has been CEO for under a year, but has helped the company go through very significant change that we're all excited about. His background, he's 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. So 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 the mindset in terms of how are we working together, how are we going to delight our customers and the market. And we have made tremendous progress over the last couple of quarters. And for example, we have established our strategic plans to optimize the structure, processes and our product portfolios, hence, driving huge savings. And also with respect to product, 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. So conversational AI is all about voice. Mobility AI is a superset, meaning it includes gesture, for example, vision. It includes also functionalities like wellness sensing. It includes also audio interaction and also the link with the surroundings of the vehicle. That's very important. And innovation matters. As you heard from Rich, I have a strong background in products, technology and innovations, right? And I'm also very well connected with most of the OEMs across the globe, including the Chinese OEMs. And when talking to all of them, I think we have fully aligned our strategy with their needs in the future. So -- and 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. And this means with more innovation and also going into adjacent markets like 2-wheelers, recreation vehicles or trucks we are expanding actually also the addressable market. So we're creating actually more value for the cars, leading to an increase in price per unit. And to give you also a concrete example, based on signed deals. By the way, we had a great quarter with huge bookings. Year-over-year growth was 16%. And when looking at those bookings and comparing FY '23 with FY '24, there is an increase of about 25% for PPU. So nevertheless, FY '23 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, and we have a strong backlog. And 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. And as you know, we had some hiccups over the past, but now I'm pleased to tell you that I've really experienced great leadership team in place with an absolutely fantastic team spirit. You see, for example, over there, Jennifer, and then we had 2 important new members for my ELT, namely Nils Schanz, who is the new Chief Product Officer; and Bob Ligon, he's 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 as a guest speaker for Mercedes. He is responsible for the great quality of MBUX. And 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. And it's hard to find those talents with these kind of expertise and deep OEM knowledge. So 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. So we have a great working relationship, and I'm also excited to have now Bob Ligon with us as a 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. And I think with Bob, we have now a great leadership team. So 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. So overall, I'm very thankful now being in this position here, and I think we have really a great future in front of us. Now with that, I would like to ask Tom to join me here and Tom will walk you through our Q4 and FY '22 results.

Thank you, Stefan. First of all, thank you for joining us today. This has been a long-awaited opportunity to share some of the things that Rich 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 as the CFO in early May, I've been focused on developing a partnership with Stefan 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 '23 guidance, which reflects our transition year associated with the strategic change to fixed contracts and our multiyear targets for FY '24 to '26, 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 FY '22 revenues at $327.9 million with, as Stefan said, very strong bookings, 16% growth year-over-year at [$684 million ]. We achieved above the high end of our Q4 guidance in many of the key financial metrics with revenue at $58.1 million. And 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. Q4 was -- this is a track that we've been providing to help give transparency to the elements of revenue. Q4 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 2 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. And two, the impact of low auto production over the last 2 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 FY '26 where it then is finished. So to get into some of the details around license revenues. And again, this is the format that we've been providing in the last couple of quarters. Again, I'd point out there were no fixed contracts in Q4. Pro forma royalties remains quite strong. And 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. And 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. So if you look at the blue line, we are always about around 50%, sometimes a little higher, depends on model deployment by the autos -- by the auto industry, but very consistent at just over 50%. And then we took a look at how we correlate to industry production. So cars with Cerence technology, which is that kind of magenta line is the cars that are produced each quarter with our technology and the red line is the overall auto production, and we indexed this back to kind of Q1 FY '20. And you can see that it's, we're slightly above the line in most quarters, which I think is quite positive. We remain -- as Stefan talk, we remain a preferred solutions provider to all the OEMs and Tier 1s. 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. And 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 period. On a Q4 FY '22 to Q4 FY '21 basis, we were actually up 15%. And so I think the trend is quite positive. And 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 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. And this is an important aspect because as I said at the beginning, we are moving or expanding also from conversational AI to mobility AI. And it [ spans ] actually the entire cabin so from cockpit to cabin and the surroundings of the car, right? So 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, and we are building all this stuff together and bring a really immersive, truly immersive incoming experience to the world, to our OEMs. And we have already signed deals about this. Now when looking at the new feature set, right, it's much, much broader than, for example, as Cerence Assistant right? And this will also advance us to generate higher ASP and also to participate in a much, much broader addressable market. Now this is the way we lead. It's with a global reach, global footprint. It's very important with strong vertical expertise. So we know the automotive market. We know the transportation market, and we know what the OEMs are expecting from us. More than 450 million cars are using already Cerence technology on the road. More than 50% of all newly produced, newly built cars are leveraging also Cerence Solutions. And you see also that our innovation is also reflected in a very extensive patent portfolio. 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. So that's the foundation. And what you see here is actually our, I call it, ecosystem. There is a strong need for conversational AI. We all know this. And there's a huge appetite also for new AI-based application driving the so-called new user experience in the car. And you see here various circles, the inner circle here is all about the new EV makers. And it's really amazing what those guys are driving with respect to the in-cabin experience. And 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. And then 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? And then finally, we have the circle with all of our, let's say, first-tier suppliers and partners. So what you see, we have very diversified network of customers 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. And 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. And for example, with NVIDIA and Qualcomm, NXP and others, we have so-called pre-integrated solutions from us. So if you give us a chipset, we can do it within a few days, actually, to complete Cerence Assistant. We are working, for example, also with Infineon on exterior microphones. Just think about doing the communication from outside the car, opens a window, opens the door, secured by my voice, by voice biometrics or face recognition. And we are working also closely, for example, with Sirius XM improving their models here, the underlying knowledge models here. So 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. Now this is our first testimonial from NVIDIA. So we're actually a strong partner and you know these semiconductor guys are also important for the automotive world. So one of their key customer is, for example, Mercedes, it's 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. But first of all, let's listen to Ali Kani from NVIDIA. [Presentation]

[ Of our ] time, it's transforming virtually every industry from health care 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.

So again, it's a very important partner, such as Qualcomm, NXP and others. And as I also said, our platform is -- our solution is platform-agnostic, meaning independent of the underlying hardware and operating system so that we have all the flexibility. So since the spin-off, we have made a lot of innovative products in our core segments. I'm not going to through all of these here, right? But the typical process with an OEM is we have some discussions. We're doing joint road mapping with our key partners. Then 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. And 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. And this is just one example. This is our so-called Cerence Co-Pilot. We have signed last fiscal year various deals with key OEMs, for example, Renault, Toyota and others. And you know I cannot share everything here. But this drives also our revenue, which will be shared by Tom in a bit. But 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. You need to have such cool features in the future. And with the so-called facelift and SOTA opportunities, we are driving additional revenue streams. A good example is, for example, Volkswagen yes. So this is actually the 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? And they made a clear commitment to Cerence, where they say, okay, in the past, they use some of our components and it did a dialogue somehow on top. And 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 2 seconds. It should be the response time. And what they did, they actually started with the ID.3, that's their EV car 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? And yes, just listen to him. [Presentation]

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. So 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 right comfort. Responses are delivered in just a few seconds. So we are looking forward to continue our collaboration to deliver premium level performance today and tomorrow.

So that video was done by Volkswagen Marketing, right? So but I think I like the video very much. But he said also it takes a couple of seconds right or few seconds, right. It has to be in 1 to 2 seconds at max. So but other than that, right, that's, again, a great partner of us and we're really thankful working with Volkswagen, but also with Audi, with Porsche and others. So 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. And 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 the 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. So we worked together with a well-known consulting firm -- they did for us more than 50 interviews with OEMs, first-tier suppliers across the world, North America, Europe, Japan and also China, which is a very important market for us. And 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, strong partner or; b, we need to think about M&A activities. So for the next couple of minutes, we are just focusing on organic place here. And again, you see also that this is an evolution. But 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. But equally or even more important is that we can use this scalable AI assistant or a stack for adjacent segments like 2-wheelers, trucking or recreation vehicles at more or less no cost. And we are also expanding this solution by teachable AI. Teachable AI means that we are learning from the users, and then also updating the system on a regular basis. And regular basis means here, our KPI is once a week. I've mentioned already digital twin, multisensory inputs. You will learn much more from Prateek in his session about this. But what you see here is right that we have really six players, organic plays, which are important to us. There is actually a 7 one that's development tools because also some of OEMs want to add some new features to it. And we're sharing also our platforms with them. So that's the foundation. Again, we are focused here on these 6 organic plays. So and what does it mean for our business in very concrete terms. Now we have also assessed the addressable market. And just let me focus here on the [ SURF ] market, 2023, EUR 3 billion. This includes also the adjacent markets, so the 2-wheelers and trucks and so on. We have just started here and it doubled by 2030 to EUR 6 billion. We have also established a new team for AIoT, A 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. Now core to this growth is the creation of the Cerence Immersive Companion. You see here that's really an evolution. We started here actually with core technology, then we said, okay, that's fine. but we need to move towards the Cerence Assistant, then we have much more control about the behavior and about the excellence of the experience. Then we launched already Cerence Co-Pilot. You see here NOMI that's a solution from NIO. And as I mentioned also, and also, Tom, that we've signed a couple of deals based on these new technology stack. And from here, we are moving actually to a smart living space in motion. And here, we're adding all the new features and technologies and Prateek will talk later about it. And this experience will be pure, intuitive and sophisticated. It's really a new novel solution, which we are sharing with all the OEMs and 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. So first one is scalable AI underneath, we have all the technology. Then we have the platform. I call it actually this is a multisensory 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. And then in the middle, we have this immersive cabin experience. And 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. So this is actually the basis and let me also go -- let me also introduce you, Nils, most of you know Nils. I've met William Li CEO of NIO and Mark, a couple of weeks ago in Germany [indiscernible] September when they had the European launch event. It was a big event. They created really a well-designed car, very flashy. And we had 4 or 5 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 was open, and you were sitting on the co-driver seat. So the window was open there. And 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 and had a similar discussion also with the CSO of Mercedes. And they said also, we need this. So let's listen to Mark. [Presentation]

NIO was founded in November 2014, with a mission to shape a joy for 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 but it is much more than a 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 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 underway. All of this is powered by [ Sirius'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. So as you can see, the future of the car is nearer than you can think but the basis for this is actually our Co-Pilot, right? So I told you a couple of minutes ago, that was innovation for Co-Pilot. Now we are focusing on the next generation of innovation. And also here, I think we are clearly the innovation leader in the automotive market. And the OEMs, they trust us that we deliver new innovation and the trust us also that we deliver high-quality products on time. It has to be in line also with their production road map, and we never missed an SOP. [Presentation]

As you can imagine, all of this new innovation gives us a lot of opportunities, right? So clearly, I think we are increasing the value for OEMs, yes. Then we are also expanding our leadership in mobility AI and also, thirdly, I think we are participating in a much, much broader addressable market, as we have seen before. And I can just reiterate what also Tom said, we increased actually already the ASP by 25% and comparing '23 with '24. So let me also wrap up here, my first part. So we said, okay, we are going to lead this organic plays. 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. And 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 '23 is a transition year for us. Nevertheless, we have a great strategy in place. We have a great leadership team in place. We have deep engagements with our OEMs, and we have a strong booking. So overall, I think we are in a very good shape. And even more, this shows also our competitive strengths 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. And now I would like to hand it over to our Chief Product Officer, Nils Schanz.

Yes. 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 first-hand 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 want to share with you why I have joined Cerence and what critical role Cerence has played when we developed the MBUX system together. So 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. But 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. So 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. So we have from [indiscernible] design system together and deeply integrated these technologies into the stack of this car. So you might ask yourself why I have joined Cerence now, and I want to explain it with a simple example from my side. So 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 2 options basically. One is they take a predefined package from one of the tech giants with all its limitations; or 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. So 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 want to monetize their data. And I believe the OEMs who missed that they will end up as just being a hardware manufacturer. So it's really strategic and key for the OEMs. And I know this firsthand, looking at the road maps from Mercedes-Benz. I think this is just a starting point, and 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 want to 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. And 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. And with that, I hand already over to our CTO, Prateek, who will talk more about how Cerence is powering the immersive companion experience.

Thank you, Nils, and welcome to the team. As Stefan mentioned, we're well on our way to Destination Next. I'm Prateek Kathpal, I'm CTO at Cerence. I've been here for, at Cerence for about 3 years. And my background is a 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 and I have also founded companies which were successfully acquired. Now in the last couple of years, a lot of investment has been made, and we have done a lot of progress, both in terms of technology and building relationships with the customers. So a decade ago, 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? But it has not been possible in the past. But 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. So Cerence journey. It began several years ago with a voice assistant. At that time, the core technology being used as part of the voice assistant or the interactive voice assistant was natural language understanding. The machine learning was not really available and not really visible at that time. But 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. Now 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. Now 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 users preferences all together to create a more personalized experience for the users. Now 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? Now 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. So it will invoke itself, give a certain notch to you and say, Hey, probably you should have stopped a little bit longer there, right? Or 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. So next time, when you are not busy at a time, it can just simply say, hey, you should have stopped at such and such intersection for a little bit longer. And so 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. Now Cerence Companion uses a 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. So what does teachable AI mean, right? So think about this. You are -- you -- for example, you say in the car, Hey, tell me turn on a relaxation mode or I want to relax, so turn on relaxation mode for me. Now the system can respond by and saying, teach me. Tell me what does the relaxation mode means for you? What does really relaxes you? And you could respond by saying turn on the ambient lights, so put some slow music, roll up the windows anything that relaxes you, right? So next time, when you -- so the assistant learns about this, -- and next time when you say the same thing, the Assistant can go ahead and perform that action on your behalf. So 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. Now and immersive companion can play many different roles, right? It could be an executive assistant for some who -- an executive assistant could be someone 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, 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. So let's hear from Renault, who is one of the automakers who is bringing this companion experience to life. Let's hear from Luc Julia, the CTO at Renault. [Presentation]

Avatar basically is more than just your voice assistant and it is going to be read [indiscernible] right? So it's going to be with you more than just in the car. And so it's going to learn more about yourself over your life. And so we need to have a technology that is going to be much more going towards artificial intelligence than just recognizing the world. So it's really a big step towards something that is going to be more than just the voice assistant. So because of the experience that Cerence has for the past 2 years in natural language and analysis of the goals of what people want to do. I mean, it's more than just [indiscernible] the world, right? So it's also recognizing the intense and all natural language speech and [indiscernible] and all the experience that Cerence has for the past years in doing this piece is really a big help for Renault that is putting that into account, right?

So the voice over here on the video was a little bit hard to hear. So if you didn't get the concept of basically what Luc Julia over here was referring to was the Avatar, the digital avatar, the Renault is adding to the car very similar to what Stefan was talking about, the new Avatar. How Renault is combining the Cerence Companion along with Avatar to provide a much more intuitive and integrated experience in the car. Now voice in the past has been a very disjointed experience, right? It has been very reactive. So you will ask Assistant a question and the assistant would respond. But the future of the voice is actually a very proactive and teachable AI-based multi-modal experience. So it combines the voice, the gaze, the gestures altogether. 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. Now 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. Now 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. Now the AI models itself from Cerence, they're 16x more compressed than any other market competing algorithms. 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 [indiscernible] well deployment, and it's faster in performance as well. Now Cerence also offers the OEMs the flexibility in this architecture to choose any components that they need. Now one of the components in automotive, while you're driving well navigation is the maps, right? So 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 at 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. And to achieve that, we need a strong partner like Cerence who could provide that voice technology for those different regions. So with that, I'm looking forward to the continued partnership between our 2 companies and their continued success.

Okay. So 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. So in fiscal year '22, we shipped 41 million vehicles with the Cerence Technology, which is a 51% penetration rate as such. Now 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 and the active users are up 16% year-over-year. Now if you look at the Cerence architecture, it's a rich portfolio of 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 an extremely complicated set of technologies, AI models and algorithms. Now 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. So 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 speed signal piece as well as the speech recognition layer. Then there is the connected vehicle platform layer, which acts as a glue between the cloud and the edge, but also what it does is that it gathers all the data from all the different components and put that into what we call as a digital twin, which allows you to run analytics and insights on all of this. And then we provide a lot of package solutions and applications on top which includes things like productivity or so you can, for example, take our teams meeting in the car or sing or karaoke or ability to open your garage so what we call as Connect -- garage connect. So all those applications and packaged services are available as part of that, to provide you a one singular solution, which can be deployed in so many different ways across a different set of vehicles. So whether you are choosing -- whether the OEM is building a high-end hardware application or a low-end head unit. The [indiscernible] student stack can actually fit all of those different architectures all at the same time. Now another key component as a part of this is the Cerence audio AI stack. which includes speed 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+ cars. Now if you think about it in a car, there's a lot of different kinds of noise that you get, right? There could be a road noise. They could be an engine noise, a traffic noise, so -- or even the fan noise, now 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. And then 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. Now let's look at the next video on how Cerence audio AI technologies, they accompany the drivers through their daily journeys. [Presentation]

Now as Stefan mentioned, the Cerence Companion Foundation stack, it inherits the key attributes from the Co-Pilot. So 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, so 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 have -- they get a deeper integration into the vehicle as a part of the companion experience. Now 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 that data back into the car to create a much more immersive experience within the car. And then finally, there's 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. Now the same foundation stack over here is applicable to the -- what we call as adjacencies as well, so adjacent markets. So it is available, obviously, for automotive, but then for two-wheelers, the trucks and the RVs as well and 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 handle wheel -- on the handle bars, but get a very connected experience for controlling the navigation, the media, the music or any other command and control of the vehicle. So companies such as TVS, Harley-Davidson, even Mercedes-Benz Sprinter vans and Daimler Trucks, they've all adopted the Cerence Solutions and; Cerence platform to elevate the experience of the drivers. [Presentation]

So 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 personalized experience for the users. And it also has the ability to reduce the cognitive load on the brain. Now as I said before, there's a lot of different data, which is coming in the cars. You could have your data coming in from your phones, your profiles, from your apps that you're using but 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. So 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 or 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. Now the Cerence AI technology is improving to a level where our AI engines can even do real-world conversations. Right? So we have all received those mortgage loan calls or the sales calls, and we can immediately tell it's a prerecorded computer-generated voice. But what we're going to 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. So the Companion that you're going to hear right now, it makes a conversational experience as natural as possible so 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. So 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 a 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. [Presentation]

Isn't that Amazing. So 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. So apart from the AI technology, one of the key reasons that we win is because of the flexibility in our delivery models. So 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. But 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've already done. But at the same time, there is those new [ EVs ] 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. And 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's one of the -- 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. So not only do we offer the solution flexibility, but we also offer the OEMs the capability where the data ownership resides with the OEMs. Now data as they call today is the next fuel in the car, right? And the OEMs have already realized this as well. So 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 with third parties to build contextual applications outside the car as well. So as you can see, the technology, the deeper relationships that we have with the OEMs and the deeper expertise in the AI set Cerence on the path to Destination Next. With this, I'll invite Tom to come over and talk about the financials.

So I think [indiscernible] what you want is right here. 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 '23 represents a transitional year as we consume a lot of the previous fixed contracts so for FY '23, we 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 '23. And then we'll have a minor impact as we head into FY '24 and beyond. Managing fixed contracts to $40 million allows us to support mostly a small number of Asian Tier 1s 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, and they also understand our business. Along with this effort and an effort that we drove internally, as we developed our FY '23 plan and multiyear 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. So I'd first like to get into our FY '23 guidance, and then we'll get into the multiyear plan in a couple of minutes. Our FY '23 full year guidance is $270 million to $290 million, with Q1 revenue guidance of $75 million to $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 the current -- 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 percent guidance is 10% to 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 '24 targeted license 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 Prateek 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 '24 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. And as you can see, quite significant growth in PPU as those autos start to ship after those launch dates leading to almost $1 increase on average from FY '23 to '24. And that's one of the big drivers as long as additional volume from those programs kick in starting even in FY '23 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 to 3 months. We are moving to reporting 5-year backlog, which we believe provides investors with better visibility to our backlog conversion process. Our 5-year backlog at the end of FY '21 was about $1.3 billion. The FY '22 5-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 '22 to enhance and redesign some programs. We had previously won and were included in prior bookings and backlog. We adjusted our ending FY '22 backlog to reflect these changes. I would point out that we are in final negotiations with these OEMs and expect to be awarded the redesign programs in FY '23. And I would also point out that we have current funded professional services projects related to these projects, which gives us, I think, a high confidence that we will win those redesigns when they were awarded in FY '23. 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 over the -- through the multiyear planning period. So this is 4 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 request. 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 the -- as that goes through POC, percentage of complete, that will add to our revenue in FY '23. Additional to -- additional professional services request when you get the out years of '24 to '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 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. So 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. So for now, our bookings will only include our transportation markets, auto and adjacencies. This is my favorite chart, not for FY '23, but for the future. Post FY '23, we returned 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-ish-percent 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 presentation. This is a 6-year financial model, 2 years of actuals, our FY '23 midpoint guidance and then our targets for FY '24 through FY '26. 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.

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. And 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% plus. 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. And this is actually Destination Next. And with that, I would like to open the floor to questions. Thank you. Rich?

[Operator Instructions] So with that, just see if we have a question online first. So yes. So the first question is and I'll start with Stefan on this, and then you can pass it around as you see fit. Can we talk about the macro environment and its impact on our business?

Yes. So I mean, we had this discussion in all of our earnings call, right? So when looking at pre-COVID and without supply chain issue, right, we lost roughly over the last 2 years, 40 million cars. And 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?

For FY '23, we took about a 3% reduction to what IHS is predicting for FY '23. For '24, '25 and '26. 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. But for '23, we're a little bit more conservative than they are right now.

Do we have any questions from the audience? There's a microphone that will be -- so we'll be coming around there.

Raji Gill from Needham & Company. Really good details. Just if I could dig a little deeper into the fiscal year '22 to fiscal year '26, 12% CAGR post fiscal year '23. You talked about kind of current penetration implementation of kind of 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 assuming -- are you making in terms of new connected or cloud connected as a percentage of the total SAAR? What percentages are you assuming in terms of market share in some of those new markets? And 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 SAAR rebound?

There's probably 2 or 3 factors that really lead to that significant growth from FY '23 to '24, 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 '23. 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 few quarters. And then we've given you the data that we've assumed on the adjacent transportation and the AIoT/non-transportation markets. So 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, Prateek talked about some of our solutions are becoming a little more out of the box. So in the entire model from '23 to '26, don't expect a significant amount of growth, actually might even be down a little bit because we had significant SOPs in FY '23. So 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 want to be.

I don't know, Tom, if you want to comment on our view of how we use third-party forecasting data in terms of how we're looking at the plan?

Yes. 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 of other sources of external data. And then I think really importantly, we're getting royalty reports from all of our OEMs across all their platforms every quarter, right? Wei Xie, 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 a very detailed databases around the trends over the years with our OEMs. So we kind of pull all of that together and make an assessment. And as I said, for '23, we're like about 3%, I think, less than IHS at this point.

Mark Delaney from Goldman Sachs. Maybe first on the content opportunity per vehicle and how that evolves going forward, can you clarify a bit how that trends starting with what you've seen historically with assistant capability as you go up to copilot, what does that mean in terms of content per vehicle? And as you think about that immersive experience in the intermediate to longer term, what is the revenue opportunity per car look like?

Yes. Thanks for the question, Mark. Maybe let me start first [ right ] and then Prateek I hand over to you. So actually, that's actually also our road map right. As I said, we started with technology then we move to the Cerence Assistant. And now co-pilot means we bring in more capabilities. It's not just embedded, it's hybrid with a focus also on cloud, cloud first. And 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? And this drives also the ASP, that was just a snapshot what Tom mentioned the 26% based on signed deals.

I think the content per vehicle is definitely increasing as we move from copilot 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 that 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 in time.

Yes, Mark, I would also point there's a couple of little pieces of data throughout the presentation that you can probably look like. One is the chart that Prateek showed on the evolution from cockpit to companion. And at the bottom of that, it kind of showed what's shipping today, what's coming online and what's kind of the future. And 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 copilot and all of the features that are associated with that. And 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. And that's just the license piece is a connected piece to that. And I think maybe to go back to the last question, it's -- today, we're a little bit over 20% connected on top of our fixed solutions. That will grow a bit. But 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 '24 going forward as much. And we start to deploy some of these new technologies, and that amortization schedule starts to build '24, '25, '26.

And let me also add to this, right? So we started actually as a technology component provider, right? And then we moved up the stack to a really trusted innovation partner of OEMs, right? And that was also mentioned in the testimony from Volkswagen, from VW, where they said, okay, they have also this older capabilities. That means also that we can bring more and more domains and new features.

A follow-up on that. So if I look at Slide 61, I believe, where you show that PPU in '23 and '24, it looks like it was $3.80 in 2023 going up to $4.80 I believe, in 2024. In the past, the company spoke about the embedded opportunity being $4 to $5 per vehicle. So maybe you can help us reconcile that $4 to $5 with what we're seeing at that $3.80 going to $4.80. Is that -- is it the fixed license consumption that's causing the delta there? Is there something else going on?

No. As you say, there's a spread of prices, right? And I think what we were talking about is that was kind of the spread of pricing within -- there was some higher, there were some lower. What we provided today was more the overall average, right? So you can see it was about $4, and it's moving closer to $5 right? I mean there's a lot of programs that are using some of our older technologies that are still shipping today that have lower ASPs. So it does affect the average because these production side, 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 over-the-air updates and stuff, we're going to have revenue opportunities on top of that. But today, it's much more of a fixed price over the time that, that particular model is shipping.

And to give you also an example here. So for example, for low-end head units, right, maybe you have only Bluetooth communication, right? And 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 '21 year-end connected backlog was $941 million. That figure is now cut almost in half to $487 million. Please expand on this change as to prior data suggested a very different trajectory for Connected.

As I talked about, 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. And all 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 FY '22. But as I said, we fully expect to rewin 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. So I think that gives us pretty high confidence. So 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 '21 to '22 professional services, which is on kind of a smaller, a shorter life cycle, right? Actually went up, right? I think almost 30%.

Yes. And I think also some of the contracts extend beyond the 5 years. And so in that case, it wouldn't have been adjustment as well. Yes.

Joe Spak from RBC. Tom, sorry, first, I apologize 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?

Yes. Well, we're not going to disclose the actual cost reduction numbers. They're baked into the model. Some of it's a realignment. A lot of it is 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 will actually have a bigger impact because of run rate into '24 and '25. And then even within the models for '24, '25 and '26, 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 Prateek was talking about to win new business, right? And it drives our bookings, which drives our future revenue.

Maybe just a quickly follow-up on that then, like what -- how should we think about R&D, maybe percent 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 kind of '24, '25 and '26, and you kind of look probably before '22, the financial percentage models, we'll probably get back to that because that's what kind of yields are 30-plus percent margin. Although G&A will not grow at the same level that revenue. We have a very strong G&A function. They are able to expand and so 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. So I think that's your best bet is to kind of go back to kind of FY '20, '21. And then as we get through these 2 years, that model in '25 and '26 will look more like that, but some leverage on G&A.

Yes. And I guess a second question. I appreciate the slide and the color on the visibility you have over the coming years and how much of that is sort of coming from the backlog. I guess, 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 sort of get to those total revenue numbers you've laid out for those outer years?

I think for '23 and partial '24, those are pretty much based on won deals, right? And then we expect to continue to grow our bookings. 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 for raise the overall value of those contracts.

And we have also deep insights in upcoming programs of the OEMs, right? So 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.

So the companion product gets into the financial model by those later years or.

Yes, more '25 and '26.

Yes. I mean, the other comment I'll make is, I think you saw several videos here from -- we're very fortunate with our customers being able to provide those testimonials and they're working with us. And I mean yes, there were some smaller ones there like a NEO, but very leadership from a technology position, and you had some very large ones like Toyota and Volkswagen taking the time and producing these videos on their own time and very high quality and doing that as a favor to us, which they weren't required to do. So we're really appreciative of their efforts to doing that. But I think it also speaks to the relationships and the strength of the relationships that we have with our customers 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. So the main competitors are the big tech players, right? Googles, the Amazons and then in China, we have, for example, Baidu, Alibaba. But first of all, I think we are well positioned here because we have a very competitive technology suite. You saw it in Prateek's session. And then we have also a great patent portfolio, really strong patents. It goes far beyond just algorithmics, right, it's visible. So 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 a benchmark winning solutions here. So I'll give you also an idea a well-known 2-wheeler OEM did a benchmark in September. They compared Amazon, Google, SoundHound with us and we won the benchmark. I mean it was really different noisy conditions, right? It was not a closed cabin. But 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. And then next to the big tech giants, we see also some players like, for example, SoundHound and iFlytek or AISpeech in China, right? But here, I think we are also ahead of them. We have seen here 70, 80 languages we are supporting. And 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. Prateek?

Yes, I think you covered it well, we continue investing. We have 800-plus patents. We are, I think, another 150-plus provisional patents are in the process. So we continue investing and continue filing more and more patents as we improve our technology. But then 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 at SoundHound where we actually -- they moved to the services technology. So I think the proof goes into that, 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.

[indiscernible] . Let's take someone else. Julian?

Julian from [indiscernible] and 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 onetime license basis or volume based and just maybe where you've had success so far?

Let me take the AIoT one just because it's more of a financial and Stefan can talk about the transportation adjacencies. So 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 4 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 3. Those will be license revenue deals mostly. So that will be 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 companies. Our hope is that we build that team up. They get experience. And then when the FoU expires in FY '24, that then when the FoU opens up, we've built a team that can then expand into other markets. But as I said in my comments, I think we've taken a prudent approach to how we've put it into our model. We haven't assumed any expansion when the FoU expires and particularly in the short and intermediate term. We've pretty much based it on kind of 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. So hopefully they over achieve and that will provide some upside down the road.

And then when looking at the 2-wheeler segment, why that's comparable to automotive. I mean roughly 40 million to 50 million units on a yearly basis. And we have also a nice [ designment ] rate here in North America, India, China and Japan. And even in Germany. So I think that's also a great product where we have a lot of hope that that can drive some more revenue in the future.

And I would just say again on that from a modeling standpoint, we have won some deals. Those are starting to go into production. And again I think from a modeling standpoint, we tried to model it off of the kind of short-term pipeline in some of the wins that we've already had and achieved. And I think that potentially in some of the out years could be another upside opportunity for us. But some of those are new markets for us. They're big markets that Stefan talked about but we need to get more experience, particularly as how those companies are going to roll those products out. We know how OEMs do it. We need to figure out the product life cycles. We do believe it's shorter in some cases so I think that will help us. Between the work that Prateek'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 will also happen in AIoT. We'll have the ability to drive revenue a little bit faster from a bookings to revenue standpoint.

Perfect. And if I may, just for the broader financial targets you've given. I'd appreciate the visibility [indiscernible] the detailed financial model over the next 3,4 years. You've had really good bookings the last couple of years. Seems like win rates are still very high. What's the -- do you have to identify the top 1 or 2 risks to these [ targets ]? Would it be like macro execution, competition...

I think macro is still a topic for us, right? What was next? That's a key question here, right? Do we still see some supply issues here, right? Supply chain issues. That could be a problem for us. On the other hand, I'm very confident that we are doing the right things here with all of the OEMs. Programs which we had lost in the past 4 years back. These OEMs are coming back now. We had recently here a big event in Detroit. Also for a well-known OEM and I'd say wow, that's amazing what you're doing here. Now they're thinking and we're working together with them on the new REQ. So that's actually also in our favor.

I think in the short term it really is for FY '23 it's auto production. So we're not forecasting a big economical world event could happen. Who knows? As I said we took -- we did take a minor what we think haircut to the IHS production numbers. I think that's probably relatively true for '24. And then of course hitting the implementation dates on those big contracts that we talked about. And for '25 and '26, it's continued strong bookings over the next few quarters.

Next online question, then we'll go there next. What kind of investments/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 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. So not big investments there. And then clearly, we're a little -- we're still going to 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. But as you see from the financial model, we come out of that quite strong in '24, '25 and '26. Our debt come due in '25. So I think we're going to be in a really good position. and have a bunch of options in '24 as to what we do with that. And then we're -- we talked about the ability to have strong partnerships. Some of those could lead to M&A down the road. And I think we'll have the opportunity to do that once we get through FY '23.

Colin Langan, Wells Fargo. I just had 2 questions. One, you mentioned you're talking about there's a chunk of connected business that's not sort of was pushed out of your backlog because 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 kind of already embedded just changes the sort of already won rate until like '25, '26?

We very much expect to win those redesign programs back. So that's in our financial model.

And to give you also a bit more color on this, right? So we are actually working with the OEM towards SOP, and SOP is in the first quarter of next calendar year. So it's just a redesign, yes.

Okay. So it would just improve that. I think that visibility percent would kind of move up when you [indiscernible] . And then you mentioned trying to line up your CAGR for autos is 13%. You have on one slide, the top 5 customers, just 1 year going up 26% on price. So why isn't the CAGR stronger? I guess if just 1 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.

We did the CAGR from '22 to '26. If you look at the growth between '22 to '23, right? It's much more significant, but it is -- there are a couple of factors there, right? That's the lower impact on fixed contracts. And then went -- to me, if you look at '25 and '26 that's more of the financial model on a go-forward basis, right? Double-digit growth, 70% -- high 70% gross margins, 30% to 35% adjusted EBITDA margins. So I think you have to kind of look and normalize what happened in '22? How we go through this revenue transition in '24, how we get the big uptick in '24 and that's a much higher growth rate, but I wouldn't want people to use that growth rate on a go forward. I think you got to look at '25 and '26 as kind of our financial model on a go-forward basis.

And I think, correct me if I'm wrong, right? But that includes Pro services as well. And we don't expect Pro Services to continue to grow at the rate 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. So 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 it's all about it.

Let me get one here and then we're going back and forth and then [indiscernible] 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.

So we have already some programs in place with some OEMs where we're launching new initiatives or new domains or whatever, right? And one of those we did also recently was Mercedes.

I mean, in general, I think the customers, the end users will spend more time in their cars. So there is a high demand for more services in the entertainment in the productivity space. And what we see is also that the OEMs are starting to monitor that way more closer. So they look into their data. They compare the market with each other and start initiatives to increase that, of course.

That was also part of our presentation. Remember the 3 pillars right, scalable AI then the companion. And then on the right-hand side, it was a so-called multisensory experience platform.

[indiscernible] we'll go here next. Wait for a microphone.

Can you just review your capital structure as of the end of the fiscal year-end that you guys just reported. And 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?

Yes. So we have a convert. I think it's around $250 million of debt between the 2. 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. And as I said earlier, our debt is due in FY '25. And 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 '24 which is good because now is a really bad time to refinance debt. So hopefully, in '24, it will be a little better. And 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 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, and so we have revenue associated with those revenue -- with that legacy contract with no cash. That's going to 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. So that's going to start to flip particularly when that legacy contract ends in Q1 of FY '26. So I think we're in good shape.

In your cash position and what's sort of the -- any contractual requirements on what the minimum cash you need to have?

Yes, 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.

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. So we have in China, R&D and professional services teams. We have also IP in China. And overall, I think also the Chinese OEMs want to go also. So for example, to Europe and [indiscernible] China here. So actually, they need us, yes? But there is still a minor risk in my view.

Well, I can add to that. I think from a technology perspective, we have the -- it's basically the Chinese technology built in China and deployed in China. So we have a research grid in China where we just train and keep the data there locally. And then obviously, we have a research grid across the rest of the world which is for North America and Europe and other regions, right? So that's another way where we segregate and reduce the risk. And then as Stefan mentioned, we have a local R&D team and professional services team, which is geared more towards the Chinese domestic OEMs. And that's how we create that line.

So we have also a separate hosting entities in Korea for the Korean market, in Japan for the Japanese market, in China and in Europe. And of course, here North America.

Okay. Back to you.

I am Amit Solomon from Neuberger Berman The 51%% penetration that you were showing, you used to break it out to a penetration of connected versus not connected so I'm wondering...

We have also this information, right? So you can see around the bond, let's assume it's $20 million per quarter based on IHS data, right, then 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. And it's $10 million is all embedded and maybe $2 million to $3 million has already connected. You need to also have this connectivity module in your car, right? So 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 competition...

This could be a competitor or there are still some cars on the road without having this kind of conversation AI?

If you look at the third-party data, right, that the -- there's about I think it's 70%. Yes, 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 because the chips haven't been available . So take that aside, -- if we're in a normalized business environment, then you'd see about a 3% increase per year of more and more cars having that voice assistant technologies. Just over the last couple of years, the data has been all over the place because of semiconductor manufacturing issues. On the connected side, it's a lower percentage. I think it's somewhere in the 40% to 50% range but growing at a much higher clip or faster clip as more and more car companies see the value in having a connected car because it gives them the opportunity to generate revenue throughout the life of the car rather than just at the time of purchase. And so there's a very strong push from the various manufacturers in that direction. And therefore, that's increasing at a faster rate. And 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. Yes.

So roughly 70% have the solution of which 51% -- and 51% is served by Cerence. Is that the right...

Yes. So roughly our share of the cars that have a connected -- have an embedded voice assistant in them is in the 75% range, [indiscernible] .

It's actually more, right? So the 51% relates to all produced cars. But only 70% of all produced cars has a conversation AI on it.

David?

David Kelley, Jefferies. Tom, maybe I 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 of years? I was just looking at, I believe it was slide...

It's about $8.5 million per quarter through Q1 of FY '26.

Okay. So it's flat.

It's now on a flat.

So the step-up in the cash flow conversion in 2024, is that more tied to...

That's driven by really strong licensing connected production, us collecting royalties on.

And the normalization, I'm assuming of some of the fixed contract burn as well in 2024? And I guess, longer term, operating cash flow conversion target kind of in line with that 2026 expectation?

Yes.

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 kind of 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. So basically, anything to do with China? Who wants to take it?

So I'm not going to share the breakdown in terms of revenue, right? So we cannot do this. Overall, we have 3 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. So overall, I think -- and we have a very efficient team in China. R&D, professional services. The Chinese team is also working on Asian languages. 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 is also a very important element of our strategy plan is that we have also a strong site in India. Not just for best cost offshoring because they bring also a lot of talent, right? And we are very proud to having them there. And there's also a great collaboration between the Indian team and the Chinese team. In Europe, in Europe, we have a focus on this traditional technologies like audio AI, text to speech and embedded in general, and in North America, we are focusing on cloud solutions. So that's actually also our site strategy in line also with our strategy plan. And I'm really proud having all of these sites here. And for us, it's very important, right? We need to be very close to the OEMs. I mean I cannot manage a team in India or in China. But we build up relationships over the last 5, 6, 7, 10 years. We are just back from our sales kickoff, the Cerence annual sales meeting in Miami 2 weeks ago. We had also 4, 5 months ago, a huge technology event led by Prateek in Europe, right? We flew in all the people. Unfortunately, team China couldn't come because due to the COVID restriction over there. But we have daily calls with the Chinese team. And I know also most of the big players here, up to the CEO of [ GD ], right? So where we have also regular calls with them.

Yes. And the only other comment I'll make is we do in our 10-K, which we filed today, I believe. We break down revenues by geographic region, but that can -- you have to be careful 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 billing is taking place. So it's not a true reflection of how the business is spread throughout the world. Luke?

Luke Junk with Baird. I wanted to ask on your appetite for M&A and partnerships beyond 2024, alluded to a few times in the presentation. Are we right to read your posture as being a little more aggressive going forward? And maybe, Stefan, if you could put a finer point on what sort of transactions you might be looking at or technology focused?

So it's a very good question, [indiscernible] So I think we have already some targets in mind, which makes sense for us, just think about vision, just think about wellness, health application in the car, right, also for accelerating our products here. As Tom mentioned, this year is not the year for doing an acquisition. But other than that, we have already a clear road map here what is interesting to us and not.

And we have various ways that we can attack the areas outside the SAM that are within the TAM. And Prateek and a few of the senior technology leaders in the company, spend a lot of time trying to understand those relationships and we -- that can be a partnership relationship. It can be a contractual relationship. It can lead to an M&A. So even though we're a little bit constrained this year on M&A, it's not going to stop us from continuing to build relationships that Prateek can talk a little bit more about. But 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.

Yes. I think what I'll just simply add is in terms of partnerships, obviously, it could fall into several different buckets, right? So as I said in my presentation, we're partner with all the leading MAP providers now, right? And we continue going deeper into that. But then 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. So we'll continue investing in those, which we'll do. But 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, and we have also established more team, corporate development and a [ ton ].

Other questions? Raji.

Just a follow up, Stefan, on the competition, if I may. There has been more and more announcements of OEMs working with some of the big tech, whether that's, for instance, BMW talked about building a next-generation voice with Alexa custom assistant solution. I know you talked about kind of coexisting with big tech. But -- could you elaborate what that actually means? Is it -- if you're in a similar -- same car as Alexa is, what part do you do? What part does. Alexa do?

So I cannot go into the details, especially not on this specific account, right? But we have seen a lot of PR, especially from Amazon, right? That was also PR with JLR a few months ago, right? And we know who won the race here, right? And for this German OEM, we are still developing for them all languages for the new programs but also a press release on the 7 Series. They are very proud. And yes, it's more or less a coexistence.

[indiscernible] You're doing specific voice technology -- so...

That's a complete solution.

SI can answer that. So see if you look at the smart home speakers like at home like Alexa or Google, they're very much voice focused, right? And then they're more focused -- they came from the smart home market, which is controlling your home devices at home. That's the first key focus, right? That's how they came into that. Now a coexistence in the car, they try to do that in the car as well. But on our side, we go deeper into the car, integration into the car, the sensors in the car. So that's one area where we differentiate. The other is we try to combine the voice with the vision and the gears and the [ gesture ]. So we're no longer a voice assistant company, right, we are beyond voice. So that's why if you see today, the companion is all about bringing all those modalities together and giving you all those other capabilities. So a coexistence would allow you to have your smart home 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, command of the vehicle. And beyond your traffic, your surroundings, how you're driving, all that experience comes from Cerence.

I have one here. What level of confidence do you have 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 assistance and copilot to the companion right. You see that we're already on the road with Cerence assistant and also with a co-pilot right. And we have signed already some deals based on companion. So overall, I'm very confident that this is the right strategy. And we need to have a razor-sharp focus. What I said at the beginning or at the end, it's all about innovation and delivery excellence. And if you can do this right, and 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 license, Connected Services and pro services. Are there any major changes to that in your current guidance?

No. No. Our license business is a virtual 100% gross margin business. Our connected services is kind of high 70s percent gross margin business. And we -- I think it's a testament to [ RPS ] that we actually get people to pay for it and we actually make money on it. It's approximately in the 20-ish percent whereas in many cases, people don't even want to pay for it. So that's a bit the profile between the 3 revenue lines.

All right. New connected is the key growth vector as you've described. The number backing out of customer-hosted/onetime items has been very stubbornly flat over several years. Even in light of weak overall auto units, the vision had been the SOPs were ramping quickly as prior wins came into production. Yet the SOPs haven't moved the needle. Please expand if you would.

Yes. 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 want to reiterate, I mean, we lost 20 million cars over the last 2 years and 20% to 25% of those should have had Connected Services attached to them. And therefore, you lose the whole amortization schedule for all of those cars. And that's had a big effect. But 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. And so those amortization schedules now start to build up, and you'll start to see good growth in Connected Services going forward.

So most of the deals, which we have signed or closing are hybrid, so having this as cloud component, right? And we see also now the appetite also for cars on the road being upgraded also with this cloud component.

Thanks, guys, for the follow-up. David Kelley, Jefferies. The customer relationships, the ecosystem, and I think about you guys working both directly to -- directly with OEMs and at times Tier 1s. 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 OEMs. And I guess secondarily, what does that mean for revenue per vehicle assuming that might be an incremental level [ thing ]?

So normally, the OEM makes a decision, right, who will visit vendor. It's not the first-tier supplier and it's also not the SOCs, right? It's only the OEM. But we are positioning us at all levels, right, with our partners with first-tier suppliers and with the OEMs, right? And in the future, I believe we are signing more deals directly with the OEMs because we consider us also more or less as a first-tier supplier, software first-tier supplier.

And what we see also is that the OEMs want to have us in the very early phase already, right? When they do the ideation for the next generations to come. They want to see our road map. They want to talk with us about technology and have 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. So I think it's a more close relationship overall with the OEMs.

And normally, all cloud deals will be funding the OEM directly.

Yes. I just wanted to add. So 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? So what that means is as we become more -- we have become more of AI modeling company. They want to talk to us early on, on what is our requirement to run those AI models on the same processor, which is going to get used by other elements on the car as well. So that's one of the reasons why we get factored in, 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 and fit into that.

[ Ben Nam ] from Neuberger [indiscernible]. Maybe a little bit of an oddball question here, but can you tell me how you -- as you immerse the driver, are there potential long-term risks, regulatory safety risks? And how -- when you roll out these features, can you demonstrate that we're not compromising driver integrity or distracting the driver because at some -- we had this whole issue talking and texting while driving and you guys are immersing the driver in a whole set of opportunities. And I don't want to be anywhere near those people when they're making their reservations, et cetera. So walk me through...

But it's more than just a driver, right?

Yes, I get it. But you're turning it into a complete companion. So is there a potential for any type of regulatory restraint or framework as the manufacturers look to introduce new feature sets?

So we have those discussions, right, with the legal department of our OEMs, right? They know this, and they need this and maybe Nils, you can also share with you.

Yes, I don't think that it's going into such a direction, right? And you started your question with talking about the [indiscernible], I think there are different -- there is different people out there. Some are using it more heavily and are interested in it, and some are not. But 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. Therefore, it's important to be also on the edge. So embedded, it's very important when it comes, for example, to wake also voice biometry or face ID, right. So we cannot share this with the cloud.

Which is a big argument for us, right? Because there we are super strong in offering...

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, a few years ago, the backup camera in a car became a regulatory requirement. But now the inside camera for the driver drowsiness detection is becoming a regulatory requirement. So 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 them engaged in the conversation, right, as opposed to simply going and starting a conversation. We can understand the emotions that the person is going through and then engage them, right? So that's actually helping reduce the load on the driver as opposed to increasing it. And some of the regulatory requirements that are actually just acting -- are helping on that.

I think the bottom line is people that are in a car, whether it be the driver or the passengers as much as we would 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's all -- it starts with the voice and certainly expands to 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 because I remember when I first joined Cerence, the statistic that 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 4 seconds, you've traveled the distance of a football field, right? And 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 time. 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 and everyone here.

Thank you so much.

And hope you'll join us in destination [ mix ].