Earnings call transcript: Cerence Q3 2025 beats EPS and revenue forecasts

Cerence Inc. reported its third-quarter fiscal year 2025 earnings, surpassing both earnings per share (EPS) and revenue expectations. The company posted an EPS of -$0.06, outperforming the forecast of -$0.13, marking a surprise of 53.85%. Revenue reached $62.2 million, exceeding the anticipated $54.94 million. Following the announcement, Cerence’s stock rose 10.96% in premarket trading, reflecting investor optimism. According to InvestingPro data, the company maintains a strong free cash flow yield of 10%, though it remains unprofitable over the last twelve months. InvestingPro analysis suggests the stock is currently undervalued based on its Fair Value model.

Key Takeaways

• Cerence’s Q3 revenue and EPS exceeded forecasts, with a significant EPS surprise of 53.85%.
• Stock surged 10.96% in premarket trading after earnings release.
• Revenue was driven by strong growth in variable license and connected services.
• The company reduced total debt by $87.5 million and achieved positive free cash flow.
• Forward guidance for revenue and EBITDA has been raised.

Company Performance

Cerence demonstrated robust performance in Q3 2025, with revenue growing by 48% year-over-year in variable license revenue and 17% in connected services. The company shipped 12.4 million units, marking a 12% increase in connected cars. This performance highlights Cerence’s strong foothold in the automotive AI sector, despite a challenging macroeconomic environment. InvestingPro data reveals the company’s overall Financial Health Score stands at "FAIR," with particularly strong scores in cash flow management and relative value metrics. Want deeper insights? InvestingPro offers 11 additional exclusive tips for Cerence, along with comprehensive financial analysis in its Pro Research Report.

Financial Highlights

• Revenue: $62.2 million, above the previous guidance of $52 million to $56 million.
• Earnings per share: -$0.06, compared to a forecast of -$0.13.
• Gross margin: 74%, up from 72% the previous year.
• Adjusted EBITDA: $9 million, exceeding the guidance of $1 million to $4 million.
• Free cash flow: $16.1 million, marking five consecutive quarters of positive flow.

Earnings vs. Forecast

Cerence’s EPS of -$0.06 significantly beat the forecast of -$0.13, resulting in a surprise percentage of 53.85%. This marks a notable improvement from previous quarters, indicating stronger-than-expected operational efficiency and revenue growth.

Market Reaction

Post-earnings, Cerence’s stock experienced a notable increase, rising 10.96% in premarket trading. This positive reaction reflects investor confidence in the company’s ability to exceed expectations and manage costs effectively. The stock’s current price of $8.58 is well within its 52-week range of $2.34 to $27.50, suggesting room for further growth. InvestingPro data shows the stock has delivered an impressive 262% return over the past year, though it remains volatile with a beta of 2.86. Analysts have set price targets ranging from $9 to $16, indicating potential upside from current levels.

Outlook & Guidance

Cerence has raised its full-year revenue guidance to between $244 million and $249 million, alongside an adjusted EBITDA range of $42 million to $46 million. The company also increased its free cash flow guidance to $38 million to $42 million. Looking ahead, Q4 revenue is expected to be between $53 million and $58 million, with a continued focus on expanding AI capabilities and customer growth.

Executive Commentary

CEO Brian Krzanich highlighted the company’s innovation, stating, "We’re seeing people more and more enjoy that feature. Hey, my feet are cold. The system knows then to turn on the floor heat." CFO Tony Rodriguez added, "We’re comfortable in operating the business at this level, by the expectation of continued positive cash flow."

Risks and Challenges

• Potential vehicle production delays and pushouts could impact future revenue.
• Macroeconomic pressures and supply chain issues remain a concern.
• The competitive landscape in automotive AI is intensifying.
• Expansion into non-automotive markets poses execution risks.

Q&A

During the earnings call, analysts inquired about the effects of automotive production pull-forward in Q3 and Cerence’s strategy for non-automotive expansion. The company maintained its stance on pricing and emphasized the potential for growth through efficiency and innovation in AI technology.

Full transcript - Cerence Inc (CRNC) Q3 2025:

Conference Operator: Good day and thank you for standing by. Welcome to the Cerence Third Quarter twenty twenty five Earnings Call. At this time, all participants are in a listen only mode. After the speakers’ presentation, there will be a question and answer session. Please be advised that today’s conference is being recorded.

I’d now like to hand the conference over to Kate Hickman, Vice President of Corporate Communications and Investor Relations. Please go ahead.

Kate Hickman, VP of Corporate Communications and Investor Relations, Cerence: Everyone, and welcome to Cerence’s third quarter twenty twenty five conference call. I’m Kate Hickman, VP of Corporate Communications and Investor Relations. Before we begin, I would like to remind you that this call may involve certain forward looking statements. Any statements that are not statements of historical fact, including statements related to our expectations, anticipations, intentions, estimates, assumptions, beliefs, outlook, strategies, goals, objectives, targets, and plans are forward looking statements. Cerence makes no representations to update those statements after today.

These statements are subject to risks and uncertainties, which may cause actual results to differ materially from such statements and expectations as described in our SEC filings, including the Form eight ks with the press release preceding today’s call, our most recent Form 10 Q, and our Form 10 ks filed on 11/25/2024. In addition, the company may refer to certain non GAAP measures, key performance indicators, and pro form a financial information during this call. Please refer to today’s press release for further details of the definitions, limitations, and uses of those measures and reconciliations of non GAAP measures to the closest GAAP equivalent. The press release is available in the Investors section of our website. Joining me on today’s call are Brian Krzanich, CEO and Tony Rodriguez, CFO.

Please note that slides with further context are available in the Investors section of our website. Before handing the call over to Brian, I would like to mention that we will be participating in the Raymond James Industrial and Energy Showcase on August and the Needham Virtual Semiconductor and Semicap Conference on August. Now, on to the call. Brian?

Brian Krzanich, CEO, Cerence: Thank you, Kate. Good afternoon, everyone, and welcome to the Q3 twenty twenty five Cerence earnings call. I’m excited to speak with you today. We are very pleased with our strong results this quarter, exceeding the high end of our guidance with revenue of $62,200,000 and adjusted EBITDA of $9,000,000 Importantly, we generated strong free cash flow of $16,100,000 marking our fifth consecutive quarter of positive free cash flow. And for the full fiscal year, we are raising and narrowing revenue guidance to two forty four million dollars to $249,000,000 This brings the low end of our guidance range above the previous midpoint.

And Tony will provide further details on our results later in the call. We continue to make progress on our three key deliverables for 2025: advancing our AI roadmap, growing our business with new and existing customers, and continuing our transformation and cost management. First, we continue to advance the development of Cerence XUI, our next generation hybrid agentic AI assistant platform. While we previously differentiated between XUI Gen one and Gen two, it’s important to understand that XUI is not a static product, but rather a dynamic platform that is continuously evolving with new capabilities and features like multimodal modality and emotion detection, rolling out over a strategic multi year roadmap. In addition, XUI is designed to scale alongside our OEM customers’ development cycles, ensuring alignment with their evolving go to market strategies and technical road maps.

We are firmly on schedule with the major milestones on this road map, highlighting our disciplined execution and commitment to delivering long term scalable value through AI innovation. And with that, we reached several important milestones for XUI within the quarter, including increasing language availability and advancing the platform’s contextual reasoning capabilities. In addition, we continue to expand our partnerships with chip providers like ARM, enabling us to flexibly distribute and share computational loads between CPUs and GPUs to deliver improved speed and performance on the edge. And we believe this approach makes XUI one of the most powerful and flexible agentic AI platforms in the automotive space. And we’re gearing up for another exciting milestone in September when we will showcase XUI at the International Auto Show in Munich.

In Q3, we also continued to define and advance our AI agentic strategy within xUI. We’re focused on developing our own standalone agents, namely a real time knowledge agent and an integrated navigation and EV charging agent, as well as empowering OEMs to integrate their own agents. Our Calm family of proprietary language models is critical to this effort, enabling streamlined interoperability by serving as the orchestrator that helps ensure consistent behavior and seamless integration across agents to deliver a seamless user experience. And we believe that the flexibility and openness of our architecture, alongside our unmatched automotive expertise, continue to be differentiators for Cerence, especially as OEMs navigate the complexity and ambiguity of the current market while still looking for ways to improve the user experience in their vehicles. And we believe OEMs continue to choose Cerence and are excited by XUI for three main reasons.

One, our deep automotive expertise, which allows us to quickly and efficiently integrate into the OEM’s hardware to access vehicle data and manage vehicle functions. There are up to thousands of automotive specific operations and commands, along with complex hardware and software that require intelligent integration to function. Two, our open agnostic architecture and business model. Technology is evolving rapidly, making it difficult for OEMs to predict the future. At the same time, their customers are expecting LLM based solutions in their vehicles today.

This puts automakers in a difficult position having to make decisions today without knowing what the future will hold. This is a tailwind for Cerus, as we offer the architectural and operational flexibility and domain expertise that can help them bridge this gap, enabling OEMs to bring LLM powered capabilities to customers today and in the future, while also maintaining ownership over their brand experience and data. And third, our team. We believe we have the best in the industry working at Cerence AI, and the majority of our team have long relationships with our automaker customers. This makes us easy to work with, as we know the ins and outs of how our customers work.

Now as a result, we continue to see strong customer interest in IQI. In fiscal q three, we signed a deal within the Volkswagen Group for one of its brands to have XUI as the basis of its next gen system. We also expanded our work with JLR, bringing additional generative AI capabilities to their current platform as we work in parallel to build their future in car experience based on XUI. And importantly, we’re continuing to see an increased PPU with these deals, and we continue to have a robust pipeline of ongoing customer interest with a steady stream of proof of concept programs across North America, German, Japanese, and Chinese OEMs. Continuing on our deliverables for 2025, the second is to further grow our business with new and existing customers.

We have a strong global momentum with our customers, including new design wins with Bauhatsu and Hyundai, as well as program extensions and renewals with Great Wall Motors and GM. Six major customer programs started production this quarter, including a BYD program for outside of China that spans 14 languages, illustrating that Chinese OEMs continue to look at CERENS to support their global expansion. The previously announced generative AI program with SMART, as well as programs with Audi, Geely, Mahindra, Nissan, and PSA also went live within the fiscal Q3. Our commitment to partnering and supporting our customers is also being recognized. We received formal letters in appreciation of our collaboration from two major customers in China, and we signed a new professional services agreement with Mercedes Benz.

Our work with Mercedes Benz signals our ability to deliver core foundational technology in coexistence with big tech and OEMs, evolving agentic AI strategies, as evidenced by our work on the latest generation of MBUX that first rolled out in the new electric CLA. We continue our efforts outside of automotive as well, with deep focus on identifying new verticals where we think we have a solid value proposition and can win. We’re being careful to understand these markets and the existing players within them, and we’re working with vertical partners to help us with go to market technology. This process, along with executing proof of concept programs, ensures we don’t overinvest before we know we have a good product and a market. For example, we have developed a call center agent and are working to identify a go to market partner for this offering.

At this time, the agent is focused on service related customer interactions in the car, where we can use our vast car knowledge and already ingested vehicle data to support incoming calls and requests. But we could see this solution being applied across a myriad of industries. We also formally announced our partnership with LG, which is leveraging our cloud, neural, and edge text to speech to power voice interaction across its global television lineup, spanning 65 voices and languages across tens of millions of households. Cerence TTS enables LGTVs to quickly respond to user inquiries via natural spoken words, creating a more natural human like user experience and simplifying users’ interactions as they search for content and programming. So for example, the user could say, find me movies with Tom Cruise.

And the TV can respond out loud while displaying options on the screen saying something like, you must like Tom Cruise. I looked up some of his movies. Do any of them interest you? Beyond the clear user experience benefits, Cerence TTS also enables LG to meet increasing accessibility requirements worldwide by ensuring that its television can be easily operated by people of all abilities. As a reminder, we believe the impact of our work to expand beyond automotive will be seen in our revenue and profitability in late fiscal twenty twenty six and beyond.

The third key deliverable for 2025 is to continue our transformation and cost management. As you can see from our continued strong cash performance, we are seeing the real benefits from this work, and it is being delivered to the bottom line for our shareholders. We continue to identify opportunities for further cost savings. Importantly, as we stated in our last earnings call, we did not see meaningful impact from tariffs on this quarter’s results. For fiscal Q4, and therefore for fiscal twenty twenty five, we believe the impacts will remain limited.

However, it’s important to note that the situation remains fluid and may evolve over the remainder of the year. We are seeing third party projections of vehicle volumes down approximately 2.5 for Q4, and we’re seeing some programs continue to push out and be delayed. With this in mind, we’re working cooperatively with our customers to find ways to optimize our partnership to best support them while also maintaining favorable conditions for CEREC. Lastly, we have a long history of investing in our technology, and we have and will continue to defend our strong IP. We want those who infringe in our intellectual property to know that we’re serious about this effort.

We have recently filed actions against Sony and TCL for their television’s infringement of our voice technology patents. In conclusion, we’re proud of what our team has accomplished this quarter and are encouraged by our results and our ongoing opportunities. We believe that we remain well positioned to support our customers and differentiate by our combination of technology and innovation, our diverse and expansive customer base, and our deep automotive expertise. Our forecast for fiscal Q4 and twenty twenty five demonstrates the strength of our products and the great work we’ve done to drive financial returns for our shareholders. And with that, I’ll turn it over to Tony.

Tony Rodriguez, CFO, Cerence: Thank you, Brian. Good afternoon, everyone, and thank you for joining our Q3 FY ’twenty five earnings call. We appreciate your time and interest in our company. Today, I’ll be reviewing our Q3 results for fiscal twenty twenty five and providing some guidance for our fourth quarter and resulting full fiscal year. Let’s get into the Q3 operating statement.

For Q3 FY ’twenty five, we reported total revenue of $62,200,000 which was above the high end of our guidance range of $52,000,000 to $56,000,000 We saw strong contributions across all of our revenue lines. Variable license revenue was $34,200,000 up 48% year over year, reflecting solid utilization across our customer base and reflecting more in period revenue from license shipments as compared to the prior year quarter, given the lower level of recent fixed contracts than in historical periods. We saw higher than expected volumes, possibly due to manufacturers producing ahead of potential tariff impacts, and receive benefit from favorable exchange rates on the euro. As expected, we recognized no fixed license revenue this quarter compared to $20,000,000 in Q3 of last year, reflecting our continued strategic shift away from large upfront license deal. To reiterate, fixed license arrangements involves customers paying early on a nonrefundable basis in exchange for discounted rates.

While these fields provide short term cash benefits and meet certain customer needs, we’ve made a deliberate decision over the past two years to strengthen our pricing strategy and better align revenue recognition with product delivery. Historically, fixed license revenue reached as high as $70,000,000 annually. Last year, it totaled $30,000,000 For this fiscal year, we planned approximately $20,000,000 in fiscal Q2, primarily tied to budgeting cycles of our Asian based customers. Going forward, we are comfortable in this $20,000,000 range annually. As a result, while total license revenue declined 20.6% year over year this quarter, the underlying mix continues to shift toward more recurring and scalable usage based models versus upfront fixed license arrangements.

Connected services revenue was $12,800,000 up 17% year over year, driven by steady growth in our connected installed base. Professional services came in at $15,200,000 down 8% from prior year, reflecting a lower mix of custom work and greater implementation efficiency. Gross profit for the quarter was $45,900,000 yielding a gross margin of 74% compared to 72% in 2024. The increase was largely due to a higher mix of technology revenue, offset by the absence of high margin fixed license revenue. Non GAAP operating expenses came in at $39,600,000 a 3% or $1,100,000 reduction year over year.

Q3 of last year benefited from a $2,400,000 bad debt recovery. Otherwise, the year over year reduction would have been 11%. This reflects focused expense management while maintaining strategic investment in R and D. As a result, our adjusted EBITDA for the quarter was $9,000,000 which is well above our guidance range of 1,000,000 to $4,000,000 Our GAAP net loss for Q3 was $3,000,000 compared to a net loss of $314,000,000 for the same quarter last year. In Q3 of last fiscal year, the company reported a goodwill impairment charge of $357,000,000 This was a noncash charge that only affected our GAAP results.

From a metric standpoint, we shipped 12,400,000 units this quarter, an increase from 12,100,000 in prior year. We also grew our number of connected cars shipped by 12%, underscoring the continued momentum in vehicle connectivity. We captured 52% of worldwide auto production, remaining in line with our historical penetration. Adjusted total billings were $226,000,000 an increase of 3.5% year over year and consistent with plan. As a reminder, when we look at total licenses shipped, pro form a royalties is an operating measure we use representing the total value of variable licenses shipped in a quarter, including the shipments from fixed licenses where the revenue was previously recognized upon contract signing.

We refer to the shipments where revenue was recognized in a prior period as fixed license consumption. Our pro form a royalties were $43,200,000 which were higher by $3,500,000 as compared to $39,700,000 in Q3 of last year. However, the consumption of our previous fixed license contracts totaled $9,100,000 this quarter, lower than the same quarter last year by about 7% and in line with expectations. This drops more of the pro form a royalties into revenue in the current period as compared to a year ago. As discussed in previous calls, we anticipate a lower level of consumption given our lower level of fixed contracts than in historical periods.

Our PPU metric increased to $4.91 for the trailing twelve month period, up from $4.47 for the same period last year, reflecting continued implementation of our improved pricing strategy and an increase in the adoption of connected solutions. When evaluating our liquidity position this fiscal year, we have been successful in reducing our total debt by $87,500,000 using cash on hand. In Q1, we repurchased $27,400,000 in principal value of our 2025 convertible notes and fully repaid the remaining $60,100,000 in June. Combined with our $16,100,000 of positive free cash flow during the quarter, our fifth consecutive quarter of generating positive free cash flow, we ended the quarter with $79,100,000 in cash and marketable securities. We’re comfortable in operating the business at this level, by the expectation of continued positive cash flow.

Now turning to our guidance. For Q4, we currently expect revenue to be in the range of 53,000,000 to $58,000,000 As mentioned, we believe some portion of the Q3 upside was due to higher than expected production within the quarter, possibly due to OEMs producing ahead of tariff impacts in Q4. In addition, we expect no material fixed license revenue to be signed in Q4, and we expect to see normal seasonality where volumes in Q4 tend to be lower than Q3. With no fixed license revenue forecast in Q4, we expect gross margins to be in the range of 68% to 69%, GAAP net loss to be in the range of 18,000,000 to 22,000,000 and adjusted EBITDA to be in the range of 2,000,000 to $6,000,000 With that, given our strong performance in Q3 and our Q4 guidance, ranges for full fiscal year expectations for revenue, adjusted EBITDA, and free cash flow have improved and narrowed. Revenue guidance is moving from a range between $236,000,000 and $247,000,000 to a range between $244,000,000 and $249,000,000 This brings the low end of our guidance range above the previous midpoint.

In addition, we are raising our adjusted EBITDA guidance range to $42,000,000 to $46,000,000 and our expected free cash flow range has increased to 38,000,000 to $42,000,000 To summarize, we believe our Q3 performance demonstrates meaningful progress across variable revenue, recurring connected services and expense discipline. We remain confident in our long term strategy, and we are actively managing our expenses while continuing to invest in innovation and customer value. Thank you again for your continued support. With that, I will turn it back to Brian to close our remarks.

Brian Krzanich, CEO, Cerence: Thanks, Tony. In closing, we’re pleased with our results this quarter and proud of what our team has accomplished. Through the remainder of the fiscal twenty twenty five, we remain focused on our key deliverables, advancing our AI roadmap, growing our business with new and existing customers, and continuing our transformation and cost management. And we look forward to sharing more on our view for fiscal twenty twenty six in the next quarter’s call. We’ll now open it up for questions.

Conference Operator: Our first question comes from the line of Nick Doyle with Needham.

Nick Doyle, Analyst, Needham: Hey, guys. Thanks for taking my questions and congrats on the PPU progress. Can you expand on what drove the increases this quarter? Was that across both license and connected services? And you talked about six programs, these Gen AI programs going into production, but it’s right to think that’s too early for that to really impact the PPE line this quarter.

So any more detail there would be great. Thank you.

Tony Rodriguez, CFO, Cerence: Sure. And you’re right, it’s too early for those to impact PPU. As we know, it’s a trailing twelve months number and those will come in as we really deliver against that. But yes, on the delivery for Q3, it has crossed all three lines. So if you think about the embedded side, we saw more volume from the embedded license this quarter.

So and if you remember from previous discussions on revenue recognition for the embedded licenses that are shipped, those will get recognized in quarters. We saw a higher volume there. And because of that higher volume, the way the fair value works for fair value accounting is some of it when we originally booked these contracts, some of that value goes to professional services. And so when we saw higher value on the embedded side, we also had an increase in the usage side of professional services. So you saw embedded up, you saw professional services up as well.

And then from a connected side, we saw an increase as we noted, but that was really kind of in line with expectations. You know, we’ve talked about this before, remember that our customers self report their royalty volumes and we have to accrue a certain amount until we get those royalty reports. And in some periods we have catch up, you know, kind of true ups to what we’ve accrued to what this actually came in. So we also had some additional true ups which impacted the embedded line and the professional services line as well, and those are normal for the business, but they you know, I think they were a little bit higher than normal this quarter. And then lastly we saw a increase in the euro exchange, the dollar that benefited all of the line items as well.

Brian Krzanich, CEO, Cerence: Yeah, Nick, I think part of the rest of your question was, you know, six new programs, are they affecting PPU this quarter? You’re right. No, they’ll go into implementation over the next quarter or two, depending on the program. You know, we are seeing, as Tony said, more connected devices or vehicles. We’re seeing some upgrades as OEMs, you know, choose to push out some of the newer programs, but then we can offer them upgrades through the cloud, things like that that are driving that PPU.

So, connected, more features. The cloud gives us the option to really have that flexibility to offer them things that we can download overnight, literally.

Nick Doyle, Analyst, Needham: Thanks. And then a clarification, I mean, you call out what that true up number was. Was

Ittai McKaylee, Analyst, TD Cowen: it

Nick Doyle, Analyst, Needham: not material enough to call it out this quarter?

Tony Rodriguez, CFO, Cerence: Yes. And I think what we’ve said in the past that we have a material number with any single customer and I think there was nothing material than a single customer. But we had true ups across the board that were probably a little higher than in previous quarters. And again, we do those, it’s a normal course of how we record revenue, right, as we get actuals versus what we’ve accrued for in the past. So nothing material for any single, but a fair amount compared to previous quarters overall.

Nick Doyle, Analyst, Needham: Understood. And a bit of a macro question here, just what are your customers saying in terms of auto production in the next six months? I mean, you mentioned this in your script, Tony. I think investors are concerned of a weakening second half and some of that’s contemplated in the guide. But are you thinking this will impact the December as well?

Like, I guess, how much do you think was pulled in company wide, industry wide, just from your point of view? Thank you.

Brian Krzanich, CEO, Cerence: Let me start and then Tony can go into more detail. Each quarter we’ve kind of told you, we don’t see much of an impact in the next quarter in tariffs and things like that. And so far that’s held. We do think there was a certain amount of build ahead in Q3 that occurred. It’s a little bit hard for us to pin it down exactly how much Nick was, but that’s a little bit why Q3 was so high and Q4 is kind of more of a standard quarter, where that’s just some of the build ahead we’re seeing.

And then but in the overall year, we’re actually up and we’ve raised our guidance and raised the bottom of our guidance above the midpoint prior. That all shows that we believe the year will end out strong, right? As we go on to next year, I’m just gonna be honest with you. We’re not gonna try and forecast next year yet. We have some initial IHS data that suggests there’s some decrease in volume.

What we don’t know is there’s a bunch of, you know, we talked about the number of POCs and new programs. We talked about the six that we won this quarter. Those all have to be factored into that. So, we have offsetting. We believe the connected vehicles will grow.

So, all of those things will balance each other, and we’ll sit down and figure out how 2026 and 2026 fiscal looks as we go through this quarter, and we’ll give you those numbers at the end of the quarter. But right now, we believe Q4 will hold to our numbers. It means a strong year, raising guidance, raising midpoint, raising above the midpoint of the prior forecast. So closing out the year strong.

Tony Rodriguez, CFO, Cerence: Yeah, think that that’s well said. And I think if you think of our second half, when you combine Q3 and our Q4 guidance, we’re ahead of kind of where our second half was. Yes, maybe a little bit of pull forward, we factored that into a little bit of volume decrease in Q4. But the other side of it is, as I mentioned, we had some true ups this kind of across the board this quarter, that part of it is a little bit of catch up but the other side is kind of new run rates for some of these programs that we have to bake into sort of a little bit higher, bake those into our overall volume run rate. So a lot of puts and calls, but that’s reflected in our full year guidance, which now is higher than as we said from last quarter’s, we’ve pulled that guidance upward.

And we’ll take a look at how that impacts ’twenty six as we finish out the year.

Nick Doyle, Analyst, Needham: Really helpful. Thanks, guys. Thank you.

Conference Operator: Our next question comes from Colin Langan with Wells Fargo.

Colin Langan, Analyst, Wells Fargo: Great. Thanks for taking my questions. I guess just following up on some of the recent comments, the guide does imply, I think about a 10% decline at the midpoint quarter over quarter in sales. I think you mentioned about a 2.5% production decline, think I it might be a little worse, but why the big move down? Is that related to some of the troughs in the quarter or is there other factors we should consider?

Brian Krzanich, CEO, Cerence: No, mean, you got to stop and I mean, that’s what we’ve been attempting to communicate is some of that was pull ins from Q4 into Q3. So, you look at Q3, we’ve really exceeded even the top end of our guidance for Q3. And we believe some of that was pulling from Q4 as people were trying to as OEMs were trying to get ahead of the tariffs that were supposed to kick in in August. So, some of that was simply a pull in from Q4, let’s call it, into Q3 to get ahead of that curve. But when you look at the full year and you take a look at Q4 and Q3 combined, because remember quarter to quarter, we’re to bounce around as production varies a bit.

With tariffs coming in, going out, adjusting every month, week, sometimes, that’s going to cause some of this fluctuation. You got to take a look at that long term. That’s why we’re are very confident in, you know, we’re raising the year or raising the bottom end of the year, even above the midpoint of the prior guidance that shows you the strong combined back half of the year. So it’s really just pull ahead.

Tony Rodriguez, CFO, Cerence: Yeah, it’s that. And the volume number, you know, we do look at overall IHS projections, which is that’s the 22.5% that we discussed. But we also have to think about our specific customers within that population, and I believe that they were, know, as you can see, our volume was up a little bit higher than even IHS. If you look at our volumes for Q3, you can see that we were higher than year over year and quarter over quarter than the IHS numbers. So correspondingly, I think we would pull that down in similar fashion.

So a little bit higher than the 2% in anticipation of how much was pulled forward. Couple that with, I’m not sure a lot of our revenue gets recorded in the tail end of the quarter as we get royalty reports and so forth. So I don’t know what the euro will look like in the last month of our fourth quarter, so we’ve got some pullback there. And then some of the true ups that we’ve seen, similarly, we don’t want to anticipate that we’d have the same amount of kind of true up volume as well. So we factored all three of those things in and that’s why you see the revenue kind of coming down a little bit in Q4.

Still, if you look at it, it’s a solid Q4, if you think about it apples to apples to where we were, would have been a year ago without any fixed in either of the quarters.

Colin Langan, Analyst, Wells Fargo: Got it. You flagged that you paid down the debt in the quarter with cash. How should we think about your cash balance now? Where do you think minimum cash needs are? And are you considering sort of adding some debt to boost the cash cushion in the future or are you fine where you are now?

Tony Rodriguez, CFO, Cerence: Well, I’ll answer that last piece, absolutely not. Know, the thing about adding debt, no. Now, could there be a scenario of potentially looking at the 2028 converts and refinancing those? Well, they’re trading at below par, so there could be some math there that you could refinance those. But if you think about our cash balance, we ended the quarter with $79 plus million in cash and marketable securities, you know, the way we look at it is we can absolutely run the business with that level of cash on hand as a cushion and considering that we still project that we will be cash flow positive in the future.

So, you know, our goal would be of course just like we did in this year where we paid off all of our requirements, the $87,000,000 from cash on hand that as we build that war chest going into 2028 that we could conceivably do the same and not have to either certainly not add to the debt number, but even not refinance and be in a position where we don’t impact liquidity. So I think we’re at a very solid base right now. Now we will always look at the capital markets and see if there’s an opt you know, a more optimal recipe in that mix. But right now, it’s very solid, and we don’t have any anticipation of adding to the debt.

Colin Langan, Analyst, Wells Fargo: Got it. All right. Thanks for taking my questions.

Tony Rodriguez, CFO, Cerence: Thank you.

Conference Operator: Our next question comes from Jeff Van Rhee with Craig Hallum.

Jeff Van Rhee, Analyst, Craig Hallum: Great. Thanks for taking the question and congrats on the free cash flow. Looks great. The a couple of questions. First on, obviously, the connected products, you’ve got some visibility into the features that people want.

I’m curious if there’s any discernible trends in there that are surprising you in terms of what’s being used or not used. And along that same line, you talked a bit about AI, you talked about some of the capabilities, but as you move more into AI centric offerings, what’s the main opportunity to differentiate from tech bellwethers?

Brian Krzanich, CEO, Cerence: Sure. So, you know, there’s a lot of that I can answer with this, but let’s start actually with the second part of your question about how do we differentiate because that also talks to you a bit about what are people using and what does Connected really get you. The way we differentiate, there are and I tried to talk about it in the call was, one, we believe our technology is leading edge, right? We’re moving into a world where we’re multimodal. We can use sensors and cameras in the vehicle and really add a lot of feature capability to the vehicle.

Second is we’re agnostic. So, when you talk about big tech, they tend to lock you in. They’re going to lock you in to, you know, you’ve got to use a certain navigation tool. You’ve got to use certain LLMs. And every time somebody does a call out to an LLM, you know, what’s the nearest Mexican restaurant who won the football game last night?

Tell me about the weather. That costs money. And as those prices change, as more competitive market comes, OEMs want to be able to move across the LLM marketplace to optimize the features and the costs. And our option of agnostic and able to work with any of them really allows them to do that. That’s a big deal for these guys.

It also future proofs them. Right? We see a lot of development going in LLMs right now. And you don’t know who’s going to be necessarily the leading player in that space two years from now. If you lock yourself in to a Google only answer or an Amazon only answer, then you’re locked in.

And whereas you choose Cerence and we can go anywhere, whether it be, you know, Claude or you want to use Google LLMs or you want to use that whoever it is, we’re able to do that. What are people using? They’re starting to use this as they see the value in this. And really what we’re going to show at the International Auto Show in Munich next month is really the true agentic nature where your car becomes a partner and you can literally just talk to it. And we’re seeing people more and more enjoy that feature.

Hey, my feet are cold. The system knows then to turn on the floor heat. Hey, can you know, want to look at the, you know, what’s the moon like tonight? Well, let me open this skylight and let you look out. Right?

Being able to have that natural discussion is where people are enjoying This is where the real agentic value comes. And just like what we explained with the TV with LG, where you can just say, hey, what are all the Tom Cruise movies that are available right now? It allows you to just ask questions in a natural way and get answers back that are meaningful and helpful. That’s what people are using.

Jeff Van Rhee, Analyst, Craig Hallum: Got it. Helpful. And on the sales front, can you talk about just new bookings in terms of do you feel you’re taking share, holding share, losing share? Curious what you’re seeing there? And then just last for me, modeling related.

26, I realize you’re not giving a guide, but can you give even early thoughts on maybe the consumption you think is a reasonable gross consumption of prepaid for the year that you think is a reasonable range?

Brian Krzanich, CEO, Cerence: So prepaid is easy. We’ve said that we are very comfortable in that same $20,000,000

Jeff Van Rhee, Analyst, Craig Hallum: No, no, was asking consumption, actual prepaid, just the consumption of licenses.

Tony Rodriguez, CFO, Cerence: Yes. I think consumption, you saw really the first and second quarter, our consumption was higher. And you’ve now seen a kind of a run rate of consumption for the last two quarters in like $9,000,000 range, right? And so which again means meant that in the second half, and this is why our variable license was up so much, you know, was one of the components of why it was up 48%, right, is that more of it fell to the bottom line. So sometimes people hear, well, geez, you didn’t have prepaids this quarter, is that a bad thing?

Well, no, we’ve consciously reduced that number annually to this roughly $20,000,000 number. What that means is as we do that, that more of that variable shipments that go out falls to in period revenue. So we’re about $9,000,000 of consumption right now. We haven’t put guidance out for this, but our consumption certainly year over year will not be It will be down just by the level that you’ve seen historically of fixed. The consumption has to go down for the entire year.

Jeff Van Rhee, Analyst, Craig Hallum: You got it. No, go ahead. Was just going to repeat the question, but on the share gain question.

Brian Krzanich, CEO, Cerence: I’d say right now our shares kind of holding where it’s been. We’re not losing anything that we’re currently in. There’s a few RFQs out right now that we’ll see over the next quarter or two that are out for bid. And it’s, you know, we’re very competitive. We’ve, you know, typically made it past round one and we’re in the final round of selection.

So right now we’re holding. I’d say it’s, you know, share wise we’re flat.

Ittai McKaylee, Analyst, TD Cowen: Okay, great. Thank you.

Conference Operator: Our next question comes from Mark Delaney with Goldman Sachs.

Aman Gupta, Analyst, Goldman Sachs: Hi, thank you for taking the questions. Have Aman Gupta on for Mark Delaney. Maybe just on this non automotive expansion that you guys are doing, and congrats on the LG news. Can you maybe help size kind of what that looks like in terms of revenue as it ramps in fiscal twenty six and and onwards? And how we should think about maybe something like a PPU in a large application for a non auto market relative to auto and how that pipeline of just general non auto deals is continuing to evolve?

Brian Krzanich, CEO, Cerence: Sure. So, can’t get forecast for ’26, but I can give you a general how we view those kinds of markets and TVs is good one to just let’s focus on. Typically, price per unit is going to be less, partly because the complexity of the application is not quite there. You’re not having all the car knowledge and having to do navigation along with real time knowledge, like who won the football game and things like that. You’re typically just doing searches within a dataset that’s tied to your provider and things like that.

So, the PPU tends to be a lot less, but the units are quite a bit more. If you just take a look at the number of vehicles sold versus the number of TVs sold worldwide, you can far and away outpace the number of vehicles. If you add a couple of the major TV providers, you can get to a fairly large number. So, we look at it from that perspective in that it’s going to be a lower PPU, but it’s lower technology and a bit simpler of an implementation. It’s mostly cloud based and all.

And we’re not going to do forecasts for ’twenty six though yet. Sorry.

Tony Rodriguez, CFO, Cerence: Yeah. And thinking about that, as you know, the PPU number that we’ve started last quarter giving and continued this quarter is an automotive PPU that’s part of, obviously, our primary market. So, when we think about outside of automotive, I’m not concerned about a decrease in overall PPU because effectively, Brian mentioned, it will be a lower PPU, higher volume, but more importantly, it’ll be additive revenue once those markets start to progress. So that’s the way we should probably think about it.

Aman Gupta, Analyst, Goldman Sachs: Thank you for that color. That’s very helpful. And then maybe for the second one, going back to the auto market. I think last quarter, Brian, you had spoke about some potential pricing pressure from customers. And given some of the tariff changes, how has that evolved?

Are you still seeing that pricing pressure? And then similarly related, are you seeing any continued delays with new awards or design activity? I know you mentioned some program push outs in your prepared remarks as well.

Brian Krzanich, CEO, Cerence: Yeah, I’d say there’s still pricing discussions. We haven’t done any pricing reductions per se. What we’ve done is come back and we’ve talked about this in the past is, how do we make this a win win for both sides? And what we’ve tried to do is say, look, we can lower your overall costs by giving us more of the business, maybe more of the features, and we’ll give you a lower cost for that bigger picture. That way, it’s more revenue for us and a lower price point for them.

So, we have several of those offers out. And Tony talked about the TPU going up this quarter just in general, so that shows you that we didn’t have to do any dramatic price reductions from that standpoint. And then there was a second part of your question. Push outs. We are still seeing a few programs push out.

There’s several that are quote, you know, as I said, our queues are out, we’re in the final stages. They should several of them close this quarter. We’ll see or do those push out. We haven’t, as I mentioned in one of the earlier questions, we haven’t had any major losses where we were competitive and we were trying to do win backs or we had the business before and we’ve lost it. There haven’t been any of those, but there are still several that are pushed and we have several that are coming due and we’re hoping those will close and of course hoping it’ll close in our favor, but we’ll have to wait through the quarter.

Aman Gupta, Analyst, Goldman Sachs: Thank you very much for taking the questions.

Colin Langan, Analyst, Wells Fargo: Appreciate it.

Conference Operator: Our next question comes from Ittai McKaylee with TD Cowen.

Ittai McKaylee, Analyst, TD Cowen: Great. Thank you. Good afternoon. If I have to dig in into some of the xUI wins that you talked about before, could you share some more detail around your number of models that you would launch with particular OEMs, just the penetration levels there and the kind of mix between more premium luxury models versus mass market? I think you mentioned VW as one of wins, but maybe as an example.

Brian Krzanich, CEO, Cerence: Sure. So, I can’t give you like other than what we gave in the prepared remarks. I can say it was somebody within the VW group, but I’m not able to tell you exactly which group and which models, which brand within that group. We did mention JLR as an example. In general, what we’re seeing with those programs is that we are seeing an increase in PPU.

They are typically going across the brand, so it’s not just the luxury end, it’s at least down through the mid, I’ll call it the mid level, mid section of the brand. There’s some very low end brands that maybe they go into other geos and things like that, but can be offering lower levels of the subscription. But in general, it’s pretty broad across the brand as far as a model standpoint, but I’m just not at liberty to tell you there’s, you know, marketing plans and announcements between the two companies that I just VW Group and all is like about as far as I can go with that as an example.

Ittai McKaylee, Analyst, TD Cowen: Yes, no, I absolutely totally understood that. That was actually helpful. Thank you. Just as a follow-up, as we think about non auto ramping in late fiscal twenty twenty six and beyond, should we think about any incremental OpEx to support that growth as well? Or do you think you can achieve that growth kind of with your current OpEx base?

Brian Krzanich, CEO, Cerence: No, I do not expect OpEx growth. I mean, for example, Tony and I did a review today on how we’re becoming more efficient by using artificial intelligence internally to help us write our code, to do some of our Q and A work, to build more tools that allow us to do analytics against our software at a much faster rate. We think there’s just in there, we can get 15 to 20% productivity improvements within our engineering team just by doing that work over the next year and expanding that into a broader. I’ll tell you right now, we’re kind of early in those stages, but we believe we can continue to grow that capability. And so our goal is to push that across the company and to fund our growth through that efficiency.

And so, are going through that. We have regular, like, forums that we’re reviewing at my level, the group’s progress in this space, And we’re talking about how to really make it measurable for next year so we can really see the productivity improvement. And the team’s really excited about that because they look at this as a way to get up to go and do new work and new things. It’s actually fun for them to use these tools and they don’t see it as a risk to their job or anything. They see it as an enhancement in a way that they can be more productive and get more done and do things that they actually didn’t have time to get done in the past, but make the product and the job much better.

So no, I’m not going to fund it with increased OpEx. I’m going to continue to make improvements in OpEx next year and instead fund this through productivity.

Ittai McKaylee, Analyst, TD Cowen: Perfect. That’s very helpful. Thank you.

Conference Operator: That concludes today’s question and answer session. I’d like to turn the call back to Brian Kurzanich for closing remarks.

Brian Krzanich, CEO, Cerence: So I just wanted to close with thank you, everybody, for taking the time out of your busy days to listen to our earnings call. We’re really excited about the results we had in Q3. We’re closing out the year, as we’ve talked about, strong by raising our guidance for the full year from a revenue and from an EBITDA and free cash flow. And we look forward to talking to you at the end of our fiscal Q4 and giving you the results for q four, but also our forecast for 2026, which I know based on your questions is what you guys are all looking forward to and and need in order to continue to help us look at this company. So thank you very much for your time.

Conference Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.