Cerence Stock price
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Key metrics
📘 Market Capitalization
📈 What is it?
Market capitalization shows how much a company is currently worth on the stock market.
🧮 How is it calculated?
🏛️ Why is it important?
It helps classify companies by size (Large, Mid, Small Cap) and indicates their market presence and relative stability.
🧮 Calculation
🎯 What does this mean for investors?
- Large-cap companies tend to be more stable, often pay dividends, but may grow more slowly.
- Smaller firms may offer higher growth potential but come with more volatility.
- Market capitalization is a useful indicator of company size — but not a measure of whether a stock is undervalued or overvalued.
📘 Enterprise Value (EV)
📈 What is it?
Enterprise Value represents the total cost to acquire a company — including its debt and excluding its cash reserves.
🧮 How is it calculated?
(= Market Cap + Net Debt)
🏛️ Why is it important?
EV gives a more complete picture of a company's value than market cap alone and is used in key valuation ratios like EV/FCF or EV/Sales.
🧮 Calculation
🎯 What does this mean for investors?
- Enterprise Value shows the true cost of buying a company, including all financial obligations.
- It is more accurate than just looking at market cap, especially when comparing companies with different levels of debt or cash.
- Professional investors prefer EV-based multiples because they better reflect the company’s full financial footprint.
📘 Net Debt
📈 What is it?
Net Debt shows how much debt remains after subtracting a company’s available cash reserves.
🧮 How is it calculated?
🏛️ Why is it important?
It indicates how dependent a company is on borrowed money and how easily it can service its debt in the short term.
🧮 Calculation
🎯 What does this mean for investors?
- Low or negative net debt signals financial strength and flexibility.
- Companies with strong cash positions are better positioned in crises.
- High net debt increases financial risk — especially in environments with rising interest rates or economic downturns.
📘 Cash
📈 What is it?
Cash represents all liquid assets a company can access immediately — including cash, bank deposits, and short-term investments.
🧮 How is it calculated?
🏛️ Why is it important?
It reflects a company’s financial flexibility and resilience — enabling investments, buybacks, or buffer in downturns.
🧮 Calculation
🎯 What does this mean for investors?
- A strong cash position means greater room for maneuver and crisis resistance.
- Cash-rich companies can invest, pay down debt, or repurchase shares.
- But excess idle cash might indicate a lack of growth opportunities.
📘 Shares Outstanding
📈 What is it?
Shares outstanding represent the total number of a company’s shares currently held by investors — excluding treasury stock.
🧮 How is it calculated?
🏛️ Why is it important?
It’s the basis for key metrics like Earnings Per Share (EPS), Market Capitalization, or the Price/Earnings ratio (P/E).
🧮 Calculation
🎯 What does this mean for investors?
- Fewer shares in circulation typically increase earnings per share — making each share more valuable.
- Share buybacks reduce the number of shares and boost per-share metrics.
- Issuing new shares does the opposite — diluting shareholder value and lowering per-share figures.
📘 Price-to-Earnings Ratio (P/E)
📈 What is it?
The P/E ratio shows how many times a company's earnings per share are reflected in its current share price — in other words, how "expensive" the stock appears relative to its profits.
🧮 How is it calculated?
🏛️ Why is it important?
The P/E ratio is one of the most widely used valuation metrics. It helps investors assess whether a stock appears cheap or expensive compared to its earnings power.
🧮 Calculation
📊 P/E (TTM) = Based on earnings from the last 12 months (Trailing Twelve Months):🎯 What does this mean for investors?
- A low P/E may indicate undervaluation — or signal underlying issues.
- A high P/E may reflect strong growth expectations — or an overvalued stock.
📘 Price-to-Sales Ratio (P/S)
📈 What is it?
The P/S ratio shows how much investors are paying for $1 of the company’s revenue – regardless of profitability.
🧮 How is it calculated?
🏛️ Why is it important?
P/S is especially useful for evaluating growth companies or businesses not yet profitable. It reflects how the market values the company’s sales.
🧮 Calculation
Market Cap = $359.58m | Revenue (TTM) = $309.49m
Market Cap = $359.58m | Estimated Revenue = $319.02m
🎯 What does this mean for investors?
- A low P/S may indicate undervaluation — or low profitability.
- A high P/S can reflect strong growth expectations — or excessive optimism.
- Especially helpful when evaluating companies where profits are low, volatile, or negative.
📘 Enterprise Value to Sales (EV/Sales)
📈 What is it?
EV/Sales shows how much investors are paying for $1 of revenue — considering not just equity, but also debt and cash. It’s the capital structure–adjusted version of the P/S ratio.
🧮 How is it calculated?
🏛️ Why is it important?
It’s ideal for comparing companies with different levels of debt. It reflects a company's true cost relative to its revenue.
🧮 Calculation
Enterprise Value = $405.43m | Revenue (TTM) = $309.49m
Enterprise Value = $405.43m | Forward Revenue = $319.02m
🎯 What does this mean for investors?
- EV/Sales allows for capital structure–neutral company comparisons.
- A lower ratio may indicate undervaluation; a higher one may signal strong growth expectations or overvaluation.
- Especially helpful when evaluating high-growth companies with low or negative earnings.
📘 Enterprise Value to Free Cash Flow (EV/FCF)
📈 What is it?
EV/FCF shows how many years it would take for a company to "pay back" its enterprise value using its free cash flow.
🧮 How is it calculated?
🏛️ Why is it important?
It focuses on real cash generation, ignoring accounting noise — ideal for assessing profitability and value based on liquidity, not earnings.
🧮 Calculation
🎯 What does this mean for investors?
- A low EV/FCF may signal undervaluation and strong cash generation.
- A high EV/FCF might reflect weak recent cash flow or aggressive growth expectations.
- Best suited for stable, mature businesses with predictable free cash flows.
📘 Price-to-Book Ratio (P/B)
📈 What is it?
The P/B ratio compares a company’s market value to its book value — showing how much investors are paying for each dollar of net assets.
🧮 How is it calculated?
🏛️ Why is it important?
P/B is commonly used for asset-heavy industries like banks or industrials. It helps assess whether a stock is trading above or below its net asset value.
🧮 Calculation
🎯 What does this mean for investors?
- A P/B below 1 may signal undervaluation — or weak profitability.
- A P/B above 1 implies the market expects future value creation (e.g., brand, IP, growth).
- Best used for companies with tangible assets and strong balance sheets.
📘 Equity Ratio
📈 What is it?
The equity ratio indicates what portion of a company’s total assets is financed by shareholders’ equity – in other words, how much it relies on its own capital.
🧮 How is it calculated?
🏛️ Why is it important?
A high equity ratio reflects financial strength and stability, especially during downturns. It’s a key indicator of a company’s solvency and long-term risk profile.
🧮 Calculation
🎯 What does this mean for investors?
- Companies with high equity ratios are generally more resilient and less dependent on external debt.
- Low equity ratios can signal higher risk or aggressive financial strategies.
- Important: Always assess the equity ratio in combination with the return on equity (ROE). This shows not just how stable the company is – but also how efficiently it uses shareholder capital.
📘 Return on Equity (ROE)
📈 What is it?
Return on equity (ROE) shows how efficiently a company uses its shareholders’ equity to generate profit. In other words: how much net income is earned per dollar of equity.
🧮 How is it calculated?
🏛️ Why is it important?
ROE is a core profitability metric. It helps investors understand whether a company delivers attractive returns on the capital provided by its shareholders.
🧮 Calculation
🎯 What does this mean for investors?
- A high ROE indicates that the company is using its capital efficiently and profitably.
- It’s especially meaningful for capital-intensive businesses or firms with high equity bases.
- Important: A very high ROE can also result from high debt levels – always interpret it alongside the equity ratio to assess financial health.
📘 Return on Capital Employed (ROCE)
📈 What is it?
ROCE measures how efficiently a company generates profits from its total capital – including both equity and interest-bearing debt.
🧮 How is it calculated?
It evaluates the return on all capital employed, regardless of how it’s financed.
🏛️ Why is it important?
ROCE is ideal for comparing companies with different financing structures. It shows how well management uses capital to create value for both shareholders and creditors.
🧮 Calculation
🎯 What does this mean for investors?
- A high ROCE means the company uses its capital efficiently – regardless of whether it's funded by debt or equity.
- The higher the ROCE compared to peers, the more value the company creates with its invested capital.
- Especially relevant for capital-intensive sectors like industrials, energy, or infrastructure.
📘 Return on Invested Capital (ROIC)
📈 What is it?
ROIC measures how efficiently a company generates returns from the capital invested in its core operations – regardless of whether the capital comes from equity or debt.
🧮 How is it calculated?
- NOPAT = Net Operating Profit After Taxes
- Invested Capital = Operating assets minus non-interest-bearing liabilities
🏛️ Why is it important?
ROIC is one of the most accurate indicators of capital efficiency. Unlike return on equity, it is not distorted by leverage and shows how much value is created for all capital providers.
🧮 Calculation
🎯 What does this mean for investors?
- A high ROIC shows how effectively a company uses the capital that is truly invested in its core operations.
- Unlike ROCE, ROIC focuses only on the capital that is actively used to run the business – and that requires a return (i.e. interest-bearing).
- Especially useful when comparing companies with large amounts of excess cash or non-interest-bearing liabilities – giving a more realistic picture of capital efficiency.
📘 Leverage Ratio (Debt-to-Equity)
📈 What is it?
The leverage ratio indicates how much a company relies on interest-bearing debt (such as loans and bonds) relative to its shareholders’ equity.
🧮 How is it calculated?
🏛️ Why is it important?
This ratio helps assess a company’s financial structure and risk profile. High leverage can enhance returns – but also increases exposure to interest rate changes and financial stress.
🧮 Calculation
🎯 What does this mean for investors?
- A low leverage ratio signals financial strength and independence.
- A higher ratio can improve returns in good times but increases risk during downturns or rising interest rate periods.
- 👉 Always interpret in the context of industry, capital intensity, and interest rate environment.
📘 Revenue
📈 What is it?
Revenue shows how much a company earns in total from selling its products and services – the gross income before any costs are deducted.
🧮 How is it calculated?
🏛️ Why is it important?
Revenue is one of the key figures to assess a company’s size, market position, and growth potential.
🧮 Calculation
🎯 What does this mean for investors?
- Growing revenue indicates rising demand and can be an early signal of future earnings growth.
- Comparing actual and expected revenue reveals trends in the market environment and analyst sentiment.
- Note: Strong revenue alone isn’t enough – margins and profitability matter just as much.
📘 EBITDA
📈 What is it?
EBITDA stands for “Earnings Before Interest, Taxes, Depreciation, and Amortization.” It reflects a company’s operating profit before the effects of financing, taxes, and accounting depreciation.
🧮 How is it calculated?
🏛️ Why is it important?
EBITDA is widely used to evaluate a company’s operating performance – especially across capital-intensive sectors or international comparisons.
🧮 Calculation
🎯 What does this mean for investors?
- A high or growing EBITDA indicates strong operational profitability – independent of taxes, interest, or accounting methods.
- It’s especially useful for comparing companies across sectors or geographies.
- Important: EBITDA is not a net income figure – it excludes key costs like depreciation and interest.
📘 EBIT
📈 What is it?
EBIT stands for “Earnings Before Interest and Taxes.” It reflects a company’s operating profit after depreciation, but before interest and tax expenses.
🧮 How is it calculated?
🏛️ Why is it important?
EBIT is a core profitability metric that shows how well the company performs in its main business operations – independent of capital structure and tax environment.
🧮 Calculation
🎯 What does this mean for investors?
- A high EBIT indicates strong profitability from the company’s core business – before financial and tax effects.
- It allows better comparison between companies with different debt levels or tax structures.
- Compared to EBITDA, EBIT already accounts for depreciation and reflects capital intensity more clearly.
📘 Net Income
📈 What is it?
Net income is the company’s total profit – the amount left after all expenses, taxes, interest, and depreciation have been deducted.
🧮 How is it calculated?
🏛️ Why is it important?
Net income is the most comprehensive measure of a company’s profitability – showing how much actual profit remains after all business and financing costs.
🧮 Calculation
🎯 What does this mean for investors?
- Growing net income indicates that the company is managing all of its costs efficiently.
- It directly influences valuation metrics like P/E ratio and the company’s dividend capacity.
- Over time, net income trends reveal how resilient and profitable the business model really is.
📘 Free Cash Flow (FCF)
📈 What is it?
Free Cash Flow shows how much actual cash remains after a company covers its operating expenses and capital expenditures.
🧮 How is it calculated?
🏛️ Why is it important?
FCF reflects a company’s real financial strength – regardless of accounting profits. It shows how much flexibility a company has for dividends, share buybacks, or debt reduction.
🧮 Calculation
🎯 What does this mean for investors?
- High free cash flow means the company generates real, usable cash – independent of reported net income.
- It’s often the most reliable base for sustainable dividends and buybacks.
- Declining FCF can be an early warning sign – even when profits appear stable.
📘 Revenue Growth
📈 What is it?
Revenue growth shows how much a company’s sales have changed compared to the previous year – both on a trailing basis (TTM) and based on forward projections.
🧮 How is it calculated?
Forward = (Expected revenue ÷ Revenue in prior year − 1) × 100
Forward growth is based on analyst estimates for the current fiscal year.
🏛️ Why is it important?
Rising revenue signals growing demand, business expansion, and market share gains – especially important for growth-oriented companies.
🧮 Calculation
🎯 What does this mean for investors?
- Growth is the engine of long-term value creation – especially in tech and growth sectors.
- What matters is not just current growth, but its sustainability.
- Forward projections reflect whether analysts expect continued momentum – or a slowdown.
📘 EBITDA Growth
📈 What is it?
EBITDA growth shows how much a company’s operating profit (before interest, taxes, depreciation, and amortization) has increased or decreased compared to the previous year.
🧮 How is it calculated?
Forward = (Expected EBITDA ÷ EBITDA from prior year − 1) × 100
The forward estimate is based on analyst projections for the current fiscal year.
🏛️ Why is it important?
Growing EBITDA indicates improving operational profitability – regardless of financing or accounting effects.
🧮 Calculation
🎯 What does this mean for investors?
- Strong EBITDA growth signals operational efficiency and scalability – especially during growth phases.
- EBITDA growth can be an early indicator of margin and earnings expansion – but should be assessed alongside revenue and EBIT.
📘 EBIT Growth
📈 What is it?
EBIT growth shows how much a company’s operating profit (after depreciation, but before interest and taxes) has increased compared to the previous year.
🧮 How is it calculated?
Forward = (Expected EBIT ÷ EBIT from prior year − 1) × 100
The forward estimate is based on analyst projections for the current fiscal year.
🏛️ Why is it important?
EBIT growth is a direct indicator of a company’s business performance – taking into account capital intensity through depreciation.
🧮 Calculation
🎯 What does this mean for investors?
- Rising EBIT signals improving operating profitability – even after accounting for depreciation.
- It’s especially important for evaluating companies with significant capital expenditures.
- Combined with revenue and EBITDA growth, EBIT growth provides a well-rounded view of operational progress.
📘 Net Income Growth
📈 What is it?
Net income growth shows how much a company’s bottom-line profit has increased or decreased compared to the previous year – both on a trailing basis (TTM) and based on analyst projections.
🧮 How is it calculated?
Forward = (Expected net income ÷ Net income from prior year − 1) × 100
The forward estimate reflects analysts’ expectations for the current fiscal year.
🏛️ Why is it important?
Net income is the ultimate measure of profitability. Growing net income signals stronger efficiency, cost control, and sustainable earnings power.
🧮 Calculation
🎯 What does this mean for investors?
- Stronger net income boosts valuation, dividend potential, and investor confidence.
- If profits stall while revenue grows, it may signal margin pressure.
📘 Free Cash Flow Growth
📈 What is it?
Free cash flow (FCF) growth shows how a company’s available cash – after covering operating expenses and capital expenditures – has changed compared to the previous year.
🧮 How is it calculated?
🏛️ Why is it important?
Free cash flow reflects real financial strength. Growing FCF indicates more flexibility for dividends, share buybacks, and reinvestment.
🧮 Calculation
🎯 What does this mean for investors?
- Declining FCF may point to rising investments, increasing costs, or weaker operating performance.
- Especially for dividend investors, FCF growth is critical – since dividends are paid from actual available cash.
- A negative trend isn't always bad, but it deserves closer attention.
📘 Gross Margin
📈 What is it?
Gross margin shows how much of a company’s revenue remains after deducting the direct costs of goods sold (like materials and production). It represents the company’s “raw profit” before fixed costs, taxes, and interest.
🧮 How is it calculated?
Or simply: Gross Margin = Gross Profit ÷ Revenue × 100
🏛️ Why is it important?
Gross margin indicates how efficiently a company can produce or procure what it sells. It is a key measure of product-level profitability and pricing power.
🧮 Calculation
🎯 What does this mean for investors?
- A high gross margin suggests strong pricing power and efficient production.
- Falling margins may signal rising input costs or competitive pressure.
- Compared to peers, gross margin offers insights into the quality of a business model.
📘 EBITDA Margin
📈 What is it?
The EBITDA margin shows how much of a company’s revenue remains as operating profit before interest, taxes, depreciation, and amortization.It reflects operating efficiency without being distorted by financing or accounting factors.
🧮 How is it calculated?
🏛️ Why is it important?
The EBITDA margin reveals how much operating income a company generates per dollar of revenue – independent of capital structure and tax effects.
🧮 Calculation
🎯 What does this mean for investors?
- A high EBITDA margin reflects strong core profitability – before accounting distortions.
- It allows for effective comparisons across companies and sectors.
- A stable or growing margin signals efficient cost control and business scalability.
📘 EBIT Margin
📈 What is it?
The EBIT margin shows what percentage of revenue remains as operating profit after depreciation but before interest and taxes.
🧮 How is it calculated?
🏛️ Why is it important?
The EBIT margin reflects a company’s core profitability while accounting for capital intensity (e.g. machinery, infrastructure). It’s especially useful for comparing businesses with different levels of depreciation.
🧮 Calculation
🎯 What does this mean for investors?
- A high EBIT margin shows that the company remains efficient even after factoring in depreciation.
- It’s especially relevant for capital-intensive industries.
- Stable or rising EBIT margins over time are a strong indicator of pricing power and business quality.
📘 Net margin
📈 What is it?
Net margin shows how much of a company’s revenue remains as bottom-line profit after deducting all costs, interest, taxes, and depreciation.
🧮 How is it calculated?
🏛️ Why is it important?
Net margin reflects a company’s overall efficiency – across operations, financing, and taxation. It shows how much actual profit is generated from each dollar of revenue.
🧮 Calculation
🎯 What does this mean for investors?
- A high net margin means the company is not only strong operationally but also manages financing and taxes efficiently.
- Peer comparisons reveal business quality and competitiveness.
- Declining margins despite revenue growth can be a red flag for rising costs or inefficiencies.
📘 Free cash flow margin
📈 What is it?
The free cash flow (FCF) margin shows how much of a company’s revenue remains as actual free cash after covering all operating expenses and capital expenditures.
🧮 How is it calculated?
🏛️ Why is it important?
This margin reflects the true liquidity generated by the business – independent of accounting rules or depreciation. It’s especially relevant for dividends, buybacks, and reinvestment decisions.
🧮 Calculation
🎯 What does this mean for investors?
- A high FCF margin means a company consistently generates strong cash flow.
- It’s a positive signal for financial stability and shareholder returns.
- The long-term trend is key – a declining margin may indicate rising investments or weakening operating efficiency.
📘 Earnings per share (EPS)
📈 What is it?
Earnings per Share (EPS) shows how much profit is attributable to a single share – and is one of the most important metrics for evaluating a company's performance.
🧮 How is it calculated?
The diluted share count reflects potential new shares that could be issued through options, convertible bonds, or other rights.
🏛️ Why is it important?
EPS is the basis for many key valuation metrics like P/E ratio, PEG ratio, or payout ratio. It enables comparisons of profitability across companies, regardless of their size.
🧮 Calculation
🎯 What does this mean for investors?
- EPS captures per-share profitability and is especially useful for comparisons over time or with analyst estimates.
- Rising EPS may signal consistent growth or share buybacks.
- Important: Always use diluted EPS for more realistic valuations – especially in companies with stock-based compensation.
📘 Free cash flow per share (FCF per share)
📈 What is it?
Free Cash Flow per Share shows how much free cash flow a company generates per outstanding share – after investments, but before dividends or debt repayments.
🧮 How is it calculated?
Free cash flow is calculated as operating cash flow minus capital expenditures (CapEx).
🏛️ Why is it important?
FCF per Share reveals how much real cash is available per share – useful for dividends, buybacks, or reducing debt. Unlike net income, free cash flow is harder to manipulate and often seen as a more reliable metric.
🧮 Calculation
🎯 What does this mean for investors?
- High FCF per share signals strong financial flexibility.
- It shows how much capital the company can effectively reinvest or return to shareholders.
- Particularly relevant for dividend payers and capital-efficient businesses.
📘 Short interest
📈 What is it?
Short interest indicates how many shares of a company are currently sold short – that is, borrowed and sold by investors who expect the price to decline.
🧮 How is it calculated?
It reflects the percentage of a company’s shares that are being shorted relative to the total shares available.
🏛️ Why is it important?
Short interest serves as a sentiment indicator: A high value may signal skepticism or bearish expectations – but also increases the potential for a short squeeze if prices rise unexpectedly.
🧮 Calculation
🎯 What does this mean for investors?
- Low short interest usually indicates market confidence in the company.
- High short interest can be a warning sign – or an opportunity if sentiment shifts.
- Especially relevant in volatile markets or ahead of key earnings releases.
📘 Employees
📈 What is it?
The employee count shows how many people a company employs worldwide – offering insights into its size, structure, and business model.
🧮 How is it calculated?
🏛️ Why is it important?
It helps assess operational scale, labor intensity, and cost structure. Combined with revenue and profit, it enables key metrics like revenue per employee or productivity.
🧮 Calculation
🎯 What does this mean for investors?
- A high headcount can signal operational complexity – but also significant growth capacity.
- Revenue per employee is a key indicator of efficiency.
- Especially useful for comparing tech, industrial, or service-heavy companies.
📘 Turnover per employee
📈 What is it?
Revenue per employee indicates how much revenue a company generates on average per employee – a key measure of efficiency and productivity.
🧮 How is it calculated?
The employee count is typically taken from the most recent annual report.
🏛️ Why is it important?
This metric helps compare business models – especially between labor-intensive and technology-driven companies. A high value suggests automation, operational efficiency, or strong value creation per head.
🧮 Calculation
🎯 What does this mean for investors?
- A high revenue per employee indicates a scalable and margin-strong business model.
- A low figure may reflect labor-intensive operations or lower value-add.
- Especially helpful when comparing tech companies to industrial or service sectors.
Cerence Stock Analysis
Analyst Opinions
11 Analysts have issued a Cerence forecast:
Analyst Opinions
11 Analysts have issued a Cerence forecast:
Cerence Events
Past Events
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AUG
6
Q3 2026 Earnings Call
about 2 months ago
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MAY
7
Q2 2026 Earnings Call
5 months ago
|
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FEB
4
Q1 2026 Earnings Call
8 months ago
|
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NOV
19
Q4 2025 Earnings Call
10 months ago
|
StocksGuide Free
Cerence — Q3 2026 Earnings Call
1. Management Discussion
Thank you. Thank you. Good day, and thank you for standing by. Welcome to the Sarence Third Quarter 2026 Earnings Conference Call. At this time, all participants are in a listening mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again.
Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kate Hickman, Vice President, Corporate Communications and Investment Relations. Please go ahead.
Hello everyone and welcome to SARINS' third quarter 2026 conference call. Before we begin, I would like to remind you that this call may involve certain forward-looking statements. statements that are not statements of historical fact, including statements related to our expectations, anticipation, intentions, estimates, assumptions, beliefs, outlook, strategies, goals, priorities, objectives, targets, and plans are forward-looking statements. CERNS 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 8K with the press release preceding today's call, our most recent Form 10Q, and our Form 10K filed on November 20, 2021. In addition, the company may refer to certain non-GAAP measures, key performance indicators, and pro forma 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. is available in the investor section of our website. Joining me on today's call are Brian Kruzanich, CEO and Tony Rodriguez, CFO.
Please note that slides with further context are available in the investor 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 2026 Industrial Showcase on August 13th and the Needham Virtual Semiconductor and Semicap Conference on August 19th. Now on to the call.
Thank you, Kate, and good afternoon, everyone. Now, before we dig in, I'd like to briefly reflect on Sarance's progress as I approach my two-year anniversary as CEO in October. And when I stepped into the role, we established a clear roadmap. first year was about strengthening the foundation of the business, improving our financial profile, restoring profitability, generating cash flow. and reducing debt. I believe we delivered on those commitments. Now, we said the second year would be about execution as we approach the end of fiscal year 26. I believe we have delivered there as well. We advanced our technology roadmap by bringing XUI from concept to production.
We improved free cash flow, and we are continuing to create value for customers and shareholders. Most importantly, we're now beginning to see the early stages of our next chapter. XUI is entering into commercialization phase. Our Jetix AI portfolio is gaining traction. And our non-automotive initiatives are beginning to move from proof points toward revenue contribution. We believe that our fiscal third quarter results demonstrate a company executing against its strategy, delivering strong financial performance. and positioning itself for future growth. In Q3, we delivered another strong quarter, with revenue of approximately $70 million, in line with our guidance. adjusted EBITDA above the high end of our guidance at $13.5 million, and free cash flow of $20 million.
Importantly, we continue to grow our recurring connected services business with revenue up more than 20% year over year. This growth further increases the recurring portion of our revenue mix, enhancing visibility into the future performance. and demonstrates the value of the connected platform we've built across our installed base. Looking ahead to the rest of the fiscal year, we're again raising our fiscal year 26 free cash flow guidance. to $76 million to $82 million, and narrowing most of our remaining forecasts as we approach the end of fiscal year 26. Given the continued cash generating strength of our business, I'd like to give an update on our capital allocation strategy. As mentioned in the past, we have several core capital allocation priorities. all focused on delivering returns to our shareholders. Investing organically to support growth, reducing debt, managing equity dilution, and selectively pursuing inorganic opportunities that can enhance our long-term growth and strategic position. And we evaluate these priorities based on the opportunities available to us, the strength of our balance sheet, and where we believe capital can generate attractive, rich, and adjusted return for shareholders.
With that, I'm pleased to share that our Board has authorized CERNS' first ever share repurchase program. This reflects our confidence in the business, the progress we've made in improving profitability and cash generation, and our commitment to discipline capital allocation. As we look ahead, we remain focused on creating long-term shareholder value through execution, strategic investment, and prudent capital allocation. The Stock Repurchase Program adds another tool to that approach while preserving our flexibility to continue investing in growth and reducing debt while also helping to offset dilution. and Tony will provide further details on the program. Now, turning to updates and highlights from the quarter, continue to see strong investment in next-generation AI-powered user experiences. automakers increasingly view AI not as a discretionary investment, but at a strategic priority that reinforces the competitive position. As vehicles become more software defined, automakers are seeing differentiated user experiences that reinforce their brand, improve customer satisfaction, and create opportunities for recurring revenue. That's where we believe CERNS AI continues to be uniquely positioned and why we continue to win.
We combine decades of automotive expertise with leading AI capabilities, enabling OEMs to bring powerful conversational experiences to market while reducing complexity, cost, and execution risk. As a result, despite the dynamic industry that OEMs are navigating, engagement remains strong. Our pipeline continues to develop and interest in our next generation platform is growing. Xerence XUI, which is now available in nearly 20 languages, remains the center of our automotive strategy. In Q3, we signed a new XUI deal with Stellantis, who expects to deploy our platform across multiple brands and regions initial production having recently started. And throughout the quarter, we continued to advance our XUI programs with JLR, a VW Group brand, BYD, Geely, and a major Japanese automaker. Several of these programs have started production or are expected to start production in fiscal Q4.
Today, we have approximately 100,000 XUI-powered cars on the road, an important milestone in bringing this technology to market and consistent with what we've said in the past, that XUI will begin its ramp at the end of 26 and impact revenue during fiscal year. year 27 and beyond as additional programs enter production and vehicle volume scale. And we continue to expect XUI deployments to support higher average price per unit, reflecting its broader functionality, increased software content, and expanding agented capabilities. A testament to the value we're bringing to our customers, Cirence AI was recognized at JLR's Global Supplier Excellence Awards in June. ELR honored us with their exceptional creator recognition, a special category they introduced specifically to highlight truly outstanding partners. In their nomination, the JLR team highlighted how we fast tracked our partnership into a true AI era collaboration. They specifically called out Sarence's flexibility as a key enabler in their ability to adopt a new AI capabilities faster and innovate with confidence. That expectation, paired with our disciplined delivery and sharp road map alignment, is now their blueprint for future-facing technology.
We believe this recognition validates not only our technology, but also our ability to serve as a trusted strategic partner as OEMs transition to next-generation AI platforms. During the quarter, we also advanced our Jet-Tec AI roadmap across parking, dining, and other task-oriented experiences. Our goal is to evolve the in-vehicle assistant from a system that primarily responds to requests into an agentic experience that can take action and help users complete tasks in context. Of note, we reached an important milestone in this strategy in Q3 by signing the first customer for our mobile work agent, developed in collaboration with Microsoft. The customer is a global premium automaker and an existing Sarence customer with rollout expected to begin in fiscal Q4. We believe this win is significant for two reasons. First, it demonstrates our ability to quickly deploy a complex agent that turns a car into a managed, trusted device compliant access to enterprise tools in the Microsoft 365 suite.
Second, it validates our strategy to sell and deploy agents on a stand-alone basis. Not only can these agents be deployed within new XUI programs, but they can also be integrated into non-XUI programs and even competitive stacks. This expands our addressable opportunity and gives OEMs a flexible path to introduce adjusted We're in talks with several other automakers to deploy our mobile work agent in the near future. Now, beyond XUI and our agent roadmap, we continue to win business across our broader technology portfolio. During the quarter, we signed our first customer for exterior vehicle interaction. which extends the reach of the vehicle's voice assistant outside the cabinet, allowing drivers to use their voice to perform authenticated vehicle actions, unlocking doors or opening the trunk. We also secured winds across our stack with Subaru, HKMC and GM. We signed an emergency vehicle detection program with a Chinese robo-taxi company. and a CERN's assistant program with Stellantis, for the vehicles that will not initially use XUI.
These programs have the potential to generate recurring business, maintain our seat at the table within the OEM technology stack, and create opportunities to expand our role over time, even when customers use multiple technologies. We are also making progress in extending our voice AI and agentic capabilities beyond the vehicle. we continue to focus on complex environments similar to the car, including commercial and industrial operations, robotics, and select IoT applications. We believe our products have the ability to serve as the trusted interaction layer across a broad range of verticals, where our edge AI, reliability, security, and domain-specific integration translate well and provide a meaningful competitive advantage. One example of our progress is the launch of our dealer assistant agent. live at infinity of Grand Rapids, Michigan, targeting a real pain point for dealerships, missed and after-hours sales and service calls that can translate into lost leads and revenue. Thank you. Our AI agent provides an always-on, instant response, serving as a virtual expert on vehicle features, scheduling test drives, and booking service appointments while freeing staff from routine repetitive calls. Since the program went live, dealer assistant agent has delivered measurable business impact to the customer with 100% of after-hour calls now being captured. There's been a 20% increase in sales opportunities, driven by always-on lead engagement and qualification. and nearly 30% increase in service appointments booked in improving utilization, and capturing additional service revenue.
While this is an early deployment, we believe that it demonstrates the impact of our GenTech solutions can deliver. And with tens of thousands of car dealerships worldwide, we see this as a promising growth opportunity. Consistent with our prior outlook, we expect approximately $7 million to $9 million in non-auto revenue forecasted for full fiscal 2026. and the larger opportunity ahead of us in fiscal year 27 and beyond. our next earnings call, we look forward to providing you additional details on our fiscal year 2027 roadmap, forecast, and strategy for building a meaningful business beyond automotive. In terms of our intellectual property strategy and ongoing enforcement efforts, we continue to actively protect our technology and investments as part of the orderly course of our business. while the timing of IP-related outcomes can be difficult to predict on a quarterly basis. We believe these efforts support our broader commitment to innovation and long-term shareholder value. And we'll continue to keep you posted as additional progress is made. As we approach the end of fiscal 2026, I want to close with the four drivers that that underpin our belief in CERNS' long-term value.
First, CERNS occupies an important position in the automotive AI stack, supported by deep OEM relationships a large install base and durable recurring revenue. Second, our XUI and Agentech AI WINS provide an opportunity for ongoing growth and higher revenue per vehicle as these programs enter production and scale. And third, we continue to deliver strong free cash flow while maintaining our focus on disciplined capital allocation. We believe that our business model supports debt reduction, balance sheet strength, inorganic growth, and the strategic and operational flexibility necessary to make key decisions like our stock repurchase program. And fourth, our expansion outside of automotive and our IP enforcement efforts provide additional sources of potential long-term value. And with that, I'll turn it over to Tony. Thank you, Brian.
Good afternoon, everyone, and thank you for joining us today. We appreciate your continued interest in Sarens. Today, I'll review our third quarter fiscal 2026 results. highlight the key drivers of the quarter, and then provide guidance for our fourth quarter and the resulting full fiscal year. For the quarter, total revenue was approximately $70 million, within our guidance range of $68 to $72 million, and up 12% from $62 million in the prior year period. The increase was led by higher license revenue, including the timing of fixed license contract execution, a positive shift to recurring connected service revenue. Total license revenue was $41.6 million, up 22% year-over-year, reflecting the higher fixed license contribution this quarter. Fixed license revenue was $12.5 million this quarter compared to no fixed license revenue in the prior year period and above the approximately $10 million contemplated in our Q3 guidance.
As we've discussed, fixed license revenue can vary quarter to quarter based on the timing of contract execution. We do not expect any additional fixed license revenue for the remainder of the fiscal year. Variable license revenue for the quarter was $29.1 million, down 15% year-over-year. Two factors drove the decrease. First, the comparison was against an exceptionally strong prior year quarter that benefited from higher than normal production, as some manufacturers built ahead of anticipated tariff impacts and from favorable foreign exchange rates. Second, our unit volumes came in below the broader market this quarter. Production of vehicles with CERN's technology was down 8% year over year, while global light vehicle production declined roughly 2%. Based on the customer production data available to us, the difference relative to the broader market primarily reflects our specific OEM and regional mix.
Much of the global market's relative resilience came from regions where we have limited presence, such as South America and South Asia. while the OEMs and regions that represent the majority of our volume saw softer production. This was compounded by a period of program life cycle transition. some programs winding down faster than their replacements are ramping. That said, we have not seen a change in pricing or economics to our existing programs, and we have continued to experience recent design win activity. Connected services revenue was $15.5 million, up 20% year-over-year, driven by continued expansion of our connected install base and a higher attach rate. We believe that this growth underscores the increasing importance of connected service revenue within our business model and provides improved visibility into future performance. Professional services revenue was $12.5 million, down 18% year-over-year, reflecting our continued focus on standardization and higher margin implementations, as well as the impact of revenue deferrals when services are bundled with license arrangements. Gross margin for the quarter was 76% compared to 74% in the prior year period and in line with the high end of our guidance range of 75 to 76%.
The improvement over prior year was driven primarily by favorable revenue mix, including the higher fixed license contribution, along with continued discipline across cost of revenue. adjusted EBITDA for the quarter was $13.5 million, an increase of $4.5 million or 51% year over year. and a guidance range of $8 to $12 million. With revenue finishing near the midpoint of our range, this outperformance was driven by favorable margin mix and operating expenses below plan. A portion of the expense variance was timing related and is expected to normalize in the fourth quarter, while the remainder reflects our continued cost discipline. Total non-GAAP operating expenses were $43 million compared to $40 million in the prior year period. Non-GAAP R&D expenses was $26.5 million, up from $24.4 million, reflecting lower capitalization of internally developed software rather than an increase in overall investment, total technology spending remains stable. Non-GAAP sales and marketing expense was $4.6 million. down year over year by about 8%, but consistent with continued investment to support our customer base and long-term growth initiatives. Non-GAAP G&A expense was $11.5 million, up from $10.1 million, reflecting normalized general operating costs as well as additional legal expenses associated with our ongoing efforts to protect, enforce, and license our IP portfolio.
Excluding the one-time legal costs incurred in Q1 to secure our patent license agreement with Samsung, we expect full-year fiscal 2026 IP-related legal costs of approximately $9 From a GAAP profitability perspective, Q3 net income was $1.5 billion, with diluted EPS was $0.03. versus a net loss of $2.7 million and a net loss per share of $0.06 a year ago. On taxes, the Samsung-related withholding tax is spread across the year through our estimated annual effective tax rate. So it isn't confined to the quarter in which it occurred. front-loaded our tax expense in Q1 above the expected full year total and impacts taxes even in quarters with little or no pre-tax income like here in Q3. We continue to model full-year tax expense of approximately $20 million, consistent with our prior projection range. with a significant tax benefit expected in Q4. During Q3, we generated $20 million of cash from operations and $20 million of free cash flow, continuing our strong cash conversion performance. We ended the quarter with $128 million in cash and cash equivalents, which we believe provides significant flexibility to invest in our strategic priorities while further strengthening the balance sheet. As we evaluate capital allocation, we continue to maintain a strong financial position and invest in the business while deploying excess capital toward opportunities that offer the highest risk-adjusted returns.
In the current environment, that may include discounted debt repurchases, share repurchases, and selective strategic investments that support our long-term growth objectives. Putting that framework into action, earlier this fiscal year we repurchased a portion of our 2028 convertible notes at a discount to PAR, reducing interest expense and leverage. Building on that, as Brian mentioned, today we announced that our board has approved our first share repurchase program, authorizing the repurchase of up to $30 million of our common stock over the next 12 months. We intend to execute through open market purchases, funded from cash on hand and free cash flow, while preserving the flexibility to keep investing in the business. and to address our remaining outstanding convertible notes. The program does not obligate us to repurchase any specific amount, and we expect to stay disciplined as we consider our capital allocation priorities. From a metric standpoint for Q3, production of vehicles with CERN's technology totaled 11.4 million in the quarter, compared to 12.4 million a year ago. Connected cars shipped increased 4% on the trailing 12-month basis, while recurring connected services revenue grew 20%, reflecting higher attach rates and per-unit economics.
Adjusted total billings were $240 million, up 6% year-over-year. Pro-forma royalties were $38 million compared to $43 million in the prior year period, reflecting the lower production volumes. Fixed license consumption within that quarter total was $8.7 million. Before turning to guidance, let me put the XQI wins Brian discussed into financial context. From an accounting perspective, we recognized revenue as licenses shipped and as connected services are delivered. So new program wins flow through our reported results in stages rather than all at once. For multi-year platform transitions such as XUI, that cycle plays out over several years.
As a result, the wins we've announced are not fully reflected in our current revenue run rate and for connected services, but near-term impact will show up first in billings with more meaningful revenue contribution phasing in during fiscal 2027 and beyond. These programs carry attractive per unit economics that we expect to support both revenue growth and margin as they scale. Also, consistent with Brian's comments, our current outlook continues to assume only modest initial contribution from non-automotive programs as we exit FY26, with the larger opportunity remaining primarily a fiscal 2027 and beyond growth driver. Turning to the fourth quarter, with respect to the sequential progression, there are two dynamics to keep in mind. First, our third quarter results included $12.5 million of fixed license revenue. And consistent with the timing-driven nature of these arrangements, we are not contemplating any fixed license revenue in the fourth quarter. Second, we expect a normal seasonality with production volumes often stepping down a bit from the third quarter to the fourth.
Together, this means we expect fourth quarter revenue to be lower on a sequential basis. For the fourth quarter, we expect revenue between $61 and $65 million. margin between 72 and 75 percent, expected EBITDA between 1 and 5 million dollars, net income in the range of 1 to 5 million dollars, and diluted EPS between 2 cents and 10 cents. I want to be clear that this guidance reflects the timing of fixed license revenue in ordinary seasonal patterns, not a change we see in the health of the underlying business. Excluding the fixed license revenue recognized in Q3, the midpoint of our fourth quarter revenue outlook is higher than our underlying Q3 revenue level. Our per-unit economics have remained intact, our recurring connected services revenue of 20% year-over-year has continued to grow, and our design wind momentum is expected to support future volume. A couple of further notes on the fourth quarter. First because the fourth quarter does not carry the high margin contribution from fixed license we expect gross margin to normalize below the 76% we reported in the third quarter.
Second, as we discussed previously, the Samsung IP license resulted in a unusually high tax expense earlier in the year, particularly in the first quarter. The expected fourth quarter benefit is incorporated into our Q4 and full year outlook. Taken together with our year-to-date results, this Q4 outlook is contemplated within the full-year guidance I'll walk through next and reflects the same discipline execution we've delivered through the first three quarters of the year. For the full fiscal year, we now expect revenue of $310 million to $314 million. gross margin of 78 to 79 percent, gap profitability in the range of net loss of $1.1 million to net income of $2.9 million. diluted EPS of a loss of two cents to an income of six cents, adjusted EBITDA of $66 to $70 million, and free cash flow of $76 to $82 million, an increase from our prior outlook of $66 to $76 million. In closing, we delivered solid execution this third quarter with growth in total revenue, gross margin ahead of guidance, continued strength in our recurring connected services, and year-over-year profitability growth. As we look to the remainder of fiscal 2026, we remain focused on discipline execution, strong cash flow generation, and maintaining the financial flexibility to support long-term profitable growth. On our next call, we expect to provide our initial fiscal 2027 guidance and an update on our strategic priorities.
With that, I'll turn it back to Brian. Thanks, Tony. In closing, we're proud of our performance as we approach the end of fiscal 2026. We believe that our results reflect strong execution, solid cash generation, and continued customer momentum, together with a disciplined approach to capital allocation. We believe the underlying trajectory of the business remains strong. Connecting services continues to be our extended growth engine. The economics of our recent business is very attractive. And the FQI and the agent programs discussed today are expected to position as well for growth as they scale.
The story of fiscal 2026 has been one of execution. We believe that the story of fiscal 2027 will be one of growth, powered by the foundation we've built, the customer commitments we've delivered, and the opportunities we see ahead with XUI and outside of automotive. We remain confident in our strategy and execution, and we're excited about the path ahead.
And with that, we'll open up the line for questions. Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Mark Delaney with Goldman Sachs. Your line is now open.
2. Question Answer
Yes, good afternoon. Thank you very much for taking the questions. Congratulations on the XUI win with Stellantis. I'm hoping to better understand the financial implications of the XUI backlog, including the recent win, and now I think you have six in total. I understood the comments around that. taking time to ramp up, but maybe you can help investors to better understand what those existing wins will mean for the business for both revenue and profits when they do fully ramp and how long that may take to occur.
Sure, I can start. This is Brian. And then Tony can jump in probably with some of the more high level detail of the finances. But, you know, we said there's about 100,000 vehicles on the road right now with XUI. And that's really pretty good considering really starting pretty early. production was just a little over a month ago. So for me, the ramp is off and going. We have several more OEMs that should do start of production, say, at the end of Q4, beginning of Q1. We don't actually control exactly when, and there's a lot of partners that have to come together to do that. to deliver the on-time launch.
So I really think that number is going to go up significantly as we go into Q1, Q2, Q3 fiscal of 27. So if I looked at 27 in total, I think you should see a couple million cars on the road X, Y versus the 100,000 that we have today. financially what that'll mean is we get paid the same way we do with the prior products where we get um the connect the the license fee when the product uh the car is shipped from the factory and then the connected uh fee over the life of the connection and what we're seeing is these licenses for connected vehicles are actually going longer we said in the past that our average was like three years, uh, the average of the XUI deals would be more close to seven years. Um, so we're seeing much longer, um, times for those. So for 27, it will, XUI will, XUI and connected will be the growth engines and automotive for us. We haven't forecasted 27. We haven't forecasted So I expect it to still be relatively minimum as they ramp up in Q4, but as we go into 27, it will fuel the growth along with connected. All the XUI models are connected, so it kind of has a double whammy. You get paid more for XUI, and they're all connected.
We haven't given an exact price for what the XUI deals are, the price per unit, but it is significantly higher than the current price per unit that we quote in our earnings calls for our current products. but we haven't given an exact number for that. And part of that's because it varies depending on the features that everybody chooses and some of that, but all of them are significantly higher than what we're quoting today.
Yes, and just to summarize that, I think it's exactly right. The impact of XUI is that it's a growth driver both to revenue and to profitability, but it does take time to ramp the old programs down, ramp the new programs up, but it'll It will result in higher PPU over time as those ramp up. And with the higher PPU, it creates the operating leverage that we've talked about. Brian, I've always talked about that our goal is to have a growing business that's increasingly profitable. And we've shown that over the last probably eight quarters now that we've been together. So, yes, this will, you know, XUI means, you know, again, revenue growth and increasing profitability growth.
Very helpful context. My other question was about the revenue trajectory into next year. I very much recognize your comments around needing to wait for next quarter for the quantitative guidance. I do think last call the company suggested that revenue next year could grow high single to low double digits. So if you could speak a little bit qualitatively on how you think about the top line trajectory into 27, if you have any early thoughts there and any key puts and takes. Thank you.
Sure, I can start again and Tony again can give you kind of the a little more financial detail, but again, we tried to give you a little bit of a grounding this quarter by giving you, hey, there's 100,000 XUI vehicles on the road and I expect non-auto to be $79 million. That kind of gives you the baseline from this year for where we're at. By the time Q4 ends, expect the XUI number to be significantly higher than that 100,000. And we'll probably give you the number again at the end of the year just to, again, kind of set the baseline. If I look into 27, yes, I think overall, you'll see us in the high single to low double digits overall growth. But again, what I think you'll see is strong growth in connected because the XUI vehicles will be the driver of a lot of those connected vehicles. You'll see strong growth in PPU as connected as XUI continues to grow more into the product base.
And then, we plan on having significant growth in the in the non-automotive space for next year. We haven't given you the forecast for that, but you can think of it as my expectation is non-automotive will grow faster as the percentage than the automotive space for next year. And so you put those together, and that's how you get to that, well, it should be high single digits to low double digits. But then it's going to be increasingly better as we go through the year. I expect it's going to be growing much faster as we exit 27, because more and more of it will be connected, and more and more of it will be non-automotive. So it'll be a nice, steady ramp as we go through that year. We haven't given the numbers yet. to give me what we're thinking right now, but I'm held to my forecast process.
But yes, that's what's going to drive and fuel the growth. Yes, and a couple of caveats, of course. When we talked about those growth rates that we see in our core business, it was for the technology growth. Again, I think we've said before that professional services, as they become more efficient, will decrease as a percentage in the mix. And we still think there's a strong base in professional services, but we certainly don't believe that that's growing. We think that's kind of a base number and that it's important to the business, but it lowers the percentage of the mix. As Brian mentioned, the non-automotive will kind of be of the growth, the real growth from a percentage standpoint growth engine in the future, albeit at a smaller base out of the blocks.
And then just remember, none of those forecasts include anything about IP monetization. And we've said that we have, currently efforts going with the Sony TCL Apple and Amazon in that space. And we don't forecast those because we don't really, we can't absolutely predict the schedules. And so if I miss by a month because of court dates or whatever, I need to be careful. Those would all be on top of that. We have a couple of those that are due to go to, the court before the end of the year, this year, and then some more into next year. So I see that as on top of everything else we've talked about from our core technology.
Thank you. I'll pass it on. Thank you. Our next question comes from the line of Itay McKaylee with TD Cowan. Your line is now open.
Hey, great. This is Justin on FreeTie. How's everyone doing? Good. So a couple of quick questions. Tony, maybe the first one for you. Appreciate you highlighting the Q4 seasonality. Anything outside of normal seasonality that you might be seeing, at least in current production schedules, volatilities that may be hitting kind of Q4 on the licensing side, or have things been like relatively stable? Obviously, you know, the second half, production environments, a little bit more volatile at this point, so just trying to get a better understanding of what you might be seeing there. Yes, I think we kind of highlighted that a little bit in the call. So, you know, again, from a volume standpoint, Q3 over Q3 a year ago, I think we saw some volume declines, primarily because, again, there was some volume ramp-ups in Q3 a year ago. given the tariff positions.
But as we think about Q3 to Q4, I don't see really any movement off of those volumes other than potentially. We look back in history and there is oftentimes a slight decrease in our Q4 in, you know, with regard to volumes, but not anything really material that we're seeing. But you've got to remember that ours is, again, a volume business on the license, the variable license side. So, you know, we think about the broader market and our specific piece of the broader market, you know, that volume is always important. But I don't see anything really changing much from Q3 to Q4. Perfect. Appreciate the color there. And then, Brian, maybe a couple for you. Maybe any update that you could share on the BYDX UI launch? How are things progressing? What's going on there? And then maybe double-clicking a little bit on that Stellantis win, kind of what are the key parameters and benchmarks that you were comped against and maybe how the competitive environment was within that?.
business quoting? Sure, so when we said 100,000 vehicles on the road, BYD is a part of that, and there's another OEM that is a part of that as well. So there's more than one OEM in that 100,000. You know, what happens is they go, So, they ramp these things by geography and by language and sometimes by model, especially in some of the larger OEMs where they have maybe 10 different models of vehicle. They'll launch them kind of sequentially. From a BYD perspective, though, it's going well. We're continuing to add more geographies and more languages. We're up to 20, we said now.
And so we add them as they require based on their production ramp. And the feedback's been really good. The feedback's been very positive on XUI from a user end user standpoint and just the production capability of being able to build a vehicle and develop the software into the vehicle. for us we think the ramps going quite well very helpful appreciate it.
Thank you. As a reminder, to ask a question at this time, please press star 1-1 on your touch-tone telephone. Our next question comes from the line of Jeff Van Ree with Craig Hallam Capital Group. Your line is now open.
Hey, Brian, Tony, this is Daniel on for Jeff on maybe sort of if you want to characterize how the typical sales cycle for looks like how long are these conversations? What's the competition? Like, maybe you could use as an example, but typical sales cycle.
You know, boy, the sales cycle, they're not short. You typically you know it starts with the OEM producing producing an RFQ. And oftentimes, especially if we are already involved with that OEM, we help them generate what the RFQ should look like as far as what kind of features they want to look for and what's the technology out there capable of. So that starts the process. From there, you usually have to come in with a proposal that includes what the technology is, what your hardware requirements are. What we often do is bring in vehicles that are actually running the technology and and bring them, for example, we went into one large OEM back in the spring with the vehicles to their headquarters and brought their whole board of directors to the meeting to sit in the vehicle and actually see what was capable. And then you start kind of getting into the pricing and features and timing. And oftentimes what's really important is the amount of support you're willing to give because the integration of this software, it's not a simple download like you do on your phone or your PC.
There's a great deal of integration with the OSP. the OEM, the tier one, hardware providers, other software providers that you all have to do to get to that point. And it's the amount of support you're willing to give. So we oftentimes have engineers sitting in the OEM to really help develop the product. That all takes probably on average six months at least. I've got some that are going well beyond that now. Because then you're kind of waiting for their process. From a competitive standpoint, what usually happens is kind of like everybody shows up at the beginning.
And they usually narrow it down to one or two, usually two of us at the end. And then it's kind of a runoff. What's interesting to me is it's not been a price war. It hasn't been, well, we need another dollar out of this or something like that. It's really been more about features and support. Can you support all of the interconnects they want, the connections? to other third party products that they're trying to do to personalize the vehicle. And then the amount of support you'll give in launching the vehicle and getting this thing to production.
That's really been more what's kind of a debate at the end. And then, yes, there's a little bit of price. I'm not going to say there's nothing, but we haven't gotten to a point where we think it's a race to the bottom. Like I said, the prices we're getting right now are quite a bit higher than what we currently quote for our PPU.
Great, and that's helpful. And then on Q4 and just what's implied, as I look at it in our model, I think the Q4 uptick XFIX license, it looks like it sort of implies a rebound in variable license and pro forma royalties, maybe something like a 10%. jump in variable slash pro forma. Just your thoughts on Q4. What's your visibility? Are you expecting a rebound in unit volume sort of in end customers or maybe in percentage of cars shipped with? Just what are you thinking to get you to that Q4 number?.
You know, we always have pretty good insight into the numbers and, you know, we're already a little bit into the fourth quarter, right? So we have some insight into this number set. And what you're really just seeing, like Tony said, was we see kind of a return to the typical seasonal Q4 output numbers from production vehicles. We're seeing more and more connected. We saw 20% year-over-year growth in the third quarter in connected. You know, we're going to see similar kinds of growth in the fourth quarter for connected as well. So, you know, we just continue to see our kind of we're back to seasonality, we're back to a normal Q4.
you know, we're seeing more and more connected. And that kind of gets us to our Q4 number. Tony, if there's anything else. Yes, the only other thing I would add is we think about some of our non-automotive areas. We see some activity of that that I really won't get into specifically or into details, but there's a non-automotive increase in the number as well.
Okay, that's helpful. Thanks, guys. Thank you. And I'm currently showing no further questions at this time. I'd now like to hand the call back over to Brian Kersanich for closing remarks. Thank you.
Yes, I just would like to say thank you, everybody, for coming to our third quarter earnings call. We really look forward to our fourth quarter where we can present our 2027 roadmap and forecasts. We're excited for the work that's going to be done. we're already doing, lining up to that. Like we said, it's the year of growth for 2027 where XUI really helps fuel that growth, the connected vehicles, the percentage will continue to increase, as we said. And then it's going to be a year where, you know, we will see more and more of the non-automotive space growth. And we expect that space to grow at a rate much faster than the automotive portion of our business as well. So we look forward to seeing you in December for the fourth quarter results and our forecast into 27.
Thank you for joining and I'd just like to thank the whole service team for a great quarter, really great execution.
and great results. And with that, I'll say good evening. This concludes today's conference. Thank you for your participation. You may now disconnect.
This live transcript is auto-generated without human intervention or review.
[Call has ended.]
Cerence — Q3 2026 Earnings Call
Cerence — Q2 2026 Earnings Call
1. Management Discussion
Good day, and thank you for standing by. Welcome to the Cerence Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker today, Kate Hickman, Vice President, Corporate Communications and Investor Relations. Please go ahead.
Hello, everyone, and welcome to Cerence's Second Quarter 2026 Conference Call. 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 facts, including statements related to our expectations, anticipations, intentions, estimates, assumptions, beliefs, outlook, strategies, goals, priorities, 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 8-K with the press release preceding today's call, our most recent Form 10-Q and our Form 10-K filed on November 20, 2025.
In addition, the company may refer to certain non-GAAP measures, key performance indicators and pro forma 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 Rodriquez, CFO. In order to provide expanded access to our leadership team, we'll also be joined by Christian Mentz, our Chief Revenue Officer, for the Q&A portion of the call. 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 TD Cowen 54th Annual Technology, Media & Telecom Conference on May 27.
Now on to the call. Brian?
Thank you, Kate, and good afternoon, everyone. Starting with the key results for our fiscal second quarter, we delivered another strong quarter with revenue of $64.2 million and adjusted EBITDA of $7.2 million, both above the high end of our guidance. Free cash flow came in at $13.6 million. Now these results reflect both disciplined execution and continued stability in our core automotive business. And as usual, Tony will provide more detail shortly.
Before we dig in more detail on the quarter, I'd like to discuss some of the recent market moves in the AI and software space, my belief as to why Cerence is in a unique position and why our customers continue to choose Cerence. Our technology excels in the automotive environment, where reliability, safety and deep integration matter. Cerence AI solutions are fully customizable, flexible and deeply integrated with one of the most complex technical environments on the planet, the car.
The environment requires a thoughtful, optimized orchestration of LLMs, SLMs and agents, giving drivers seamless access to whatever they may need regardless of connectivity. Cerence is differentiated in our ability to deliver this, thanks to our unique domain expertise and experience integrating into vehicles.
Our broad AI-native tech portfolio of both embedded and cloud solutions backed by our proprietary automotive-specific data set and our skilled team also differentiate us from our competitors. Plus, we have a flexible architecture that gives our customers the freedom to leverage the latest AI innovation, including from our partners like NVIDIA and Microsoft, while helping future-proof their products by not locking them in to one ecosystem or model.
We know that 3 years from now, today's best general purpose LLM or parking agent is likely not to be the one that is here today. And with Cerence AI, our customers can easily evolve their offerings to best serve their end users. This is what sets us apart from general purpose AI models. That's why we continue to secure major wins across our portfolio, against technology and platform providers, big tech and hyperscalers.
As I mentioned on our last quarter's call, we have 3 key priorities for 2026: the first is advancing our business through leading technology; second, maintaining our cost diligence; and third, driving profitable top line growth. And we continue to see strong momentum for Cerence xUI.
In addition to JLR, a VW Group brand and Geely, I can now also name BYD, a major Chinese automaker as a new customer who is leveraging xUI for its overseas programs. BYD is also the first to start production with cars rolling off the lines as we speak, a very exciting milestone for our team.
I can also give a bit more detail on the major global automaker we mentioned in last quarter's call. This is a multiyear, multi-platform contract with a Japanese automaker with significant volume; and importantly, a win back from a hyperscaler. These wins speak volumes of our technology and team and we are encouraged by the strong economics. All programs signed to date carry PPUs that exceed our current run rate, reinforcing both the value of our platform and OEMs' desire to invest in next-generation in-vehicle experiences.
We also have additional opportunities in late-stage discussions and strong pipeline of RFQs and POC. With the strong win rate we've seen thus far for xUI deals, we believe we'll continue to see success in these pending opportunities. From an xUI revenue standpoint, billings are already ramping up with more revenue to flow in fiscal year '27 and beyond.
Importantly, this timing is consistent with our expectation that the transition to xUI will be a multiyear rollout. And as Tony will explain, some recent wins are not yet reflected in backlog as contracting and implementation needs to be finalized.
Outside of xUI, we have a broad, sticky technology portfolio that continues to keep us deeply embedded with OEMs and remaining integrated with their platforms, even if they split their sourcing or go in a different direction for their voice solution. A good example of this is our Audio AI Suite.
In Q1, we signed Audio AI deals with several OEMs, including GM, Daihatsu, Mercedes-Benz and Toyota. Our progress continued in Q2 with several significant wins, including BMW and Maruti Suzuki India. Maintaining our position in these programs means we keep our seat at the table and secure recurring business even when coexisting with competitors, giving us the opportunity to expand over time.
We also signed new program wins with Toyota Europe that includes the addition of generative AI capabilities to their existing Cerence Assistant based platform, demonstrating that our Gen AI solutions like Chat Pro continue to serve as a strong option for OEMs to bring LLM-based capabilities into the car.
In addition to the BYD xUI program starting production, several notable programs leveraging tech across our portfolio also started production in this quarter. JLR went live with Chat Pro via an over-the-air update, bringing Gen AI to cars already on the road as they continue developing their future platform based on xUI. We also expanded our presence in smart brand vehicles with the addition of our GenAI-powered Car Knowledge solution to their existing Cerence-based platform. Other key start-up productions include Toyota, Renault, Changan Mazda, Audi, HKMC, Great Wall Motors, Mercedes-Benz, Subaru and Geely.
Outside of automotive and consistent with what we said in the past, we are concentrating our efforts on high-value verticals where our strength in edge solutions, quality, reliability, privacy and domain-focused approach matter most and where we believe we have a clear right to win. Specifically, we are prioritizing dealership AI, commercial and industrial operations and select IoT and robotics applications. Rather than selling voice as a stand-alone component, our approach is to deliver full vertical solutions, combining voice, LLMs and SLMs, orchestration and workflow integration into purpose-built vertical packs.
In terms of go-to-market, we are scaling responsibly through a mix of direct engagements with our core verticals and distributor-led expansion in areas like kiosk, logistics and defense, where we leverage our existing partners for broader domain reach and co-sell leverage.
We are encouraged by early customer traction, and we continue to believe the initial financial contribution from non-automotive markets will begin as we exit fiscal year '26, consistent with our prior guidance.
To give an update on our intellectual property strategy and ongoing enforcement efforts, earlier this week, we filed patent infringement action against Amazon, reflecting our conviction in the strength and breadth of our patent portfolio. We have invested for years to develop this foundational IP that is embedded in and underpins our core voice and conversational AI technologies, which are deployed across our products and customer programs.
We actively protect and commercialize this technology as part of the ordinary course of our business. When we identify unauthorized use, we will pursue appropriate remedies to reinforce our rights, protect our platform and safeguard the value of our innovation. While the timing of IP-related outcomes can be difficult to predict on a quarterly basis, we view these efforts as integral part of sustaining and enhancing our operational business over the long term.
Turning to our outlook. For Q3, we expect revenue between $68 million and $72 million and adjusted EBITDA between $8 million and $12 million. For the full year, we are raising the midpoint for both revenue and adjusted EBITDA guidance. We now expect revenue to be in the range of $305 million to $320 million and adjusted EBITDA to be in the range of $60 million to $70 million, and we are raising our free cash flow guidance by $10 million, which represents a 16% increase at the midpoint. Tony will provide further details.
We are pleased with our results this quarter and as we reach the midpoint of fiscal year 2026, I want to close by anchoring on our 4 strong value drivers we continue to see for Cerence AI. First, Cerence plays a key role in the automotive AI stack and across the global automotive ecosystem, bringing durable recurring revenue. Our long-term relationships with global automakers enable us to drive growth in our core business by expanding within existing platforms and transitioning OEMs to xUI over time.
Second, our xUI wins will drive PPU growth as they scale, which will drive increased total company growth over time. And third, we continue to deliver strong free cash flow while maintaining our focus on disciplined capital allocation. Our business model supports debt reduction, balance sheet strength and strategic and operational flexibility.
And lastly, we are driving new income streams. As we've discussed previously, our expansion outside of automotive and our IP enforcement efforts are expected to be long-term sources of potential incremental value creation.
And with that, I'll turn it over to Tony.
Thank you, Brian. Good afternoon, everyone, and thank you for joining us today. We appreciate your continued interest in Cerence. I will walk through our second quarter fiscal 2026 results, highlight the key drivers for the quarter and then share our outlook for the remainder of the year.
For the quarter, total revenue was $64.2 million, exceeding the high end of our guidance range of $58 million to $62. The variance from $78 million reported in the prior year period was primarily attributable to timing of fixed license contract execution rather than any change in underlying demand.
Notably, our core technology business remains resilient, highlighted by steady variable license revenue and continued growth in our recurring Connected Services revenue, reinforcing the strength and durability of our business model. Variable license revenue for the quarter was $31.8 million, a 6% year-over-year increase, reflecting steady customer utilization and consistent program performance.
Connected Services revenue was $15.3 million, up 21% year-over-year, driven by continued expansion of our connected installed base through a higher attach rate. This growth underscores the increasing importance of recurring revenue within our business model and provides improved visibility into future performance. Professional services revenue was $11.3 million, down 19% year-over-year, reflecting our continued focus on standardization and higher-margin implementations as well as the impact of revenue deferrals when services are bundled with license arrangements.
Fixed license revenue was $5.8 million this quarter compared to $21.5 million in the prior year period. As discussed, fixed license revenue can vary quarter-to-quarter based on the timing of contract execution. The prior year quarter included a higher level of fixed license agreements, creating a difficult year-over-year comparison.
Taking into account year-to-date performance and our current expectations for the remainder of the year, we continue to expect full year fixed license revenue to be comparable to prior year, and we view this quarterly variance as timing related rather than structural.
Gross margin for the quarter was 74% compared to 77% in the prior year period. The decline was primarily driven by lower fixed license revenue mix, partially offset by continued discipline across cost of revenue.
Total non-GAAP operating expenses were $43.3 million compared to $34.1 million in the prior year period. R&D expense increased to $27.5 million, reflecting lower capitalization of internally developed software and lower technology cost of goods sold rather than an increase in overall investment. Additionally, the prior year quarter benefited from a $2.1 million R&D tax credit catch-up, creating a difficult comparison. Importantly, overall, total technology spending remained stable.
Sales and marketing expense was $5.1 million, driven by higher employee-related costs and marketing activities, consistent with the continued investment to support our customer base and long-term growth initiatives. G&A expense was $10.7 million, reflecting normalized general operating cost as well as additional legal expenses associated with our ongoing efforts to protect, enforce and license our IP portfolio.
As discussed previously, the prior quarter included elevated legal costs related to the execution of the Samsung patent license agreement. And as Brian noted, we continue to view IP licensing and enforcement as a long-term value driver rather than a near-term factor. Despite increased expenses, adjusted EBITDA for Q2 was $7.2 million, exceeding the upper end of our guidance range of $2 million to $6 million.
From a GAAP profitability perspective, net income and EPS were both within our guidance ranges. Q2 net income was $1.7 million and diluted EPS was $0.04 compared to $21.7 million and $0.46, respectively, in the prior period.
On taxes, recall that withholding taxes associated with the Samsung license drives an unusually high effective tax rate this year. We continue to model full year income tax expense of approximately $18 million to $22 million, unchanged from our projection last quarter. Q1 represented the peak quarterly tax expense, and we expect meaningful lower tax expense for the full year through the income tax benefit recorded in Q2 and expected in the second half.
Importantly, Q2 profitability exceeded expectations, driven by operating performance despite the absence of IP license revenue compared to last quarter and lower fixed license revenue compared to the prior year. During Q2, we generated $14.1 million of cash from operations and $13.6 million of free cash flow, further demonstrating strong cash conversion and the benefit of connected billings outpacing GAAP revenue over time.
We ended the quarter with $108.3 million of cash and cash equivalents and believe the company remains well positioned to fund strategic initiatives while continuing to strengthen the balance sheet. Our strong cash generation from operations provides meaningful capital allocation flexibility.
From a metric standpoint, approximately 11.3 million cars were produced that included Cerence technology in the quarter compared to 11.6 million in the prior year period. Connected cars shipped increased 12% on a trailing 12-month basis. 50% of worldwide auto production included Cerence technology, in line with historical penetration. Adjusted total billings were $239 million, an increase of 7% year-over-year.
Our pro forma royalties were $40.3 million, up from $39.7 million in the prior year period. Fixed license consumption totaled $8.8 million and benefited the current quarter as more pro forma royalties converted into revenue in the current period compared with last year.
As we have discussed, we expect the quarterly year-over-year comparisons to flatten out as we exit fiscal 2026 and continue to keep annual fixed license revenue consistent. Our 5-year backlog is currently approximately $971 million, up from $960 million a year ago and down slightly from year-end as not all recent wins we've highlighted are yet reflected in our reported backlog. As a reminder, backlog may not be indicative of future revenue. Our PPU metric increased to $5.09 for the trailing 12 months, up 5% year-over-year, reflecting continued pricing discipline and increased adoption of connected solutions.
Looking ahead to Q3 and the second half of fiscal 2026, we expect continued stability in our variable license revenue, ongoing growth in Connected Services and continued potential, and potentially favorable, variability in fixed license timing during the second half.
For Q3, we expect revenue between $68 million and $72 million, including $10 million of expected fixed license deals, gross margin between 75% and 76%, adjusted EBITDA between $8 million and $12 million, net income between negative $1 million and $3 million, EPS between negative $0.02 and positive $0.07.
Our full year outlook has improved. For the full year, we are narrowing the range of revenue to $305 million to $320 million, increasing the midpoint to $312.5 million. We are reaffirming gross margin range of 79% to 80%. We are narrowing the ranges for net income to negative $3 million to positive $7 million and EPS to negative $0.07 to positive $0.15 while maintaining the midpoints. We are narrowing the range of adjusted EBITDA to $60 million to $70 million, increasing the midpoint by 8%. In addition, we are raising full year free cash flow guidance $10 million or 16% at the midpoint to a range of $66 million to $76 million.
In closing, we delivered strong execution in the quarter with stable performance in our core business. We continue to benefit from strong visibility driven by our backlog and long-term OEM relationships, while we further improve the quality of our revenue through continued growth in recurring connected services.
As we look ahead to the second half of fiscal '26, we remain focused on disciplined execution, strong cash flow generation and maintaining the financial flexibility needed to support long-term profitable growth.
With that, I'll turn it back to Brian.
Looking at the quarter, we are proud of our performance through the first half of 2026. Our results reflect strong execution, solid cash generation and continued customer momentum alongside a disciplined approach to capital allocation.
Our priorities remain clear: driving profitable top line growth, advancing our technology and maintaining cost discipline. We remain confident in our strategy and execution through the second half of this year, and we're excited about the path ahead.
And with that, I'll open the line up for questions.
[Operator Instructions] Our first question comes from the line of Mark Delaney with Goldman Sachs.
2. Question Answer
Brian, you mentioned vehicles using xUI are now coming off the production line. So I was hoping you could give a bit more context about how the product is being received at the auto OEMs. And if you have it yet or any early feedback you could share from consumers who perhaps now have xUI in their cars?
Sure, Mark. First, I just want to say if people have noticed my voice is a little bit more slurred, I had my tonsil removed couple of weeks ago, and I'm still recovering. So if you can't clearly understand me, just ask again.
So what I said was BYD is the one OEM that is currently shipping. The other OEMs are starting to ship, I'll say, June, July time frame through the end of the year. BYD just started shipping like 2 weeks ago -- 3 weeks ago. So we haven't really gotten any consumer feedback yet. We'll be collecting that probably over this quarter. And so at the end of Q3, we should be able to give you some feedback and update.
As far as how it's been received at the other OEMs, I brought Christian on. Christian is our CRO, our Chief Revenue Officer. He's the one directly in front of the customers. I'm going to let him actually give you some -- just on the face feedback of how we are being received at OEMs.
So Christian, do you want to give some feedback?
Yes. Mark, great to meet you. Yes, as Brian said, the BYD announcement just went out and the launch just happened in April, 2 weeks ago. But the feedback that we are hearing from OEMs, obviously, that we are working very closely with -- leading up to the start of production is that they really appreciate the performance of the technology, the rich feature set, the automotive-grade integration of the technology.
So our LLMs have been fine-tuned specifically for some of the automotive use cases, the fast latency and also the collaboration model that we sometimes even have agile teams working directly with these OEMs together to integrate the tech and then also support them post SOP. So once we actually will receive that feedback, we'll continue to work with our customers to make the technology better for customers over time.
Helpful context. And then my other question is hoping for some perspective on what Cerence expects with respect to medium- to longer-term revenue growth? We can see the 5-year backlog fell from 6 months ago, but you mentioned it doesn't have all the wins in it. The percentage of vehicles shipped with Cerence technology was 50%, down from about 52% at the end of the year. But you also talked about how PPU is growing. You've got the xUI engagement, some non-auto opportunities. So as you think about all these different factors and what appear at least from the outside to be somewhat mixed data points, what does that all mean for the medium- to longer-term revenue potential of the company?
Sure, Mark. I can start and then Tony may have some thoughts. When you take a look at all those things, right, you can't look at this business ever. And I always look well beyond this. You can't look at it on a quarterly basis. So, yes, our -- I think our backlog dropped by a little bit, but that's against $1 billion. And like we said, it didn't include a bunch of these deals that just when the cutoff or calculating was done. So we don't expect that number to really change much over the year. We think we'll exit around $1 billion.
And the nice thing is, we've taken a look and you can look 5 years out and that backlog number, if you didn't sell anything more, it is still quite strong, right? The thing that's nice about this is we have good insight into kind of the long-term revenue profile of the company because of that backlog.
As far as growth, I still say, until we get more insight into things like outside automotives and IP enforcement, the business -- the core business can grow somewhere in the high single to low double-digit growth rate year-over-year. And that's going to be fueled by connectivity, more and more connected cars, that will be more of the near-term growth and then xUI, which we said the deals that we're signing are multiples of our current PPU for the most part.
So I still say the core will be in that high single to low double digit. And then we'll start adding in things like IP enforcements and outside of automotive as we just get a little more insight into it at the end of this year.
Tony, anything else?
No, I think that's good. I will caveat that we, of course, have not given guidance for fiscal 2027. But Brian hit the highlights, right? Our core -- we feel strong in our core business, core technology business. And remember one thing that the growth that Brian talked about low-single-digit -- excuse me, low-double-digit to high-single-digit growth within our core is remember that the billings and the piece of our business that's growing is connected and we get those billings and then we have to amortize that over the typical subscription period.
So even though you'll start seeing xUI ramp at the end of this year and into '27, that will help our billings and our cash flow, but it takes a little bit more time to see that in revenue. But we still see what Brian is saying as far as expectations of the core. And then, as you get the midterm growth outside of a year or so is where the traction outside of automotive would take place.
Our next question comes from the line of Jeff Van Rhee with Craig-Hallum Capital Group.
This is Daniel Hibshman on for Jeff Van Rhee. Brian, maybe just on the connected traction, I guess, first off, is it fair to say that's where the particular strength for this quarter is? Or if you were pointing between connected and fixed license and PS, where you would say sort of the outperformance was on the quarter? And then on the connected in particular, that has been accelerated. I take it that's not xUI flowing through yet as Tony was just saying, it takes a while for that to flow through the waterfall. So just where that connected strength is that's been hitting outside of xUI?
Sure. I'll start and see if I could answer -- there was about 3 questions in 1. But yes, if I take a look at this quarter, I'd say that it was driven by -- the outperformance was driven by a couple of things. One, absolutely connected. Connected continues to be our leading growth engine. Now why do we see more connected? You're right. It's not xUI yet. xUI, as Tony just said, even the BYD cars that are shipping today, he has to amortize that over the life of that contract. So you won't really start to see the kind of the compounding interest of xUI as a way to think about it until starting next year because that's just how long it will take for all of these deals to kind of kick in and start to see.
So what you're seeing is really the connected on our current technologies, things like Chat Pro, which bring things like ChatGPT, and we showed you that we brought that to several customers over the last quarter, where you can now have an LLM like -- or not just LLM like an actual LLM environment, but only through a connected experience. And so that has a lot of use, a lot of interest. I have a car that has it, and it's great. It's a lot of fun to use, and I get -- I use all it the time for information.
So that's what's fueling -- you can see already that people like the LLM. They like being able to get real-time knowledge. They like being able to get access to the real world in their vehicle. And that's why connected is growing so fast.
The other thing that is fueling some of our growth, slightly to a lesser extent is, we've talked to you about we've been bringing down the fixed revenue stream. And as we bring down that fixed revenue stream, we're also doing much less discounts. So the company in the past had a process that often gave multiple double-digit discounts in order to do these fixed extended early pay licenses. And we've reduced that. We said it will be about $23 million for this year. And that brings the discounts that we're doing down to like single digits, which are starting to get close to the weighted average cost of capital.
And so it's like net. And so that is increasing the real-time revenue you're seeing today. I think those are the 2 big drivers. And then, just Christian's team that's constantly going out and selling like our audio AI or just enhancements that we're constantly driving across the platform.
Tony, did I miss anything?
No, no, I think those are certainly the 2 largest areas. And I think from an outperform standpoint, you'd remember that there's strength in that visibility of the license business, right, and that penetration within that OEM base. We did see some outperformance in this quarter on license, some of which is, yes, what Brian is saying is that we're getting a bit more price because there's less discounting happening with lower fixed, but also some volume-related outperformance with some of our customers this quarter.
That's helpful. And then in terms of -- one, Tony, for you on the modeling, I just want to make sure I heard correctly. On the R&D non-GAAP OpEx, I believe that's up from about $22.5 million to $27.5 million in the non-GAAP OpEx for R&D this quarter sequentially up. Just to be clear, you said that's sort of to think of this as the new baseline for R&D. I didn't quite catch what you said on that. And then if that is the new baseline, just sort of what all the investments were in that, that were made this quarter and how to think about that in terms of the road map that's pushing going ahead?
Yes. I would say from an OpEx standpoint that is effectively the baseline you should be modeling out going forward. One thing to remember is less CapEx, right? So we had more CapEx in Q1 than we did OpEx as certain of our programs kind of rolled off that internally developed software GAAP capitalization. So we had less capitalized software this quarter and those costs then go into OpEx. So that was -- probably one of the biggest drivers was that.
We did benefit in Q1. There was also some delayed timing of some R&D that came on board in Q2. So I think your point in question is right. This is effectively the way you model out for the remainder of the year.
Yes, I just want to add one thing. This is Brian. What we're really talking about here is mostly headcount, right? It's the engineers doing this work. And when they move from CapEx to OpEx, that's a good thing. That says that they're working on projects and those projects are moving into production. And so you want that.
I think you'll see -- I think Tony is right, rest of this year, this number is right. But you may see some of that headcount move back into CapEx next year as we develop next-generation xUIs, start doing some work on things outside automotive that are capitalized because they're invention and they're new. So you're going to see some jogging between these 2 over time, but the headcount is flat. We are not growing headcount. We are disciplined in controlling that. So that overall spend is not going to really change when you look at just the cash.
Yes, makes sense. Nice to see the EBITDA and earnings quality going up with less of the cap software. So, makes sense.
[Operator Instructions] Our next question comes from the line of Thomas Blakey with Cantor Fitzgerald.
Congratulations on the strong quarter. In prior conversations, Brian, I think we talked about maybe the xUI orders coming in maybe even a little bit stronger than expected as this new product is brand new in the market. I wonder if you could just maybe talk about on the heels of looking out, not asking for guidance here, what the pipeline looks like to sustain this kind of like strong momentum that you have out of the gate here in terms of xUI interest? And I have a follow-up, please.
Sure. I'll start, and this will be another one, I think, Christian can give you like real-time insight. I can tell you that there are a couple of other POCs like we were at a large OEM earlier in April. doing a presentation of xUI for their next-generation vehicles. And there's at least one other one that I know of that's out there. We're always at the somewhat time line of the OEM, right? So they put out a bid process. We come in and presents our xUI.
One of the things that's very unique and strong about our presentation is we actually bring several vehicles with xUI running on it, usually like a BYD, a Geely and some -- and another vehicle. And they get to sit in the vehicle, drive -- whatever they want to do and actually experience the product real time.
So will we get those resolved by the end of Q3? I hope to have at least one of those, I think. I don't know if we'll get the second one resolved. But we're not losing to others. We're just simply waiting for decisions.
Christian, if you have any other insight?
Not much. I would go a bit further, and I'm confident that in Q3, we will close at least 1 more. And as Brian said, we're participating in the bidding process and actively doing proof-of-concept work with several global OEMs as we speak. And yes, it's not always easy to put your finger on the close date, but we feel that we have a solid pipeline and demand for the product.
That's great. And that would be -- I think that would bring us up to 4 very solid wins in a very short period of time showing the demand. And I...
No, there's more. We said that we're -- we've got 5 of 6. So there's been 6 bids. We've got 5. If Christian is right. And so you guys all heard it. I'll hold that to his review now. [Indiscernible] think it's 6 out of 7 likely by the end of the quarter, and we'll see about any others.
That's great. And I was just going to mimic that I've tried the product, and I agree, Brian, I definitely want it my car as well in due time. So -- and then maybe as a second question, sticking with the top line here. Just the non-auto business, I think you guys clearly have solid traction here in a pipe for the core business. You have so many other growth vectors here. And I think you should have visibility to them. I'd love to hear you kind of maybe expand a little bit on the non-auto business, whether it's consumer electronics, any timing of expected revenues there?
And I know Tony is gating the IP-related business, but would love to just kind of understand -- not talking about the top line in that regard, but I guess maybe shifting a little bit more to the expenses, how hard we want to step on the accelerator here with regard to the IP business? And that would be it for me.
Sure. I'll start. This is another one that Christian can give some insight. On the non-auto, I think it will contribute small numbers, a couple of million at most this year when you add it all together. But most of that's NRE type funding for POCs. And the way we're looking at it, not much of it is going to be in consumer electronics. You're not going to see us in a much around like Game Boys and things like that or whatever, right? You're not going to talk to your PS3 through us.
We're looking for things that are like automotive. And part of the reason I did the discussion at the beginning of the earnings call was to show you where we think we have a right to play. And it's where machinery is complex, integration into that machinery is complex. And general purpose LLMs will have a hard time integrating into those because they require unique tuning and training against models. And so that's where we look at things like industrial robotics. We've looked at aerospace and have many interest there. And we've looked at automotive going further into things like the dealership and the end user experience post purchase of your vehicle, right?
Providing an app for the OEM that you can just ask it, "Hey, how do I do this in my vehicle?" Or "What are all the features my vehicle has for whatever -- for audio or things?" So we're looking for more things like that.
Go ahead, Christian, any other adds or thoughts?
Yes. Maybe think of it as a core tenet that it's easy -- relatively easy to produce a quick win, but we really don't see ourselves doing everything for everyone. We really want to be disciplined in that we invest our time, resources in things that can really scale. And these are the areas that Brian mentioned where we believe we have a right to win and where we do really well and we can transfer some of the competence that we have built over years in the automotive space into other areas. And again, it's very important for us that they are scalable and build a meaningful recurring business and are not one-offs.
Yes. And then the second part of your question was around the legal expenses. It's a bit always hard to predict, but I would say that the pace that we're going at right now is about the right pace. We've said we've got an agreement on the Samsung deal. That one is closed out. We have Apple, we have Sony, we have TCL and now we have Amazon. Those are enough to probably cover most of this year. And we also shifted how we did these deals where we are now paying the legal fees as we go along rather than sharing in the profit like we did with the Samsung agreement.
And so I think we've got enough of the legal team to push through for the rest of this year. We'll see maybe something opportunistic will pop up. But I think this is about the right pace.
And the, with regard to the legal cost, we've -- like I said, we've accelerated a little bit. Brian just kind of alluded to where we are. We've anticipated a bit more legal fees in the second half, but it's all included in our profitability expectation.
And remember, we've projected no revenue from any of these. And so several of these have court dates towards the end of this year, calendar year. So we'll see what happens from a revenue, but it's too hard to predict revenue by the quarter. If I'm off by a couple of weeks, you guys will yell me because I missed it, even though we win. And so we'd rather just have it be -- we'll keep you updated. We'll let you know, and it will come in real time.
And I'm currently showing no further questions at this time. I'd like to hand the call back over to Brian Krzanich for closing remarks.
So thank you, everybody. As we said, we are very excited about the potential of the company and where we're headed. I think the strong cash flow and just good, disciplined performance by the entire organization, whether it's the engineers working with the OEMs on the vehicles, launching these xUI programs and doing upgrades to our existing programs, all the way through the finance team, the legal team, the HR team, everybody is just really firing on all cylinders right now. And so we really are positive about our future. I really appreciate you guys attending the phone call this morning. And thank you very much.
This concludes today's conference. Thank you for your participation. You may now disconnect.
Cerence — Q2 2026 Earnings Call
Cerence — Q1 2026 Earnings Call
1. Management Discussion
Good day, and thank you for standing by. Welcome to the Cerence First Quarter 2026 Earnings Call. [Operator Instructions] Please be advised that today's call is being recorded. I would now like to hand the conference over to your speaker, Kate Hickman, Vice President of Corporate Communications and Investor Relations. Please go ahead.
Hello, everyone, and welcome to Cerence's First Quarter 2026 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, priorities, 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 8-K with the press release preceding today's call, our most recent Form 10-Q and our Form 10-K filed on November 20, 2025.
In addition, the company may refer to certain non-GAAP measures, key performance indicators and pro forma 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 Rodriquez, 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 38th Annual ROTH Conference taking place March 20 to 24. Now on to the call. Brian?
Thank you, Kate. Good afternoon, and welcome, everyone. I'm excited to speak with you today following another strong quarter of performance for Cerence. We are pleased with our results this quarter with revenue of $115.1 million and adjusted EBITDA above the high end of guidance of $44.6 million. And importantly, we generated record quarterly free cash flow of $35.6 million, demonstrating continued profitability. Tony will provide further details on our Q1 results later in the call.
As I mentioned on last quarter's call, we have 3 key priorities for 2026. They are advancing our business through leading technology, including our next-gen platform xUI, maintaining cost diligence and driving top line growth. First, we made important progress in driving our business through continued innovation, especially as we geared up for the CES in early January. On the ground in Vegas, we showcased the latest advancements to Cerence xUI, highlighting new LLM-powered experiences spanning both edge and cloud. We demonstrated our CaLLM Edge small language model running across multiple chipsets, enabling faster performance, lower latency and reliable in-car interactions, even when connectivity is limited. And plus, we showcased xUI running live in a Geely vehicle, marking the first public demonstration of a near production car powered by xUI. And we showed off our audio AI suite, including advanced multi-speaker and multi-zone capabilities.
Importantly, within Q1, we completed development of several of our new AI agents, which are now fully integrated into xUI but can also be implemented in non-xUI platforms. At CES, for the first time, we demonstrated our Mobile Work AI Agent developed in partnership with Microsoft. This agent turns your car into a trusted device with voice-first access to Microsoft 365 Copilot, Teams, Outlook and OneNote. This was incredibly well received, and we have significant customer traction and active commercial negotiations coming out of the show with OEMs who want to bring this new agent to their drivers.
We also debuted 2 new purpose-built AI agents that expand our portfolio beyond the in-vehicle experience into broader areas of the automotive ecosystem. The new Dealer Assist Agent helps dealerships automate sales and service workflows like lead capture, test drive booking and service scheduling, while integrating with CRM and dealer management systems to improve responsiveness and efficiency. The Ownership Companion Agent enables OEMs to provide drivers with an always-on, in-car service companion that supports diagnostics, maintenance guidance and instant service booking, creating a more connected ownership journey and strengthening brand loyalty.
The introduction of these new agents expands our reach and enables us to deliver an end-to-end full journey solution from vehicle purchase to regular in-car usage to troubleshooting and to service and maintenance. Overall, feedback from customers, partners, media and analysts and investors was incredibly positive, including Cerence xUI being named Gizmodo's Best in-vehicle Assistant in its Best of CES 2026 awards. We look forward to continuing the conversations we kicked off at the shows.
On our second priority of cost diligence and strategic capital allocation, in Q1, we paid down $30 million of principal of debt due in 2028 using cash on hand while maintaining our cash position to invest in future growth. In addition, we are continuing our attention to cost management and delivering strong cash performance.
And in Q1, we completed the implementation of the previously mentioned restructuring plan related to certain foreign operations, further reducing operating expenses and positioning Cerence for profitable, sustainable future growth for the remainder of fiscal '26. We will remain diligent and maintain our attention to cost management.
And lastly, in terms of our goal of driving top line growth, we believe there are 3 key areas of focus. First, increasing adoption of Cerence xUI and driving greater penetration of our stack in existing programs, which we believe will deliver increased PPU. To give you a sense of how we're progressing with customer adoption of xUI, as of today, we have now 5 significant customer programs for xUI. There's the previously mentioned programs with JLR and a brand within the Volkswagen Group. At CES, we announced our plans with Geely for their cars shipped outside of China.
And in Q1, we received a new award from another major Chinese EV OEM, leveraging xUI for their overseas development in 5 languages. In Q2, we received an award from a major volume global automaker, which we look forward to sharing more about in the future. These programs are currently on track to hit the road during the calendar year with strong PPU growth. There are a few important things to note about these deals. One, that we have a strong win rate for xUI and that these wins have been against big tech competition. This not only tells us that xUI is needed in the market, but we believe also serves as a good indicator of how we'll perform in the outstanding RFQs we have on the table.
And two, all of these programs have PPUs that are higher than our current run rate, demonstrating clear value and OEM willingness to invest. We continue to see strong customer traction outside of xUI as well. In Q1, we signed several important deals, a win that brings our generative AI apps, that's Cerence Chat Pro and Car Knowledge to additional countries with HKMC, audio AI wins with GM, Mercedes-Benz and Daihatsu and an upgrade to our latest Neural TTS for Mercedes. And we contracted development of Slovenian language to help our customers meet regional language requirements, expanding our product offerings. Importantly, on the GM audio AI deal, this was a competitive win back that brings our speech signal enhancement, one of the highest margin elements of our software stack to GM's next-generation infotainment platform across all brands.
This lays out the foundation for potential adoption of additional elements of our audio AI suite with this major North American automaker in the future. We also saw 8 programs start production, including BYD, GWM and HKMC. Trucking programs with Scania and Ford trucks also went live this quarter, marking continued strong momentum in adjacent transportation markets and building upon our existing work with Daimler trucks, Volvo trucks, PACCAR and Iveco trucks.
Our second area for potential growth is increasing the number of connected vehicles shipped, resulting in an expansion of our connected service business. As Tony will detail, we continue to see growth in connected services as customers continue to adopt connected solutions, and we believe this momentum will continue. This is a key pillar of our long-term growth strategy, providing high-quality, predictable revenue. And third, we have an opportunity for growth in our nonautomotive businesses.
In Q1, we continue to operationalize our strategy and model, and we spent time at CES meeting with new customers and validating our approach to bringing the power of Agentic AI and voice to new industries, including one of the leading digital signage players worldwide that is interested in integrating our solutions across their portfolio. And we have good momentum with awards expected through Q2 and beyond. As a reminder, we believe the impact of our work to expand beyond automotive will be seen in our revenue and profitability starting in late fiscal year 2026 and beyond. And this is reflected in the fiscal 2026 guidance we provided last quarter. And we believe our IP monetization strategy will continue to yield benefits for Cerence.
As we mentioned on our last quarter's call, we resolved our suit with Samsung, which, among other things, resulted in Samsung agreeing to pay Cerence a onetime lump sum payment of $49.5 million. We recorded this patent license revenue in Q1, and we believe the resolution of this suit marks an important milestone in our IP monetization strategy. And we have cases with Sony, TCL and Apple outstanding. As a reminder, with most cases taking multiple years to reach resolution, this is a long-term strategy.
In conclusion, we believe we have a strong technology and customer momentum and are on a solid ground to execute on our future growth plans through the rest of fiscal year '26 and beyond. For Q2, we expect revenue of between $58 million to $62 million and adjusted EBITDA of $2 million to $6 million.
And we're pleased to reaffirm our full year guidance that we provided on last quarter's call, and Tony will provide further details on this. We believe that Cerence has the right foundation for long-term sustainable growth. and we're incredibly proud of what our team has accomplished this quarter. And with that, I'll turn it over to Tony.
Thank you, Brian. Good afternoon, everyone, and thank you for joining us today. We appreciate your continued interest in Cerence. I'll walk through our first quarter fiscal 2026 results, highlight the key drivers of the quarter and then share our outlook for Q2.
For the first quarter of fiscal 2026, total revenue was $115.1 million, up $64.2 million or 126% from $50.9 million in the prior year period. We believe it's important to start by highlighting the continued positive progress in our core technology business, including variable and fixed license revenue and our recurring connected services revenue stream. Excluding the impact of patent license revenue, our core technology lines delivered solid growth and stability, reflecting steady customer utilization, continued adoption across our programs and the increasing importance of our recurring revenue base.
Variable license revenue for the quarter was $30.5 million, up 34% year-over-year, driven by steady customer utilization, more in-period shipment recognition and continued adoption across our core programs. Fixed license revenue was $7.8 million in the quarter. These fixed license deals were not present in Q1 of last year as they were primarily recorded in Q2 of the prior year, creating a timing difference. Importantly, for the full fiscal year, we continue to expect fixed license revenue to be comparable to the prior year, and we view this as a timing shift rather than a change in underlying demand. Connected Services revenue was $14.5 million, up 6% year-over-year despite a $2 million true-up benefit in the prior year quarter. Without this prior year true-up, Connected Services revenue would have increased over 20% year-over-year. This connected services revenue line represents a recurring revenue stream driven by continued expansion of our connected installed base and remains a key pillar of our long-term growth strategy, providing high-quality, predictable revenue and improved visibility over time.
Now turning to a strategic milestone achieved during the quarter. During Q1, we recorded $49.5 million of patent license revenue, reflecting the successful resolution of our patent litigation with Samsung. As previously disclosed, this resolution includes a onetime lump sum payment to Cerence. The agreement is part of a confidential cross-license arrangement, which limits the level of detail we can provide. That said, we believe this outcome represents an important validation of the strength and breadth of our IP portfolio and a strong proof point for the applicability of our technology across multiple industries and verticals.
Including the patent license revenue, total license revenue for the quarter was $87.8 million compared to $22.7 million in prior year. Professional services revenue was $12.8 million, down 12% year-over-year, reflecting our continued focus on standardization, scalability and margin improvement as well as the impact of revenue deferrals when services are bundled with license arrangements under applicable accounting guidance. Gross profit for the quarter was $99.4 million, representing a gross margin of 86%, up from 65% in the prior year period. This improvement reflects the favorable mix shift towards license revenue as well as continued discipline across cost of revenue.
Turning to operating expenses. Total non-GAAP operating expenses was $57.3 million, up $23.2 million compared to Q1 of last year. The increase was driven primarily by the legal costs associated with achieving the patent license outcome this quarter. These costs were directly tied to the patent license value creation and are not reflective of our ongoing run rate expense structure. Additionally, while total R&D spend remained fairly comparable year-over-year, R&D expense increased as a smaller portion of our R&D costs qualified for capitalization as internally developed software, resulting in higher expensed R&D.
Resulting adjusted EBITDA for Q1 was $44.6 million, representing a 39% margin compared to $1.4 million or 3% in the prior year period. This reflects strong operating leverage, disciplined cost management and the benefit of the patent license revenue. GAAP net loss for the quarter was $5.2 million compared to a $24.3 million net loss in the same quarter last year.
Another key accomplishment during the quarter was the continued deleveraging of our balance sheet. During Q1, we repurchased $30 million in principal value of our 2028 convertible notes at a discount to par, using $37.9 million of cash generated from operating activities. We produced $35.6 million of free cash flow, a record for any quarter in the company's history. And while not necessarily indicative of future results, we have generated over $100 million of free cash flow over the last 8 quarters. We ended the quarter with $92.1 million of cash and marketable securities, and we believe that the company remains well-positioned to fund strategic initiatives while continuing to strengthen our balance sheet.
From a metric standpoint, approximately 11.9 million cars were produced that included Cerence Technology in the quarter, flat from $11.9 million in the prior year first quarter.
We also grew our number of connected cars shipped by 14% on a trailing 12-month basis, underscoring the continued momentum that we are seeing in vehicle connectivity. Also on a trailing 12-month basis, 51% of worldwide auto production included Cerence technology, remaining in line with our historical penetration. Adjusted total billings were $231 million, an increase of 2% year-over-year. As previously discussed, when we look at total licenses shipped, pro forma royalties is an operating measure we use representing the total value of variable licenses shipped in a quarter, including shipments from prior fixed licenses where 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 forma royalties were $39.8 million, which were up as compared to $36.7 million for Q1 of last fiscal year.
Consumption of our fixed license contracts totaled $8.7 million this quarter, lower than the same quarter last year by 38%, but in line with expectations given the lower level of fixed contracts than historical periods. This drops more pro forma royalties into revenue in the current period as compared to a year ago. Similar to our 5-year backlog metric, we will provide the details of our PPU metric in the middle and the end of each fiscal year. That said, we expect the PPU metric to increase by the end of fiscal 2026.
Looking ahead to Q2 fiscal 2026, we expect revenue to be between $58 million and $62 million, gross margins between 71% and 72%, a GAAP net income at about breakeven with EPS between negative $0.01 and positive $0.08 and adjusted EBITDA between $2 million and $6 million.
The Q2 revenue guidance reflects some fixed license revenue, but not to the extent of Q2 last year where virtually all of last year's fixed license deals were recorded. We are also reaffirming our full year fiscal 2026 guidance as previously communicated, with revenue between $300 million and $320 million, adjusted EBITDA between $50 million and $70 million, free cash flow between $56 million and $66 million and gross margins between 79% and 80%.
In summary, Q1 marked a strong start to fiscal 2026, highlighted by solid core technology performance, an important IP milestone and continued progress towards sustainable profitability and balance sheet strength. We believe Cerence is well-positioned to execute against our strategy, expand recurring revenue and deliver long-term shareholder value. With that, I'll turn it back to Brian.
Thanks, Tony. So in closing, we're pleased with our results this quarter and incredibly proud of what our team accomplished as we start 2026. We remain focused on the 3 key priorities: driving top-line growth, advancing our business through leading technology, including xUI and maintaining cost diligence. We believe we have an exciting path ahead, and we look forward to sharing more on next quarter's call. And we'll now open it up for questions.
[Operator Instructions]
And our first question will come from the line of Jeff Van Rhee from Craig-Hallum Capital Group.
2. Question Answer
A couple for me. On the connected side, I'm curious on the Mobile Work Agent. Just where does that rank in terms of the agents and xUI and other capabilities as you're layering in a lot of sort of AI-centric capabilities. Is that top of list in terms of what customers are most enthusiastic? It sounded like you're sort of messaging extremely strong demand there or interest there. And then along those lines, just any sort of framing around the impact that, that can have on your ARPUs going forward?
Sure. So this is Brian. Justin, I can start. So the Microsoft Outlook or Office 365 does not require xUI. And that's a good thing. It's a cloud-based solution that actually just makes the car a trusted device and then puts our LLM on top of that. So we manage the requests. So when you put a request in that says, for example, "Hey, I only want to get messages from Jeff while I'm driving to work because he's the most important person to talk to this morning," it will filter all that and manage that so you're not distracted while you're driving. What's good about that, the fact that it is cloud-based is it can go on existing vehicles that are maybe 2 to 3 years old that have a connected capability as well.
And so what we're seeing is the interest is not only in the future forward-looking xUI systems, but we have OEMs coming to us and saying they'd like to put this on vehicles back 2 and 3 years. And so it's quite positive. And we haven't talked about pricing yet, but it will be an additive and it will add to our PPU. Did that answer your question, Craig -- Jeff, I mean, I just want to make sure I got that.
Yes, it does. It does. And is the -- in terms of an existing car, if you make it available to an existing vehicle, is that a revenue event? Or is that you're just getting people addicted to the technology and you get the revenue down the road? How does that work?
It would be a revenue event for us.
Okay. Okay. Got it. And then on the numbers front, you called out a number of interesting bookings or signings, including this major volume global automaker in Q2. I'm curious in terms of TTM billings, is that going to show up? Are we going to start to see TTM billings growing in Q2? And maybe even just a preview of backlog that's going to be reported at the end of Q2? Are those going to step in there where we should see some meaningful uptick both in backlog and TTM billings when we wrap up Q2?
So I'm going to let Tony talk about how we'll see in the profile. But if I take a look at that, we talked about JLR and the Volkswagen Group vehicle coming in, in late summer, let's call it. The other ones are -- we've said the other ones are all going to come in this calendar year. But that's really started production and they'll ramp, right? So remember, we get paid both when the car ships out of the factory and then for the connected portion when the car drives off the dealer lot. So the revenue from a pure revenue stream won't start until late summer and will start to ramp, right, as the vehicles kind of go through their normal ramp in both geography and volume. And then a lot of it will really happen at the back end. So what I was trying to do by showing all 5 is that we've -- I've gotten a lot of questions in the past. Hey, I said, we have 6 RFQs out, and we've got 2 guys already signed up with JLR and the Volkswagen Group company. I wanted to give you guys an additional update that we're now actually signing more deals and seeing good growth and good PPU growth out of this technology. And so those 6 RFQs are turning into actual deals signed. That's kind of that loop for you guys.
Got it. And then maybe the other part of the question, just maybe for Tony, is the -- should we expect -- are these signings that you're putting up and you're talking about here big enough that we should, assuming continued trend and continued strength in Q2 that we should start to see backlog and TTM billings pop by the end of Q2?
Yes. These will be reflected in a 5-year backlog, of course, because once the contracts are signed and then as you know, you've been familiar with this, that we project the volume over a contract period or at least if it's over 5 years, within the 5-year period and apply the contract price to the -- to that volume. And so you will see it in backlog next quarter.
Okay. And just last for me, and I'll let somebody else jump on the -- also on the connected side, just curious, based on the metrics that you're watching, how is usage of the existing in-car connected systems trending? I think back in the day, you used to share some metrics around how frequently people were interacting with the system. Just what trends and what learnings with respect to sort of apples-to-apples usage of a person who has connected in their car over time are you seeing?
Yes. I'd tell you that if you have one of the older systems, the usage is pretty good early on when you first get the vehicle and then it kind of drops off. That was before LLMs were really available. If you look at vehicles from, say, let's say, the Cerence Assistant and onward, we're starting to see more and more usage. We don't publicly talk about what's the percentage and all. But what we're seeing is as functionality has increased and ease of use has increased, we're absolutely seeing stronger usage of the product. And we think as you add things like the Microsoft Suite, the Office 365 and all of that, it's just going to really massively increase the usage rate of these products.
Our next question will come from the line of Mark Delaney from Goldman Sachs.
You have Aman on for Mark. I guess sticking with the xUI and AI product front, thanks for the updates on the pipeline there. Maybe if you can help parse out the interest from more of the Western OEMs versus you talked about getting 2 wins, one with Geely and one with another China OEM for overseas business. How is that pipeline relative to the Western OEMs? And are you seeing any difference in time to market from when you sign one of these agreements and actually start of production? And any PPUs that you can do as well would be helpful.
Sure. So let's see. So as you just described, 3 of the 5 are, I'll call them, from Western or more classic OEMs. And so we're seeing strong interest. We still have several other OEMs we're talking to in negotiation and deal preparation that tend to be more Western as well. I'd tell you, if I take a look at the JLR and the Volkswagen one, they're running about as fast as the Chinese ones. So I don't see a huge difference. I'd say the Western OEMs are becoming -- especially kind of the leading ones are becoming more and more aggressive about their timing and bringing this stuff to production. So I'd tell you right now, 3 to 5 are Western or more classical OEMs versus the 2 Chinese brands. We're seeing additional Western OEMs with interest.
From a PPU standpoint, all we've said publicly is that the prices we're getting for xUI on these deals is significantly higher than what our current listed PPU is that we've talked about, which is around $5. I think it's $5.05, if I remember correct. Tony can correct me if I got that off, that we published last quarter. So we're seeing a good significant increase in PPU from those deals. And they're all a little bit different because they all -- they take different features and stuff like that. So you'll see, as Tony said, you'll start to see it in backlog and then you'll start to see it in revenue in the back half of this year and into fiscal '27, it will be more and more significant.
Understood. And then maybe one a little more on the financials. I think EBITDA came in a couple of million above the high end of your 1Q guide, but you maintained the full year guide. Are there any puts and takes or things we should be thinking about through the balance of the year? Or is it -- how should we think about the full year guide being maintained relative to the 1Q guide beyond some of those metrics?
Yes. And a couple of things. One is, yes, we did overachieve on EBITDA, and that was good. We're one quarter in now, right? So what we want to look at is as we think about the rest of the year, we typically wouldn't change guidance unless there was some significant movement that would guide us that way for the full year. So what it does is provide us really confidence. Q1 certainly provides us much confidence in achieving the full year EBITDA estimate, which we've reaffirmed. So -- and I would think that some of that is a little bit of deferral of some expenses in Q1 into the other 3 quarters. So we're still, I guess, like we reiterated that we're reaffirming guidance for the full fiscal year, and this give us good confidence in that range.
[Operator Instructions] Our next question will come from the line of Itay Michaeli from TD Cowen.
Just a follow up on the EBITDA question. Can you just dimension what kind of allowed you to beat the range in fiscal Q1? And then just clarify perhaps what the EBITDA was excluding the settlement in the quarter.
I don't know if Tony is unable to get off.
Sorry. Yes, let's -- we'll talk a little bit about the beat first. So a couple of things. One is we had some good news with regard to legal costs associated with the Samsung settlement. So as I think we've discussed in the past and certainly in Q4 when we talked about it is that the patent license agreement, part of that was that the legal fees were on a contingent basis. And so we were able to look at that agreement and achieve about $4 million better in legal costs associated with that. So that was part of the beat. The other one related to the compensation. So looking at a couple of R&D projects that got deferred, so that assisted in OpEx in the quarter is really the 2 main areas.
That's helpful. And then maybe I ask secondly on the new win with the major volume global automaker. Maybe just walk us through maybe, Brian, just how the competitive process went and kind of what you think kind of led to your win there? And maybe going forward, how you think about your win rate going forward, just given some of the recent traction you've experienced?
Yes, sure. This is Brian. I'm excited by the progress we've made, right, to have the 5 deals signed, considering we really officially launched the xUI product in the back half of last year, calendar year is significant. And all of the competitions, it's coming down to there's usually just a couple of us left in the running at the end. And it becomes less about things like price and all. Price is always a bit of a part of the negotiation. But really, at the end, it comes down to a couple of things. One, capability of the technology. Do they have belief that you're going to deliver what you say you're going to deliver?
And for us, we're able to show up with a vehicle like we did at CES fully functional with the xUI fully operating and including things like the Microsoft Office 365 fully functioning, running in the vehicle live. So that gives them confidence that the technology is there, it can go, it can do what we say. So that's the first thing. And then it's about the confidence in the team's ability to actually work with the OEM, and we have a long history of that with our team. And then just the overall technology capability of your product, right? What can it do? And we have a lot of things that differentiate us, everything from some of the agents we've added like the Microsoft one, the audio technologies we've added. So it really comes down to the end. It's more about the technology and the team and less about the price. And that's really how we win. And then it's oftentimes around customizations. They'll have things that they want that are unique to their brand or to the product they're trying to deliver. And our ability to be very flexible in that space and deliver those customizations in a timely manner is oftentimes is differential, too. That was in some of the earlier ones, a clear differentiator.
And I'm not showing any further questions in the queue. I'd like to turn it back over to Brian for closing remarks.
One thing before Brian probably kicks in, too, that we should probably clarify a little bit because we talked about the EBITDA beat, which is -- which was great. As we've said, we were a very successful profitability quarter and cash flow quarter. And as we think about the GAAP financials, if you look at the earnings release and look at the pretax income compared to a year ago, it's a pretty dramatic improvement year-over-year. And we beat EBITDA, we actually beat our -- we don't put guidance out for pretax income, but the pretax income was actually better than anticipated, similar to EBITDA. That said, you can see in our materials that we had an effective tax rate of 117%.
And what's a little bit wonky about these taxes as many of you know, the analysts are on the call that understand FIN 18 and the fact that what you do each quarter is you project your anticipated tax rate for the full year you put into each quarter. So the fact that -- and you can see that this quarter was 117%. So what that really says is for the full fiscal year, we expect a tax rate of about 117%. That said, we still, like we've mentioned, we've reiterated or reaffirmed our net income guidance of negative $8 million to positive $12 million. But what's a little bit wonky about that is that we have a certain amount of tax that we are going to pay this year. Part of it is the withholding tax associated with the patent license agreement that we did this year with -- in Korea. So that will be a big chunk of foreign withholding tax.
We also have other entities that we pay foreign withholding tax. So there's a certain amount of set tax that we are going to pay. And we're so close to breakeven that, that percentage really impacts -- is impacted by the actual results and then that set amount of tax as opposed to what most people think about as you think about a tax rate and you apply that to, again, a little bit higher or lower earnings.
So I guess, way to think about this, if you're doing your modeling is to think that we're probably going to have an actual tax provision in the range of probably $18 million to, call it, $22 million. And then if you see that 117% effective tax rate that we use this year, you can really back into the expectation of pretax income for the whole year by taking the net income average, which is negative 8% to 12%. The middle of that is roughly 2%. And then you can say, well, if you had to gross that up to get to if you're going to have roughly mid-range taxes of about $20 million, that means pretax income of about $22 million, so a mid-range guidance. So it's a little bit wonky this one. So the fact we overachieved in pretax income and applied that 117% FIN 18 rate actually increased our net loss even though we had a better-than-expected pretax loss. So a little confusing, but certainly, if the folks on the call in subsequent discussions, if you want to talk a little bit more about taxes, we can.
Okay. Thanks for that, Tony. That was very helpful. I know that whole tax situation was a little bit confusing for everyone.
To close, I just want to say it was a great Q1 and start of our fiscal '26. We're really happy with the deals we've signed on xUI. I think they are clear indicators of the power of the technology and our ability to compete in this marketplace against whoever our competitors are at the time. And so I'm really proud of what the teams both delivered and accomplished this quarter. You saw the great earnings, the great results that we've had, record free cash flow. and we're set up for a great Q2. And so I just -- I look forward to talking to everybody at the end of this quarter. I think you'll be happy with our results. And with that, I'll talk to you all during the quarter and look forward to talking to you on this call at the end of Q2. So thank you very much.
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.
Cerence — Q1 2026 Earnings Call
Cerence — Q4 2025 Earnings Call
1. Management Discussion
Good day, and thank you for standing by. Welcome to the Cerence Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, Kate Hickman. Please go ahead.
Hello, everyone, and welcome to Cerence's Fourth Quarter 2020 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 8-K with the press release preceding today's call, our most recent Form 10-Q and our Form 10-K filed on November 25, 2024.
in addition, the company may refer to certain non-GAAP measures, key performance indicators and pro forma 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 TMT and Consumer Conference on December 8 and the Needham Growth Conference on January 13.
In addition, Cerence will also be exhibiting at CES in Las Vegas from January 6 to 9th.
Now on to the call. Brian?
Thank you, Kate. Good afternoon, and welcome, everyone. I'm excited to speak with you today and reflect on my first full year as Cerence's CEO. It's been a great year for the Cerence team and our customers, and I couldn't be happier with the proforma.
Over the past year, we've strengthened the financial and operational foundation of the company and significantly increased positive cash flow generation, beating nearly every metric and putting us on a solid ground for executing on our future growth plans. We've made significant progress with our xUI platform, including meeting all our technology milestones while driving strong customer interest and adoption. We paid down $87.5 million of our debt using cash on hand while maintaining our cash position for the future, and we secured our first successful outcome in our efforts to protect and monetize our intellectual property.
As a result, we believe that Cerence has the right foundation for long-term sustainable growth in fiscal '26 and beyond. All of this has led us to posting strong results for this quarter. Again, delivering above the high end of our guidance range with revenue of $60.6 million and adjusted EBITDA of $8.3 million.
And importantly, we generated strong free cash flow of $9.7 million. For the full fiscal year, revenue was $251.8 million. Adjusted EBITDA was $48.1 million, and free cash flow grew almost threefold year-over-year to $46.8 million. And CPU increased to $5.05 for the trailing 12-month period, up 12% from the same period last year.
And then Tony will provide further details on our results later in the call. As you've heard us discuss in recent quarters, we are deeply committed to monetizing our intellectual property and protecting it against infringers.
Last month, we resolved our suit with Samsung, which, among other things, resulted in Samsung agreeing to pay cars a onetime lump sum payment of $49.5 million. This payment is pursuant to a confidential cross-license agreement with Samsung, which limits our ability to provide specifics. Nevertheless, we believe that it's an important milestone in our strategy and a proof point for the broad applicability of our technology across different industries and verticals.
I'd also like to share a bit more about our approach to IP monetization and how it fits into our long-term strategy. While we always prefer to enter licensing deals without resorting to litigation, we expect to take all necessary steps, including litigation to ensure that we receive fair value for our foundational IP. And this is why we currently have actions against Apple, TCL and Sony, among others. And we have a multiyear road map of potential future actions and are consistently evaluating if new lawsuits are warranted. We believe IP monetization will be a continuing ongoing revenue stream in the future and will help to support our nonautomotive business growth.
The payment under the Samsung licensing agreement as well as the expected costs related to our other active suits are incorporated into our fiscal year '26 guidance, which Tony will discuss. It's important to note that the process for these lawsuits is long. So as we move through the fiscal 2026, we will keep you apprised of any important updates.
Now taking a moment to look back at Q4. We continue to make progress on our 3 key deliverables: advancing our AI road map, growing our business with the new and existing customers and continuing our transformation and cost management initiatives.
First, in terms of advancing our road map, we continued our development of Cerence xUI with the addition of several new languages and ongoing advancements of our core tech and audio AI solutions, which are the basis for the xUI experience. We also hosted another successful demo at IAA in Munich in September. And we showcased our flexible agnostic approach, partnering with SiMa.ai as well as MediaTek to bring advanced low-power conversational AI to vehicles.
We also furthered the advancement of our Agentic AI strategy, partnering closely with Microsoft to roll out a mobile work agent that enables people who choose to work in the car to do so more safely and securely through voice first access to Microsoft 365 copilot, teams, outlook and OneNote with xUI's automotive-grade genic architecture, the mobile work agent can seamlessly and proactively orchestrate between copilot and other domains like navigation to enable a cohesive and context of where user experience. Through our partnership with Microsoft, we're turning the car into a trusted device, something that we believe our competitors cannot deliver.
Looking forward to 2026, we are gearing up for our next big milestone, CES in Las Vegas where we'll continue to showcase the latest innovations in Cerence xUI and our Cortec. We'll also demonstrate new AI agents focused on vehicle service and dealerships, part of our strategy to expand to other areas of the automotive ecosystem to drive additional revenue opportunities. In terms of customer adoption, the continued development of our 2 previously mentioned xUI customer programs, JLR and a brand within the Volkswagen Group. Both programs are on track and are expected to hit the road in 2026.
We also continue to build the xUI pipeline with additional POCs with large global automakers. -- including some North American OEMs, where we are working to regain market share. Thus far, we're seeing positive momentum in converting POC programs to deals. Our second key deliverable is continuing to grow our business with new and existing customers. In Q4, we signed several important deals, including with Toyota to bring our GenAI-powered solutions into their vehicles, with Ford to expand the presence of our audio AI across their lineup and with an autonomous trucking company for our emergency vehicle detection solution.
Other key wins in the quarter included BMW, Honda and great Wall Motor. We also saw 9 programs start production in Q4, including BYD, Subaru and Geely. Outside of automotive, we continue to operationalize our new strategy and distributor model with a focus on 3 key areas: first, expand our work with partners like Microsoft and NVIDIA. Second, continue to double down on our work with distributors to grow in areas like voice-powered kiosks and logistics.
And lastly, as mentioned, continue our IP monetization efforts. 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 year 2026 and beyond, and this is reflected in the fiscal 2026 guidance. Our third key deliverable is continuing our transformation and cost management initiatives.
As you can see from our continued strong cash performance, we have driven real benefits from our work and are delivering it to the bottom line for our shareholders. Continuing our attention to cost in Q4, we initiated a restructuring plan with respect to certain foreign operations intended to further reduce operating expenses and position Cerence for profitable, sustainable future growth. We expect to incur the majority of the restructuring expenses related to this plan and to complete its implementation in Q1.
At the remainder of fiscal 2026, we will remain diligent and maintain our attention to cost management. In conclusion, we are incredibly proud of what our team has accomplished this quarter and in fiscal year 2025 as a whole. As we look to fiscal year '26 and beyond, there are several key vectors for our ongoing growth. First, increasing adoption of Cerence xUI and driving greater penetration of our stack and existing programs, delivering increased PPU.
Second, increasing the number of connected vehicle ship, resulting in expansion of our connected services business; and third, growth in our nonautomotive business towards the end of the year. This includes our IP monetization efforts, which we believe will continue to yield benefits and provide an ongoing revenue stream. And as a reminder, with most cases taking multiple years to reach resolution, this is a long-term strategy.
We look forward to building on the strong foundation set in fiscal 2025. For long term, sustainable growth in fiscal 2026 and beyond. Now while Tony will walk you through the details, we expect fiscal year 2026 revenue to be a range of $300 million to $320 million, marking a 23% year-over-year increase at the midpoint. And this reflects the patent license payment from our Samsung cross license as well as anticipated 8% growth in our core technology business, which excludes professional services. And we expect professional services to shrink as our newer technology requires less time and engineering to deliver and OEMs and Tier 1s continue to grow their internal capabilities.
And we expect adjusted EBITDA of $50 million to $70 million and free cash flow of $56 million to $66 million. We're motivated by all we've achieved in the last year and believe we have an exciting path ahead of us as we transition into a new phase of growth for Cerence AI.
I'll now turn it over to Tony to take you through the details.
Thank you, Brian. Good afternoon, everyone, and thank you for joining us today. We appreciate your time and continued interest in our company. Today, I will walk you through our Q4 and full year results, highlight the key drivers behind our performance and provide guidance for the upcoming quarter and full fiscal year 2026.
We ended fiscal '25 on a strong note, delivering results that exceeded expectations and reinforcing the momentum we've been building all year. As Brian mentioned, Q4 total revenue was $60.6 million, surpassing our projected range of $53 million to $58 million. For the full fiscal year, revenue reached $251.8 million, exceeding our earlier expectations. This performance reflects broad-based strength across our business, disciplined execution and continued progress in driving profitable growth during the year.
Variable license revenue for the quarter was $31.6 million, up 25% year-over-year. fueled by strong customer utilization, solid in-period shipments and a tailwind from favorable euro exchange rates. We had no material fixed license deals in the quarter or Q4 of last year. Importantly, we believe this continued shift toward recurring scalable usage-based models strengthens our revenue quality and visibility. For the full year, total license revenue grew 13%, a healthy expansion considering that we had lower fixed license contracts in the current year by about $8 million.
Q4 connected service revenue came in at $14.2 million, up 17% year-over-year, reflecting a continued expansion of our connected installed base. For the year, Connected Services revenue was $53.4 million, which compares to $133.4 million in fiscal 2024. So that prior year figure was an anomaly as it included a onetime $86.6 million noncash benefit from a decommissioned legacy contract.
Excluding that, Connected Services actually grew 14% year-over-year, which we believe shows a steady demand and growing recurring scale. Professional services revenue for Q4 was $14.2 million, down 18% year-over-year as we continue to standardize our product offerings, streamline custom projects and gain efficiency and implementations.
Also under applicable accounting rules and certain professional service revenue is deferred when it is included as a component of licensing pricing. For the full year, professional services declined 21% year-over-year, but was directionally consistent with our focus on higher gross margins. Gross profit for the quarter was $44 million, yielding a 73% gross margin, up from 64% in Q4 of last year. which we believe provides a clear demonstration of the improved mix towards technology revenue.
Operating discipline remains a major focus. Q4 non-GAAP operating expenses were $38.3 million, down 3% year-over-year, reflecting strong cost control while continuing to invest in innovation and growth. For the full year, non-GAAP operating expenses were $146.1 million, down $28.5 million or 16% from last year. Highlighting the expected sustained benefit of our cost realignment initiatives. These efficiencies translated into robust bottom line performance.
Q4 adjusted EBITDA was $8.3 million well above our $2 million to $6 million guidance range. For the full year, adjusted EBITDA reached $48.1 million, doubling our initial expectations when the year began. That is a powerful statement of execution, discipline and scalability.
Our GAAP net loss for Q4 narrowed to $13.4 million from $20.4 million for the same quarter last year. For the full fiscal year, GAAP net loss was $18.7 million. We also made significant progress on our balance sheet.
During fiscal 2025, we reduced total debt by $87.5 million using cash on hand, and we ended the year with $87 million in total cash and marketable securities. We generated $9.7 million in positive free cash flow in Q4, our sixth consecutive quarter of positive free cash flow and $46.8 million for the full fiscal year. We are confident in our liquidity position and believe that we will be able to continue funding strategic initiatives from operating cash generation.
From a metric standpoint, we shipped approximately 11.7 million units for the quarter, an increase from 10.6 million in the prior year fourth quarter. We also grew the number of our connected cars shipped by 14% on a trailing 12-month basis, underscoring the continued momentum in vehicle connectivity. Also on a trailing 12-month basis, 52% of worldwide auto production included Cerence technology remaining in line with our historical penetration.
Adjusted total billings were $236 million, an increase of 8.4% year-over-year. Our 5-year backlog metric is currently approximately $1 billion, up slightly from where it was 2 quarters ago. As a reminder, our 5-year backlog may not be indicative of future actual revenue. As previously discussed, when we look at total licenses shipped pro forma royalties and operating measure we use representing the total value of variable licenses shipped in the quarter, including shipments from prior fixed licenses where revenue was previously recognized upon contract signing. We refer to shipments where revenue was recognized in the prior period as fixed license consumption.
Our pro forma royalties were $39.6 million which were down slightly as compared to $41.9 million in Q4 of last year. Consumption of our previous fixed license contract totaled $8.5 million this quarter. better than the same quarter last year by about 49% and in line with expectations given the lower level of fixed contracts than in historical periods. This drops more of the pro forma royalties into revenue in the current period as compared to a year ago.
Our PPU metric increased to [$5.55] for the trailing 12-month period up 12% from $4.50 for the same period last year, reflecting continued implementation of our improving pricing strategy and an increase in the adoption of connected solutions.
Looking ahead, we believe '26 is shaping up to be an exciting year of growth and profitability. Again, as Brian mentioned, we expect total revenue in the range of $300 million to $320 million. At the midpoint, this represents a 23% year-over-year increase. This includes a $49.5 million patent license payment, which we expect to account for as revenue finalized in Q1, a year-over-year comparable $22 million in expected new fixed license contracts, while absorbing modest headwinds from the anticipated continuing reduction of professional services revenue.
At the midpoint, we anticipate high single-digit growth in our technology run rates across both variable license and connected services, underscoring durable demand and expanding recurring contribution.
Operating expenses are expected to remain largely stable with an increase primarily related to legal costs tied to IP licensing. For the full year 2026, we expect adjusted EBITDA of $50 million to $70 million, free cash flow of $56 million to $66 million and gross margins between 79% and 80%. For Q1 FY '26, we expect revenue between $110 million and $120 million, again, including the $49.5 million patent license payment which we expect to account for as revenue and roughly $8 million in expected fixed license contracts. Adjusted EBITDA is expected to be between $30 million and $40 million.
To summarize, fiscal year '25 was a year of strong execution, improving profitability and sustained momentum. We exceed our targets, strengthen our balance sheet and position the company for a year of accelerating growth in fiscal 2026. Our 2026 outlook reflects not just higher revenue and margin expansion but also the realization of the value of our strong foundational IP portfolio and continued growth from our recurring technology lines. We're confident in the resilience of our business built to drive ongoing innovation, customer success and long-term shareholder value.
Thank you again for your confidence and continued support. With that, I will now turn it back to Brian to close our remarks.
Thanks, Tony. In closing, we are pleased with our results this quarter and incredibly proud of what our team accomplished in fiscal year 2025. For fiscal year 2026, we are focused on 3 key priorities: driving top line growth, advancing xUI and maintaining cost diligence. We believe we have an exciting path ahead, and we look forward to sharing more on our Q1 progress and next quarter's call.
We'll now open it up for questions.
[Operator Instructions] The first question that we have today is coming from the line of Jeff Van Rhee of Craig-Hallum Capital Group.
2. Question Answer
A couple maybe start with the IP side. Congrats on the win there. Just to be clear, was that flowing through at a pure profit? And then I probably get back into it, but I want to avoid any possible mistake. What is the assumption for '26 in terms of legal expense?
It's Tony. Tony. Thanks for the question. Yes, a couple of things on that IP side. So yes, we expect that to flow through revenue, so that adds the gross amount of $49.5 million. This first one that really we closed in our ongoing process to monetize our IP outside of automotive. We did this on a contingent basis with the attorneys. So those costs will be recorded in Q1 as well.
And I'll give you some numbers in there. It was actually, I think, in our 8-K as well. But -- so -- and it was the international customer. So there was also some withholding tax within Korea. So at the end of the day, that payment will flow through down to the bottom line. Again, anticipating that, that would be in revenue in Q1. And the net amount would be minus roughly call it $24 million of legal cost and a bit of withholding tax as well.
Okay. Yes. That's helpful.
And then your second question...
It was the ongoing legal. Yes.
Yes, yes. And so the way we're looking at this now is that we have an option of how we pursue these, right? And we believe that we will utilize our external legal costs to do it on more of an hourly basis to get a higher return kind of on these type of events. And accordingly, we're looking at the kind of mid-range of guidance about $7 million to $8 million of additional legal costs this year. And that's in our guidance, yes.
Yes. Very helpful. And then you talked about the ramp interest in xUI and some ramping in the proof-of-concepts to POCs. Can you just put a little finer point on that? Any quantification, any scope you put around the sort of the degree of increase in interest for that?
We have about -- this is Brian, Jeff. We have about half dozen POCs going on with different OEMs in various levels of the UI platform. ether's kind of a continuum UI that has a variety of options and capabilities. And so that's kind of the number of companies that we're working with or partners that are looking at xUI right now. And then you saw we also announced several more Chat Pro and [indiscernible] add-ons this quarter and implementations.
Great. Just 2 last, if I could sneak in. One on the Connected. Nice sequential pickup there. Any if I recall, there are several ways you can take that revenue. I could be mistaken there. But is there anything in there that is pull forward true up or what I would call sort of one of the unusual way of taking connected? Or is that a clean number?
No, there's really only one way I know of, and maybe Tony is more, but it is always over the life of the contract. So there's no pull forward or unique accounting that's being done here. We take a look at the total value of the contract. If you look at the lifetime, they're anywhere from 1 to 10 years, some that are on a 10 years. The average we've said in the past has been about 3 studies that way still.
And so we would break that revenue then out over that 3-year period.
Yes. And so yes, definitely is clean. I think you're right. You followed us enough to know that in the case of where we get a billing where we continue to monitor activity within the connected side and if we believe that we work with our OEM and was any potential underreporting. If we get catch-up billings within connected, we will -- that relate to past services, we will recognize some of that, but this quarter it was really none of that.
Okay. Great. Congrats on the that.
That's not unique about connected. Those true-ups are just -- it's a volume related, right? And sometimes it takes a while for us to get all of the volumes correct between the OEMs and ourselves.
Yes. No, totally understood. And maybe last then, just on the -- you've talked about sort of the nonautomotive opportunities ramping in the out year. Maybe just spend a second there and so to help us rank order top 1, 2, 3 opportunities in the nonautomotive bucket.
Sure. Again, I put our IP monetization in that bucket as well, right? We sit in here, we have other seats going on. And we have a multiyear large list of opportunities in that space. And you really have to take a look at that. Those are mostly us getting paid for our technology in nonautomotive space. In fact, it's all about, right, including the Samsung is nonautomotive revenue. So I do want to clarify that. That is using our technology in the nonautomotive space that we are getting paid for it should have been paid for.
We'd always prefer to just do a standard license, but we'll defend it in other words. The other spaces for the nonautomotive I'd tell you, the first one is the kiosk space. We actually did an implementation this last quarter in South America with a bank implementing voice into the kiosks. We have several other POCs going on with kiosks in various types of applications moving forward.
So I'd say that's the first priority or the first opportunity that's coming due. Then we have -- we've talked about it in the past, what we call [indiscernible], which is our phone answering chat service that can be implemented. We're targeting, again, spaces that we know. So we're looking at dealerships and automotive space. Basically, you can answer phones, make appointments, do things for the just support your CRM or your service base.
Also other applications in -- with OEMs in that space as well, answering a lot of their calls since we already ingest all of the owners manual. So those would be the first like 2 that I'd tell you that are near term and the products are ready. In fact, those will be at CES in demonstration mode. So you'll be able to come see those at our booth in CES.
Our next question will come from the line of Mark Delaney of Goldman Sachs.
This is Will on for Mark Delaney. So my first one is for the 8% growth in the core business in fiscal '26 that you expect, how does that break out between units and content step up?
Will, thanks for the question. So again, a couple of things to think about as in 10%. When we think about that 8% core technology, thinking that the core license revenue and core connected, right? And as we think about the latter they're connected we think about the additional in billings for Connected has been growing over the last 1.5 years, 2 years. and then that gets amortized over the subscription period, right? So we're seeing those increased billings continue to amortize and grow that number and we expect that growth related to increased billings in 2026 and then the amortization of the previous billings that are in deferred revenue. So we've growing deferred revenue and then amortizing that.
So that's roughly 8% or 9% in the connected side and similarly, a similar percentage in license. So it's a little bit different. As we've discussed in the past, we've continued to decrease the fixed license revenue over the last 2 years or so. And what that means is more of the variable licenses actually dropped down into revenue in period.
So because of those decreased fixed licenses over the last couple of years. What we're seeing is that overall pro forma revenue will likely be fairly flat, but more of it will be in-period revenue for those shipments. That's about half of that growth. And then the other half would be coming from additional price and volume out of the licenses.
Just no, that was helpful. just one follow-up question, but so can the company share an update on the competitive landscape, especially with new AI systems come into vehicles illustrated that you saw with GM and Gemini. So can you just give us an update on what you're seeing across the competitive landscape?
Yes, I'd say the competitive landscape hasn't necessarily changed dramatically from the standpoint of who our competitors are, right? There aren't -- we're not seeing anything new or unique. What we would say is that -- more and more of the technology is becoming large language model based. And you're seeing more and more identic AI in the products. And that's driving the competition more than, I'd say, new players or new additions.
So it's the same ones. And I'd tell you, we've talked about them in the past, Google is there, Amazon is there. Those are the 2 that we're usually competing against.
[Operator Instructions]
And I'm not showing any more questions in the queue. So I'd like to turn the call back over to Brian for closing remarks. Please go ahead.
Yes. Thank you. So again, I would just like to thank everybody. Those were great questions, and I appreciate everybody's time. We're really excited about the results we had for both Q4 2025, but full year 2025. And we're feeling like we really set the foundation for growth as we go into 2026. And we look forward to talking with you guys at the end of the first quarter here and showing you great results again and laying out more and more of our strategy for 2026 as we move forward.
So thank you very much for the call today, and we look forward to talking to you again here on.
Thank you all for participating in today's conference call. You may now disconnect.
Cerence — Q4 2025 Earnings Call
Financial data from Cerence
Revenue
Revenue is the sum of all sales generated by a company, e.g. for its products or services.
Revenue (TTM) metric explainedDirect Costs
Direct costs are the costs incurred directly in connection with the manufacture of the product or service.
Gross Profit
Gross Profit indicates how much of the revenue remains in the company after deducting direct production costs. If the percentage share of sales is calculated, this is referred to as the gross margin.
Gross Profit metric explainedSelling and Administrative Expenses
Selling, general and administrative expenses (SG&A) include all expenses for marketing and sales as well as the general administration of the company.
Research and Development Expense
Research and development costs (R&D) provide information on how much the company invests in the research and development of its products. The costs are particularly interesting as a percentage of revenue and in comparison to direct competitors.
EBITDA
EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is the company's earnings before interest, taxes, depreciation and amortization. The EBITDA margin is calculated as a percentage of sales.
Depreciation and Amortization
Depreciation represents reductions in the value of the company's assets (e.g. due to wear and tear on machinery).
EBIT (Operating Income)
EBIT (Earnings Before Interest and Taxes) is the company's profit before interest and taxes, also known as the operating income. The EBIT Margin is calculated as a percentage of sales at
.
Net Profit
Net Profit represents the profit or loss after deduction of all costs.
Net Profit metric explainedStocksGuide Premium
| Jun '26 |
+/-
%
|
||
| Revenue | 309 309 |
26%
26%
100%
|
|
| - Direct Costs | 66 66 |
8%
8%
21%
|
|
| Gross Profit | 244 244 |
40%
40%
79%
|
|
| - Selling and Administrative Expenses | 96 96 |
37%
37%
31%
|
|
| - Research and Development Expense | 111 111 |
15%
15%
36%
|
|
| EBITDA | 37 37 |
396%
396%
12%
|
|
| - Depreciation and Amortization | - - |
-
-
|
|
| EBIT (Operating Income) EBIT | 37 37 |
606%
606%
12%
|
|
| Net Profit | -15 -15 |
39%
39%
-5%
|
|
In millions USD.
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Cerence Stock News
Company Profile
Cerence, Inc. builds automotive cognitive assistance solutions to power natural and intuitive interactions between automobiles, drivers and passengers, and the broader digital world. It also engages in the sale of software licenses and cloud-connected services. The company was founded on February 14, 2019 and is headquartered in Burlington, MA.
StocksGuide Premium
| Head office | United States |
| CEO | Mr. Krzanich |
| Employees | 1,300 |
| Founded | 2019 |
| Website | www.cerence.com |


