Cerence Inc . (NASDAQ:CRNC), a leader in automotive AI solutions, reported a 14% year-over-year increase in revenue for the third quarter of fiscal year 2024, totaling $70.5 million. Despite this growth, the company recognized a substantial non-cash goodwill impairment charge of $357 million. Cerence maintains a solid cash position with $126 million in reserves and generated $12.9 million in cash flow from operations. Looking ahead to fiscal year 2025, the company anticipates revenue to be flat or to experience a low single-digit decline from their adjusted $237 million run rate. Amidst a significant business transformation aimed at cost savings and AI innovation, Cerence remains focused on achieving positive adjusted EBITDA and cash flows.
Key Takeaways
- Q3 FY2024 revenue rose to $70.5 million, a 14% increase year-over-year.
- A significant non-cash goodwill impairment charge of $357 million was recorded.
- The company reported a cash balance of $126 million and cash flow from operations of $12.9 million.
- For FY2025, revenue is expected to be flat or slightly decline from the adjusted $237 million run rate.
- Cerence is targeting $35-40 million in net annualized cost savings, mainly to be realized in FY2025.
- The company is investing in generative AI and has secured 8 OEM design wins.
- Cerence has $87.5 million in convertible notes due in June 2025 and is exploring refinancing options.
Company Outlook
- Cerence projects a steady revenue outlook for FY2025, with expectations of a flat to low single-digit decline.
- The company is focused on delivering positive adjusted EBITDA and cash flows through its business transformation.
Bearish Highlights
- The company reported a non-cash goodwill impairment charge, indicating adjustments to the value of acquired assets.
Bullish Highlights
- Cerence's AI solutions are gaining traction with 8 OEM design wins and implementations by global OEMs such as Volkswagen (ETR:VOWG_p), Audi, Fiat (BIT:STLAM), and Skoda.
- The business transformation is expected to yield significant cost savings, enhancing profitability.
Misses
- The anticipated revenue for FY2025 does not show growth, suggesting a potential plateau or slight downturn.
Q&A Highlights
- CEO Stephan Wootman emphasized the global reach of Cerence solutions, with more than half of new cars featuring their technology.
- Wootman highlighted the rapid advancement in generative AI and large language models as key to future automotive user experiences.
- The company is set to initiate further cost reduction efforts in the coming months.
In summary, Cerence Inc. is navigating through a period of strategic transformation, balancing the challenges of a significant impairment charge with the opportunities presented by its AI solutions and cost-saving initiatives. The company's focus on innovation and financial discipline sets the stage for its future performance in the competitive automotive AI market.
Full transcript - Cerence Inc (CRNC) Q3 2024:
Conference Operator: Good day, and thank you for standing by. Welcome to the Cerrit's Third Quarter 2024 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone.
Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Richard Yerganian, Senior Vice President, Investor Relations. Richard, please go ahead.
Richard Yerganian, Senior Vice President, Investor Relations, Cerence: Thank you, Felicia. Welcome to Cerence's Q3 of fiscal year 2024 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 fact, including statements related to our expectations, estimates, assumptions, beliefs, outlook, strategy, goals, objectives, targets and plans should be considered to be forward looking statements. Cyrense 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 as described in our SEC filings, including the Form 8 ks with the press release preceding today's call. Our Form 10 ks filed on November 29, 2023, and our most recent Form 10 Q. In addition, the company may refer to certain non GAAP measures, key performance indicators and pro form a financial information during this call. Please refer to today's press release for further details of the definitions, limitations and uses of those measures and reconciliations of non GAAP measures to the closest GAAP equivalent. The press release is available in the IR section of our website.
Joining me on today's call are Stephan Wootman, CEO of Cerence and Tony Rodriguez, Interim CFO of Cerence. As a reminder, the only authorized spokespeople for the company are Stephan, Tony and me. Now on to the call. Stefan?
Stephan Wootman, CEO, Cerence: Thank you, Rich, and good morning, everyone. To begin, I would like to briefly comment on our Q3 results. Our financial performance was as expected with revenue in the middle of our guidance. Due to the decline in our stock price, we performed a goodwill assessment following completion of the quarter that resulted in a goodwill impairment charge of approximately $357,000,000 negatively impacting our GAAP profitability. With the exception of gross margin, which was within the range, all other non GAAP profitability metrics were above the guidance we provided on our last call.
Additionally, we had a strong quarter for cash flow from operations, which came in at $12,900,000 We remain substantially on track to achieve the full year guidance we provided in our last conference call. And Tony will provide the details later in the call. We recognize that some of you may be listening to our call for the first time and thought it would be helpful to provide a high level overview of Cerence and our business. Cerence creates AI and voice powered user experiences across the transportation industry, primarily for automobiles. We were among the first to bring voice interaction to cars and today we count nearly all the world's leading OEMs and Tier 1 suppliers as our customers and partners.
More than half of cars that roll off the production line globally includes Cerence Solutions. So as are that many of you have interfaced with Cerence as the company behind the audio and voice technology in your cars, whether it be Mercedes Benz (ETR:MBGn), Volkswagen, Stellantis (NYSE:STLA), Toyota (NYSE:TM) or many others. In fact, we recently surpassed 500,000,000 cars shipped with our technology. As the automotive faces an incredible transformation, we believe Cerence is well positioned to partner with automakers to deliver what drivers want and need from the in car experience. That is an intuitive, seamless interaction in which they can complete virtually any task, all without comprising safety.
We believe there are 3 key differentiators that distinguish our offering. 1st, we have a lengthy history and deep customer relationships, giving us critical understanding of the unique dynamics in the automotive industry. We have extensive experience in both in production and in development systems and we work closely with our customer as an innovation partner helping to define and design their next generation infotainment system. 2nd, we have a strong IP position, approximately 700 patents and automotive specific data supporting an end to end solution that improves all aspects of the in car user experience, from the moment a driver begins speaking, all the way through to task completion. Additionally, our global footprint spends more than 70 languages to support OEMs worldwide.
3rd, we are deeply customer centric, empowering our OEM customers with flexible and customizable solutions that puts their brands at the forefront. So they cannot only differentiate themselves from their competitors, but also maintain ownership of their data. Think about it. The infotainment system is a car brand's main interface with their customers on a daily basis. They don't want to just hand that brand equity over to a partner who doesn't have the interest as its top priority.
Plus, we believe that OEMs want to maintain their ability to monetize the valuable data generated from their systems, rather than handing it off to a 3rd party. Our solutions address all of these considerations. As we look to the future as a preferred supplier of voice and AI in the car, we are moving quickly to advance generative AI and large language model powered innovation that we believe will be central to the automotive user experience of the future. I will provide more detail on that in a few minutes. Given our relationships with nearly all the world's leading OEMs, we have deep insight into the many challenges automakers are facing today.
1st, pressure for faster development cycle that consistently deliver a fresh user experience. 2nd, increasing software development requirements and the push on AI, all while balancing costs and lastly, growing pressure from an evolving regulatory landscape. These factors are driving automakers and their suppliers to assess their strategies and investment and that includes Syrens. As such, we are undergoing a business transformation intended to position Cerence to meet the current and future needs of our customers. On our last conference call, we also shared that given our lower revenue run rate profile, we would be undertaking cost reduction actions that we expect to position us to consistently deliver positive adjusted EBITDA and positive cash flows.
Along these lines, our objective is to realign our cost structure to create a more efficient organization, while also focusing our resources on the product areas we expect to reap the most rewards, driving faster growth and improved profitability. We have partnered with a specialized firm to support us through our transformation efforts, which are well underway. As one of our first steps, we recently unified our product and core technology teams, which we believe will help to accelerate innovation and to drive efficiency to meet customer demands and elevate pain points as well as deliver on our AI roadmap. We expect to begin the next steps in our cost reduction efforts within the months. Our initial expectations are to achieve net annualized cost savings on a run rate basis of approximately $35,000,000 to $40,000,000 which will be predominantly realized in fiscal year 2025.
Next (LON:NXT) quarter, we will provide fiscal year 2025 guidance and give more specifics on whether savings for in the P and L. The gross savings are expected to be higher, allowing us to reinvest in the resources that are required to bring innovative new solutions to the market, including advancing our generative AI roadmap and next generation platform. We expect that some of the expense reductions will have an impact on certain revenue streams, primarily those that are less profitable. We are carefully managing these actions to mitigate the impact and focus our investments in the areas that we expect will drive our future growth and support OEMs as they continue to prioritize software and AI innovation. Tony will discuss this more in his remarks, and he will provide specifics along with official fiscal year 2025 guidance on our next call.
From a product and technology perspective, we have 3 main areas of focus. 1st, advance our core technology stack as a foundation for everything we do. We continue to innovate across input, output, conversational AI, audio AI and other solutions like emergency vehicle detection, bring in advanced capabilities and new features. Our turnkey offering, Cerence Assistant, provides a strong foundation for our new generative AI solutions. 2nd, we continue to capitalize on the traction we generated at CES in January for our generative AI powered solutions that enables OEMs to leverage AI with customization and cost efficiency.
We have made fast progress with 8 OEM design wins in January and several global OEMs, including Volkswagen, Audi, Fiat and Skoda already going live with these solutions, not only in new cars, but also those already on the road. We expect another 4 Gen AI customer programs to go live before the end of the calendar year. Although, based on a small sample size and short timeframe, we are seeing a positive increase in price per unit for these offerings and an increase in user adaption and usage. Lastly, as OEMs are moving quickly and looking to Cerence as a trusted partner to help them efficiently bring AI into their cars, we are laying a strong foundation and developing an eager customer base that we have the potential to convert to our next generation AI computing platform down the line. This new platform leverages CERN's proprietary automotive large language model, enabling a single conversation interface to work across application to complete tasks based on user preferences.
To give you a real world example, imagine getting into your car after a busy work day. You ask the in car assistant to summarize the next the text message you receive throughout the day. It filters out a few less important messages and highlights one from your spouse that says, we are low on groceries, should we go out to dinner tonight? You ask the assistant to find you a French restaurant with outdoor seating and an open reservation, confirm the details, then send a test message back to your spouse, filling them in on the plans. The assistant confirms that there is a charging station near the restaurant that you have enough battery to get there and then start the navigation.
This is all done in a single interaction rather than multiple steps that require switching back and forth between applications. And you can speak naturally and comfortably to the system just as you would to another human. This new platform is in development and we're working closely with several customers on their specific needs. We do not expect our transformation plans to slow this program down. In fact, our plan is to take some of the gross savings cost savings to reinvest them to scale and accelerate our Gen AI roadmap.
In summary, we believe that our product strategy will further strengthen our ability to serve customers and lead to a healthy pipeline of business opportunities. I would like to now hand the call off to Tony to review our Q3 results and outlook for Q4. Tony joined us in early June as our interim CFO as we continue our search for a permanent CFO. Tony brings over 25 years of experience as a financial leader, managing all aspects of finance and accounting for both public and private global companies. After Tony's comments, I will be back for a few closing remarks and then we will take your questions.
Tony? Thank you, Stefan.
Tony Rodriguez, Interim CFO, Cerence: I will now talk through our Q3 results, Q4 and full year guidance and continue the revenue framework discussion for fiscal year 2025 that was introduced last quarter. For Q3, our revenue was $70,500,000 landing in the middle of our range of guidance of $66,000,000 to $72,000,000 This represents an increase of $8,800,000,000 or 14% over last year's Q3 revenue of $61,700,000 At $12,500,000 our Q3 adjusted EBITDA for the quarter was $9,700,000 higher than a year ago and above the higher end of the guidance range. This quarter's revenue and profitability benefited from increased fixed license revenue as compared to prior year. Our cash flow from operations for the quarter was $12,900,000 and our balance sheet at the end of the quarter included total cash and marketable securities of $126,000,000 As Stephan mentioned a few minutes ago, our GAAP results were negatively affected by a $357,000,000 goodwill impairment. This is a non cash impairment charge that only affects our GAAP results.
Turning to our detailed revenue breakdown, variable license revenue was $23,100,000 down $2,700,000 or 10% from the same year same quarter last year. Fixed license revenue came in at $20,000,000 for the quarter compared to a Q3 last year where we had no fixed license revenue. This brings our fiscal year to date 24 fixed license revenue totaled to approximately $30,400,000 and we do not expect additional fixed license revenue in Q4. Connected services revenue was $10,900,000 This was slightly higher than last year's connected services revenue of $10,200,000 when excluding $8,400,000 of revenue from the legacy contract that we will discuss again in a little more detail later. Our professional services revenue was down 4% year over year.
As a reminder, our professional services are not a revenue growth driver for us in itself, but rather an enabler of both license and connected services revenue. We expect revenue professional services revenue to be flat to down year over year going forward. Moving on with more detail on our license business. As a reminder, pro form a royalties is an operating measure representing the total value of variable licenses shipped in a quarter as it includes the consumption of previously recognized fixed license contracts. Our pro form a royalties were $39,600,000 which were flat to Q2, but down as compared to Q3 of last year due to lower volume of licensing royalties.
Consumption of our previously recognized fixed license contracts totaled $16,500,000 this quarter, lower than the same quarter of last year by 12%. Because the annual value of fixed contracts has been trending down, over time this will result in smaller consumption of royalties associated with past fixed contracts. As consumption levels decline, we expect that should correspondingly result in variable license revenue growth in future periods as royalties will accrue directly to the revenue line as production occurs. We continue to expect consumption run rates to normalize by the end of fiscal year 'twenty six, at which time new fixed contracts should roughly align with the level of consumption during the year. As we review our key performance indicators this quarter, our penetration of global auto production for the trailing 12 months declined slightly to 53% due to weaker production volumes among our top customers.
We shipped 11,700,000 cars with Cerence Technology in the quarter, down 6.2% year over year, while IHS production for the same period declined 0.5%. Quarter over quarter, we were up 3%, while IHS production was also up 3%. The number of cards produced that use our connected services increased 19% on a trailing 12 month basis compared to the same metric a year ago, as some programs that were previously delayed started ramping production. Adjusted total billings increased 3% for the trailing 12 month period this year compared to the previous year. As a reminder, we provide updates on our 5 year backlog on our second and fourth quarter earnings calls.
Now before I review our outlook for the Q4 fiscal year, I'd like to address our outstanding convertible notes. As you may be aware, we have $87,500,000 of convertible notes that have gone current and are due in June of 2025. Because of the conversion price of $37 per share, these notes are viewed as debt. Given the coupon rate of 3%, these notes are favorable to the company compared to similar instruments available in the current debt market. We were reviewing options for next steps, including evaluating the trade off between cash flow and dilution, And we'll prioritize a solution that we believe to be in the long term interest of the company and our shareholders.
We will update you when a decision has been made. Moving on to our guidance. We are guiding the 4th quarter revenue to be between $44,000,000 Excluding the cash impact of our transformation activities, we expect fiscal year 'twenty four cash flow from operations to be in the range of $10,000,000 to $15,000,000 We do expect total cash restructuring charges in the range of $18,000,000 to $22,000,000 related to the transformation efforts. We expect to incur these charges in the Q4 of fiscal year 'twenty four and the Q1 of fiscal year 'twenty five. Consistent with what we explained in last quarter's call, I want to take a moment to discuss the legacy contract with Toyota.
This contract was a connected services contract acquired by our former parent Nuance Communication in 2013. Toyota decommissioned the solution in Q1 of fiscal 2024, resulting in accelerated deferred revenue in Q1 of this year for Toyota and a directly related contract. So as of the 1st fiscal quarter of this year, the contract is behind us. It is important to view fiscal year 2024 revenue excluding the impacts from those services. We believe this provides a new revenue run rate profile from the company.
If you take the midpoint of our current fiscal year 'twenty four revenue guidance, I just discussed on the previous slide of $324,000,000 and exclude $87,000,000 of legacy related revenue recognized in Q1, the adjusted revenue for the fiscal the adjusted revenue for the company for fiscal year 2024 is approximately $237,000,000 We consider this new revenue run rate relevant for both our cost model and as well as planning our business activities going forward. With this adjusted new run rate of our expected revenue, I do want to take a moment to look forward. While I'm not prepared to provide fiscal year 2025 guidance at this time, I can discuss the framework we provided last quarter of how to think about the fiscal year 2020 'twenty five revenue and profitability. First, as Stephane mentioned, we expect to begin implementation of our recently identified cost reduction efforts within the month. And our initial expectation is to achieve net annualized cost savings on a run rate basis of approximately 35 $1,000,000,000 to $40,000,000 which will predominantly be realized in fiscal 2025.
Since fixed contracts have been trending down, we would expect significantly less fixed license consumption in fiscal year 2025 compared to fiscal year 2024 assuming flat OEM production and mix and pricing mix. In addition, if you assume $20,000,000 of new fixed licenses in fiscal year 2025, very modest growth in run rate connected services and some modest revenue impact related to the cost reduction efforts of the Q4 transformation, it would be reasonable to anticipate a range of flat to low single digit percentage decline off of the new estimated revenue run rate of $237,000,000 For some additional color on sensitivity of this view, those assumptions could be lower or higher depending on global auto production changes, day shifts and the introduction of new platforms, pricing and mix shifts. Again, this does not represent guidance, but rather as a framework of how to think about fiscal year 'twenty five revenue, which is subject to changes based on a number of operating industry and customer related factors. In terms of profitability, with a lower anticipated mix of professional services in the revenue framework, we expect improved gross margins as compared to a fiscal year 'twenty five business without legacy revenue.
Including the impact of our cost saving efforts, in the near term, we are striving for positive adjusted EBITDA in the single digit margin range as we progress toward our higher long term profitability goals. I'd now like to hand the call back off to Stephane for closing remarks.
Stephan Wootman, CEO, Cerence: Thank you, Tony. As we close out the fiscal year, we have 3 main priorities. 1st, accomplish our fiscal Q4 and full year financial objectives. 2nd, execute on our transformation plan, while minimizing any disruptions to our ongoing customer operations and third, deliver on our AI innovation roadmap. That concludes our prepared remarks and we will now open the call up for questions.
Conference Operator: The first question comes from the line of Jeff Van Rhee of Craig Hallum Capital Group. Jeff, please go ahead.
Stephan Wootman, CEO, Cerence: Great. Thanks for taking my questions.
Jeff Van Rhee, Analyst, Craig Hallum Capital Group: Just a couple for me. First, Stephan, on the AI wins, maybe just talk to what you're seeing early understandably, but what are you seeing in terms of the actual usage on an apples to apples basis? I think you had a slide in the deck that talks a little bit about that, but wonder if you could quantify it a little more precisely. And then also along those same lines, any quantification around average revenue per unit or user, however you want dial it in, what you're seeing on revenue impact there?
Stephan Wootman, CEO, Cerence: Hey, good morning, Jeff, and thanks for your question here. Yes, so I think it's too early to quantify all the details here. I think in the near term, there's not a significant impact on the revenue and billings as the programs are just launched and have been rolled out. Feedback from the OEMs directly are very positive. There is also a good growth potential, but still asset at the early stage and this depends heavily on the user adaption and do the subscriptions.
And as a reminder, our business is B2B. Nevertheless, what you can see from the graph in the deck is that it's not just about ChetPRO, who sees a tremendous improvement for general questions. It's across all domains here from navigation up to simple command and control, calling MUM and so on and so forth. And that shows actually or is a proof of concept that we're doing the right thing here, what we said also earlier, right? This kind of Jet GPT or Jet Pro is heavily integrated in the OEM assisted OEM branded assistant and the assistant has full control about the solution.
And also by feeding the system with our own automotive data, we see less hallucinations, right? And overall, it's also very cost effective approach for the OEM.
Jeff Van Rhee, Analyst, Craig Hallum Capital Group: Got it. As you think about the usage of in car sort of engagement systems, if you will, and you look at the broad landscape, obviously, you've dominated the what I would call the in car systems, but then you've got people Bluetooth ing in CarPlay, Android Auto. When you do your studies on the market and TAM, so to speak, how are you seeing the evolution of the percent of users that are opting for which of those solutions? I'm talking like over time. But do you have any sense of how many people are opting for just simple Bluetooth versus embedded in car systems?
And if they are, brands are using, how that's playing out?
Stephan Wootman, CEO, Cerence: I mean, I cannot disclose all information, but when referring to Mercedes, clearly, they want to see a higher boost in their solution with respect to CarPlay, and that's indeed what they are achieving now. For us, it's much more than just bring in large language models, right? It's all about AI computing platform with smart DC capabilities, right? And full interaction with the car, right? And also bring in general knowledge, right?
So overall, I think that's a trend, which is really appreciated by OEMs, and I'm pretty sure also with their end consumers.
Unidentified Speaker: Okay, great. I'll leave it there. Thank you.
Conference Operator: One moment for your next question. The next question comes from the line of Colin Langan of Wells Fargo (NYSE:WFC). Colin, please go ahead.
Colin Langan, Analyst, Wells Fargo: Great. Thanks for taking my questions. The comments are now, I thought last quarter you mentioned 25%, you expected mid single digit growth and now it's flat to low. Is that right? And what sort of if I'm right, what drove the slightly softer outlook into next year?
Stephan Wootman, CEO, Cerence: Maybe let me start first, Colin, and good morning to you as well. And then I will ask Tony to share his view. So overall, I think we have the significant reduction in costs, right? And we assume also there will be a modest impact on the revenue side. As we said, okay, we are with this kind of product rationalization, right?
And we believe that also some products with lower margin, we are going to downsize and but Tony, what's your view on this?
Tony Rodriguez, Interim CFO, Cerence: No, I think that's exactly right. As you think about the guidance at single digit growth year over year last quarter, really it's the impact of the cost restructuring. As we take a significant amount of cost out of the business to realign our cost, it will have an impact to the top line. So we brought that down slightly.
Colin Langan, Analyst, Wells Fargo: Got it. And in your comments, you mentioned the debt coming due next year. What are the options? It sounded like you were alluding to potentially maybe issuing equity to pay that down. But also, I look at the balance sheet, I think you have over $100,000,000 I mean, can you fund a lot of that repayment with the cash on the balance sheet?
And are the debt markets open to refinance it?
Tony Rodriguez, Interim CFO, Cerence: Yes, that's exactly right. I think we're looking at all options. Certainly, as we mentioned, the 3% notes are beneficial to the company at this point, but we want to address the liquidity concerns of it coming due in June of 2025. So we're looking at all options, including refinancing, using our existing cash as well. And looking at that, the benefit of the liquidity from a lower coupon rate, which would be adjusted higher on refinancing and certainly the conversion price would be lower than currently in the notes.
So we're looking at all those, but yes, the markets are open to a refinance.
Colin Langan, Analyst, Wells Fargo: Got it. All right. Thanks for taking my questions.
Conference Operator: One moment for your next question. The next question comes from the line of Nick Doyle of Needham and Company. Nick, please go ahead.
Tony Rodriguez, Interim CFO, Cerence: Hey, guys.
Nick Doyle, Analyst, Needham and Company: Good morning and thanks for taking my questions also. You had when you just talked about the lower OpEx will impact revenue and you talked about a couple of times in your script. Could you just be a little more specific on which product streams are impacted or at least which segment? And then that adjusted net cost savings of $35,000,000 to $40,000,000 would that put you in the $140,000,000 dollars a year range for 2025 or still too early? Thanks.
Tony Rodriguez, Interim CFO, Cerence: Yes. So I'll take that. Yes, when you think about the impacts of the cost reductions, it will be primarily related to professional services revenue. So that's where Stephane had mentioned that mix is a bit lower than prior expectations, we'd expect higher gross margins overall. So, and then I'm sorry, I missed the last question about the $140,000,000
Nick Doyle, Analyst, Needham and Company: Just asking if that the adjusted net cost savings number of 35 $1,000,000 to $40,000,000 would put you around $140,000,000 a year
Unidentified Speaker: in total OpEx?
Tony Rodriguez, Interim CFO, Cerence: Yes. Well, there's when you think about it, there's a combination of things. We've got run rate from 2024, but that's entire year. We also have increases in 25%. And so we're looking at really a run rate off of Q4 run rate and the expenses would be off of that number.
Nick Doyle, Analyst, Needham and Company: Got it. Thank you. And then on the fixed contract consumption, you're saying you hope to normalize by 2026 and the consumptions should go lower over time as that normalizes and that all makes sense. But do you have a specific number that you're looking at for the Q4 and maybe what we're thinking of for through 2025, is that $10,000,000 a quarter number, I get that it moves up and down.
Tony Rodriguez, Interim CFO, Cerence: Yes. I don't have specifics that I can speak of now on consumption rates, other than what we've said that we expect that to be lower in fiscal 2025.
Conference Operator: Okay.
Stephan Wootman, CEO, Cerence: Thank you.
Conference Operator: One moment for your next question. The next question comes from the line of Luke Junk from Baird. Luke, please go ahead.
Unidentified Speaker: Good morning. Thanks for taking the questions. Stephane, wanted to start with maybe just a higher level question and understanding the approach to the R and D organization going forward. Clearly, it sounds like there's going to be some impacts in terms of the pro services element of R and D. I think you also mentioned sort of a unified product and core technology team in your prepared remarks.
If you just maybe could expand on that? And I know you're not breaking out the cost reductions into individual buckets right now, but R and D is going to be important part of that clearly. So maybe just at a high level, if you could comment on R and D opportunities on costs. Thank you.
Stephan Wootman, CEO, Cerence: Yes. So as said, right, our focus is clearly on our GenAI roadmap, including the new AI computing platform. We have recently unified our product and core technology teams. We believe that we will see some efficiency here and also this will help us to accelerate innovation and again drive efficiency to meet also the demands of our OEMs. That's very important.
Overall, what I said is that our solution, our new solution is well received by a couple of OEMs across the globe. I think we are doing the right things here. Also with respect to cost optimization, finding synergies between the two teams, right. And Neil Schantz, who joined us 1 half year ago from Mercedes, who was also essential for various launches over the last couple of weeks here. He is extremely qualified, and he will run both R and D and Product and Professional Services.
Conference Operator: The next question comes from the line of Mark Delaney of Goldman Sachs (NYSE:GS). Mark, please go ahead.
Mark Delaney, Analyst, Goldman Sachs: Yes. Good morning. Thanks very much for taking my questions. First, I was hoping to better understand how you're thinking professional services going forward. I think in the past you've used that as a lead generator and you've described it as part of your investments that helps with your longer term traction and revenue growth.
It sounds like you want to make some cuts there and understand the lower margins, but maybe help us better understand the implications for revenue growth and why you're making some of the cuts in that part of your business?
Stephan Wootman, CEO, Cerence: So, Steph, I mean, professional services is a very important tool for us for enabling licenses, whether it's be embedded or cloud services, right? So don't get us wrong here. We see some optimizations in professional services and also for streamlining our products. We see also efficiencies in deploying our new products. To give you also an example, a POC, so proof of concept can be done within a car within less than 2.5 weeks.
And then, of course, for doing the fine tuning and optimization and customizations with respect to the OEM demands like Brandon and so on and so forth, it take us between 4 to 6 months. Compare this with the past where it took us 12 to 18, 24 months, right? And of course, then PS review goes down. But nevertheless, PS is the enabler for the license business. And that goes also hand in hand with the expectations from OEMs, right, what we said also in the earnings call earlier is that, I mean, there's clearly a demand for more flexibility and a faster deployment and also keeping the system fresh and up to date and we are supporting these new requests from the OEMs and finally from the consumers.
Mark Delaney, Analyst, Goldman Sachs: Understood. Thank you. My other question was just better understanding your commentary, Stefan, around how to think about monetization for the new Gen AI types of subscriptions. You mentioned your revenue is going to depend on usage and what the OEM customers are seeing in terms of how often these services are being used. Can you elaborate a little bit more on how your revenue will flow through?
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