Cerence Inc. (CRNC) Q1 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call presents strong financial performance, notably a record high free cash flow and gross margin improvement. The Q&A highlights strong demand for new products and strategic wins, such as a major automaker deal, enhancing future revenue visibility. Despite increased operating expenses, these are tied to strategic legal outcomes. However, the lack of upward guidance revision and high tax rate introduce caution. Overall, the positive factors outweigh the negatives, suggesting a stock price increase in the 2% to 8% range.
Key Financial Performance
Revenue $115.1 million, up $64.2 million or 126% year-over-year. The increase was driven by strong core technology performance, including variable and fixed license revenue, and a $49.5 million patent license revenue from a settlement with Samsung.
Adjusted EBITDA $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.
Free Cash Flow $35.6 million, a record for any quarter in the company's history, compared to a lower amount in prior periods. This was achieved through strong cash generation and operational efficiency.
Variable License Revenue $30.5 million, up 34% year-over-year. This growth was driven by steady customer utilization, more in-period shipment recognition, and continued adoption across core programs.
Fixed License Revenue $7.8 million, compared to no revenue in Q1 of the prior year due to timing differences. This is expected to be comparable for the full fiscal year.
Connected Services Revenue $14.5 million, up 6% year-over-year despite a $2 million true-up benefit in the prior year quarter. Without the prior year true-up, revenue would have increased over 20% year-over-year, driven by the expansion of the connected installed base.
Patent License Revenue $49.5 million, a one-time lump sum payment from Samsung as part of a settlement. This reflects the strength of the company's IP portfolio.
Gross Margin 86%, up from 65% in the prior year period. This improvement was due to a favorable mix shift towards license revenue and disciplined cost management.
Non-GAAP Operating Expenses $57.3 million, up $23.2 million year-over-year. The increase was primarily due to legal costs associated with the patent license outcome and changes in R&D expense capitalization.
Pro Forma Royalties $39.8 million, up from $36.7 million in the prior year period. This reflects higher variable license shipments and lower fixed license consumption.
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Operating Highlights
Advancements in Cerence xUI: Showcased new LLM-powered experiences, including CaLLM Edge small language model for faster performance and reliable in-car interactions. Demonstrated xUI in a Geely vehicle and introduced an audio AI suite with advanced capabilities.
New AI Agents: Developed Mobile Work AI Agent in partnership with Microsoft, integrating Microsoft 365 Copilot, Teams, Outlook, and OneNote. Introduced Dealer Assist Agent for automating dealership workflows and Ownership Companion Agent for in-car service support.
Customer Adoption of xUI: Secured 5 significant customer programs, including partnerships with JLR, Volkswagen Group, Geely, and a major Chinese EV OEM. Achieved higher PPUs and strong win rates against competitors.
Expansion in Connected Services: Increased connected vehicles shipped by 14% year-over-year. Expanded connected service business as a key growth pillar.
Non-Automotive Growth: Explored opportunities in digital signage and other industries, with awards expected in Q2 and beyond.
Cost Management: Paid down $30 million of debt and implemented a restructuring plan to reduce operating expenses.
Revenue Growth: Achieved $115.1 million in revenue, a 126% increase year-over-year. Generated record free cash flow of $35.6 million.
IP Monetization: Resolved a patent suit with Samsung, resulting in a $49.5 million payment. Continued IP cases with Sony, TCL, and Apple.
Long-term Growth Strategy: Focused on expanding recurring revenue, increasing PPU, and entering non-automotive markets.
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Risk or Challenges
Market Competition: Cerence faces strong competition from big tech companies in the automotive AI and voice assistant space, which could impact its ability to secure new contracts and maintain its market position.
Regulatory and Legal Risks: The company is involved in ongoing patent litigation cases with Sony, TCL, and Apple, which could result in significant legal costs and uncertain outcomes.
Revenue Dependency: A significant portion of revenue is tied to fixed license contracts and connected services, which are subject to timing shifts and customer adoption rates, potentially impacting financial stability.
Economic Sensitivity: The company's performance is closely tied to the automotive industry, making it vulnerable to economic downturns or disruptions in vehicle production.
Debt Management: While Cerence has reduced its debt, it still carries financial obligations that could limit its ability to invest in growth initiatives.
Geopolitical Risks: The company’s reliance on international markets, including China, exposes it to geopolitical tensions and trade restrictions that could disrupt operations or revenue.
Technological Adoption: The success of new AI agents and platforms like xUI depends on customer adoption and integration, which may face delays or resistance.
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Guidance & Outlook
Revenue Expectations: For Q2 fiscal 2026, revenue is expected to be between $58 million and $62 million. Full-year fiscal 2026 revenue guidance is reaffirmed at $300 million to $320 million.
Adjusted EBITDA: For Q2 fiscal 2026, adjusted EBITDA is expected to be between $2 million and $6 million. Full-year fiscal 2026 adjusted EBITDA guidance is reaffirmed at $50 million to $70 million.
Gross Margins: For Q2 fiscal 2026, gross margins are expected to be between 71% and 72%. Full-year fiscal 2026 gross margins are reaffirmed at 79% to 80%.
Free Cash Flow: Full-year fiscal 2026 free cash flow is reaffirmed at $56 million to $66 million.
Connected Services Growth: Continued growth in connected services is expected, driven by increasing adoption of connected solutions, which is a key pillar of the long-term growth strategy.
Non-Automotive Business Expansion: Revenue and profitability impact from non-automotive business expansion is expected to begin in late fiscal year 2026 and beyond.
Patent Monetization Strategy: The company expects continued benefits from its IP monetization strategy, with ongoing cases involving Sony, TCL, and Apple.
PPU Metric: The PPU (price per unit) metric is expected to increase by the end of fiscal 2026.
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Shareholder Return Plan
The selected topic was not discussed during the call.
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Key Q&A
Q:On the connected side, where does the Mobile Work Agent rank in terms of customer enthusiasm and its impact on ARPUs?
A:The Mobile Work Agent is highly ranked in terms of customer enthusiasm, with strong demand and interest. It is a cloud-based solution that can be implemented on vehicles 2-3 years old with connected capabilities. Pricing has not been discussed yet, but it will be additive to ARPUs.
Q:If the Mobile Work Agent is made available to existing vehicles, is it a revenue event or a strategy to build future revenue?
A:It would be a revenue event for the company.
Q:Will the major volume global automaker signing in Q2 impact TTM billings and backlog?
A:Yes, these signings will be reflected in the 5-year backlog and will show up in TTM billings. Revenue from these deals will start in late summer and ramp up as production and vehicle sales increase.
Q:How is the usage of existing in-car connected systems trending?
A:Usage of older systems drops off over time, but newer systems like the Cerence Assistant show increasing usage due to improved functionality and ease of use. The addition of features like Microsoft Office 365 is expected to further increase usage rates.
Q:What is the interest level in xUI and AI products from Western OEMs compared to Chinese OEMs?
A:Three out of five recent deals are with Western OEMs, showing strong interest. Western OEMs are becoming more aggressive in bringing these technologies to production, and the pipeline includes additional Western OEMs.
Q:What is the pricing trend for xUI deals compared to the current listed PPU?
A:The prices for xUI deals are significantly higher than the current listed PPU of around $5.05.
Q:Why was the full-year EBITDA guidance maintained despite exceeding Q1 expectations?
A:The company typically does not change guidance unless there is significant movement. The Q1 overachievement provides confidence in meeting the full-year EBITDA estimate, with some expenses deferred to later quarters.
Q:What factors contributed to the Q1 EBITDA beat?
A:The beat was due to lower legal costs related to the Samsung settlement and deferred R&D project expenses.
Q:What led to the win with the major volume global automaker, and how does the company view its win rate going forward?
A:The win was attributed to the capability of the technology, confidence in the team, and the ability to deliver customizations. The company is optimistic about its win rate due to recent traction and differentiation in technology.
Q:What caused the high effective tax rate in Q1, and how does it impact full-year guidance?
A:The high effective tax rate of 117% was due to foreign withholding taxes and the application of FIN 18. Despite this, the company reaffirmed its net income guidance for the year.
Q:Review of Unclear Management Responses
A:Management avoided providing specific metrics on the usage rates of in-car connected systems, stating only that usage is increasing without disclosing percentages or detailed data.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI agent
AI suite
Agent
CES
Cerence result
Communications Investor
Corporate Communications
GM
HKMC
IP monetization
RD
Samsung
afternoon today
area
automaker future
award
balance sheet
brand
core technology
customer traction
deal win
development language
driver
element
future program
journey
license resolution
maintenance
margin period
momentum
patent license
pillar term
portfolio
priority
record
show
term quality
timing
truck
xUI
CRNC Transcript
Cerence Inc. (CRNC) Q1 2026 Earnings Call Transcript
Positive2-4
The earnings call presents strong financial performance, notably a record high free cash flow and gross margin improvement. The Q&A highlights strong demand for new products and strategic wins, such as a major automaker deal, enhancing future revenue visibility. Despite increased operating expenses, these are tied to strategic legal outcomes. However, the lack of upward guidance revision and high tax rate introduce caution. Overall, the positive factors outweigh the negatives, suggesting a stock price increase in the 2% to 8% range.
Cerence Inc. (CRNC) Q4 2025 Earnings Call Transcript
Positive11-19
The company exceeded revenue and EBITDA expectations, showcased strong financial metrics, improved cash flow, and raised guidance, all indicating robust performance. Despite some concerns in the Q&A about competitive dynamics and legal costs, the overall sentiment remains highly positive due to record high revenue, strong earnings, and optimistic guidance. The announcement of advancements in AI and expansion into non-automotive verticals further boosts the outlook. These factors suggest a strong positive stock price reaction.
Cerence Inc. (CRNC) Q3 2025 Earnings Call Transcript
Unknown8-6
The earnings call presents a mixed picture: strong Q2 revenue and free cash flow, but weak Q3 guidance. The strategic partnerships and product development are positives, but the net loss and expected decline in Q3 sales are concerns. The Q&A reveals no immediate impact from new AI programs and ongoing pricing pressures. The raised full-year guidance balances the short-term revenue drop. Without market cap data, predicting a strong reaction is challenging, but the overall sentiment leans towards a neutral short-term outlook.
Cerence Inc. (NASDAQ:CRNC) Q2 2025 Earnings Call Transcript
Positive5-8
Cerence's earnings call highlights strong financial performance, including a 15% YoY revenue increase and a return to profitability. The company's strategic partnerships with Nvidia and Microsoft, along with positive free cash flow and increased license revenue, contribute positively. Despite uncertainties in the automotive industry and professional services revenue decline, optimistic guidance and strong financial metrics suggest a positive outlook. The Q&A session reveals management's confidence in connected revenue growth, supported by AI integration. Overall, the positive aspects outweigh the negatives, indicating a likely positive stock price movement.
CRNC Slides
CRNC Report
Frequently Asked Questions
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