Cerence Inc. Price & Performance (CRNC)

Please note that slides with further context are available in the Investors section of our Web Now on to the call. [indiscernible] Thank you, Jason. And good afternoon, everyone. And welcome to the Q1 twenty twenty five Sarens Earnings Call. I'm really excited to speak with you today. While Tony will walk you through the details, I have the pleasure of sharing our great Q1 results with you first. Top line revenue of $50,900,000 and adjusted EBITDA of $1,400,000 both exceeded the high end of our guidance. And we had strong free cash flow of $7,900,000 On our last call, I shared that our fiscal year 2025 goal is to return Sarence to profitability. A critical step to fuel the future growth. With our Q1 results, on a non GAAP basis, we have moved toward profitability even earlier than we forecasted. I couldn't be more proud of what the team has accomplished and the great start this has given us for 2025. In addition, during Q1, we repurchased $27,000,000 of our convertible notes due in June of twenty twenty five. And as we've discussed in the past, our plan is to extinguish this debt through some combination of repurchases and financing.

We will decide the best path forward taking into account shareholders' interest, and with their view towards driving long term value.

As many of you know, but those who are new to the call may not, Cerence AI delivers AI powered multimodal and conversational agent experience for automotive and beyond. We partner with the world's leading automakers and transportation OEMs to create AI powered assistance empowering them to deliver incredible user experiences to their drivers while also maintaining their unique brand and data ownership and keeping costs in line. In addition to our deep technical expertise and our exciting product roadmap, more on that in a moment, The world's leading automakers and Tier one suppliers love to work with Cerence because we are a neutral and highly specialized supplier. Living and breathing automotive and speaking the same language as our customers. Unlike our competitors. With the ongoing challenges OEMs are facing, cost pressure, slowdown in EV and car sales, and an ever changing geopolitical landscape, Terrence AI is uniquely positioned as an AI innovation partner can help automakers deliver a premium experience while also navigating the impacts of a complex and rapidly changing industry. This quarter, team has been laser focused on our three key deliverables for 2025. First, continuing our work to bring Sarenz XEY our next gen product based on our family of language models to market. [indiscernible] multi LOM architecture provides deep customization and enables compatibility with both new and existing entertainment systems.

Making it easier for automakers to deploy to both current and future vehicles. We reached several important milestones for XUI Gen one within the quarter. Including delivering five proof of concepts and kicking off our first major customer program, further validating and solidifying our product and go to market strategy. And we've partnered with leading AI companies like NVIDIA and Microsoft empowering us with tools and resources to deliver improved performance and cost efficiency to our customers and their drivers.

These AI leaders are eager to work with us given our position with global OEMs and installed base. And you'll see more announcements in this space as we approach NVIDIA's GTC in March, and the Shanghai Auto Show in April. The XUI Gen two which we are demonstrating now and will be available to our customers customers by the end of twenty twenty five will deliver a single conversational interface that works across both cloud and embedded applications to complete tasks based on user preferences, integrating all aspects of a user's interaction into a seamless conversational interface that extends beyond voice. Our future product vision is to enable the driver to get into the vehicle and put their phones down Using their in car system to complete the task they would normally do in their phone, In this new agenic world, we can combine activities like navigation, phone calling, text messaging and web search that even with your phone today would require multiple footsteps and switching between various apps X UI brings the future of agentic and conversational idea vehicle and transforms the car into an assistant that saves you time and truly simplifies Your life The second key deliverable for 2025 is continuing to grow our business with new and existing customers.

In this first quarter of fiscal twenty twenty five, we secured six new design wins across our current product line and two new wins for our generative AI solutions across large and global OEMs. We also saw start of production for six major customer programs and two generative AI programs within the quarter. Including a large trucking customer and a major cloud win back in China. And the Renault Avatar program that includes our Gen AI solution. The third key deliverable for 2025 is continuing You've already seen the benefits of this work in our Q1 top and bottom line results. And as I previously stated, we believe we should always be looking at how we can be more efficient from both a cost and operational perspective, For fiscal year twenty twenty five, we are focused on simplifying and streamlining our organization and our structure to continue taking cost and spending out of Cerence. We can find more efficient and productive ways to accomplish the same task while also finding opportunities to vastly improve our speed to market and get exceptional products into the hands of our customers at a more rapid and competitive pace. This work is underway as we've continued to evaluate our office space, and legal entities kicked off a process to streamline and improve our relatively complex customer contracts and continue to evaluate every rehire and new hire as we will We are looking forward to fiscal twenty twenty twenty five we are issuing initial revenue guidance of $74,000,000 to $77,000,000 with GAAP net income expected to be in the range of $1,000,000 to $5,000,000 and adjusted EBITDA in the range of $18,000,000 to $22,000,000 And Tony will provide further details on the second fiscal quarter in his remarks.

This is my second earnings call as CEO of Cerence AI. And I and the rest of the team are proud and encouraged by the first quarter results. Cerence AI is bringing conversational AI and true agentic to the vehicle now not just in the future, And we have an exciting roadmap ahead. With that, I'll turn it over to Tony to go through the detail of our quarterly numbers, our guidance, and our restructuring activities. Tony? Thank you, Brian. Today, I will be reviewing our Q1 results fiscal year twenty twenty five providing some guidance for our second quarter. I will also comment on our progression toward full fiscal year twenty twenty five guidance.

Let's get into the Q1 operating statement. At the top, we achieved Q1 revenue of $50,900,000 which exceeded the high end of our guidance range of $47,000,000 to $50,000,000 Our revenue this quarter was aided by $2,000,000 in connected royalty true ups, for one of our OEM customers.

As a reminder, this is normal as our customers self report royalty volumes that approximate their auto shipments with our technology in each quarter and periodically true up to actual. With this revenue achievement, our gross margin for the quarter of 65% also exceeded our the high end of our guidance of 60%. Gross profit was also benefited from a greater mix of higher margin license and connected service revenue as compared to professional services Cerence. While our professional services revenue was lower than anticipated during the quarter, it performed at a higher gross margin than anticipated. Moving down the operating statement, our non GAAP operating expenses were $34,100,000 for Q1. Compared to $44,400,000 from the same quarter in fiscal year twenty This decrease of $10,400,000 or 23% represents a full quarter of savings from the restructuring efforts conducted at the end of last year.

We also delayed some planned R and D hiring until Q2 Additionally, the company received notice of acceptance of an international tax credit that allowed us to record $2,500,000 in operating cost benefit. The tax credit benefit recognized this quarter related to 2021 through 2024 fiscal years and was anticipated in our full year guidance, but later in the fiscal year. Our adjusted EBITDA of $1,400,000 well exceeded our guidance of loss in the range of $6,600,000 to $9,000,000 This was driven by improved gross profit as well as decreased operating expenses from continued effort of managing our ongoing operating costs.

And the previously discussed international tax credit of $2,500,000 As compared to prior year, our Q1 revenue declined $87,400,000 but this was driven by $86,600,000 of non cash revenue recorded in last fiscal year associated with legacy Connected Services contract that was decommissioned in Q1 of fiscal twenty twenty Our net loss for Q1 was $22,400,000 compared to net income of $23,900,000 for the same quarter in fiscal 'twenty four. Again, the decline is driven by the decommissioned legacy contract. We ended the quarter with $110,500,000 of cash and marketable securities. Down $19,900,000 compared to where we ended last fiscal year. The lower cash balances quarter related to our repurchase of $27,400,000 in principal value of our 2025 convertible notes. Offset by our positive free cash flow during the quarter of $7,900,000 Our cash flow in Q1 absorbed approximately $8,900,000 of cash Restructuring costs associated with the transformation efforts of Q4 last year. We believe the good start to the year positions us well to achieve our full year cash flow expectations. During the quarter, we recorded restructuring and other costs of $11,100,000 which included a $10,200,000 charge primarily related to our transformation initiatives. Of which $3,000,000 related to accelerated stock based compensation associated with the termination of former senior management employees.

As we look at our revenue breakdown and operating There is a license revenue of $22,700,000 was up $1,900,000 or 9.1% from the same quarter last year and slightly ahead of our expectations. As planned, there was no material fixed license revenue during the quarter. Q1 connected services revenue of 13,700,000.0 was up $3,500,000 or 34% from $10,200,000 the same quarter last year when excluding the legacy We believe this reflects a positive trend of increased demand for our connected vehicles. As planned, our professional service revenue was down year over year. However, the work performed was more profitable than a year ago. As we review our key performance indicators this quarter, total adjusted billings which are defined as our total billings adjusted to exclude professional services, Prepaid billings and prepaid consumption was $227,000,000 an increase of 3% for the trailing twelve month period this year compared to previous year. Total billings including professional services for Q1 of $69,000,000 were up 7% compared to $64,600,000 for Q1 last year.

As a reminder, when we look at our total licenses shift, Pro form a royalties is an operating metric we use representing the total value of variable licenses shipped in a quarter including the shipments where revenue was previously recognized upon contract signing, We refer to shipments where revenue was recognized in prior periods as fixed license consumption. Our pro form a royalties were $36,700,000 which were higher by approximately $1,400,000 as compared to Q1 last year in line with our expectations. Consumption previously fixed contracts totaled $14,000,000 this quarter, lower than the same quarter last year by about 3%.

And lower than projected. Going forward, we anticipate a lower level of consumption of royalties associated with fixed license contracts. Our penetration of global auto production for the trailing twelve months We shipped approximately 11,000,000 cars with Santa Fe Technology in Q1.

Up 2.6% compared to last quarter. But down 10.5% year over year. Q1 worldwide IHS production declined 1.2% compared to the same quarter last year, and was up 10.8% quarter over quarter.

Excluding China, worldwide car production was only up 2.8% quarter over quarter and down 4.8% versus This is important to note as this shows that part of our worldwide penetration decline relates to the increase in China production within worldwide auto production. And to date, we have not been significantly successful at selling to Chinese OEMs into the Chinese domestic market. Weaker production volumes among our top customers also contribute to our year over year total volume decline. That said, the number of cars produced that use our connected services increased 5.1% on a trailing twelve months basis compared to the same metric a year ago and 5.6% compared to last quarter. This reflects the increased demand for connected vehicles.

Now turning to our guidance.

For Q2, we currently expect revenue to be in the range of $74,000,000 to $77 This includes $20,000,000 of projected fixed license revenue expected to be signed during Additionally, our Q2 revenue guidance absorbs approximately $2,000,000 of headwinds in professional services we saw in Q1. We are projecting we are not projecting any additional fixed license revenue for [indiscernible] With the level fixed license revenue forecasted in Q2, we expect gross margin to improve to between 7476%. Net income to be in the range of $1,000,000 to $5,000,000 and adjusted EBITDA to be in the range of $18,000,000 to $22,000,000 When taken in the context of our full year guidance, this means that the implied second half guidance for adjusted EBITDA would be negative. If you simply base your calculations off the midpoint of our range. To be clear, this is not our intention to signal any change in direction of the business. Rather, it is still early in the year and as mentioned, Q1 was aided by a few timing related factors, on the expense side that will catch up to us later in the week than the year.

With that said, we had a positive first quarter but are not yet prepared to officially revise our twenty fiscal twenty twenty five revenue profitability and cash flow guidance. The strong start to the year positions us very well and gives us confidence that our our full year numbers are likely to come in towards the top end of the range of our guidance that we gave last quarter. Especially full year adjusted EBITDA and free cash flow. When looking at our liquidity, as previously noted, we repurchased $27,400,000 of outstanding 2025 convertible As Brian mentioned, our plan is to extinguish the remaining $60,000,000 of convertible notes due in June through some combination of payoff and financing. Between now and June, we will continue to evaluate potential capital structures that could position the company to execute our longer term strategic direction will also allowing us to retain a cash reserve to be flexible as we move forward. Overall, we are pleased with the solid results for Q1 our continued financial I will now turn it back to Brian to close our remarks. Thanks, Tony.

In closing, we're happy with our Q1 results and motivated by our Q2 forecast. We remain focused on execution business process improvement cost reduction, and advancing our next gen roadmap. Now before we close, I want to take a moment to explain my philosophy on forecasting. We take our commitment to The Street seriously. And our goal is always to meet or beat our forecast. I have a firm policy not to change guidance after the first quarter. Our first quarter results and second quarter forecast give us confidence in our fiscal year twenty twenty five forecast for revenue and we are projecting to be in the upper end of the range for adjusted EBITDA and free cash flow. With regards to the recent tariff announcements, we don't believe that there will be a meaningful impact to Q2. As we're already halfway through the quarter and the recent tariffs were paused earlier this week. Now for the rest of the fiscal year, considering the number of changes that have occurred just in the last several weeks, we believe the situation is still incredibly fluid. It would be too speculative for us to say what, if any, impact there will be on our results at this time.

And we'll provide an update on our next earnings call in May if there is meaningful impact. We continue to believe in our ability to deliver on our Q2 and fiscal year twenty twenty five guidance and then our growth for fiscal year twenty twenty six and beyond. And we look forward to continuing to share our progress with you. And we'll now open it up for questions.

Our first question comes Nick Doyle with Needham and Company. Your line is open. Yes. Thanks for taking my question.

The design win and SOP commentary is really positive So two questions there.

How big can that first major customer program with [indiscernible] And second, how many units or any help around sizing fixed SOPs that are expected to really start here? And how does that impact your PPUs going forward? Thanks.

Sure. So Nick, this is Brian.

I'd tell you that the first one is with a European auto manufacturer. If you look over the life of the contract, it's several million units. I think in the first year, it's roughly 1,000,000 ish maybe slightly less.

And we're seeing the PPU upgrades that we've talked about in the past. Tony is going to talk to you a little bit about PPU after I'm done here because we really have a plan to start bringing PPU to you guys moving and starting in the next quarter. If you take a look at the rest of the POCs that we have going, it's with all of the major OEMs just about in various levels of completion or start And so again, they could be for the XGen one that we're looking at right now, it could be multiple millions of units as we move forward. And we're seeing the PPU upgrade that we expect for this product. So So there's interest and we're getting paid for the the product we bring. This This technology is really the beginning of the agentic connected vehicle model that we have. And it will continue in XGen one and then XGen two as well.

Thanks. And [indiscernible] Yes. Hi, Nick. Yes, I mean, just bridging that on PPU. We've talked in the past on these calls that we really need to simplify the model and get to a volumes times price model effectively. What we can say, we're not prepared to to guide on PPU or effective PPU going at this point. By next quarter, we will. And we'll be able to give you more of these volume questions and PPU questions. But what I can say is there's really two fronts to us growing our PPU. And I'll comment a little bit about how we are kind of seeing that trajectory. But the two fronts are the number of connected cars, how many of our overall cars shipped are connected The second is the price in with the additional features of these newer products on the connected side, that increase in price and how it's driving effective PPU. And again, at this point though, I'm not prepared to provide a number. I would say that our effective PPU is really thinking about our license revenue in a quarter for those cars shipped. So divided so the revenue divided into those cars shipped. And then on the connected side, it's the volume of the connected [indiscernible] Because as you we've talked about before, those billings are then recognized over subscription period.

So we want to get to an effective PPU with the value of those cards shipped. What I have seen kind of precursor to next quarter is that we are seeing the benefits of those two fronts. Increased number of connected cars and the increased price impacting positively and growing that effective PPU number. Really helpful. Thank you. And then second, billings is trending in the right direction. Can the conversion of some of what's in the pipeline today get you to the $290,000,000 that you talked about And then if I could just squeeze in, why take in all the fixed contracts this quarter? [indiscernible] Things. Yes, so the number that we've the company has historically given on is trailing twelve months billings, right? And we quoted that $227,000,000 of trailing twelve months adjusted billings. And again, it's adjusted for not including billings related to professional services and then gives up and down associated with pretty previous fixed and current fixed. So that's a good number. We've talked about that billings this quarter will outpace our projected Cerence. And again, our projected revenue, which we're we have not re guided is $2.36 to $2.47 So again [indiscernible] The billings outpacing that, I think we're on track to certainly do that.

The second question was the second question was why do all the the prepay now? [indiscernible] just a combination, Nick, of customers and what we're able to negotiate You've got to remember the prepaid come with a discount. The past that discount was often quite high. And by, A, shrinking the total footprint that going to do down to $20,000,000 and [indiscernible] being more selective and making sure that with deep partners and discounts, we're able to get this discount down to record levels So, it was really we had more demand than we had budgeted of 2020. And we got the right discounts and so we went ahead and administered it. That's why we always Tony and I always say, you really need to look at the full year. There's going to be lumpiness in our numbers quarter to quarter. But it's just right customers, great discounts, lower than we've almost ever achieved And it's the right thing to do now.

Yes. And lastly, the timing In these cases, these customers with those lower discounts and everything Brian said are coming to a point where they're previous fixed is now consuming down to a point where they want to re up that prepayment and it fits into their fiscal year as well, which starts April 1. Or well, I'm sorry, within this quarter. So they want to get it ahead of the next quarter. So I think all those things are why we would do it. It's not that we planned per se to do it. It's we're taking we're being opportunistic with that $20,000,000 Thank you.

Moment for our next question.

Our next question comes from Mark Delaney with Goldman Sachs. Your line is open.

Yes, good afternoon. Thanks for taking the questions. Good to hear about the breadth of your customer engagements and momentum with your Gen AI solutions. I'm hoping you can expand a bit more on that topic and maybe speak to the competitive landscape for digital assistance and any sense of how your market share may trend relative to what you've seen with your traditional products?

Sure. So [indiscernible] The competitive landscape really pretty much what it was last quarter as well. We continue to see some of the big players like Google and Amazon in there. We see some of the I'll call software providers like ourselves. We see SoundHound and some of the others And then we see some call it DIY where there are either SSC providers or some of the OEMs starting. Now what happens is they're biting off bits and pieces. And they're oftentimes being very prescriptive in some of the things, but they must be connected or you're locked into certain LLMs. So our approach to that is always hey, we're agnostic. We can use the latest and greatest LLMs. You can choose We can customize you can choose customized wake up words, A good example was Renault's Avatar, where we customize the wake up world around Reno, which is their avatar thing, really customize the user experience And that's really how we approach these So and then we offer embedded capabilities that are quite strong And as we move through this year, get even stronger, NextGen two and this is what Microsoft is really helping us with around the CALM embedded LLM capabilities, shrinking the footprint and getting two agentic LLM capabilities embedded in a car, which means we have to get small footprint from memory, right sizing the SoC and being able to get it capable and having the right latency Those are all the things that we compete with.

But otherwise, the competitive landscape hasn't really changed.

That's helpful context, Brian. Maybe too soon to try and quantify, but I mean the share of market, do you think it's similar to what you've seen before? Do you think maybe gain some share with all the traction you're Yes. So I mean Tony tried to kind of walk you through And basically if you look at the OEMs that we typically participate in, which are though let's call it the Western OEMs Our market share is relatively flat and that's What we're seeing is China inside of China, which is taken away from our traditional OEMs. And our ability to progress into China in China has not been there yet. And we're continuing to look at options and ways to do that. I believe our technology competes very well in that space. It's all about basically national winners that they're selecting [indiscernible] So we typically plan our our market share is relatively Got it. One last one for me. Just on the restructuring actions, I think you did on the last call, you expected to be at the high end or maybe even somewhat above the $3,540,000,000 dollars annualized target. Maybe update us on where that came in and I think you said it's all in place exiting the fiscal first quarter, but just to clarify where you stand on cost action and if there's any more to come or it's all in place?

Thank you.

So I can start that and Tony And Tony, can can answer in more detail. I think also Mark, I may not have completely answered your first question. So I do think we will in the OEMs that we play with, or that we participate with, we will gain share our target is to gain share We saw a win back in China around the cloud. We're continuing to drive, we believe, a leading edge roadmap of products So our goal is to continue to gain share in the guys that we typically play with. And then we're aggressively seeing what we could do inside of China. Now your question was cost reduction. Your second question was around cost reductions and cost improvements. I'd tell you that what we've already forecasted for '26 or excuse me for '25 is already is work that's for the most part already done. So you're seeing results of it filters through the cost of So whether it's headcount reductions or closures or site reductions things like that are already filtering through as the year goes on. We do have a set of programs that I talked about that we're continuing to look at. And drive.

And if we take something like improving our contracts and the efficiency within our finance unit, That's what Tony has ongoing right now. That work will probably take through at least halfway through this year and into probably second half of next year. And you're really going to see the benefits of that one roll into '26. And it's hard for us to forecast right now because as we look at things like reducing the number of legal entities or improving how we financially account for things and improving and streamlining that We're still trying to figure out how do we account for how much efforts and does that remove from the system and spend it. You'll many fewer tax returns do we have to do? How many filings do we not have to do? But most of those will roll into 26 for additional cost reductions as we move forward. Thanks. One moment for our next question.

Next question comes from Colin Langan with Wells Fargo. Your line is open.

Great. Thanks for taking my questions. You mentioned you guided to the high end of the range. You said there were some factors in Q1 that were outliers. Can you just remind me what they are? Was it the the $2,000,000 of royalty true ups and then the $2,500,000 of tax credit, are those the items you're referring to that were kind of better than expected?

Yes, a couple of Yes, a couple of the one time items. We say one time items and I'll talk a couple of it. One is [indiscernible] as we as our royalty reports come in, OEMs and Tier 1s report royalties, They report and then they oftentimes will true up to actually report estimated number and true up the actual. So in this case, there was a connected services contract and we did some work with an OEM and wanted to make sure we were capturing all of our activity and got $2,000,000 of a true up for pass. So some of that was in quarter of that $2,000,000 So it isn't it would have hit the quarter as well. So and then some of this is before the quarter. But even if you take that $2,000,000 away, we were kind of smack dab in the middle of our guidance. This put us over the edge guidance on the top line. The tax credit was something that was baked into our full year expenses. We just happen to get confirmation of that credit in Q1, so we were able to record it. For previous years, the years 2021 through 2024 in the first in Q1, where we had had that baked into savings of OpEx for fiscal twenty twenty five, but not necessarily in Q1.

So those were the two main items that drove improved profitability to the bottom line.

Line. And the tax credit isn't a special wasn't treated as a special item?

I'm sorry, say that again?

The tax credit wasn't a special adjustment on special item. [indiscernible] Yes. The tax credit was it's an OpEx credit international tax credit associated with offsetting R and D costs. And so previous years, we incurred the entire international for this international of this country. We incurred the cost of for R and D without the savings of the credit. This was a catch up for that country and again, the $2,500,000 related to $24,000,000 and before. So we will have some savings in 2025 as well the rest of the year for the 2025 expectations for that credit. But that was kind of the catch up.

And you mentioned in the closing commentary about tariff risk. I got a bit of a little surprised [indiscernible] kind of assume software wouldn't have much risk. Where is your tariff exposure if there are tariffs How should we be thinking about that if you could frame it? Sure. It would just be in unit volume.

So if The projections were at one point that if the tariffs were applied, it affects 25% of the cars. I mean, multiple $1,000 increase in cost. And so if people buy fewer cars, that's when We had paid from a shipment standpoint, right? So it would be purely volume. So we don't get We are a U. S. Company and so at least right now with the talk of tariffs, it's it doesn't apply quote to our product. But it applies to the or would have applied potentially to our customers [indiscernible] And that's all we were That makes sense. And as I said, right now, we've all been put on hold and we're halfway through the year. So we don't see it right now. It's just [indiscernible] And just lastly, you talked about ex U. I. How quickly can this ramp? How quickly can adoption be? Because our contracts two to three years or is this something that could be added and drive that pricing higher in the next year or two? Pretty quickly.

Sure. So you have to remember that there's two versions of our agenTec large language model software version that we think about One is an embedded non connected version and the other one is a connected [indiscernible] And the connected version gives you the ability to do things like hey, what was the latest score on the football game or who won La Liga this weekend? It gives you real time data points of interest that are updated and all of that kind of [indiscernible] But it's not required to run the car, do navigation. Those are all embedded Typically, the cars come from anywhere. Tony and I were talking about this this morning. From one to we've seen as long as ten year contracts for connectivity. I'd tell you that the majority of them are probably somewhere in that two to three years. At that point, the customer, the end user, the driver makes some agreement with the OEM. The manufacturer of the car, to continue connectivity. At some rate. We don't drive that. And we're just it's the early days of seeing what the lease sign up is. For people. So we don't really have a forecast for that.

When we look at this, we look at just most cars are being connected as we ship them. What's that rate and that's how we project through '25 and and all from that perspective because most of those cars are going to still be within the one year to three year [indiscernible] Got it. All right. Thanks for taking my questions.

One moment for our next question.

Our next question comes from Jeff Henry with Craig Hallum Capital Group. Your line is open. Hey, Brian and Tony. This is Daniel on for Jeff.

Maybe just sort of as an example of the sort of places where you're seeing momentum, I you could speak to that Chinese win back you mentioned, you just described that deal in a little bit more detail what that bake off was like how you won, why you won etcetera. Sure. So that one was with a Western OEM cloud infrastructure. And we won based on, again, the the technology leadership that we provided and our willingness to be much more flexible and continue their cloud system exactly how they want it. So it was a win back that we'd had against a very strong competitor local competitor.

Okay. That's helpful. And then just on connected, either for Brian or Tony, just on the metrics that we should be looking at, a few different ways we could read this in new connected, I guess if you exclude the $2,000,000 true up this quarter. I guess it's down sequentially, it's up single digits year over year. The trailing twelve months car shipped, it's growing 5%, but a little bit of a deceleration from last quarter. Just a bunch of different ways we could read that. How would you cutting through all that speak to the metrics What's the most relevant? How should we be looking at the trajectory there?

Yes.

I think there's a couple ways to look at it as we think about our two two fronts of growth with regard to Connected, right? The number of connected cars that connected connected rate. So for every car that ships out, how many of those are connected? And then two, what is that price per unit? That we're seeing over both connected, is that growing? As we anticipate? And how is that contributing to overall PPU. So it's those two fronts. What I would say is that we're not ready to provide that that guidance right now on connected rates and PPUs. But and then the second one is or the third one would be billings. So just remember too that we so if a car ships out, with a connected at that time we're billing for two things. One is the embedded license, which drops to revenue right away. And then the connected, which then gets recognized over the future. That's why as the first question [indiscernible] hey, what's your billings? Are you on track for your billings this year? Which will outpace our GAAP revenue because connected billings will be billed but not recognized until the future.

So, and we don't break a apart our billings between licensed and connected. So there's components that if you're trying to model are missing and we know that it's important to you, it's important for us to know to be able to give you that information to help you model. But that's really next quarter. But I think the way things you need as we go forward, our the connection rate the price per unit on the connected side, the price per unit overall of cars shipped. And then last And then just last for me, just a modeling question professional services COGS dipped below $10,000,000 this quarter, I think first time we've ever seen that. And that's kind of been a little bit of a trajectory over the past year.

Where those COGS have been going down. Is that sustainable? Is that structural? Is that one time? Just our expectations for PS, COGS?

Yes. So, yes. So PS is is down as we've said. What I mentioned in the call is that our margin for PS is actually improved. I think typically plan that business, see that business as a 30% margin business, which brings down our overall margin. This quarter, it was north of that. Which was beneficial to us. So overall COGS were down because professional service revenue was down, but also for what we did sell we sold it at a higher margin. So as you think about modeling you can probably model professional service margins at north of 30 now.

One moment for our next question.

Our next question comes from Jeff Osborne with TD Cowen. Your line is open. Thank you. Just two quick ones from my side. One, think it was last quarter you gave some usage stats on the Gen AI platform.

Want to say it was maybe June, July that your first customer in Europe pushed that update into the installed base. Is there any metrics you can share about usage of the newer platform relative to the older conversational AI? [indiscernible] [indiscernible] Yes, I don't have any, Jeff, any new med usage. Just if you look at our cloud traffic, that as the generative AI connected vehicles go out, we're continuing to see our cloud usage increase. As well. But I don't have any new numbers for you from that perspective. [indiscernible] Wasn't sure if there's like a halo effect in particular as you had an install base of I think it was the ID3s and 4s, if my memory is right.

That new users were using it for a month or two and then that tapered off but doesn't sound like that's the case. Is that right?

That's not what we're observing yet. No. We are continuing to see an effect One of the biggest things we work on is is really helping end users understand just what's the car is capable of doing So what we're finding is as users see all they can do with voice, in their car with these connected cars with the Gen AI. They're using it more and more.

That's great to hear. My last question is just as we approach the June deadline for the debt, remind us, is there a minimum cash balance that you feel comfortable having obviously you've got a nice EBITDA guidance here for Q2 assuming you generate nice free cash flow. But as you think about paying off the remaining tranche, how should we think about the options? And then what the minimum cash balance you feel comfortable having? Yes, we don't have a minimum per se. That said, we're very comfortable with paying it. If we pay it off and don't refinance any, we'll likely be north of $70,000,000 at the lowest point. So So is that the exact right number? That's what we're looking at as far as overall capital structure to see where we want to be. But we're comfortable that if if we need to, we can continue to grow the cash flow of the business.

And grow from a lower point of $70,000,000 of cash after the payoff. [indiscernible] to where that optimal amount is. Got it. That's all I had. Thank you.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Brian remarks.

Okay.

I would just like to reiterate, we're really Proud of our Q1 results You saw our forecast for Q2 And we've also said that for the full year, we're comfortable in saying we'll be in the upper end of our guidance. For both free cash flow and adjusted EBITDA. We are really driving hard as we [indiscernible] push our generative AI development work and doing our POCs at the customers. And we look forward to talking to you in May. To give you an update and the progress on all of those. And with that, I'd just like to close the call with a thank you very much And I look forward to talking to you all in May.

And have a wonderful day.