Ladies and gentlemen, thank you for standing by, and welcome to the Cerence’s First Quarter 2021 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. [Operator Instruction] Please be advised that today's call is being recorded. [Operator Instruction] I would now like to hand the call over to Richard Yerganian, Vice President of Investor Relations for Cerence. Please go ahead.

Thank you, Michelle. Welcome to Cerence's First Quarter Fiscal Year 2021 Conference Call. Before we begin, I would like to remind you that this call may involve certain forward-looking statements. These statements are subject to risks and uncertainties as described in the press release preceding today's call. Cerence makes no representations to update those statements after the date hereof. 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. Joining me on today's call are Sanjay Dhawan, President and CEO of Cerence; and Mark Gallenberger, CFO of Cerence. As a reminder, the only authorized spokespeople for the Company are Sanjay, Mark and me. While any were amazed by our voice cloning technology last quarter, Sanjay, Mark will be live for the prepared remarks and Q&A, and I challenge you to be able to tell the difference from last quarter's conference call to this one. Before handing the call over to Sanjay, I would like to announce several upcoming investor events. They are all virtual events, so the exact timing of our participation is subject to change. The conferences include this Wednesday, the 2021 Goldman Sachs Tech and Internet Conference that on February 10; and in March, we plan to participate in the Berenberg Capital Industrial Technology Conference; the Raymond James 42nd Annual Annual Institutional Investor Conference; Baird's 2021 Vehicle Technology and Mobility Conference; and the Cowen Mobility Disruption Summit. Please visit the Events page in our Investors section of the Cerence's website for the most up-to-date information on our participation. Now, on to the call. Sanjay?

Thank you, Rich. Fun to be live this time. So welcome to everyone on the call, and thank you for joining us to discuss our first quarter fiscal 2021 results. I'll first review our strong performance in Q1, followed by a summary of the key product introductions during the quarter. This will be followed by comments about the near-term business environment and update of our key performance indicators, and then I'll hand the call over to Mark to review the detailed financial results. After a record fiscal year in fiscal 2020, we are off to a fast start in fiscal 2021 as our initiatives for innovation and market expansions continue. In Q1, we again delivered record revenue of $95 million, representing 23% year-over-year growth. Our performance was driven by strong growth in our license, connected services, and in our professional services businesses. While revenue growth is an important metric for the Company, I'm extremely proud on how we drive the business to achieve profitable revenue growth. Our intense focus on this led to a non-GAAP gross margin of 75%, adjusted EBITDA of approximately $40 million or 42% margin, and non-GAAP EPS was a strong $0.59. Overall, our Q1 results surpassed expectations in every key financial metrics, and Mark will share the details later in the call. You may have seen our recent announcement further strengthening our professional services organization by hiring Sujal Shah to lead this group. Sujal comes to us from Harman and has extensive experience in the automotive space, and in particular, creating new service offerings that will lead to even more future growth opportunities in this part of our business. I want to welcome Sujal and wish him the best. As strong as our financial results were for the quarter, there were many non-financial highlights as well. One of the key achievements in the quarter was that we were awarded a design win for a major European OEMs, next-generation infotainment system, expected to start production in 2023. We just received the okay to share the deal and the name of the European OEM is Stellantis. It's, as you all know, one of the top three auto OEM that was recently formed by the combination of FCA and PSA. This win is important for two reasons. First, we won back a customer that had been lost to a competitor, when our business was still part of Nuance. And second, the deal includes many of the latest connected services and apps product offerings we announced just a couple of weeks ago at our Cerence in Motion event, a true testament of the strength of our new offerings in innovative technology. Another headline event was our agreement with Xevo, a Lear Company, to deliver Cerence Pay conversational-AI powered contactless payments into vehicles via the Xevo market platform. This deal is significant because it represents a major bookings for one of our new Cerence apps. The bookings to revenue cycle for these offerings, is much shorter than our standard products, so we expect to see revenue from this deal before the end of the calendar year. It is our speed of innovation and execution that allows us to retain or win new design opportunities, and that capability was clearly on display at our Cerence in Motion event. During this event, we introduced amazing technology that either represents best-in-class or brand-new capabilities focused on extending a driver's full digital life from outside the car to inside the car. We introduced Cerence Drive 2.0, a major upgrade to our core technology. Cerence Drive 2.0 features a combination of edge technology enhancements and improved and expanded connected cloud services capabilities. Whether it'd be the number of languages we support, the level of accuracy, the speed of response or the human like text-to-speech capability, we're confident Cerence Drive 2.0 represents the best -- the very best of conversational AI technology available in the mobility market. During the Cerence in Motion event, we also introduced a series of other new products. Cerence Extend provides the ability for a driver to use their voice to control apps on their android or iOS-based smartphones. Cerence Extend removes the limitation of using your voice for a defined subset of apps on your phone and allows you to use your voice to control apps ranging from Microsoft Teams to ordering a coffee through your Starbucks app. This product plays a significant role in extending the consumers' full digital life from outside the car to inside the car. No one else offers this technology. To truly extend one's digital life into the car also means providing a seamless way for a driver to interact with smart home and IoT systems. This is exactly what Cerence Connect allows you to do using your voice. Supporting multiple IoT and big tech ecosystems, Cerence Connect allows the user to provide simple instructions or create custom smart home routines or rules. Even if you use different ecosystems within your home, Cerence Connect allows you to control them through one AI interface. Cerence Tour Guide is a new application that serves as a high-quality professional tour guide in your car, whether selecting a pre-planned trip or using the application on-the-go, Cerence Tour Guide can inform the user about the key points of interest and also book experiences like restaurants, museums and other attractions. Cerence Look is a new product that has the capability to leverage gaze technology and/or the GPS location of the car to provide information on points of interest along the road. The technology was recently demonstrated by Mercedes-Benz as its travel knowledge product, which allows a driver to ask about the POI, point of interest, outside the car and the voice assistant responds with the information describing their POI. Cerence Look is currently in production now. Cerence Browse provides the intelligence of Internet search engines in the car using conversational AI. Cerence Browse connects to multiple sources in the real-time, indexes continuously updated information from Internet sources and uses machine reading comprehension to deliver the best possible response. As I said earlier, innovation is key to our growth and competitive advantages. But innovation alone isn't enough, it's the ability to bring those innovations to market quickly with the highest quality and meetings were surpassing the requirements of our customers. I'm happy to report we had several awards during the quarter, recognizing the contributions that the Cerence's team has made to conversational AI technology in the car, and one, from a customer recognizing the value of Cerence as a partner. While we value the recognition from customers, the one we received from Baidu is worth mentioning for two reasons. First, Cerence was the only automotive supplier Baidu recognized for their 2020 awards. And second, it's another example of how it's a story of Cerence and big tech, not Cerence or big tech. As part of the Cerence event, we also formally launched conversational AI-based platforms for two adjacent markets that we have been targeting, the two-wheeler and building mobility markets. There are approximately 90 million two-wheel vehicles produced every year, and we see the opportunity to penetrate this market with a truly unique solution. As we have mentioned before, we received our first win in this space late in fiscal 2020, and we believe we are well positioned for additional wins this fiscal year. In the elevator market, we have made significant progress, completing proof-of-concept demonstrations with two of the top five elevator manufacturers in the world. The key to this business is that our product is capable of being retrofitted into existing elevators as well as incorporating into new installations. We are optimistic that we will have multiple elevator customers this fiscal year. Just the innovation, expansion and acceptance that I just discussed -- with the innovation, expansion and the acceptance that I just discussed, our KPI continued to show good progress, and I'll highlight two in particular. The first was related to our average billings per car, which increased 20% year-over-year on a trailing 12-month basis. We previously compared year-to-date results to the prior fiscal year, but now are reporting on a trailing 12 months basis to provide a more accurate picture of the trends in the billings per car. The other noteworthy KPI was that our adoption metrics continue to show a strong recovery following the impact of COVID in the middle part of the last year. We would expect this positive trend to continue. We continue to see excitement from our customers about our product innovations and our long-term growth opportunities remain bright. In summary, the momentum created during our first year as an independent company continued into our second year. We believe the innovation technology that we have brought to the market will keep the momentum going. Our focus has been on drive our AI to enhance the experience in a safer, more productive way. We will continue to expand in-cabin AI using voice and increasingly other modalities. Longer term, we look for opportunities where we can apply our AI skills into other areas like Road AI. We have a long-term vision for the future of transportation and mobility, and I'm very excited about the role Cerence will play. I would like to turn the call over to Mark to review the financial results of the quarter and our guidance for Q2 and for the year. Mark?

Thank you, Sanjay. I'll first review the strong performance for the first quarter, and then I'll provide guidance for our second quarter and an update for the full year. Once again, our results came in stronger-than-expected leading us to another record revenue for the quarter. Revenue came in at $95 million, which is $5 million above the high end of our guidance and is a 23% increase from the same period last year. Our profitability metrics were very strong, and they all exceed the high end of our guidance range. The non-GAAP gross margin was 75.3%. Non-GAAP operating margin was 39.7%. Adjusted EBITDA came in at $40.3 million or 42.4% margin and non-GAAP earnings per share was $0.59. The Q1 results are still benefiting from the cost savings that we implemented due to COVID last year. As previously mentioned, these cost savings will return during the course of this fiscal year. However, we believe that some of the gross margin improvements that we have seen in our connected services and professional services businesses are sustainable into the future. And these improvements will be reflected in our long-term model that we intend to update later this year. During the quarter, we generated approximately $11 million of CFFO, and our balance sheet remains strong with total cash and marketable securities at $127 million. During the quarter, we successfully renegotiated our term loan A with our banking partners, which is estimated to save the Company $1 million in annual cash interest expense. The key changes were a lowering of the interest rate spread by 50 basis points, removing the LIBOR fixed floor of 50 basis points and extending the maturity by 10 months to April 2025. Now, let's review in more detail our revenue performance for the quarter. The record revenue was driven by three factors. First, our variable license product of revenue was up 21% from last quarter and up 8% from last year, driven by a continued strong recovery in auto production since hitting the trough in the April, May time frame of last year due to COVID. Second, our new connected services revenue expanded 24% from last quarter and was up 55% year-over-year due to a continually expanding customer base, adopting our new connected service offerings. And third, our professional services business grew 9% from last quarter and was also up 55% from last year, driven by an increase in engineering activity in order to get customers ready for their start of production. Additionally, our professional services revenue was higher than expected in the quarter due to the early completion of customer projects that resulted in an acceleration of about $2 million of revenue into Q1. Moving on to our Q2 guidance. Our revenue guidance for the second quarter of $92 million to $95 million reflects year-over-year growth of 6% to 10% and takes into consideration the current risks and uncertainties of the semiconductor device shortages that are impacting auto production. According to IHS market, the semiconductor shortage issues are expected to be resolved by mid-calendar year, and IHS does not expect an impact to its full year forecast, but rather a shift to the second half of the calendar year. Due to our higher year-over-year revenue guidance for Q2, and the continued cost benefits from the expense reductions taken last year due to COVID, we are expecting all of our Q2 non-GAAP profit margin metrics to be up by 240 to 500 basis points versus the same period last year. For the fiscal year, we are updating our guidance to reflect our stronger-than-expected first quarter revenue and margin performance and also considers the risks and uncertainties surrounding the semiconductor device shortages that I previously mentioned. Therefore, we are raising the bottom end of our guidance from $360 million to $370 million and keeping the high end at $380 million, which raises the midpoint of revenue to $375 million. Also due to our continued strong profit performance, we have also increased all of our profit margin metrics by up to 200 basis points. Specifically, we increased non-GAAP gross margin to be 74% to 75%, non-GAAP operating margin to be 33% to 35%, adjusted EBITDA to be 35% to 37%, non-GAAP EPS to be $1.91 to $2.10 and CFFO to be in the range of $67 million to $72 million for the year. Adjusted EBITDA for the full year is expected to be in the range of $131 million to $140 million, which is up from our original guidance of $122 million to $135 million due to better-than-expected profitability and the updated revenue guidance. Please refer to our earnings press release or to the appendix of this presentation for more details of our guidance as well as our GAAP to non-GAAP reconciliation tables. So in summary, the business delivered another solid quarter. Our new products and technologies continue to enhance our competitive position, which is enabling us to maintain our strong market share. And the business model continues to perform well as evidenced by our Q1 results and by raising our revenue and profit metrics for the year. A combination of strength in our core business, along with opportunities for new business from our new products and adjacent markets, thanks to bright future for Cerence. This concludes our prepared remarks, and now we will open it up for questions.

[Operator Instructions] Our first question comes from Joseph Spak with RBC Capital Markets. Your line is open.

Thanks very much for the question. Sanjay, I just want to sort of, I guess, off the bat, talk about how you see the market here for evolving because I know nothing changes on your current programs or wins. But since the beginning of this year, we saw Amazon at CES talk about selling the underlying access to Alexa, to companies, including Stellantis. Ford moved to Android OS, and that obviously comes with Google Voice. And then on the earnings call, they talked about integrating Alexa. So I know in both of those instances, there's nothing that precludes Cerence being integrated. But it does seem like on the next gen, automakers might have more options going forward. So how do you view that development? And what is, in your view, the, if you will, like a killer feature that keeps Cerence with the automakers and potentially, more importantly, the customers using Cerence services?

Sure. So Joe, from my standpoint, nothing new here, we have said from day one, when we were formed as a company, that we always see big tech, multiple big tech to co-exist in the car. It would be a bad assumption to say that 22 hours of my life I spend outside the car, and I have a certain digital life. And then when I get into the car, it's a totally different digital life, which is separate. Doesn't work, right? From a user standpoint, you always want kind of seamless. And the second thing that we have always said also is that, the big tech ecosystem is not limited to one big tech company. And I would challenge anyone to think through their own digital life. And you'll get the answer that your digital life includes Amazon, includes Google, includes Apple, includes Microsoft, and so on. And so the big kind of reason for the co-exist is that we were purely with the OEMs to provide the big bet independent multi-big tech experience ecosystem bridges basically through voice, right? And so that remains kind of the key interesting thing. And the opportunities that you talked about and others basically where we -- if you look at our products like Connect, we're connecting to not just Apple IoT home ecosystems or Amazon or Google or Samsung Smart things or LG ThinQ or others, we do it all, right, basically, and we become kind of that bridge. Similarly, when you look at our Extend product, it's not only for Android, it's for Android, and it's for iOS, right? So that becomes kind of the interesting reason why the story becomes strong.

I guess, my second question would just be on the guidance, and you mentioned the semi shortage and IHS is calling for the recovery in the second half, although it does seem like expectations there might be slipping a little bit. But you don't have the benefit of that December quarter that they're counting on in your guidance. So, I think it looks impressive here that you're able to, as you pointed out, Mark, raised the midpoint. So can you just walk through maybe the offset there, what you're seeing more organically that's giving you that confidence?

Yes. So, I think the increasing penetration rates, we see that continuing that trend like in the past. And so that's not slowing down. So regardless of what's happening with short-term auto production, those penetration rates, not only on the embedded but also on the Connected, those rates are continuing to happen. So I think that gives us comfort that we are still growing above the auto SAAR. Last year, for example, we had a phenomenal year. We were well, well above auto production, which was down 19%, when our business was up about 9% year-over-year. This year, we are forecasting us to be higher as well above what's happening with auto production. But I think it really comes down to the technology and the increasing secular tailwind that we're enjoying in the auto space.

Our next question comes from Raji Gill with Needham & Company. Your line is open.

Yes. Congrats on excellent momentum in your business and in the marketplace. It's quite impressive. The growth that you're seeing in professional services, it's been kind of consistent and improving. Wondering how you think about that business line this year, but also in the future about growing that business, kind of what are the steps that you envision? I mean, along those lines, how do we think about the margins in that business? I know you talked about you would have been improving that. What are the drivers to improving the margins on the services line?

Yes. Sure. I can start. And Sanjay, if you want to add some color. I'll start on the margin side. We are making improvements that we think are sustainable. And those improvements are really around shifting some of the actual activities that are being done into lower-cost locations, specifically in India and into China. And we think those improvements or those changes are going to help us improve the gross margins of our pro services, which we believe will be sustainable. And as I mentioned earlier, we do plan to update our longer-term target model with some improved margin assumption for the pro services business in addition to the Connected. We just want to give us a little bit more time to make sure that the new business model proves itself out before we reset expectations on those assumptions. And I think Sanjay might want to talk a little bit about the revenue, please?

Yes. So Raji, the main reason for our PS business is to strongly support our product integration into our customers' products. So, we stay very focused on that. And those integrations are -- exist in the car and also in the cloud. And we continue to kind of expand our PS in a footprint as well around all of that stuff. But remember, our core focus is our product business. Our license, the SaaS cloud services and so on and so forth. So while I see PS contributing strongly, and I'm very happy for that, and I'm very proud of the PS team to improving the gross margins and so on and so forth and also expanding as well because the car is getting more and more digital. So, there are more and more integrations needed with not just voice. The interesting thing about voice and conversational AI is, it's touching every part of the connected car. And so we do get involved in kind of various different integrations, including with vision and other new technologies which are coming into the car and other new sensors, which are coming into the card. And we'll continue to do that. And again, like I said, the opportunities are huge in PS, but we stay very focused on kind of making sure that the PS is very focused on our core -- supporting our core product integrations.

And Mark, there was a 39% sequential drop in fixed prepay. Obviously, that business is lumpy. Wondering how you're thinking about prepay this year?

Yes. So prepays can be lumpy. It's more concentrated. So, as we've seen in the past, they can go up and down and so forth. Last year, we did about $54 million in prepays, and we do expect prepays to be down this year. Historically, we've been in that range of low 40s to low 50s and I think we're going to stay in that range. So last year, we were at the higher end of that range. This year, I would estimate we'll probably be around in the middle of that range. And so, that's where we see it trending this year.

And last question, Sanjay. How do you think about increasing ASP growth for your services? And you're obviously providing a tremendous amount of value to the OEM. You enable a myriad of applications. Yet, the ASPs are still fairly low compared to other services in the business -- other applications that are being offered in the vehicle. So, I'm wondering what are the steps that you're taking to improve the ASPs and when do you think we'll see that improvement?

So Raji, the core business model was set in a certain given way that the Company had -- when I first stepped in as the CEO about almost 15 months back now, right? And what we are doing very systematically is to enhance that core business model. Overnight, we cannot change that core business model because that's been in existence for many years, and OEMs are used to buying in a certain way. The core to our increasing the ASP strategy is kind of new products and new innovations. And I cannot be more proud of how our product management and R&D teams have executed over the last year. It was -- I hope you had seen the Cerence in Motion event, which was -- we brought all of our kind of new product innovations out and these are not just product announcements. As we mentioned, we're getting -- we already have multiple design wins on these, which will show up as kind of increased ASP and increased revenue in the coming quarters and years, basically. So, the cycle is slower given the way auto works, right? But having said that, we're trying very hard to bring in kind of our apps business online to contribute revenue earlier, right, and faster, we're making progress, and we're working very hard for it.

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

I was hoping first to follow up about the co-existence with big tech companies and the Company talked about seeing good evidence of that. But I was hoping you could elaborate a bit more and talk about how you're seeing your content per vehicle trend when you are in one of those co-existence types as opposed to being more of a standalone technology? I think the question is about what sort of price you can get for your technology, if there's other services also being offered at the card? I realize the Company is doing a lot of new technologies and those are additional monetization opportunities. So if you could help investors short those out, perhaps some examples would be helpful?

Sure. So, we have not seen any major swings from a co-existence standpoint. And Mark, you can jump after me as well, I'm just thinking loud here, basically looking at almost dozen cars or so that we co-exist with a big tech or not. So, we've been able to kind of maintain our pricing position with the value-added by us and then buy our products. And then kind of the strategy, Mark, is to obviously expand with all the new cloud services and apps and other offerings, basically. There are some new discussions happening, a couple of OEMS, which are also from a co-existence standpoint. And those are a little too early for me to comment on kind of what the pricing impact would be. Obviously, our goal would be to kind of maintain and enhance, right, of the core tech and also the expanded products and technologies. Mark, anything you want to add, please?

No, I think that's correct. Yes. Yes. I think that's accurate depiction, Sanjay.

That's helpful. Thank you for you the comment there. And then for my second question, I wanted to better understand the growth in billings per car, which was very nice at the 20% growth. But you mentioned you changed the calculation about how you're coming up with that figure to be a little bit of a different time period. So would you be able to provide us with how that metric would have looked last quarter, if you'd reported under this current methodology?

Yes, we can certainly do that. The only real difference is that last year, we were using fiscal year-to-date versus the prior fiscal year or fiscal year '19. And the reason why we did that is, we didn't have the specific data back in fiscal year '18. So, we could only use fiscal year-to-date information and comparing it to fiscal year '19. Now that we're into the new fiscal year, we can use a trailing 12-month versus the prior trailing 12-month period. And so, now we can compare it that way. But -- and so yes, we can -- last quarter was exactly the same answer because it was the full fiscal year. So, we use fiscal year '20 versus fiscal year '19. So, the actual measurement or the result would be exactly the same as what we reported last quarter because it was trailing 12 months versus the prior year trailing 12 months.

Our next question comes from Chris McNally with Evercore. Your line is open.

Maybe if two questions. One to Mark on just the model and then Sanjay, we could talk a little bit about the long term. I guess, Mark, what we're trying to figure out is you used to have that great rule of thumb of 10% to 15% growth above production. It seems like with production moving around and obviously, such a different growth rate in connected and professional that may not be the case anymore. Is there any way that we could think about any rule of thumb for the outgrowth going forward? Even if it's on an annual basis, just something rule of thumb because, obviously, you're going to grow a lot above, but it seems like it moves around year-to-year. So, I just would love if you guys have thought anything like that through?

Yes. That's a tough one. It does move around. Last year, we had 28% or 28-point spread, so well above the 10% to 15%. It's almost like looking at trends, right? And if you look at the last four or five years, we've been consistently above, we still think that's the case going forward because the penetration rates are not slowing. I think last year, because we were so far above, it just makes this year a little bit tougher for compares, right? So we're probably a little bit under that spread, but still above what auto production is going to be doing, clearly still better than that. But maybe not quite as high as what we've seen historically. I think it's just going to ebb and flow. There's a few things to consider, right? One is prepays, we're planning to be lower this year. So that's going to have to be reflected in that spread. The legacy -- our legacy connected business, that's a flattening effect this year. As we all know, that program is coming to an end. So, we're not projecting any year-over-year growth for fiscal year '21 for that business versus fiscal year '20, it's flat. So that has an impact as well. So, it's hard to give you a specific rule of thumb, if you will, because it's a combination of many different factors that will ebb and flow. But I think the underlying fundamentals of the secular tailwinds, that remains intact. That's where the penetration rates are continuing for the embedded and the penetration rates are continuing for the connected. And so that's what I would suggest you kind of focus on is those penetration rates.

No, that makes sense. And I think going forward, we almost sort of have to think about the license business as really the only business that we can do the rule of thumb, and even there, we'll probably have to sort of take into account the year-over-year compares for the prepaid, so that make safe. And then Sanjay, I know you're going to update later in the year on 2024. I think we're all looking forward to that as it seems things are moving in the right direction. Could we maybe just focus on sort of the longest term aspect of the 2024 guide, that $75 million that you had given, looking at these future drivers, things like Car Life and Cerence Pay? Could you just talk about your confidence in that one sort of line item? Do we have enough visibility out so that we booked that much business out to 2024 or the pipeline looks extremely encouraging? Just curious, given the long-term nature and the potential there, how much visibility do we have now versus sort of we still need things to unfold over the next couple of years?

Yes. So in the last quarter, we booked two deals, which will contribute revenue to that line. So, these are real bookings. We don't break them down from a number standpoint, but there are significant bookings, right? So that was good. At least it started now, right? This current quarter, we have a strong pipeline and I'm expecting more than two deals that will be booked this current quarter that will also contribute towards that revenue line. We expect small revenues in this year. This year, we are only assuming very little contribution from that. But then obviously, kind of as more and more cars ship with the apps and the new connected services, the revenue goes up. So as of now, I'm feeling confident about the progress. Chris, it is hard work. We're working extremely hard and very focused to kind of take -- work step-by-step with every OEM to kind of bring these new capabilities in.

Our next question comes from David Kelley with Jefferies. Your line is open.

Maybe just wanted to start with the Stellantis announcement, can you give us a bit more color on the technology relationship there? And then maybe how you're thinking about the size of that incremental opportunity?

Sure. So, Mark, I'll start and maybe you can jump in on the -- to answer the size and all that. So, the opportunity was basically with the official statement that we've got clearance to mention just a few hours back was Cerence has extended its partnership agreement to the cars of next-generation of Stellantis. I'm reading it from the e-mail, from the accounts team. So that's the official statement that we're allowed to say at this stage. It's their next-gen platform. I can't go into the details of it because, obviously, it's for them to announce, right? And so that's that having a little bit difficulties, David, to kind of go into more specifics, I want to, but I can't, right? But we're extremely proud and happy to be brought in because this was one platform that we had before Cerence was formed. When Cerence was still part of Nuance auto, we had lost it to a competitor, and we're just honored and extremely proud to be brought back in, in the next gen. Mark, I don't think so we can talk much about price, right?

Yes. Yes. Unfortunately, we can't get specific on any one particular customer unless we get their specific approval or okay. And at this point, we don't. With that said, though, it's a win that we feel is notable. We feel that because it was a win back, like in and of itself is notable. And just given that I think, given the size of this customer, I think you could sort of make an assumption that it's a notable deal that we feel like it was worth mentioning.

Okay. That's all fair. I thought I'd give it a shot. And this may be switching gears to the Xevo announcement. You referenced the quicker bookings to revenue cycle. Just curious, maybe high level, if you could walk us through, again, you don't have to get into specifics here, but how the revenue structure of that business work? I'd assume it's more of a transaction basis. But just curious to get some color around that would be great?

Yes. I can start, and Sanjay, I'm not sure if you want to fill in any blanks. But it's like you said, it's like a revenue-sharing or transaction-based approach, and it would get funneled through the Xevo platform. And so our arrangement would be with Xevo. And so, they would be managing those relationships. They would be doing the administrative work, what have you. And then, as those transactions occur out there in the marketplace, we would get a portion of our piece of it. And so, it's a revenue-sharing type of arrangement based upon transactions. And then we would get paid by -- paid from -- by Xevo on that transaction.

Our next question comes from Jeff Van Rhee with Craig-Hallum. Your line is open.

Just outstanding execution here, just continuing up really solid performance. A couple for me, I know you don't quantify as it relates to the bookings or you do periodically. But can you give us some color even quantitatively about the bookings this quarter? Any observations, I think, about the size, scope, sort of different twists to what you booked or what you thought you'd book? And along those same lines, same thing on pipeline. Sort of talk about the pipeline composition, obviously, you have a lot of new products suspect you'll have some commentary about some of these new products you already have starting to fill the pipe. But any other observations, edge, connected, places you're succeeding, things that are lagging, maybe those two critical pieces, maybe a bit more color?

Mark?

Yes. So yes, you're right about bookings. We don't do it quarterly. And we mentioned this, I think, last year. And as a reminder for everybody, we give midyear update for our bookings and fiscal year-end update to our bookings and our backlog. So, we're going to stick to that because bookings can be lumpy from one quarter to the next, and we think that's the right practice. But not do it once a year, but do it twice a year. And so with that said, I think we'll defer our commentary on bookings until our next earnings call. However, pipeline remains strong as we continue to expand our product offerings and also into adjacent markets. And that is naturally expanding the number of opportunities that we have going into our pipeline. And so, that's the color I can provide at this point.

Maybe win rates on connected deals. Can you comment on that?

Yes. I think the win rates are unchanged. We are not seeing any difference from what we've seen historically.

Fair enough. Then just last one on the PS side, obviously, a very good number there and very good leading indicator for what's really going on out there. From a utilization standpoint, where are you with respect to the capacity organization?

Sanjay, I don't have that number handy. I'm sure if you have it?

Yes, we're about running close to 80% utilization. So utilization has defined billed to billable and billed to available. These are the two numbers we track, Jeff, right? So bill to billable and bill to available, and we are in our 80s.

There is...

By the way, a few more percentage points that they can improve right? So with the appointment of Sujal, who's our new PS Head, he comes from Harman's PS organization and understands this extremely well. So, the trick of improving the gross margin, there are two things: number one, to look at the COGS, so basically kind of use as much offshore as possible in the right mix of offshore and onshore. So improve the COGS. And the second trick is to improve the utilization. So, those are the two things that he's focused on.

Okay. One last brief one, if I could, COVID. What are your assumptions now? I know you mentioned some cost return clearly when you come back to more normalized environment. What are the assumptions in the model with respect to coming back? What magnitude of sort of back in the office do you ultimately expect and any thoughts on timing?

Yes. So, we did have some significant cost savings last year. We're starting to bring those expenses back in. I think for Q1, we were a little bit behind our hiring plan. So that was part of the benefit in Q1 as it relates to the margins. You're going to see more incremental of those expenses coming in, in Q2. Probably about the same magnitude in Q3 and then things are going to start to level off as we get into Q4, probably still going up, but not at the same rate. So by the time we're finished with this fiscal year, I would expect all of those COVID savings that we took last year to kind of find their way back into the P&L, along with the removal of the hiring freeze, which was really a cost avoidance that we had last year. And so, we will net-net have higher headcount relative to last year because we unfroze that hiring freeze. However, we did say that on the gross margin line, connected and pro services, some of those expenses, we think, are not going to be coming back just because we're making some sustainable improvements. And we'll be giving you an update to that long-term model in the coming months.

Yes, Jeff, but I just want to add one thing that -- I'm just extremely proud of our team of how we're executing on profitability. I tried to say that in my comments as well. I mean, there is -- you can compare us to many, many other companies and kind of delivering 42% EBITDA this year and then increasing the guidance for the whole year. Just very proud that, we're able to deliver profitable growth, that's something that Mark believes and I believe in. And we're just proud that our team is able to deliver to that.

Our next question comes from Michael Filatov with Berenberg Capital Markets. Your line is open.

Just one quick one, really. I believe, originally, your 2024 outlook wasn't baking in much in terms of renewals on the connected services side. So, I was just wondering if you have sort of any better visibility into sort of the expected renewal rates on the connected side and sort of where those renewals stand today? And maybe you could remind us of when both of those renewals will start to happen?

Yes. So, you're right about our model. We were conservative, and we didn't factor in any renewals in our 2024 model, mainly because we just don't have any data points. So far, we still have that one that we announced last quarter. So that's really the only update that we've got, which we provided last quarter. I think as we get more and more, over the next year or so, we'll get more comfortable as to what those renewal rates will look like. But I think with that said, the consumer is wanting the cars to be connected. So I think just the demand and the adoption rates, that KPI that you saw in our slide deck, as those trends continue, I think the consumers are ultimately going to be pushing for that connected car and for that connectivity to continue. So, I think that should bode well for us in terms of the future ability for these renewals to come to fruition.

Michael, I just completely coincidence. I drive at 2017 BMW. And this weekend, I did -- personally, I paid BMW $225 for a package to -- connected services package per year to provide connectivity into my car, right? This is this weekend. So, I can share by transaction with you. And if you go to connected drive.bmw.usa.com, you will basically see kind of the packages that they have for various different connected services, and I bought the -- there's a $50 one, there's, I think, $150, and then there's a $225. So, I bought the $225 package because the connectivity in my car was -- had expired as part of the new car purchase, right? And it's a yearly subscription.

I appreciate. That was great color. And I know you provided some of the moving pieces around pro services revenue and some of that was pulled forward into Q1. But maybe if you can talk about sort of the growth expectations for new connected versus the variable revenue and edge, what's really driving the growth in the updated midpoint of your fiscal year guidance, that should be helpful? Thank you.

Yes. So, the new connective, we see that continuing. The growth trends there continue to be good. And in pro services, we had a very, very strong year last year. And year-over-year, it was up 55%. Part of that was driven by an acceleration of some PS revenue into Q1. And so, I would expect for Q2, the PS revenues to be down because of that, and that's been reflected in the guidance that we had given. But I think year-over-year, PS should be up as well. And so, I think on all fronts, whether it's the license business, the connected, the new connected business as well as our PS business, all of those businesses, we expect all of them to be up year-over-year. And so, all that's been factored into our guidance. We haven't gotten more granular on the specific revenue streams. But at the corporate level, that's how we kind of build up to our total guidance for the year being plus 12% to 15% year-over-year. And each one of those individual business lines we expect to be up as well.

[Operator Instructions] Our next question comes from Dan Ives with Wedbush Securities. Your line is open.

This is Strecker on for Dan. So with just the recent GM headlines in electronic vehicles and then just the massive EV push overall, can you, Sanjay, talk about how that just plays into the Cerence growth story potentially over the next couple of years? Thank you.

Yes. So as you know, we have announced many, many GM -- many, many EV partnerships over the last many quarters, right? And from our standpoint, the core assumption in the thesis of what we do is that the car is getting more digital, which basically means it's getting more connected, more electric, more autonomous, more shared. And the user interaction using AI is going to play more and more important role. That's the core thesis behind Cerence. And as you saw in my slide that I presented to you at Cerence in Motion and also in the earnings today, we are very focused on Driver AI, Cabin AI, Road AI, right? That's our focus because our core assumption is that the car is getting more digital and connected and electric. And with that, basically, AI is going to play a very important role in the driver interactions, in the cabin interactions, in the road interactions. And what we want to do is basically be a premier company, focused on providing the AI platforms for that. That's our core thesis.

There are no further questions. I'd like to turn the call back over to Rich Yerganian for any closing remarks.

Thank you very much, and thank you for joining us on the call this morning, and we hope to see you at one of our upcoming conferences over the next few weeks. Thank you, and have a good day.

Thank you.

Ladies and gentlemen, this does conclude the conference. You may now disconnect. Everyone, have a great day.