Cerence Inc (CRNC) 2021 Q4 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Cerence Fourth Quarter 2021 Earnings Call. (Operator Instructions) Please be advised today's conference may be recorded. (Operator Instructions)

I'd now like to hand the conference over to Rich Yerganian, Vice President of Investor Relations. Please go ahead.

Thank you, Liz. Welcome to Cerence's Fourth Quarter and 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. Before handing the call over to Sanjay, I would like to announce several upcoming investor events. The conferences include the Credit Suisse 25th Annual Technology Conference on November 30 in Scottsdale, Arizona, and several virtual events, including the Goldman Sachs Global Automotive Conference on December 2, Raymond James virtual Technology Investors Conference on December 6 and the 24th Annual Needham Growth Conference on January 11. Please visit the Events page in the Investors section of the Cerence website for the most up-to-date information on our participation at these conferences.

Now on to the call. Sanjay?

Thank you, Rich. Good morning, everyone. Welcome to everyone on the call, and thank you for joining us to discuss our fourth quarter and fiscal year 2021 financial results. For our call, I'll first review our strong financial performance in the fourth quarter and full fiscal 2021, followed by a review of some of the key products we introduced during the year, awards recognizing our leadership in conversational AI and notable events that took place during the year. Next I'll update our key performance indicators and then hand the call over to Mark to review the detailed financial results, including our outlook for fiscal 2022.

We're pleased that we have been consistent in delivering strong results on key profitability metrics throughout the first 2 fiscal years as an independent company. We're still in the midst of our customers' production constraints due to the semiconductor shortage, yet we were able to deliver year-over-year growth of 7.5%. Our revenue came in just above the midpoint of the range was aided by strong year-over-year growth in our fixed license contract, which was up 54% from the previous year. The degree that the semiconductor shortage will continue to impact our customers' production plan is still an open question as we start the new fiscal year.

Thank you, Rich. Good morning, everyone. Welcome to everyone on the call, and thank you for joining us to discuss our fourth quarter and fiscal year 2021 financial results. For our call, I'll first review our strong financial performance in the fourth quarter and full fiscal 2021, followed by a review of some of the key products we introduced during the year, awards recognizing our leadership in conversational AI and notable events that took place during the year. Next I'll update our key performance indicators and then hand the call over to Mark to review the detailed financial results, including our outlook for fiscal 2022.

We're pleased that we have been consistent in delivering strong results on key profitability metrics throughout the first 2 fiscal years as an independent company. We're still in the midst of our customers' production constraints due to the semiconductor shortage, yet we were able to deliver year-over-year growth of 7.5%. Our revenue came in just above the midpoint of the range was aided by strong year-over-year growth in our fixed license contract, which was up 54% from the previous year. The degree that the semiconductor shortage will continue to impact our customers' production plan is still an open question as we start the new fiscal year.

For the full fiscal year, I am especially proud of our results given the challenges due to the semiconductor shortage impact on auto production and some lingering effects due to COVID. Top line growth was up 17% compared to fiscal 2020. And nearly all of the other profitability metrics were significantly above our original guidance provided at the beginning of the year. Bookings at $590 million came in very strong, including nearly $120 million for our new products and services, which will provide a strong solid foundation for the revenue target for these products in our 2024 model. We believe these bookings will allow us to maintain market share for our licensed products and gain share for our connected services.

These bookings led to a record backlog for the company of approximately $2 billion. What I'm most proud of was a win back from a competitor with a European OEM. This was business loss when the business was still part of Nuance and the win back represents validation of the efforts that Cerence team has done to continue to innovate and elevate our products to a level the competition will find hard to match. For those of you I have had the pleasure of speaking with, you have heard me talk about the 3 key principles that drive the company, innovation, speed of execution and cost.

As a tech company, it is imperative for us to continue to innovate and bring new products to market that enhance our existing technology or provide new features or capabilities. This is how we will maintain our technology and market share leadership. I'm very proud of our R&D team that has delivered so many new products this year. In some cases, such as Cerence Browse or Extend, the products were introduced during the year and others such as Cerence Look, Swype and EVD, they were in production for the first time. I'm especially excited about our Cerence Browse product. Browse fits perfectly with our core and Extend it would be common digital life ecosystem.

Browse literally allows the driver to search the web for any information by using their voice while driving. Cerence Browse is also a good example of our speed of execution as the product went into -- from inception to start of production with one of the top customers in just 8 months. I'm also excited about our EVD or Emergency Vehicle Detection product. We're the first company to provide emergency vehicle detection in the car and to be able to alert the driver so that they can safely get out of the way. This is an important safety feature that we expect will be adopted more and more by -- more and more automakers. This capability is now in production.

Two of our new products, Cerence Drive and Building Mobility leverage our core technology for the car into the adjacent markets of 2-wheel vehicles and elevators. We have now won business in both of these adjacent markets and believe they can be significant generators of revenue in the future. As a company, we're laser focused on transportation and mobility space. This focus allows us to work very closely with our customers to make sure we're meeting their needs for their next-generation infotainment system. You can expect another steady stream of enhanced AI technology and new products from Cerence in fiscal year 2022 as well.

Of course, as CEO, you would expect me to be excited about the new products we have brought to market. but it's always great to get independent acknowledgment of what we have accomplished. You can see from the slide, our AI technology leadership is recognized by companies and organizations from around the world. The Baidu award is especially pleasing because in some ways, they could be considered a competitor. They also rarely recognize nonindigenous Chinese company. The Automotive News PACE Award for Cerence Pay is another one we are especially proud of since it recognized one of our newer applications Cerence Pay. These awards recognize not only the leadership we offer in conversational AI technology, but also our ability to execute and deliver these new products to our customers.

Cerence is dedicated to our customers' success and we work extremely hard and collaboratively view with our customers. Several of these awards are representative of that. While fiscal year 2021 was a good one from the perspective of our financial performance, there were also several important accomplishments, we expect to keep that momentum going. Firstly, we had several wins in 2-wheeler market, one with a leading global provider of 2-wheeler motorcycle and 4-wheel ATV. We expect the first product to hit start production with our technology in calendar 2022. Second, we have been talking about the potential of our technology in the elevator market for some time now. I'm excited to report that we have won our first business. It is with one of the top manufacturers in the world, and we are excited to help them create the elevator of the future, using conversational AI.

We expect to expand further in this market during this fiscal year. We have also won our first piece of business in another adjacent market that we have not yet disclosed. You will hear more about this in the near future. We had approximately $112 million in bookings for our new products and services, which is roughly 20% of our total bookings for the year. The interest in these new products have been very high and bookings in fiscal year 2021 was what gave us confidence to raise our revenue target for these products in our fiscal 2024 model we shared with you last quarter. While the adjacent market and new apps and services are key to our future growth, we still have a laser focus on strengthening our core business. To that end, we have added 14 new logo wins during the year, meaning 14 distinct pieces of business we did not already have.

This included 5 competitive takeaways, including 3 in China. At 174, we have record number of SOP startup production during the fiscal year. As auto production recovered, we would expect the -- this high number of SOP to be an added acceleration to our business. In summary, fiscal 2021 was a very good year for setting the foundation for future expansion of the business. We fully expect to build on this success in fiscal 2022.

Moving on to our KPIs. The results represent continued strength in the business, while auto production may be down due to the semiconductor shortage and COVID, we continue to ship our technology in more than one of every 2 cars produced on a global basis.

More importantly, we saw an increase of 20% in the number of cars produced with our Connected Services compared to the total auto production growth of 9% over the same time period. Our strong growth is likely due to a combination of the penetration of connected car technology and market share gains. Our average billings per car increased a solid 8% year-over-year. The average contract duration continued to expand, primarily due to the increase in mix of connected contracts with longer subscription period. While still on positive trend, the data on KPIs shows a slowdown in monthly active users. We believe this is attributable to the lack of availability of new cars and COVID-19 residual impact on car usage in different parts of the world.

I want to close my remarks by reminding you of our long-term vision for the company. Our goal is to be the central AI brain of the car, essentially becoming a driver trusted co-pilot. To that end, we will see significant opportunity in the combination of vision and voice AI with applications in driver monitoring as well as road and cabin monitoring. This is an area you will hear more from us in 2022.

Finally, before turning the call over to Mark, I'd like to acknowledge the launch of our inaugural ESG report this past Thursday. We believe we are good stewards of the principles of ESG and this report is a significant step in sharing that with all of you. You can download the full report from our website.

I'd like to now turn the call over to Mark, so he can review with you the details of the quarter and full fiscal year and provide Q1 guidance and our initial guidance for fiscal year 2022. Mark?

Thank you, Sanjay. I'll first review another strong financial performance for our fiscal Q4, and then I'll provide guidance for our fiscal Q1 as well as fiscal year 2022. We delivered another solid quarter of top line growth and even stronger bottom line performance. Revenue came in at $98.1 million, which met our original guidance of $97 million to $101 million and is a 7.5% increase from the same period last year despite very difficult auto production conditions due to the semiconductor shortage. Most of our profitability metrics remain very strong and exceeded the high end of our guidance range. The non-GAAP gross margin was 78.1% mainly driven by favorable product mix.

Our non-GAAP operating margin was 37.2%. Adjusted EBITDA was $38.8 million or 39.6% margin, and our non-GAAP earnings per share of $0.66 exceeded the high end of our guidance by $0.05. During the quarter, we generated more than $23 million of CFFO and our balance sheet remains strong with total cash, cash equivalents and marketable securities of approximately $166 million.

Now let's review a detailed breakdown of our revenue. Our strong revenue growth compared to last year was driven by 3 factors: first, our total license revenue was up 11% year-over-year, while our variable license revenue was down 13% from the same period last year due to the semiconductor shortage. We outperformed auto production, which declined by 16% for the same period. Our variable license revenue is where you would see the most direct impact from lower auto production, which is partially offset by the continued increasing penetration of embedded AI technology getting designed into autos.

Our fixed license contract revenue increased 53% year-over-year as a result of 2 larger-than-normal deals that closed in the quarter. Second, while our Connected Services revenue was basically flat from last year, it includes a onetime adjustment of $1.7 million to correct an amortization schedule on a hosting contract. Without the adjustment, our new Connected Services revenue would have been up 18% year-over-year. And lastly, our professional services revenue was up 9% year-over-year due to the increase in the number of customer projects and activities that we have going on.

Moving on to a summary of the full year. We delivered excellent results that were significantly higher than the original guidance that we provided at the beginning of the fiscal year. Despite the challenges our customers have had to face due to the semi shortages, we delivered better-than-expected results on nearly every metric. On the top line, we achieved 17% growth year-over-year, which is approximately $17 million higher than the midpoint of our original guidance. We also delivered strong year-over-year growth in every profitability metric, including adjusted EBITDA growth of 34% and non-GAAP EPS growth of 49%. Additionally, we generated over $74 million in CFFO, which is an increase of 66% versus last year.

All in all, our second fiscal year as a public company continue to demonstrate the company's capacity for growth and the ability to deliver strong bottom line results. Now let's review a detailed breakdown of our revenue for the full fiscal year. All 3 product and service areas contributed to the sequential growth. License revenue was up 23% over the prior fiscal year due to growth in both variable and fixed licenses. Despite the impact of semiconductor shortages on auto production, our variable license grew 19% year-over-year, which is about 10 points higher than the auto production growth of 9% for the same time period.

As previously mentioned, our variable license is the portion of our business most directly impacted by changes in auto production, yet we were able to deliver growth due to the continued penetration of conversational AI technology being designed into more autos as well as the number of SOPs we had during the year. Our fixed contract license grew 31%. The amount of fixed contracts are difficult to predict. And while this year, they totaled $71 million, we expect that number to come down in fiscal '22.

Our total Connected Services revenue was up 12% for the year, driven by growth in our new Connected Services, which was up 31%. However, excluding the onetime amortization adjustment that I previously mentioned, our new Connected Services growth would have been 36%. With or without the adjustment, our growth in new connected revenue was quite strong. And our Professional Services revenue was up 9% year-over-year. While that growth is important, it's also worth noting that our non-GAAP gross margin improved from 12% in fiscal '20 and to 21% in fiscal '21 as we continue to make sustainable improvements to our service delivery model.

Due to the strong bookings during the year, our ending backlog increased by $200 million to a record of approximately $2 billion. The biggest driver of growth in our backlog was due to our new Connected Services business as more and more vehicles get connected. Backlog for our Professional Services also grew nicely, which is consistent with the increasing need for our engineering resources to support our customers on a global basis. And as expected, our legacy connected backlog continues to bleed off over time as we continue to provide the Connected Services to the legacy installed base.

Speaking of our legacy connected business. As a reminder, the legacy connected business is a one-off connected contract that was part of an acquisition that Nuance did back in 2013. We have already explained how this legacy contract would be a cash flow headwind to our CFFO for fiscal years '20 and '21 because most of the cash associated with the revenue that we are now reporting was collected by Nuance prior to the spin.

The cash flow headwind attributed to this contract is now behind us, and now our deferred revenue is expected to return to be a source of cash starting in fiscal '22. However, the revenue amortization has peaked in fiscal '21 and is expected to wind down starting this year. You can see from this chart, the annual revenue contribution for the duration of this legacy contract, with the largest drop of $23 million occurring this fiscal year.

So as we provide guidance for fiscal '22, the $23 million decline in legacy revenue will have an impact on our year-over-year growth rate. Turning to our full year guidance. Our fiscal '22 revenue growth is expected to be in the range of plus 3% to plus 10%. This assumes using the most recent IHS auto production forecast of 0 growth for the same period. However, after adjusting for the $23 million drop in our legacy connected revenue, our pro forma growth would be in the range of plus 9% to plus 16%.

Keep in mind, this guidance also assumes an expected decline in our fixed license revenue after our record-setting amount of $71 million last year. Our market share remains steady, and the revenue guidance reflects this assumption. As we previously talked about, we generally expect to grow about 10 to 15 points above auto production, which is expected to be flat this year according to IHS. And so our pro forma adjusted growth of plus 9% to 16% is generally in line with our expected growth rate, above auto production.

Additionally, the adjusted growth rate for this year is consistent with last year's growth of plus 17% and the year prior of plus 10%. As we did last year, we'll update our fiscal '22 guidance throughout the year as more clarity about the semi shortage environment is received. Recall that last year, due to COVID, we initially provided guidance of $360 million to $380 million and continue to increase our estimates throughout the year and ultimately delivered $387 million in revenue, exceeding the high end of the original range.

We believe it's prudent for us to factor some level of conservatism into our guidance due to the ongoing semiconductor shortage plaguing the auto industry and the continued uncertainty of the timing of when the semi supply chain will ultimately be corrected.

Regarding our EBITDA guidance, we're continuing to make investments in our business, particularly in R&D, so that we keep extending our technology lead and translate those investments into higher top line growth. Although our EBITDA guide of 37% is down from our record-setting margins of 40% last year, recall that we cautioned investors a year ago that our margins were temporarily inflated due to the COVID cost reductions and that we plan to add back those expenses throughout fiscal '21. Despite our increase in R&D, we still expect to deliver strong EBITDA margins in the mid- to high 30s. We continue to improve the cash flow conversion of the company with CFFO to EBITDA conversion increasing from 39% in 2020 to 48% last year and now projected to be over 51% this year.

Moving on to our guidance for Q1. Our revenue guidance of $91 million to $96 million reflects a year-over-year change of down 3% to up 3% or essentially flat. While according to IHS, auto production is forecasted to be down 21% for the same period. We've taken into account not only the IHS forecast, but also the current risks and uncertainties of the semiconductor shortages impacting auto production. The good news is that auto production appears to have troughed in the August, September time frame and is starting to pick up again.

Keep in mind that about 1/3 of our business is directly impacted by auto production in any given quarter, which shows up in our variable license revenue. We expect to generate between $31 million and $35 million of adjusted EBITDA and between $0.47 and $0.53 earnings per share on a non-GAAP basis. So this concludes our prepared remarks, and now we'll open it up to questions.

(Operator Instructions) Our first question comes from Chris McNally with Evercore.

Maybe if we could start on the big picture. I was just -- we're getting a lot of questions, we'd just love to have your reiterated outlook of 2024. Has anything changed since you initially gave that outlook for $700 million a couple of months ago?

So let me start, and then I'll ask Mark to add in, Chris. So from my standpoint, no, nothing has changed. We stand by our guide for fiscal '24 and we feel good about it. As you heard in my prepared remarks, the new products contribute a lot towards that guide and 20% of our bookings, about $120 million was set from a bookings standpoint. We also have -- we'll be announcing some new aftermarket products. We have received an award letter for one of them already, which is not part of our bookings yet. They will be part of our fiscal quarter 1 bookings. So from that standpoint, I feel good that our new products are further contributing towards the contribution.

And lastly, for the -- once again on the new product side, the elevator piece, you saw me mentioned, that we have one of the top manufacturers of elevators as our customer in fiscal '21. Having said that, we have decided not to take any bookings from that contract yet because we want to be cautious about what bookings we report to The Street and so on and so forth. And -- but the contract is won. We will be shipping for revenue in this current fiscal -- in the new fiscal year, fiscal '22. But we have not taken any bookings yet because we want to be cautious about -- it's a new market for us, and we want to see sort of the volumes and trends and so on and so forth from that customer.

So the net-net basically is in the fiscal '24 model, the new -- the core business is going strong, and we stand behind the growth that we have projected in our core business, whether it's the license or Connected Services or Professional Services. And the new business of new apps and devices piece, we're making very good progress. So from my standpoint, no change to the fiscal '24 model, Chris. Mark, anything you want to add?

Yes, I think the only other thing I would add is the fact that the secular tailwinds are still there as it relates to more and more penetration of this technology getting designed into automobiles. IHS has increased their projections for penetration rates. And so I think that provides a nice offset to some of the downward effects that not only COVID provide -- had on auto production, but also on the semi shortages. And so that gives us also confidence that the -- even though auto production is down, over the last 1.5 years or so, offsetting that is the increasing penetration rates. And the other thing I'll mention is the fact that a lot of these new products that we've designed and are now starting to get wins for, that revenue will be back-end loaded. And so the bookings that we're seeing today gives us that level of comfort that the revenue will come into that 2024 target model.

Okay. Super clear. I appreciate it on '24. So if we maybe then talk more about the near term and really the potential for your TAM, SAM or orders, right? It was only about a year ago, you talked about almost 80%, 90% win rate. And it seems like there's at least a $2 billion core market out there for voice AI. Sanjay, without putting a time frame on it, like could we -- is the proposals that you're going after, whatever share you get 80% plus, is there a potential order number over the next couple of years where we could start to move into the sort of the $1 billion-plus order range? Just maybe talk about the size of business that's out there for bidding on over the next 12 to 24 months.

Clearly, we're, Chris, happy with the bookings that we reported of $590 million, which is pushing our backlog to $2 billion. Last year, we reported $835 million in bookings. But our normal run rate used to be in the $400 million to $450 million per year. This last -- in fiscal '21, there was one European contract with a large European OEM that is going to be some internal kind of restructuring of their purchasing and other departments, which basically moved the contract out from fiscal '21 into fiscal '22. Otherwise, that -- again, we're very confident we are going to get that, and further add into our bookings towards the goal of crossing $1 billion in bookings.

As you all know, Chris, that bookings are lumpy in nature. It's very hard to predict. But as long as we're making good progress and adding to our backlog, I feel very confident about the prospects of the company in the future. We work really hard to secure our core business wins. We work really, really hard to kind of expand with our -- into our adjacent markets. You heard me earlier talk about some of the progress there as well. So overall, yes, am I happy with the $600 million in bookings? Yes. Would I like to see more heading towards the $1 billion that you mentioned here? Absolutely. No questions, right? The TAM expansion and the TAM opportunity is clearly there. And you have heard me say that especially on the Connected Services side, right? So fingers crossed we'll keep marching towards that goal.

That's great. And I'm going to be greedy and just ask the third question because I know this question will be asked by everyone else, so I apologize for people behind me in the queue. But on the connected revenue, we understand the legacy comes off. But when we think about the new, Q3 to Q4, we had a move sequentially from $14 million to $11 million, where we tend to think about that as an installed base, so sequential positive business. Can you just talk about the quarter-over-quarter move in new connected and any seasonality that affected that number?

Yes. The majority of our revenue is simply an amortization schedule, but there are some contracts that are usage-based, and those will ebb and flow from one quarter to the next. And then also, we did have that onetime adjustment to correct an amortization schedule in Q4. So that entire amount did hit Q4 new connected revenue.

Our next question comes from Mark Delaney with Goldman Sachs.

Yes. So can you talk a little bit about how to think and contextualize through the December quarter revenue guide. You commented on how your outlook is outgrowing IHS' view of auto production on a year-on-year basis, but the industry production rates are starting to pick up sequentially, and I think IHS is expecting that as well, and yet your December quarter revenue guide is for revenue to be down quarter-to-quarter. Maybe you could talk a little bit on some of the puts and takes that are leading to that.

Yes. So we -- you have to look at what we are sort of modeling internally for our Q1 revenues. And if you look at the Q4 revenues, we did have a large amount of fixed contract revenue, which we don't expect to repeat to that same level. And so in last quarter, in Q4, if you look at the slides, we had $25 million of fixed revenue -- fixed license revenue that is. And so that's a pretty substantial number, and we don't expect that to repeat. So when you factor that down, that number down quarter-over-quarter, that's really what's driving it. So we do expect variable licenses, which is most tightly coupled to auto production. We expect that number to increase sequentially.

Got it. And in terms of the number of vehicles with Cerence technology installed, I mean, you did talk about good competitive win rates in the 5 competitive wins. But the percentage of vehicles produced with Cerence technology, I think it's been moving sideways and you're coming in at, I believe, 53%. Can you talk a little bit more on that? Maybe what's constraining the attach rate of your technology, maybe on that's one of your KPIs?

Yes. So I think some of that is driven by the fact that we are using trailing 12-month data. And I think some of the COVID impacts are still being factored into the TTM results. If I'm looking at some of the data that we don't publish on a quarterly basis, we are seeing that trend increasing. So I think as we get further into this fiscal year and we drop off some of those older quarters, that should probably help that KPI.

Just also to add, Mark. We put a press release out last quarter, and then you heard me mention, 174 SOPs that happened in fiscal '21, 174 start-up productions is a record for our company. So feel like Mark rightly said, that number is TTM. And -- but we're making good progress there.

Our next question comes from Luke Junk with Baird.

First, a question on the EBITDA margin guidance. I'm just hoping we could put a finer point on bridging to the midpoint as we look at some of the big moving pieces here between mix, R&D and other factors. And really, the question here is as I look bigger picture versus what you've said for the 2024 targets, should we interpret the current year as sort of the biggest step function change in those dynamics relative to where you were in fiscal 2021 and where we're going a couple of years out?

Well, yes, because fiscal 2021, as we've been mentioning for over a year now that '21 is going to have inflated margins throughout the year as we brought a lot of those COVID expense reductions back into the P&L. And so even though we benefited short term from those COVID expense reductions and we delivered record-setting margins. Going into '22, we are factoring in the fact that all of those COVID expense reductions are now back into the P&L and that we're also going to continue to invest in our R&D to continue to innovate and to continue to extend our technology lead.

And so you will start to see increases in R&D, both on a dollar basis and as a percent of revenue. That's going to be probably the single biggest driver. And so back to your point, I think '22 is probably going to be the year in which you'll see the most year-over-year change to some of the margin assumptions. However, the targets that we have laid out for '24 in the target model, we expect to be able to hold those margins even with these more expenses that we're building into the R&D expense line for fiscal '22.

Okay. Great. Maybe a question for Sanjay. Bigger picture, multiple kind of awards, mentioned both in the release and going through the commentary today. And I'm just wondering, you mentioned 3 of those were in China. Is there anything that we can glean competitively about sort of where the industry is going or what competitors are looking for that, essentially where competitors are going that made those customers choose your solution versus peers.

I just returned from my second Europe trip in U.K., France last week. I was in Germany a few weeks before. Now that with COVID opening, I have started traveling with -- and going and seeing the customers after almost 18 months of virtual sort of interactions with the customers. And one thing that I'm consistently hearing from our customers, and by the way, I have also been to Detroit as well myself. And one thing that I'm consistently hearing from the customers that the roadmap that we have put together over the last couple of years as an independent company is a solid roadmap.

We're creating the best embedded AI technology which is coupled with the best of connected services and apps portfolio, which basically allows the customers to bring multiple big tech and the digital life of a consumer in the car. So I feel very good about our product positioning. And this is coming firsthand, me sitting in the rooms now over the last month, 1.5 months with the top 10, top 15 OEMs around the world and getting their very direct feedback with regards to our product portfolio. I think we're -- we just need to keep working hard on -- continue the journey of winning the new designs of the vehicle architecture and continue to deliver the products that we have been discussing with our customers.

Our next question comes from Colin Langan with Wells Fargo.

I just wanted to follow up on the quarter-over-quarter decline in Connected Services. You mentioned the amortization adjustment, which I think it would still be down sequentially, even including that. You also mentioned usage-based contracts might be down quarter-over-quarter. Why would that fall? Is that a seasonal reason? Is there something else I'm missing, I just -- I kind of -- I guess, I think, like many people thought that was more of a kind of steady rise with the adoption.

Yes, we've had some prior quarters, Colin, where the usage is just simply ebbs and flows. And I think it also ties back to the one slide that we've got in the presentation deck, where things have slowed down a bit in terms of monthly users and so forth. And so I don't have a specific reason for why the decline has happened. But part of it could be just fewer cars, COVID related, and so forth. But we don't view that as any trend or anything concerning. It's just sometimes these usage contracts will ebb and flow from one quarter to the next. And that's the piece that could move some of the revenue up or down from one quarter to the next. But I think the key takeaway is if you look over a 4-quarter, 8-quarter trend, we continue to see continued growth in our new connected revenue line. That's really the -- the punch line is that, that trend is continuing to grow.

Okay. Got it. And then just -- I'm sure you saw last week, SoundHound announced a SPAC. I know they're in the vast majority of your comp set. I'm sure questions are going to come up. I mean can you just remind us sort of how you compete against them and how your technology might be different in some ways as people might start lining both companies up against each other?

Sure. I always respect our competitors and SoundHound is a great company to compete against. Competition brings the best out in all of us, and we welcome it. The -- I was surprised as hell on the valuation. And I'll let you guys sort of do the math there, but a $20 million revenue, we're 20x their revenue piece and the company has been out there for 16-plus years, right? So that, the revenue piece aside, on the product side, 2, 3 years back when I first joined as the CEO of Cerence, one of the areas that I felt -- the area that we were very strong was embedded AI -- embedded AI in the car. Our cloud portfolio needed a refresh from my standpoint, my assessment. And I brought in a CTO, which was focused. He's not an auto guy, is a cloud guy. And his charter with our product management team was to strengthen our cloud portfolio.

Today, I felt 2, 3 years back that our cloud portfolio was weaker as compared to our competition. And our R&D team under our CTO's guidance worked amazing wonders in terms of putting together an absolutely market-leading cloud portfolio. And again, don't take my word on it, take the word of our customers. And our customers have recognized this. And as I said to you in our press release as well, that we're winning back some of the customers, there was a European customer who was lost to our competitor here, before my time, before Cerence was spun out as an independent company, and we have won that -- we've won the next generation of that customer back with a complete embedded and cloud portfolio that we have as a company. So -- and the feedback, like I said, from my trip touching OEMs very directly over the last couple of months in Germany in Detroit, in U.K. and France and so on, it gives me the confidence to make a statement here on this call.

Our next question comes from Raji Gill with Needham & Company.

Question, Mark, on the fixed prepay/licensing revenue business. $25 million in the quarter, it looks like that's going to be up about 31% in fiscal year '21, getting to about $70 million -- $71 million. When we're looking at fiscal year '22 and as you factor in your overall guidance, how do we think about the prepaid revenue? I would assume that, that line of the business would drop fairly precipitously and then it will be offset by higher growth in licensing variable and new connected and other new applications. But I just wanted to get an extent of the drop off in fiscal year '22 for prepaid, given it's so high. And what drove the above-average growth in prepaid in the September quarter because it was quite significant.

Yes. So as I mentioned in my prepared remarks, it was driven by 2 larger than typical deals that we had closed in the quarter. And if I look at historically, we may have maybe one large deal in any given quarter, which tends to -- as I mentioned before, it tends to swing those numbers around, and they're difficult to predict, the size of those deals. And so it's very unusual to have 2 happen at the same time. And that's really what sort of drove the spike in Q4.

Like I said, typically, it's one customer or it's a series of customers on smaller deals, which, typically, would keep us in that $10 million to $15 million type of range. And so it was just that timing which drove it. I think if you look into fiscal '22, we do expect it to recede. We certainly don't think it's going to be a repeat of last year where we had a $71 million record. And if you look at our historical range, we've typically been in that low 40s to mid-50 type range. If you go back 3 or 4 years, that's typically been the range from one year to the next.

So this past year did exceed our historical ranges. And I think I've also mentioned to you in the past that if we deviate from those historical ranges, on the upside, that's good for short term, but it also does create a little bit of a pressure on our next year and sometimes the year after growth because we have to consume -- or the customer has to consume those licenses.

So because we were outside that range, that does put a little bit of a damper on growth rates for next year and possibly into fiscal '23 as well as those licenses get consumed. Right now, it's hard to predict exactly where that number is going to be, but I would say that it's going to be down $12 million, $13 million, $14 million or so year-over-year. So that kind of gets you back into our historical range, but at the higher end of the historical range. That's what I'm anticipating.

Got it. I appreciate that. And when you're thinking about your fiscal year '24 target of $700 million and you're reiterating that, it does imply a fairly significant ramp, a reacceleration in revenue growth in fiscal year '23 and then kind of continuing into fiscal year '24. I'm just curious what's giving you the confidence of that visibility, given that we've seen prepaid being a bit lumpy. We've seen some of these kind of changes in the usage case for the new connected revenue.

Is it just kind of the new applications and the mobility markets that are adding it? Or are you seeing something in the attach rates for new connected that's giving you confidence to hold that target of $700 million as you look at these new cars that are going to being produced, including your cloud connected voice revenue. Does that -- is that giving you kind of confidence that you can get to that $700 million?

I think -- yes, I'll start and Sanjay may want to jump in as well. But I think really the bottom line is that the secular tailwinds and the digital car is not slowing down in any way. In some ways, it's actually accelerating. And so those penetrations of this technology is continuing to be pretty strong. And auto production, I think, is a speed bump. Things are kind of -- because of auto production being lower because -- first, because of COVID; and second because of the semi supply chain.

Ultimately, if the demand is still there, the end demand is still there and the penetration rates continue to grow even above expectations, then we're in a very strong position competitively. We continue to maintain our dominant share on the embedded side, and we do see growth potential and market share gains on the connected side, not to mention some of the good progress we've already been able to talk about with some of these new markets.

Yes. Thanks, Mark. And just from my standpoint, I think if you look at our model and the core categories of revenue that we break the model down to, there is edge AI, which Mark just commented on. So feeling good about the target of $300 million there. For connected AI, the biggest piece that I'm focused on is new apps and services. We're expecting a contribution of about $90 million there. It's single digits in 2021. And this is where sort of the bookings that we are making is extremely important for this new business. And you heard me say we have booked $120 million in fiscal '21 for some of these new products.

And then lastly, for the new mobility markets, once again, in fiscal '21, it's single-digit millions going to about $65 million. As you see in the model, that piece, once again, for 2-wheelers and elevators, we have started making good progress there with a major win that I mentioned to you. We have not even taken any bookings against that yet, although we expect revenue in fiscal '22 on that. And the reason is we're being cautious to -- since that's a brand-new market for us, we want to understand it better before we sort of come back and share more details, but I feel good about that $65 million target that we have set out for fiscal 2024.

On the last item is the professional services. I don't see any problems at all going from $75 million in fiscal '21 to $110 million in fiscal '24. So yes, overall, as I break down the model and kind of go line by line and so on, I think the team is working hard to achieve our goals.

Our next question comes from David Kelley with Jefferies.

Maybe just starting with the contract duration step up, some mix shift contribution, but really is a meaningful uptick even from last quarter. I think, a year plus and that's, I believe, a trailing 12-month metric. So curious if there was -- or you're seeing some meaningful duration step up with some of the recent wins you've had? And if there's anything else, maybe we should be thinking about strategically that's been a driver and could continue to be a driver of that uptick?

Yes. So in terms of that metric, I did look at it as well because it looked like there was a pretty nice uptick quarter-over-quarter. And actually, it has to do with the TTM effect, right, the trailing 12 months, where a year ago, there was a different concentration of our bookings, and there weren't as many connected contracts. So a year ago, with that 1 quarter, it had a shorter duration. And so that quarter has now dropped off from the TTM.

So this just naturally increased for this quarter because that last quarter dropped off a year ago. So that was more from a formulaic point of view. But I think when you look at the trend overall, we are seeing more and more of our customers willing to commit to longer contract periods. I think a lot of that has to do with the fact that the connected car is here, it's here to stay, and it's going to continue to grow, and they see the real value in making sure that those cars on the road stay connected. And they are willing now to commit to longer periods than they have historically. And so I think that's starting to show up in our results.

Okay. Got it. That's helpful. And then maybe, Sanjay, a question strategically. Some competitive wins in China, we tend to think of that market as being a bit faster to production. So just curious as to how you view Cerence's broader China momentum into next year. And then maybe one quick follow-up on that. I know you don't break out '24 targets regionally. But could you give us a sense of how you've been thinking about China as a contributor to some of the longer-term targets?

Sure. So I think Chinese OEM, in a very competitive space for sure. We have one major competitor in iFLYTEK there. And I think you have heard me say we share roughly -- were slightly higher in the independent reports that I saw a few months back, our market share, China for China, OEMs in the cars shipped in China were a little more than 40% in market share. Our competitor is also roughly 40%, slightly below us, and then 20% is everybody else.

We're very focused on growing our share there. In some of the competitive wins you saw, 3 of them were in China, which supports my statement that we're making progress against our competitors as well. And once again, our full portfolio is the main reason because embedded AI, we were always being very strong as a -- traditionally as a company. So overall, I see us making progress there and continue. It's difficult to forecast what that actual market share would be next year, following year and so on and so forth, right? But in terms of looking at the competitive space and our progress there, I think I feel good about taking this 41%, 42% market share and crossing 50% in the very near future.

That concludes today's question-and-answer session. I'd like to turn the call back for closing remarks.

Thank you, everyone, for joining us on today's call, and we hope to see you at upcoming investor events. Thank you, and have a good day.

Thank you.

Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.