Cerence - Q1 2026

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Cerence First Quarter 2026 earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, we'll open up for questions. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's call is being recorded, and I would now like to hand the conference over to your speaker, Kate Hickman, Vice President of Corporate Communications and Investor Relations. Please go ahead.

Kate Hickman (VP of Corporate Communications and Head of Investor Relations)

Hello everyone, and welcome to Cerence's First Quarter 2026 conference call. I'm Kate Hickman, VP of Corporate Communications and Investor Relations. Before we begin, I would like to remind you that this call may involve certain forward-looking statements. Any statements that are not statements of historical fact, including statements related to our expectations, anticipations, intentions, estimates, assumptions, beliefs, outlook, strategies, goals, priorities, objectives, targets, and plans, are forward-looking statements. Cerence makes no representations to update those statements after today. These statements are subject to risks and uncertainties, which may cause actual results to differ materially from such statements and expectations. As described in our SEC filings, including the Form 8-K with the press release preceding today's call, our most recent Form 10-Q, and our Form 10-K filed on November 20th, 2025.

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. The press release is available in the investor section of our website. Joining me on today's call are Brian Krzanich, CEO, and Tony Rodriguez, CFO. Please note that slides with further context are available in the investor section of our website. Before handing the call over to Brian, I would like to mention that we will be participating in the 38th annual Roth Conference taking place March 20th to 24th. Now onto the call. Brian?

Brian Krzanich (CEO)

Thank you, Kate. Good afternoon and welcome, everyone. I'm excited to speak with you today following another strong quarter of performance for Cerence. We are pleased with our results this quarter, with revenue of $115.1 million and the Adjusted EBITDA above the high end of guidance at $44.6 million. Importantly, we generated record quarterly free cash flow of $35.6 million, demonstrating continued profitability. Tony will provide further details on our Q1 results later in the call. As I mentioned on last quarter's call, we have three key priorities for 2026. They are advancing our business through leading technology, including our next-gen platform xUI, maintaining cost diligence, and driving top-line growth. First, we made important progress in driving our business through continued innovation, especially as we geared up for the CES in early January.

On the ground in Vegas, we showcased the latest advancements to Cerence xUI, highlighting new LLM-powered experiences spanning both edge and cloud. We demonstrated our CaLLM Edge small language model running across multiple chipsets, enabling faster performance, lower latency, and reliable in-car interactions, even when connectivity is limited. Plus, we showcased xUI running live in a Geely vehicle, marking the first public demonstration of a near-production car powered by xUI. We showed off our audio AI suite, including advanced multi-speaker and multi-zone capabilities. Importantly, within Q1, we completed development of several of our new AI agents, which are now fully integrated into xUI but can also be implemented in non-xUI platforms. At CES, for the first time, we demonstrated our Mobile Work AI Agent developed in partnership with Microsoft.

Now, this agent turns your car into a trusted device with voice-first access to Microsoft 365 Copilot, Teams, Outlook, and OneNote. This was incredibly well-received, and we have significant customer traction and active commercial negotiations coming out of the show with OEMs who want to bring this new agent to their drivers. We also debuted two new purpose-built AI agents that expand our portfolio beyond the in-vehicle experience into broader areas of the automotive ecosystem. The new Dealer Assist Agent helps dealerships automate sales and service workflows like lead capture, test drive booking, and service scheduling while integrating with CRM and dealer management systems to improve responsiveness and efficiency. The Ownership Companion Agent enables OEMs to provide drivers with an always-on, in-car service companion that supports diagnostics, maintenance guidance, and instant service booking, creating a more connected ownership journey and strengthening brand loyalty.

The introduction of these new agents expands our reach and enables us to deliver an end-to-end, full-journey solution from vehicle purchase to regular in-car usage to troubleshooting and to service and maintenance. Overall, feedback from customers, partners, media, and analysts and investors was incredibly positive, including Cerence xUI being named Gizmodo's best in-vehicle assistant in its Best of CES 2026 Awards. We look forward to continuing the conversations we kicked off at the shows. On our second priority of cost diligence and strategic capital allocation, in Q1, we paid down $30 million of principal of debt due in 2028 using cash on hand while maintaining our cash position to invest in future growth. In addition, we are continuing our attention to cost management and delivering strong cash performance.

In Q1, we completed the implementation of the previously mentioned restructuring plan related to certain foreign operations, further reducing operating expenses and positioning Cerence for profitable, sustainable future growth for the remainder of fiscal 2026. We will remain diligent and maintain our attention to cost management. Lastly, in terms of our goal of driving top-line growth, we believe there are three key areas of focus. First, increasing adoption of Cerence xUI and driving greater penetration of our stack in existing programs, which we believe will deliver increased PPU. To give you a sense of how we're progressing with customer adoption of xUI, as of today, we have now five significant customer programs for xUI. There's the previously mentioned programs with JLR and a brand within the Volkswagen Group. At CES, we announced our plans with Geely for their cars shipped outside of China.

In Q1, we received a new award from another major Chinese EV OEM leveraging xUI for their overseas development in five languages. In Q2, we received an award from a major volume global automaker, which we look forward to sharing more about in the future. These programs are currently on track to hit the road during the calendar year with strong PPU growth. There are a few important things to note about these deals. One, that we have a strong win rate for xUI and that these wins have been against big tech competition. This not only tells us that xUI is needed in the market, but we believe also serves as a good indicator of how we'll perform in the outstanding RFQs we have on the table.

And two, all of these programs have PPUs that are higher than our current run rate, demonstrating clear value and OEM willingness to invest. We continue to see strong customer traction outside of xUI as well. In Q1, we signed several important deals, a win that brings our generative AI apps, that's Cerence Chat Pro and Car Knowledge, to additional countries with HKMC, audio AI wins with GM, Mercedes-Benz, and Daihatsu, and an upgrade to our latest Neural TTS for Mercedes-Benz. We contracted development of Slovenian language to help our customers meet regional language requirements, expanding our product offerings. Importantly, on the GM audio AI deal, this was a competitive winback that brings our speech signal enhancement, one of the highest margin elements of our software stack, to GM's next-generation infotainment platform across all brands.

This lays out the foundation for potential adoption of additional elements of our audio AI suite with this major North American automaker in the future. We also saw eight programs start production, including BYD, GWM, and HKMC. Trucking programs with Scania and Ford Trucks also went live this quarter, marking continued strong momentum in adjacent transportation markets and building upon our existing work with Daimler Trucks, Volvo Trucks, PACCAR, and Iveco Trucks. Our second area for potential growth is increasing the number of connected vehicles shipped, resulting in an expansion of our connected service business. As Tony will detail, we continue to see growth in connected services as customers continue to adopt connected solutions. We believe this momentum will continue. This is a key pillar of our long-term growth strategy, providing high-quality, predictable revenue. Third, we have an opportunity for growth in our non-automotive businesses.

In Q1, we continue to operationalize our strategy and model. We spent time at CES meeting with new customers and validating our approach to bringing the power of agentic AI and voice to new industries, including one of the leading digital signage players worldwide that is interested in integrating our solutions across their portfolio. We have good momentum with awards expected through Q2 and beyond. As a reminder, we believe the impact of our work to expand beyond automotive will be seen in our revenue and profitability starting in late fiscal year 2026 and beyond. This is reflected in the fiscal 2026 guidance we provided last quarter. We believe our IP monetization strategy will continue to yield benefits for Cerence.

As we mentioned on our last quarter's call, we resolved our suit with Samsung, which, among other things, resulted in Samsung agreeing to pay Cerence a one-time lump sum payment of $49.5 million. We recorded this patent license revenue in Q1, and we believe the resolution of this suit marks an important milestone in our IP monetization strategy. We have cases with Sony, TCL, and Apple outstanding. As a reminder, with most cases taking multiple years to reach resolution, this is a long-term strategy. In conclusion, we believe we have a strong technology and customer momentum and are on a solid ground to execute on our future growth plans through the rest of fiscal year 2026 and beyond. For Q2, we expect revenue of between $58 million-$62 million, an Adjusted EBITDA of $2 million-$6 million.

We're pleased to reaffirm our full-year guidance that we provided on last quarter's call. Tony will provide further details on this. We believe that Cerence has the right foundation for long-term, sustainable growth. We're incredibly proud of what our team has accomplished this quarter. With that, I'll turn it over to Tony.

Tony Rodriquez (CFO)

Thank you, Brian. Good afternoon, everyone, and thank you for joining us today. We appreciate your continued interest in Cerence. I'll walk through our first quarter of fiscal 2026 results, highlight the key drivers of the quarter, and then share our outlook for Q2. For the first quarter of fiscal 2026, total revenue was $115.1 million, up $64.2 million, or 126% from $50.9 million in the prior year period. We believe it's important to start by highlighting the continued positive progress in our core technology business, including variable and fixed license revenue and our recurring connected services revenue stream. Excluding the impact of patent license revenue, our core technology lines delivered solid growth and stability, reflecting steady customer utilization, continued adoption across our programs, and the increasing importance of our recurring revenue base.

Variable license revenue for the quarter was $30.5 million, up 34% year-over-year, driven by steady customer utilization, more in-period shipment recognition, and continued adoption across our core programs. Fixed license revenue was $7.8 million in the quarter. These fixed license deals were not present in Q1 of last year as they were primarily recorded in Q2 of the prior year, creating a timing difference. Importantly, for the full fiscal year, we continue to expect fixed license revenue to be comparable to the prior year, and we view this as a timing shift rather than a change in underlying demand. Connected services revenue was $14.5 million, up 6% year-over-year despite a $2 million true-up benefit in the prior year quarter. Without this prior year true-up, connected services revenue would have increased over 20% year-over-year.

This connected services revenue line represents a recurring revenue stream driven by continued expansion of our connected install base and remains a key pillar of our long-term growth strategy, providing high-quality, predictable revenue and improved visibility over time. Now turning to a strategic milestone achieved during the quarter. During Q1, we recorded $49.5 million of patent license revenue, reflecting the successful resolution of our patent litigation with Samsung. As previously disclosed, this resolution includes a one-time lump sum payment to Cerence. The agreement is part of a confidential cross-license arrangement, which limits the level of detail we can provide. That said, we believe this outcome represents an important validation of the strength and breadth of our IP portfolio and a strong proof point for the applicability of our technology across multiple industries and verticals.

Including the patent license revenue, total license revenue for the quarter was $87.8 million compared to $22.7 million in prior year. Professional services revenue was $12.8 million, down 12% year-over-year, reflecting our continued focus on standardization, scalability, and margin improvement, as well as the impact of revenue deferrals when services are bundled with license arrangements under applicable accounting guidance. Gross profit for the quarter was $99.4 million, representing a gross margin of 86%, up from 65% in the prior year period. This improvement reflects the favorable mix shift towards license revenue as well as continued discipline across cost of revenue. Turning to operating expenses, total non-GAAP operating expenses was $57.3 million, up $23.2 million compared to Q1 of last year. The increase was driven primarily by the legal costs associated with achieving the patent license outcome this quarter.

These costs were directly tied to the patent license value creation and are not reflective of our ongoing run rate expense structure. Additionally, while total R&D spend remained fairly comparable year-over-year, R&D expense increased as a smaller portion of our R&D costs qualified for capitalization as internally developed software, resulting in higher expense to R&D. Resulting Adjusted EBITDA for Q1 was $44.6 million, representing a 39% margin compared to $1.4 million or 3% in the prior year period. This reflects strong operating leverage, discipline cost management, and the benefit of the patent license revenue. GAAP net loss for the quarter was $5.2 million compared to a $24.3 million net loss in the same quarter last year. Another key accomplishment during the quarter was the continued deleveraging of our balance sheet.

During Q1, we repurchased $30 million in principal value of our 2028 convertible notes at a discount to par, using $37.9 million of cash generated from operating activities. We produced $35.6 million of free cash flow, a record for any quarter in the company's history. And while not necessarily indicative of future results, we have generated over $100 million of free cash flow over the last eight quarters. We ended the quarter with $92.1 million of cash and marketable securities, and we believe that the company remains well-positioned to fund strategic initiatives while continuing to strengthen our balance sheet. From a metric standpoint, approximately 11.9 million cars were produced that included Cerence technology in the quarter, flat from 11.9 million in the prior year first quarter.

We also grew our number of connected cars shipped by 14% on a trailing 12-month basis, underscoring the continued momentum that we are seeing in vehicle connectivity. Also on a trailing 12-month basis, 51% of worldwide auto production included Cerence technology, remaining in line with our historical penetration. Adjusted total billings were $231 million, an increase of 2% year-over-year. As previously discussed, when we look at total licenses shipped, Pro Forma Royalties is an operating measure we use representing the total value of variable licenses shipped in a quarter, including shipments from prior fixed licenses where revenue was previously recognized upon contract signing. We refer to the shipments where revenue was recognized in a prior period as fixed license consumption. Our Pro Forma Royalties were $39.8 million, which were up as compared to $36.7 million for Q1 of last fiscal year.

Consumption of our fixed license contracts totaled $8.7 million this quarter, lower than the same quarter last year by 38%, but in line with expectations given the lower level of fixed contracts than historical periods. This drops more pro forma royalties into revenue in the current period as compared to a year ago. Similar to our five-year backlog metric, we will provide the details of our PPU metric in the middle and the end of each fiscal year. That said, we expect the PPU metric to increase by the end of fiscal 2026. Looking ahead to Q2 fiscal 2026, we expect revenue to be between $58 million-$62 million, gross margins between 71%-72%, a GAAP net income at about break-even with EPS between -$0.01 and +$0.08, and Adjusted EBITDA between $2 million-$6 million.

The Q2 revenue guidance reflects some fixed license revenue, but not to the extent of Q2 last year where virtually all of last year's fixed license deals were recorded. We are also reaffirming our full-year fiscal 2026 guidance as previously communicated, with revenue between $300 million-$320 million, Adjusted EBITDA between $50 million-$70 million, free cash flow between $56 million-$66 million, and gross margins between 79%-80%. In summary, Q1 marked a strong start to fiscal 2026, highlighted by solid core technology performance, an important IP milestone, and continued progress towards sustainable profitability and balance sheet strength. We believe Cerence is well-positioned to execute against our strategy, expand recurring revenue, and deliver long-term shareholder value. With that, I'll turn it back to Brian.

Brian Krzanich (CEO)

Thanks, Tony. So in closing, we're pleased with our results this quarter and incredibly proud of what our team accomplished as we start 2026. We remain focused on the three key priorities: driving top-line growth, advancing our business through leading technology, including xUI, and maintaining cost diligence. We believe we have an exciting path ahead, and we look forward to sharing more on next quarter's call. We'll now open it up for questions.

Operator (participant)

As a reminder to ask a question, you may need to press star 11 on your telephone and wait for a name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question will come from the line of Jeff Van Rhee from Craig-Hallum Capital Group. Your line is open.

Jeffrey Van Rhee (Senior Research Analyst)

Great. Thanks. Thanks for taking my questions, guys. A couple for me. On the connected side I'm curious on the mobile work agent. Just where does that rank in terms of the agents and xUI and other capabilities as you're layering in a lot of sort of AI-centric capabilities? Is that top of list in terms of what customers are most enthusiastic? It sounded like you were sort of messaging extremely strong demand there or interest there. And then along those lines, just any sort of framing around the impact that that can have on your ARPUs going forward?

Brian Krzanich (CEO)

Sure. So this is Brian. Jeff, then I can start. So the Microsoft Outlook or Microsoft 365 does not require xUI, and that's a good thing. It's a cloud-based solution that actually just makes the car a trusted device and then puts our LLM on top of that. So we manage the requests. So when you put a request in that says, for example, "Hey, I only want to get messages from Jeff while I'm driving to work because he's the most important person I need to talk to this morning," it will filter all that and manage that so you're not distracted while you're driving. What's good about that, the fact that it is cloud-based, is it can go on existing vehicles that are maybe two to three years old that have a connected capability as well.

So what we're seeing is the interest is not only in the future-forward-looking xUI systems, but we have OEMs coming to us and saying they'd like to put this on vehicles back two and three years. So it's quite positive. We haven't talked about pricing yet, but it will be an additive, and it will add to our PPU. Did that answer your question, Craig or Jeff? I mean, I just want to make sure I got that.

Jeffrey Van Rhee (Senior Research Analyst)

Yeah, it does. It does. In terms of an existing car, if you make it available to an existing vehicle, is that a revenue event, or is that you're just getting people addicted to the technology and you get the revenue down the road? How does that work?

Brian Krzanich (CEO)

It would be a revenue event for us.

Jeffrey Van Rhee (Senior Research Analyst)

Okay. Okay. Got it. And then on the numbers front, you called on a number of interesting bookings or signings, including this major volume global automaker in Q2. I'm curious, in terms of TTM billings, is that going to show up, or are we going to start to see TTM billings growing in Q2, and maybe even just a preview of backlog that's going to be reported at the end of Q2? Are those going to step in there where we should see some meaningful uptick both in backlog and TTM billings when we wrap up Q2?

Brian Krzanich (CEO)

So I'm going to let Tony talk about how it'll fit in the profile. But if I take a look at that, we've talked about JLR and the Volkswagen Group vehicle coming in late summer, let's call it. The other ones are we've said the other ones are all going to come in this calendar year, but that's really start of production, and they'll ramp, right? So remember, we get paid both when the car ships out of the factory and then for the connected portion when the car drives off the dealer lot. So the revenue from a pure revenue stream won't start until late summer, and we'll start to ramp, right, as the vehicles kind of go through their normal ramp in both geography and volume. And then a lot of it will really happen at the back end.

So what I was trying to do by showing all five is that I've gotten a lot of questions in the past. Hey, I said we have six RFQs out, and we've got two guys already signed up with JLR and the Volkswagen Group company. I wanted to give you guys an additional update that we're now actually signing more deals and seeing good growth and good PPU growth out of this technology. And so those six RFQs are turning into actual deal signed. That's kind of that loop for you guys.

Jeffrey Van Rhee (Senior Research Analyst)

Got it. Got it. And then maybe the other part of the question, just maybe for Tony, is should we expect are these signings that you're putting up and that you're talking about here big enough that we should, assuming continued trend and continued strength in Q2, that we should start to see backlog and TTM billings pop by the end of Q2?

Tony Rodriquez (CFO)

Yeah. These will be reflected in a five-year backlog, of course, because once the contracts are signed and then, as you know you've been familiar with this, that we project the volume over a contract period, or at least if it's over five years, within the five-year period and apply the contract price to that volume. So you will see it in backlog next quarter.

Jeffrey Van Rhee (Senior Research Analyst)

Okay. And just last for me, and I'll let somebody else jump on the also on the connected side, just curious, based on the metrics that you're watching, how is usage of the existing in-car connected systems trending? I think back in the day, you used to share some metrics around how frequently people were interacting with the system. Just what trends and what learnings with respect to sort of apples-to-apples usage of a person who has connected in their car over time are you seeing?

Brian Krzanich (CEO)

Yeah. I'd tell you that if you have one of the older systems, the usage is pretty good early on when you first get the vehicle, and then it kind of drops off. That was before LLMs were really available. If you look at vehicles from, say, let's say, the Cerence Assistant and onward, we're starting to see more and more usage. We don't publicly talk about what's the percentage and all, but what we're seeing is as functionality has increased and ease of use has increased, we're absolutely seeing stronger usage of the product. And we think as you add things like the Microsoft Suite, Microsoft 365, and all of that, it's just going to really massively increase the usage rate of these products.

Jeffrey Van Rhee (Senior Research Analyst)

Got it. Great. Thanks for taking my questions.

Operator (participant)

Thank you. One moment for our next question. Our next question will come from the line of Mark Delaney from Goldman Sachs. Your line is open.

Aman Gupta (Executive Director of Private Equity)

Hey, guys. You have Aman on for Mark. Thanks for taking the questions. I guess sticking with the xUI and AI product front, thanks for the updates on the pipeline there. Maybe if you can help parse out the interest from more of the Western OEMs versus you talked about getting two wins, one with Geely and one with another China OEM for overseas business. How is that pipeline relative to the Western OEMs? And are you seeing any difference in time-to-market from when you sign one of these agreements and actually start of production? And any PPUs that you can do as well would be helpful. Thank you.

Brian Krzanich (CEO)

Sure. So let's see. So as you just described, three of the five are I'll call them from Western or more classic OEMs. And so we're seeing strong interest. We still have several other OEMs we're talking to in negotiation and deal preparation that tend to be more Western as well. I'd tell you if I take a look at the JLR and the Volkswagen one, they're running about as fast as the Chinese ones. So I don't see a huge difference. I'd say the Western OEMs are becoming especially kind of the leading ones are becoming more and more aggressive about their timing and bringing this stuff to production. So I'd tell you right now, three of five are Western or more classic OEMs versus the two Chinese brands. We're seeing additional Western OEMs with interest.

From a PPU standpoint, all we've said publicly is that the prices we're getting for xUI on these deals is significantly higher than what our current listed PPU is that we've talked about, which is around $5. I think it's $5.05, if I remember correct. Tony, you can correct me if I got that off, that we published last quarter. So we're seeing a good significant increase in PPU from those deals. And they're all a little bit different because they take different features and stuff like that. So you'll see, as Tony said, you'll start to see it in backlog, and then you'll start to see it in revenue in the back half of this year and into fiscal 2027. It'll be more and more significant.

Aman Gupta (Executive Director of Private Equity)

Understood. Thank you for that, caller. And then maybe one a little more on the financials. I think EBITDA came in $2 million above the high end of your 1Q guide, but you maintain the full-year guide. Are there any puts and takes or things we should be thinking about through the balance of the year, or is it how should we think about the full-year guide being maintained relative to the 1Q guide beyond some of those metrics?

Tony Rodriquez (CFO)

Yeah. And a couple of things. One is, yes, we did overachieve on EBITDA, and that was good. We're one quarter in now, right? So what we want to look at is as we think about the rest of the year, we typically wouldn't change guidance unless there was some significant movement that would guide us that way for the full year. So what it does is provide us really confidence. Q1 certainly provides us much confidence in achieving the full-year EBITDA estimate, which we've reaffirmed. And I would think that some of that is a little bit of deferral of some expenses in Q1 into the other three quarters. So we're still, I guess, like we reiterated, that we're reaffirming guidance for the full fiscal year, and this just gives us good confidence in that range.

Aman Gupta (Executive Director of Private Equity)

Thank you very much.

Operator (participant)

Thank you. Once again, that's star 11 for questions. One moment for our next question. Our next question will come from the line of Itay Michaeli from TD Cowen. Your line is open.

Itay Michaeli (Senior Analyst)

Great. Thanks. Good afternoon, everybody. Just to follow up on the EBITDA question, can you just mention what kind of allowed you to beat the range in fiscal Q1? And then just clarify perhaps what the EBITDA was excluding the settlement in the quarter.

Brian Krzanich (CEO)

I don't know if Tony is unable to get off.

Tony Rodriquez (CFO)

Sorry. Sorry, guys. Yeah. We'll talk a little bit about the beat first. So a couple of things. One is we had some good news with regard to legal costs associated with the Samsung settlement. So as I think we've discussed in the past, certainly in Q4 when we talked about it, is that the patent license agreement, part of that was that the legal fees were on a contingent basis. And so we were able to look at that agreement and achieve about $4 million better in legal costs associated with that. So that was part of the beat. The other one related to compensation. So looking at a couple of R&D projects that got deferred, so that assisted in OpEx in the quarter is really the two main areas.

Itay Michaeli (Senior Analyst)

That's helpful. Then maybe secondly on the new win with the major volume global automaker, maybe just walk us through, maybe Brian, just how the competitive process went and kind of what you think kind of led to your win there. And maybe going forward, how you think about your win rate going forward, just given some of the recent traction you've experienced?

Brian Krzanich (CEO)

Yeah. Sure. This is Brian. I am excited by the progress we've made, right, to have the five deals signed, considering we really officially launched the xUI product in the back half of last year, calendar year. It's significant. All of the competitions, it's coming down to there's usually just a couple of us left in the running at the end. It becomes less about things like price and all. Price is always a bit of a part of the negotiation. But really, at the end, it comes down to a couple of things. One, capability of the technology. Do they have belief that you're going to deliver what you say you're going to deliver?

For us, we're able to show up with a vehicle like we did at CES, fully functional with the xUI fully operating, and including things like the Microsoft 365 fully functioning, running in the vehicle live. So that gives them confidence that the technology's there. It can go. It can do what we say. So that's the first thing. Then it's about the confidence in the team's ability to actually work with the OEM. And we have a long history of that with our team. Then just the overall technology capability of your product, right? What can it do? And we have a lot of things that differentiate us, everything from some of the agents we've added, like the Microsoft one, the audio technologies we've added. So it really comes down to the end.

It's more about the technology and the team and less about the price. And that's really how we win. And then it's oftentimes around customizations. They'll have things that they want that are unique to their brand or to the product they're trying to deliver. And our ability to be very flexible in that space and deliver those customizations in a timely manner is oftentimes a differentiator too. That was, in some of the earlier ones, a clear differentiator.

Itay Michaeli (Senior Analyst)

Terrific. That's very helpful. Thank you.

Operator (participant)

Thank you. I'm not showing any further questions in the queue. I'd like to turn it back over to Brian for closing remarks.

Tony Rodriquez (CFO)

One thing before Brian probably kicks in too that we should probably clarify a little bit because we talked about the EBITDA beat, which was great. As we've said, we were very successful profitability quarter and cash flow quarter. As we think about the GAAP financials, if you look at the earnings release and look at the pre-tax income compared to a year ago, it's a pretty dramatic improvement year-over-year. We beat EBITDA. We actually beat we don't put guidance out for pre-tax income, but the pre-tax income was actually better than anticipated, similar to EBITDA. That said, you can see in our materials that we had an effective tax rate of 117%.

What's a little bit wonky about these taxes is many of you know the analysts that are on the call that understand FIN 18 and that fact that what you do each quarter is you project your anticipated tax rate for the full year you put into each quarter. So the fact that, and you can see that this quarter was 117%. So what that really says is for the full fiscal year, we expect a tax rate of about 117%. That said, we still, like we've mentioned, we've reiterated or reaffirmed our net income guidance of -$8 million-$12 million. Well, what's a little bit wonky about that is that we have a certain amount of tax that we are going to pay this year. Part of it is the withholding tax associated with the patent license agreement that we did this year in Korea.

So that'll be a big chunk of foreign withholding tax. We also have other entities that we pay foreign withholding tax. So there's a certain amount of set tax that we are going to pay. And we're so close to break-even that that percentage really is impacted by the actual results and then that set amount of tax as opposed to what most people think about is you think about a tax rate and you apply that to, again, a little bit higher or lower earnings. So I guess a way to think about this if you're doing your modeling is to think that we're probably going to have an actual tax provision in the range of probably $18 million-$22 million.

Then if you see that 117% effective tax rate that we use this year, you can really back into the expectation of pre-tax income for the whole year by taking the net income average, which is -$8 million-$12 million. The middle of that is roughly $2 million. Then you can say, "Well, if you had to gross that up to get to if you're going to have roughly mid-range taxes of about $20 million, that means pre-tax income of about $22 million," so a mid-range guidance thing. So it's a little bit wonky, this one. So the fact that we overachieved in pre-tax income and applied that 117% FIN 18 rate actually increased our net loss even though we had a better-than-expected pre-tax loss.

A little confusing, but certainly, if the folks on the call, in subsequent discussions, if you want to talk a little bit more about taxes, we can.

Brian Krzanich (CEO)

Okay. Thanks for that, Tony. That was very helpful. I know that whole tax situation was a little bit confusing for everyone. To close, I just want to say it was a great Q1 and start of our fiscal 2026. Really happy with the deals we've signed on xUI. I think they're clear indicators of the power of the technology and our ability to compete in this marketplace against whoever our competitors are at the time. And so I'm really proud of what the teams both delivered and accomplished this quarter. You saw the great earnings, the great results that we've had, record free cash flow. And we're set up for a great Q2. And so I look forward to talking to everybody at the end of this quarter. I think you'll be happy with our results.

With that, I'll talk to you all during the quarter and look forward to talking to you on this call at the end of Q2. Thank you very much.

Operator (participant)

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.