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CI

Cerence Inc. (CRNC)·Q2 2025 Earnings Summary

Executive Summary

  • Q2 FY25 revenue of $78.0M and 77.1% gross margin both exceeded the high end of guidance; adjusted EBITDA was $29.5M, and free cash flow was $13.1M, marking the fourth consecutive positive FCF quarter .
  • Versus S&P Global consensus, revenue beat by ~$2.7M and EPS beat materially; EBITDA was above consensus as well, reflecting mix favoring higher-margin technology revenue and disciplined OpEx execution (values marked with asterisks are from S&P Global) *.
  • Full-year FY25 guidance: revenue unchanged; profitability and cash flow raised—adjusted EBITDA to $28–$34M, net cash from operations to $39–$45M, and free cash flow to $25–$35M; Q3 FY25 guide calls for $52–$56M revenue, 66–68% gross margin, and adjusted EBITDA $1–$4M .
  • Management highlighted growing momentum for xUI/agentic AI, OEM pricing pressure that they are mitigating through value engineering, and strategic IP protection (new lawsuit vs Microsoft/Nuance); they also plan to repay the remaining $60.1M converts in June and maintain >$70M cash thereafter .

What Went Well and What Went Wrong

What Went Well

  • “We surpassed the high end of our revenue and adjusted EBITDA guidance and posted our fourth consecutive quarter of positive free cash flow” (CEO) .
  • Mix tailwinds: gross margin 77% exceeded guidance as technology (license/connected) was a larger share of revenue than forecast .
  • xUI milestones and new customer wins; seven major programs started production (e.g., Mercedes MBUX Virtual Assistant), and generative AI solutions went live at Hyundai, Kia, and PSA .

What Went Wrong

  • Professional services revenue was down more than expected as solutions become standardized and integration moves in-house at some OEMs; Q2 PS revenue declined ~$4.8M YoY .
  • FX headwinds: euro-dollar negatively impacted revenue, though offset in OpEx, resulting in neutral profitability impact .
  • Emerging pricing pressure from OEMs amid macro/tariffs; management is countering with consolidation/offload strategies to deliver win-win solutions rather than price cuts alone .

Financial Results

Sequential Trend (Q1 FY25 → Q2 FY25)

MetricQ1 2025Q2 2025
Revenue ($USD Millions)$50.9 $78.0
Gross Margin (%)65% 77.1%
Adjusted EBITDA ($USD Millions)$1.4 $29.5
Free Cash Flow ($USD Millions)$7.9 $13.1

Year-over-Year (Q2 FY24 → Q2 FY25)

MetricQ2 2024Q2 2025
Revenue ($USD Millions)$67.8 $78.0
GAAP Diluted EPS ($USD)($6.66) $0.46
Gross Margin (%)69.2% 77.1%

Versus S&P Global Consensus (Q2 FY25)

MetricConsensusActualDelta
Revenue ($USD Millions)75.34*78.01 +2.67 (Beat)*
Primary EPS ($USD)0.303*0.630*+0.327 (Beat)*
EBITDA ($USD Millions)19.77*23.53*+3.76 (Beat)*

Values with asterisks are from S&P Global.

Segment Revenue Mix (Q2 FY25 vs Q2 FY24)

Segment ($USD Thousands)Q2 2024Q2 2025
License35,527 51,460
Connected Services13,597 12,648
Professional Services18,701 13,902
Total Revenues67,825 78,010

KPIs and Operating Metrics

KPI/MetricQ1 2025Q2 2025
Percent of worldwide auto production with Cerence Technology (TTM)52% (FY24 baseline) 51%
Change in connected cars shipped (TTM YoY)+5.1% +10%
Adjusted Total Billings (TTM YoY)+3% 0%
Pro Forma Royalties ($USD Millions)$36.7 $39.7
Fixed License Consumption ($USD Millions)$14.0 $9.7
Trailing 12-month Average PPU ($)$4.51 $4.87
Connected Vehicle Rate (%)26% 29%
Cars with Cerence tech shipped in quarter (Millions)~11.0 ~11.6
5-year backlog ($USD Millions)~$969 (Q4 FY24) ~ $960

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Revenue ($USD Millions)FY2025$236–$247 $236–$247 Maintained
Adjusted EBITDA ($USD Millions)FY2025$15–$26 $28–$34 Raised
Net Cash from Operating Activities ($USD Millions)FY2025$34–$40 $39–$45 Raised
Free Cash Flow ($USD Millions)FY2025$20–$30 $25–$35 Raised
Net Loss ($USD Millions)FY2025($40)–($29) ($35)–($29) Improved (narrowed)
Revenue ($USD Millions)Q3 2025N/A$52–$56 New
Gross Margin (%)Q3 2025N/A66–68% New
Adjusted EBITDA ($USD Millions)Q3 2025N/A$1–$4 New
Net Loss ($USD Millions)Q3 2025N/A($13)–($10) New

Earnings Call Themes & Trends

TopicQ4 2024 (Q-2)Q1 2025 (Q-1)Q2 2025 (Current)Trend
AI/Technology InitiativesRecord GA program launches; FY25 roadmap outlined xUI Gen 1 PoCs and first major customer program; partnerships with NVIDIA/Microsoft xUI market launch; multimodal CaLLM Edge demos; wins incl. JLR, Renault; MediaTek/NVIDIA collaboration; Arm Kleidi partnership Strengthening momentum
Supply Chain/Macro/TariffsMacro caution; restructuring savings Tariff impact minimal in Q2; fluid beyond; philosophy to meet/beat Tariff impact limited in Q3; some OEM pricing pressure; cooperative mitigation Manageable but monitored
Product Performance/Launches22 platform launches in FY24 6 SOPs; 2 GA SOPs; European win of several million units 7 SOPs incl. Mercedes MBUX; GA live at Hyundai/Kia/PSA Broadening deployments
Regional Trends/ChinaPenetration decline partly due to China production; limited domestic China exposure Western OEM share relatively flat; growing with China OEMs outside China Q2 auto production down QoQ driven by China; Cerence less exposed domestically Exposure outside China supports stability
Regulatory/LegalN/AN/AFiled copyright suit vs Microsoft/Nuance; ongoing Samsung patent case Active IP protection
R&D/Cost Actions$35–$40M net annualized savings plan $10.4M YoY OpEx reduction; $2.5M R&D tax credit catch-up $15.9M YoY OpEx reduction; $2.2M R&D tax credit catch-up; delayed R&D hiring Sustained cost discipline

Management Commentary

  • CEO: “We surpassed the high end of our revenue and adjusted EBITDA guidance and posted our fourth consecutive quarter of positive free cash flow… As we look to the future… we believe we are well-positioned… With Cerence xUI, we are partnering with OEMs… and delivering enhanced user experiences via OTA updates” .
  • CFO: “Gross margin for the quarter of 77% also exceeded the high end of our guidance… Non-GAAP operating expenses were $34.1M… a decrease of 32%… savings from restructuring… and R&D tax credits” .
  • CEO: On tariffs and pricing: “We are seeing some pressure from our customers on pricing… We’re working cooperatively… to optimize our partnership… maintaining favorable conditions for Cerence” .
  • CEO: On IP: “We filed an action against Microsoft and Nuance… As a company deeply rooted in innovation, we feel it’s critical… to vigorously defend our IP” .

Q&A Highlights

  • Pricing and PPU: Management acknowledged OEM pricing pressure but emphasized increasing take rates/feature bundles and connected adoption driving TTM PPU up to $4.87 from $4.51; they will not guide PPU yet but see positive trends .
  • Connected services ramp: Connected revenue recognized from prior billings; sequential uptick underpinned by SOP ramps; revenue follows with a lag of a quarter or two after vehicle sale/activation .
  • FX and OpEx: Euro-dollar headwinds reduced revenue but were neutral to profitability due to lower translated OpEx; OpEx benefited from R&D tax credits; further credits expected in-period rather than catch-ups .
  • IP lawsuit vs Microsoft/Nuance: Aim is to protect text-to-speech IP; litigation separate from ongoing technical collaboration with Microsoft (e.g., ChatGPT in vehicles) .
  • Capital structure: Plan to repay $60.1M of 2025 converts in June, maintaining >$70M cash post-payment; may consider further capital structure options .

Estimates Context

  • Q2 FY25 beats: Revenue $78.01M vs $75.34M consensus (beat); Primary EPS $0.630 vs $0.303 (beat); EBITDA $23.53M vs $19.77M (beat). Values retrieved from S&P Global.*
  • Implication: Street likely raises FY25 profitability and FCF forecasts following company’s raised guidance and better-than-expected mix/margins .
  • Note: Company-reported adjusted EBITDA of $29.5M exceeds internal guidance and may differ from S&P EBITDA definitions .

Key Takeaways for Investors

  • Quality beat with margin strength: Technology mix and disciplined OpEx delivered outsized beat on EPS and EBITDA; margin durability is a key near-term driver .
  • FY25 profitability/FCF raised: Adjusted EBITDA now $28–$34M and FCF $25–$35M; look for Street upward revisions and multiple support on improved cash generation .
  • Near-term lumpiness: Q3 guide reflects no material fixed licenses and lower PS activity, normalizing gross margin to 66–68%; focus on sequential trajectory into Q4 .
  • Strategic catalysts: xUI launches, multimodal CaLLM Edge, Arm/NVIDIA/MediaTek partnerships, and OEM program ramps (e.g., Mercedes MBUX) support medium-term growth and PPU expansion .
  • Risk management: Pricing pressure exists, but Cerence is trading discounts for deeper integration/value to protect PPU; tariff volume impacts remain fluid but limited near term .
  • Balance sheet de-risking: Planned repayment of remaining converts in June, with >$70M cash held post-payment, reduces financial overhang .
  • IP defense: Active litigation supports monetization/protection of core TTS assets; operational collaboration with Microsoft continues in parallel .