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Cerence Inc. (CRNC)·Q4 2025 Earnings Summary

Executive Summary

  • Q4 revenue of $60.6M and GAAP gross margin of 72.6% both exceeded the high end of guidance; adjusted EBITDA was $8.3M and free cash flow was $9.7M, marking strong execution into year-end .
  • FY25 revenue of $251.8M, adjusted EBITDA of $48.1M, and operating cash flow of $61.2M all finished above prior guidance ranges set in August; free cash flow reached $46.8M, nearly 3x year-over-year .
  • Initial FY26 guide calls for revenue of $300–$320M (+23% y/y at midpoint), including a $49.5M patent license payment in Q1 and ~8% growth in the core technology business; Q1 FY26 revenue guide is $110–$120M with 85–86% gross margin .
  • Stock narrative catalysts: beat vs consensus on revenue and EPS in Q4, high-margin IP monetization (Samsung $49.5M), and accelerating xUI adoption with programs at JLR and a VW Group brand hitting the road in 2026 .

What Went Well and What Went Wrong

What Went Well

  • Beat on top line/margins vs guidance; Q4 revenue $60.6M vs guidance $53–$58M and GM 72.6% vs 68–69% guided .
  • Core operations strengthened: variable license revenue rose to $31.6M (+25% y/y) and connected services reached $14.2M (+17% y/y), reflecting quality of recurring revenues .
  • IP monetization milestone: “Samsung agreed to pay Cerence a one-time lump sum payment of $49.5 million,” signaling a scalable, non-automotive revenue stream; active suits against Apple, TCL, Sony continue .

What Went Wrong

  • GAAP net loss persisted: $(13.4)M in Q4 (diluted EPS $(0.31)), underscoring legal, tax, and other below-the-line pressures despite operating strength .
  • Professional services declined y/y in Q4 to $14.2M (−18% y/y) as offerings standardize and implementations become more efficient; management expects professional services to shrink over time .
  • Legal cost burden: management indicated approximately $78M of additional legal costs in FY26 tied to IP actions, which may dampen GAAP profitability even as EBITDA and FCF expand .

Financial Results

Quarterly Financials vs Prior Periods

MetricQ2 2025Q3 2025Q4 2025
Revenue ($USD Millions)$78.0 $62.2 $60.6
GAAP Gross Margin (%)77.1% 73.7% 72.6%
GAAP Diluted EPS ($)$0.46 $(0.06) $(0.31)
Adjusted EBITDA ($USD Millions)$29.5 $9.0 $8.3
Cash from Operations ($USD Millions)$15.5 $23.7 $12.8
Free Cash Flow ($USD Millions)$13.1 $16.1 $9.7

Segment Revenue Breakdown

Segment ($USD Thousands)Q2 2025Q3 2025Q4 2025
License51,460 34,176 32,264
Connected Services12,648 12,842 14,161
Professional Services13,902 15,218 14,214
Total Revenues78,010 62,236 60,639

License Mix Detail

License Mix ($USD Millions)Q2 2025Q3 2025Q4 2025
Variable License$29.9 $34.2 $31.6
Fixed License$21.5 $0.0 $0.7

KPIs

KPIQ2 2025Q3 2025Q4 2025
% of Worldwide Auto Production (TTM)51% 52% 52%
Change in Connected Cars Shipped (TTM y/y)10% 12% 14%
Change in Adjusted Total Billings (TTM y/y)0% 3% 8%
Connected Attach Rate (TTM)—31% 32.5%
Average PPU (TTM)—$4.91 $5.05
5-Year Backlog——~$1.0B

Performance vs Wall Street Consensus (S&P Global)

MetricQ2 2025Q3 2025Q4 2025
Revenue Consensus Mean ($USD Millions)*$75.3$54.8$55.3
Actual Revenue ($USD Millions)$78.0 $62.2 $60.6
Primary EPS Consensus Mean ($)*$0.303$(0.095)$(0.216)
Actual GAAP Diluted EPS ($)$0.46 $(0.06) $(0.31)

Values retrieved from S&P Global.*

Guidance Changes

MetricPeriodPrevious GuidanceCurrent Guidance / ActualChange
Revenue ($M)Q4 FY25$53–$58 $60.6 (actual) Raised/Beat
Gross Margin (%)Q4 FY2568–69% 72.6% (actual) Raised/Beat
Adjusted EBITDA ($M)Q4 FY25$2–$6 $8.3 (actual) Raised/Beat
FY Revenue ($M)FY25$244–$249 $251.8 (actual) Raised/Beat
FY Adjusted EBITDA ($M)FY25$42–$46 $48.1 (actual) Raised/Beat
FY Cash from Ops ($M)FY25$48–$50 $61.2 (actual) Raised/Beat
FY Free Cash Flow ($M)FY25$38–$42 $46.8 (actual) Raised/Beat
Revenue ($M)Q1 FY26n/a$110–$120; includes $49.5M patent license; 85–86% GM New
Revenue ($M)FY26n/a$300–$320; adjusted EBITDA $50–$70; FCF $55.5–$65.5; CFOps $61–$67 New

Earnings Call Themes & Trends

TopicQ2 2025 (Prior)Q3 2025 (Prior)Q4 2025 (Current)Trend
AI/Technology (xUI)xUI momentum; next-gen platform positioning VW brand win; JLR expansion; multimodal/agentic roadmap Added languages; agentic architecture; Microsoft mobile work agent; CES showcase plans Strengthening
Supply Chain/TariffsMinimal impact assumed; fluid environment Some pull-forward ahead of tariffs; volumes variability FY25 minimal impact; caution that situation remains fluid Stable but fluid
IP Monetization—Filed actions vs Sony/TCL; stance to defend IP Samsung $49.5M payment; active Apple/TCL/Sony suits; ongoing strategy Accelerating
Product/PPU/Connected51% auto penetration; connected growth 52% penetration; PPU $4.91; connected attach 31% 52% penetration; PPU $5.05; attach 32.5% Improving
Regional/Customer Wins—BYD outside China; multiple OEMs live Toyota, Ford, BMW, Honda, Great Wall; nine programs started Broadening
Competitive Landscape—Coexistence with big tech (e.g., Mercedes MBUX) Competing mainly vs Google/Amazon; LLM/agentic trend Consistent

Management Commentary

  • “We strengthened the financial and operational foundation of the Company and increased positive cash flow generation… secured our first successful outcome in our push to protect and monetize our intellectual property.” — Brian Krzanich, CEO .
  • “Variable license revenue for the quarter was $31.6 million, up 25% year-over-year… Q4 connected service revenue came in at $14.2 million, up 17% year-over-year.” — Tony Rodriquez, CFO .
  • “We paid down $87.5 million of our debt using cash on hand… ended the year with $87 million in total cash and marketable securities.” — Tony Rodriquez .
  • “We believe IP monetization will be a continuing, ongoing revenue stream in the future… incorporated into our fiscal year 2026 guidance.” — Brian Krzanich .

Q&A Highlights

  • IP monetization economics: Q1 FY26 revenue recognition of $49.5M (Samsung) with contingent legal costs (~$24M) and withholding tax; management expects net to flow through bottom line .
  • Legal cost Outlook: approximately $78M of additional legal costs in FY26 as the company pivots to hourly external legal work to increase return on cases .
  • Connected services recognition: no “pull-forward” or unusual accounting in Q4; revenue recognized over subscription term, occasional catch-up true-ups not material this quarter .
  • Core growth components: ~8% core technology growth in FY26 driven by connected billings amortization and more variable licenses flowing in-period as fixed deals decline .
  • Competition: landscape remains focused on LLM/agentic AI with main competitors Google and Amazon; Cerence emphasizes agnostic architecture and automotive-grade integration .

Estimates Context

  • Q4 beat vs S&P Global consensus: revenue $60.6M vs $55.3M*; GAAP diluted EPS $(0.31) vs Primary EPS consensus $(0.216)*. Differences in EPS definitions (GAAP diluted vs Primary EPS) should be noted when comparing .
  • Q3 beat: revenue $62.2M vs $54.8M*, EPS $(0.06) vs $(0.095)* .
  • Q2 beat: revenue $78.0M vs $75.3M*, EPS $0.46 vs $0.303* .

Values retrieved from S&P Global.*

Key Takeaways for Investors

  • Q4 delivered broad-based beats against guidance and consensus, with strong gross margin (72.6%) and continued free cash flow generation; FY25 closed above raised guidance on revenue, EBITDA, and FCF .
  • FY26 setup is compelling: revenue +23% y/y at midpoint including $49.5M patent license in Q1, with core tech growth ~8% and gross margin guided to 79–80% for the year .
  • IP monetization is now a validated, incremental revenue stream (Samsung $49.5M), but investors should model legal cost intensity in FY26 (~$78M additional per management) given ongoing cases (Apple/TCL/Sony) .
  • Mix continues shifting toward scalable, recurring models: variable license revenue and connected services growth underpin revenue quality and margin durability .
  • xUI adoption and ecosystem partnerships (Microsoft, NVIDIA, MediaTek, SiMa.ai) are strategic differentiators; first xUI-powered cars expected in 2026, supporting medium-term PPU and attach-rate expansion .
  • Near-term trading implication: Q1 FY26 guide implies a step-up revenue/EBITDA quarter (license payment), with very high GM (85–86%); monitor legal/tax netting and timing .
  • Medium-term thesis: improved backlog ($~1B), higher PPU ($5.05 TTM), and rising connected attach rates (32.5%) position Cerence for sustained margin expansion and FCF growth beyond FY26 .
Citations: 
- Press release and 8-K Q4 FY25: **[1768267_0001628280-25-053169_cerenceaiq4fy25pressrele.htm:0]** **[1768267_0001628280-25-053169_cerenceaiq4fy25pressrele.htm:1]** **[1768267_0001628280-25-053169_cerenceaiq4fy25pressrele.htm:8]** **[1768267_0001628280-25-053169_cerenceaiq4fy25pressrele.htm:10]** **[1768267_0001628280-25-053169_q4fy25earningsdeckfinal.htm:3]** **[1768267_0001628280-25-053169_q4fy25earningsdeckfinal.htm:4]** 
- Earnings call transcript Q4 FY25: **[0001768267_2309085_1]** **[0001768267_2309085_2]** **[0001768267_2309085_3]** **[0001768267_2309085_4]** **[0001768267_2309085_6]** **[0001768267_2309085_7]** **[0001768267_2309085_8]**
- Q3 FY25 8-K and deck: **[1768267_0001628280-25-038336_cerenceaiq3fy25earningsd.htm:3]** **[1768267_0001628280-25-038336_cerenceaiq3fy25earningsd.htm:4]** **[1768267_0001628280-25-038336_cerenceaiq3fy25earningsd.htm:7]** **[1768267_0001628280-25-038336_cerenceaiq3fy25pressrele.htm:1]** **[1768267_0001628280-25-038336_cerenceaiq3fy25pressrele.htm:2]** **[1768267_0001628280-25-038336_cerenceaiq3fy25pressrele.htm:8]** **[1768267_0001628280-25-038336_cerenceaiq3fy25pressrele.htm:10]**
- Q3 FY25 transcript: **[1768267_2060481_1]** **[1768267_2060481_2]** **[1768267_2060481_5]** **[1768267_2060481_7]** **[1768267_2060481_8]**
- Q2 FY25 8-K press release: **[1768267_0000950170-25-065725_crnc-ex99_1.htm:0]** **[1768267_0000950170-25-065725_crnc-ex99_1.htm:1]** **[1768267_0000950170-25-065725_crnc-ex99_1.htm:6]** **[1768267_0000950170-25-065725_crnc-ex99_1.htm:9]**
- Other press releases: xUI award **[1768267_34ce4ba60248454ca83d5823ddf3bd40_0]**, IAA agentic showcase **[1768267_0997d2bcae23479dbf6bf3d8b43602c8_0]**, Microsoft mobile work agent **[1768267_934015d737554f27994473cd82c10413_1]**, Apple suit **[1768267_cfce0230e85f4f9fb1262945f767fa7e_0]**