Good day, and thank you for standing by. Welcome to Cerence’s Q2 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Richard Yerganian. Please go ahead.

Thank you, Sharon. Welcome to Cerence's second quarter fiscal year 2021 conference call. Before we begin, I would like to remind you that this call may involve certain forward-looking statements. These statements are subject to risks and uncertainties as described in the press release preceding today's call. Cerence makes no representations to update those statements after the date hereof. In addition, the company may refer to certain non-GAAP measures, key performance indicators and pro forma financial information during this call. Please refer to today's press release for further details of the definitions, limitations and uses of those measures and reconciliations of non-GAAP measures to the closest GAAP equivalent. Joining me on today's call are Sanjay Dhawan, President and CEO of Cerence; and Mark Gallenberger, CFO of Cerence. As a reminder, the only authorized spokespeople for the company are Sanjay, Mark, and me. Before handing the call over to Sanjay, I would like to announce several upcoming investor events. They are all virtual events, so the exact timing of our participation is subject to change. The conferences include the Craig-Hallum's 18th Annual Institutional Investor Conference on June 2nd; Needham & Company's Fifth Annual Virtual Automotive Technology Conference on June 8th, and Baird's 2021 Global Consumer Technology & Services Conference on June 10th. Please visit the Events page in the Investors section of Cerence's website for the most up-to-date information on our participation. Now on to the call. Sanjay?

Good morning. Thank you, Rich. Welcome to everyone on the call and thank you for joining us to discuss our second quarter fiscal 2021 earnings. It always amazes me how many companies call their quarterly reports earnings calls when they aren't producing any earnings. For Cerence, this is truly an earnings call. For our call, I will first review our strong financial performance in Q2, followed by a review of our first half bookings. This will be followed by a few comments on some notable events that took place during the quarter. Next, I'll update our key performance indicators and then hand the call over to Mark to review the detailed financial results. In Q2 at $98.7 million, we once again delivered record revenue, representing 14% year-over-year growth. Our performance was driven by strong growth in our license and connected services product line with both up approximately 20% year-over-year. As you can see, there was minimal effect on our revenue from the semiconductor shortage affecting the auto industry, although our Q3 guidance does take into account a modest impact. While revenue growth is a key part of our story, we believe profitable growth is also important. Our relentless focus on cost and efficiency led to a non-GAAP gross margin of 77%, adjusted EBITDA of approximately $39 million or 40% margin, and very strong non-GAAP EPS of $0.69. Mark will share the details later in the call. But overall, we're incredibly pleased with our second quarter results and how business continues to excel. As we have done in the past, our practice is to report bookings at the halfway point of the fiscal year and report backlog at the end of the fiscal year. Our total first half bookings were $293 million, approximately flat to the second half of fiscal 2020. Last year, we had a burst of multiple significant awards that fell within the first half of the fiscal year. We expect that burst to happen in the second half of this fiscal year. In fact, we are off to a very strong start in Q3 with over $100 million bookings already booked. Overall, our pipeline continues to be strong and our win rate remains extremely high. We had no competitive loss of note in the first half, and we won back an important multinational customer that had chosen a competitor when the business was still part of Nuance. Additionally, first half booking highlights include strategic customer wins with Hyundai and a prominent Japanese car company. It is important to note that bookings for our new applications products were approximately $33 million. This is a solid start for building the bookings foundation to support our $75 million of applications revenue expectations in our target 2024 model. We expect these bookings to deliver initial revenue before the end of the calendar year. You may have seen our press release last week announcing P97 networks as a partner in the ecosystem of our Cerence Pay application. This further solidifies Cerence Pay in the market and will connect drivers to seamless payments through the P97 mobile commerce platform currently available to more than 30% of the retail fuel sites across the U.S. Continuing the momentum in our newest offerings, we were awarded two important decisions in the two-wheeler market with one of the most prestigious and fastest-growing two-wheeler and ATV companies in China and an iconic domestic motorcycle brand that you would all recognize. We made further progress in the elevator market and expect to share more progress with you on our next earnings call. Aside from these important developments, we had several notable events and achievements in the quarter. Two electric vehicles, the Hyundai Ioniq 5 and the Daimler EQS were launched in the quarter to rave reviews. We're proud to be a key AI supplier for both of these amazing cars. We announced new product capabilities to seamlessly work with Google's Android Automotive OS, allowing Cerence technology to more deeply coexist with all Google applications. With Cerence's best-in-class conversational AI, built on top of Android Automotive OS, automakers can now ensure their native digital assistance can seamlessly coexist with Google automotive services, including Google Assistant without compromising brand ownership and while preserving their unique in-car experience. Next, Cerence was the proud recipient of numerous Project Voice Awards that honor global best-in-class achievement in voice and conversational AI. The awards were for Company of the Year, Developer of the Year, Executive of the Year, Best use of TTS, Achievement of the Year and Best Automotive Solution for our incredible work with Daimler on the newest MBUX offerings. At Cerence, our mission is to develop a technology, which experience focused on providing a safe, more enjoyable experience for the driver and their passengers. We do this better than anyone else, because that's our sole focus. Our engineers are constantly challenging themselves about how we can do better, develop new capabilities and leverage more information generated by the car sensors and cameras to accomplish this mission. It is why we have business with not only the long-time established automakers but also most of the new EV car companies around the world. We appreciate the recognition of the work that we do. And finally, we made an investment in CerebrumX, a start-up with deep automotive experience and a platform using connected car data and augmented learning to maximize the value of connected vehicles. Working together, our companies plan to enable OEMs to create new revenue streams based on connected car data by creating new AI-powered applications, insights and services that improve the in-car experience and enhance safety and security. I also want to add a few comments on the all-important China car market. The indigenous China car market historically has been our least penetrated geography, but that is starting to change dramatically. We count among our customers several of the EV start-ups such as Xpeng and Nio, but we are also building our presence in some of the traditional OEMs in China, such as Great Wall Motors, Chery, Geely and Wuling. Wuling, the automaker in China with the highest volume, went so far as to create an ad campaign featuring Cerence specifically for the Indonesia market. Wuling, like most automakers, understand the user experience inside the car is becoming the soul of the car and the key brand differentiator though company can create their unique brand experience for a car better than Cerence. Moving on to our KPIs. Overall, they continue to indicate a positive outlook. Since all of the KPIs except the adoption metrics are based on trailing 12-month basis, the impact of COVID-19 still skews the data, especially the KPIs of Cerence technology penetration in the number of connected cars shipped. We would expect those KPIs to normalize with our next report. Our average billings per car, which increased 10% year-over-year continues to demonstrate our value-add to our customers through increasing content per vehicle. As conversational AI becomes a standard for connected car, the adoption rate of using the technology will continue to rise dramatically. This is evident in our adoption rate KPI slide where both active users and the number of transactions are on a steep positive slope over the last two years when compared against the previous two years. When technology is easier to use, more people will use it and that is what you see in this chart. I expect to see this continue to rise as more and more cars had conversational AI compared to the old ways of interacting with the car. In closing, I'll end in much the same way I begin. We're incredibly pleased at our performance in the record results we delivered. We are operating from a position of real strength with tremendous excitement and commitment from our customers, a robust product and innovation roadmap, and a significant growth opportunity on the horizon. Our long-term vision is to play a key role not only in driver AI but also cabin and road AI. We will rely on the vast experience of our team, but also look to inorganic opportunities to help us achieve our vision. I'm pleased with what we have been able to accomplish so far, but I also believe we are still in the early stages of our potential and what Cerence will fully achieve. I would like to turn the call over to Mark to review the financial results of the quarter and our guidance for Q3.

Thank you, Sanjay. I'll first review another strong quarterly performance, and then I'll provide guidance for our third quarter and an update to our full year guidance. Once again, we achieved record revenue as results came in stronger than expected. Revenue came in at $98.7 million, which is almost $4 million above the high end of our guidance, and is a 14% increase from the same period last year. Our profitability metrics were also very strong and exceeded the high end of our guidance range. The non-GAAP gross margin was 77%, non-GAAP operating margin was 37.6%, adjusted EBITDA was $39.3 million or 40% margin, and non-GAAP earnings per share was $0.69. Due to exchange rate fluctuations, we had a foreign exchange gain of approximately $0.08 per share, which is accounted for in the other income line item. During the quarter, we generated more than $16 million of cash flow from operations and our balance sheet remains strong with total cash and marketable securities at $137 million. Now let's review a detailed breakdown of our revenues. The record revenue was driven by two factors. First, our total license product revenue was up 22% year-over-year. Our variable license revenue was up 32% from the same quarter last year driven by a continued strong recovery in auto production since the trough during the April-May timeframe of last year due to COVID. While difficult to quantify, we believe our variable license revenue was partially impacted by the semiconductor shortage slowing down auto production during the quarter. Our variable license revenue is where you would see the direct impact from lower car production. Second, our total connected services revenue grew 18% from last year. But more importantly, our new connected services revenue, which excludes our legacy business expanded a strong 51% year-over-year due to a continually growing customer base adopting our new connected service offerings. Now moving on to our guidance for Q3. Our revenue guidance for the third quarter of $94 million to $97 million reflects year-over-year growth of 25% to 29% and takes into consideration the current risks and uncertainties of the semiconductor device shortages that are impacting auto production. Forecast from various firms about the time required to resolve the semiconductor manufacturing issues are changing frequently. We are closely monitoring this situation and believe we have accounted for the impact on our guidance. Keep in mind, only about 35% to 40% of our business is directly impacted by auto production in any given quarter. For the fiscal year, we have updated our expectations based on a stronger-than-expected first half on both the top and bottom-line. We now expect our full year revenue to be in the range of $380 million to $390 million, which is up from our original guidance of $360 million to $380 million and non-GAAP EPS to be in the range of $2.22 to $2.37, which is up from our original guidance of $1.81 to $2.05. Please refer to our earnings press release or to the Appendix section of this presentation for more details of our guidance as well as our GAAP to non-GAAP reconciliation tables. So in summary, we had another strong quarter of excellent financial performance. While we remain cautious in the near-term due to the semiconductor shortages impacting the auto industry, we are continuing to benefit from the secular tailwinds caused by the digital transformation of the auto industry. Our long-term prospects remain bright and our focus on innovation and growth while at the same time crafting a profitable business model will benefit the company and our shareholders well into the future. This concludes our prepared remarks and now we will open it up to the call for questions.

Okay. And your first question comes from the line of Chris McNally from Evercore.

Hey, Sanjay. Hey, team. Thanks so much. So the first question is around the booking detail you gave for the new applications. Really appreciate that the $30 million. And it sounds like there's some short lead times from the prepared remarks. Could you just add some qualitative data around interest in Cerence Pay? Any else around kind of the overall demand for these new areas maybe RFP interest because clearly this is the added extras on the connected business?

That $30 million we mentioned is from two customers. One we announced is Xevo, which collaborates with several OEMs, and the other is a direct contract with another European OEM. For the first customer, Cerence Pay is the primary product, while the second includes multiple products in that booking with the OEM. Since Q2 moving into Q3, we have signed another OEM for our apps products, specifically for the travel guide product. In our remarks, we noted that over $100 million in bookings has already occurred in Q3, marking a very strong start. Additionally, another OEM is set to launch the travel pro app. Our pipeline remains robust, with approximately six to ten ongoing RFP/core discussions with various OEMs.

That's great. To address the question about overall bookings, you provided a first half figure. Considering last year's substantial performance and the uncertainty of the second half's progress, do you have an internal target or goal to maintain that absolute level of over $800 million in bookings? I understand that timing can be unpredictable, especially since the last month of Q4 will be critical. However, from a high-level perspective, can we aim to sustain that strong level of bookings throughout the year?

Yes, we do aim to meet or exceed last year's bookings number. While we don’t provide specific guidance on bookings, our internal goals are set with that in mind, and we have the pipeline in place to support it. Last year's second half was weaker than the first half, but this fiscal year seems to be reversing that trend, with the expectation that the second half will outperform the first. The timing of bookings is largely influenced by OEMs and their cycles, which is beyond our control. In summary, our pipeline is robust, and we are optimistic about meeting or surpassing last year's figure of $800 million.

That's great to hear. And then if I could just squeeze in one real auto techy potential on new opportunities. Sanjay, thus far voice HMI has really not been a focal part of active safety and we're seeing a huge push across the industry that politicians are getting involved about basically safety and Level 2+ driver monitoring and DMS. Just a high-level question, do you see a lot of opportunities for Voice to be a part of ADAS going forward, particularly in things like heads-up display and interaction around driver monitoring?

Yes. We're definitely seeing more and more interest to bring these technologies together, right? And it's not just for basic simple voice prompts and all that stuff for your DMS system that comes from the voice AI platform. It's deeper integration to create safer driver experiences. And that's the reason we're very focused on creating and expanding our platform beyond voice AI to kind of bring vision into it and tie them tightly together not just for a better driver experience, but more so from a safety and security standpoint, right? So that's more to come on this. But yes, we're definitely seeing OEMs getting more and more interested to tie the two together.

Thank you very much, Sanjay.

Your next question comes from Colin Langan from Wells Fargo.

Great. Thanks for taking my question. Just to start any clarity on what your assumption is for the semi impact into Q3? Because I mean it looks pretty benign in your guidance. I thought your comments said that, it's like 30% to 35% of your sales are impacted by auto production, but about 50% is license revenue. So I would have thought it would be a bit higher. Yes, any info there?

Yes. So Colin, the 35% to 40% that really kind of focuses more on the variable portion of our license. So we do have the fixed portion of our license as well. So those can be lumpy, those can vary from one quarter to the next. And so that's kind of how we get to that 35% to 40%. In terms of answering your first question on auto production, we are getting a lot of the same information that you guys are getting in terms of what the OEMs are saying. Things look like they're a little bit worse than expected. This is getting a little bit longer than people expect in terms of rightsizing, the supply chain, and correcting it. We also closely look at IHS, third-party report information and that information, I believe is down as well a couple of points. I think when we initially went into the year, we were thinking around 13% I think. And now I think that's down around 11% or 12%. And so we factor all that in. But offsetting some of that is the secular part of the story, right, where we are seeing increasing penetration of this technology. And so that does help offset some of those short-term downward issues as it relates to the semiconductor supply chain. And we try our best to try to factor that in as well into our guidance which does provide to some degree an offset to some of the short-term issues.

Got it. And you mentioned a win in the two-wheeler market. Any color on the size of that market opportunity? I guess I'm not as familiar versus light vehicle? Is there any sort of framing of how big the opportunity is and how much momentum you might have there?

Let me start, and Mark can jump in. We talked about two wins, one in China and one in the U.S. In China, we can now mention the name CFMoto, which is one of the largest two-wheeler companies. In the U.S., we can't disclose the name yet, but it's well-known. We are working on quantifying this from a total addressable market perspective in the upcoming analyst meeting, where we will provide more details about the TAM assumptions. Almost 60 million to 80 million two-wheelers are shipped, which is slightly smaller than the automotive market. This is a significant space, though it has different requirements. Safety is increasing the demand for voice integration in these two-wheelers. Previously, we announced Xiaomi 70Mai as our first win, and now we are adding a couple more OEMs. Our sales team is engaging with almost all other OEMs to showcase our products and secure design wins. We will share the exact TAM assumptions during this year's analyst conference. Mark, do you have anything else to add?

I think you've covered everything. The only point I want to emphasize is regarding the total addressable market. A significant part of that volume is in Asia, where a greater number of two-wheelers are being sold. Therefore, while our focus is global, we are particularly concentrating on the Asian market for two-wheelers.

Yes. Yes, I think Japanese OEMs ship almost 50% of the volume of the world in two-wheelers. So, that's a very important geography for us. Chinese OEMs are very important. Indian OEMs are very important. And clearly, we're focused on European and U.S. OEMs as well.

Perfect. Those are my questions.

Your next question comes from the line of Daniel Ives from Wedbush.

Can you discuss the electric vehicles, particularly what we're observing from China? I understand you can't comment on specific model successes, but could you share some insights on the activities there?

What? For the EV market in China you're asking, Dan?

Yeah.

The electric vehicle market is clearly a significant area for growth. Currently, it doesn't contribute much to our business due to low volumes. However, we see substantial growth opportunities and our sales team is dedicated to securing accounts in this sector. Many companies in this market are starting to gain significant traction, and we believe this is a trend that cannot be overlooked, regardless of the current low volumes. We are committed to winning business with these customers and have already seen some results. While it may not be a large market today, we believe it will become much larger in the future.

The next question comes from Joseph Spak from RBC Capital.

Thank you. Good morning everyone. How are you?

Great. Thank you, Joseph.

One of the aspects I often examine is the growth of variable revenue in licenses in relation to production, as this is closely linked to production levels. You saw some strong performance this quarter, even though the regional mix has posed challenges, particularly as you noted progress in China while still having less presence there, which has contributed significantly to growth. This supports Sanjay's comment about advancements in China. However, I'm curious about the shift this quarter, as the industry volume growth is expected to be more concentrated in North America and Europe, even if the figures are slightly lower than anticipated a few months back. Given this shift, how do you expect your performance to compare with production? If your growth is increasingly coming from China, it may present some challenges in the upcoming quarter due to the math involved.

Yeah, I think...

Go ahead, Sanjay.

No. No Mark, please, after you. Go ahead.

Yeah. I was just going to say one of the things that I am seeing going into this quarter is some new SOPs right so business that we've won historically, now those are starting to hit volume production. And so that has been factored into some of our guidance which I think should play out nicely for us. So that's one aspect that I did have factored into our guidance because of some SOPs that are hitting. And Sanjay, I don't know if you want to add anything else?

No. What I was going to say was that Joseph, China is for us to improve further our penetration. For North America and Europe, we have good penetration. It is to increase the further adoption and hence growing the revenue per car and so on, right? That's kind of the picture. The China we have a very strong competitor there called iFlytek as we have talked about that before. And we have a laser focus on how we are going to kind of increase our penetration in China further, right? We have very good penetration. We go head-to-head with iFlytek. This is China for China market. But there is still a lot of room left for us to win back and so on, which we are absolutely making progress, no questions. And then for the rest of the world like I said, we have good penetration. We need to improve the revenue per car. And the big opportunity in the rest of the world in Europe and in Americas for us is cloud services, right, to increase in cloud. So that's the expansion strategy. So, we have taken into account a number of these puts and takes for our guidance. And overall, as you saw we increased our yearly guidance from $360 million to $380 million originally to $380 million to $390 million which is almost 15% to 18% growth from last year.

No, thanks for that Sanjay. Yes. I guess just while we're on China, something I'm sure you're well aware of that's been a bigger topic over recent years is, export controls with China and AI. And since you're making a lot more progress there, can you just remind us of like where does that IP actually lie? Like how much is shared between the regions? And what if any sort of protections, do you have if relations between the countries around AI gets choppier?

Mark, do you want to handle that?

Yes. We have a substantial number of employees in China, approximately 300. While some intellectual property is developed there, most of our intellectual property exists outside that region. It's important to note that many global OEMs are exporting to that area, which means our contracts are often aligned with their home bases. Therefore, I don't anticipate any significant issues. Most of our intellectual property is situated outside of China, so I do not foresee any major concerns.

Okay. And maybe just one housekeeping. I know in the past Mark you said, the prepay line item for the year, I think would be flat to down and I know it can be really choppy and it's difficult to know in advance. But given that year-to-date, it's up mid-teens like it would seem like it'd have to be down mid-teens for that to still hold. Is that still a valid assumption for the year, or did anything change there?

Yes. I think last quarter we were around 10 or so, and this quarter we were slightly below that run rate. We had one customer that drove our figures, accounting for over 50% of the total fixed amount, which pushed us to the higher side. Given what transpired this quarter, I now expect that for the remainder of the year, we may end up flat to up compared to the previous year. That's my rough estimate at this moment, though it's challenging to provide guidance on that line item. Last year, we achieved around $54 million in total. For the first six months, we are around $27 million, which suggests we are on a similar run rate as last year. Initially, we anticipated being flat to down this year, but it seems likely we will now end up flat and possibly see an increase. Predicting this remains difficult. Sure.

Thank you. Your next question comes from Raji Gill from Needham & Company.

Yes, thank you and congrats on all the great momentum in a tough environment. Mark, on the gross margin upside, I was wondering if you could perhaps talk about some of the puts and takes there. The professional services business was down quarter-over-quarter which has a lower margin so you might have benefited from a favorable mix shift to licensing and connected. But you also are kind of guiding gross margins kind of in this 76%, 77% range going forward. So, is this the true gross margin profile of the company that you want to manage to? Any thoughts on what's happening on the margin side?

Yes. This quarter, as you mentioned, professional services were down, leading to a shift toward higher revenue license business, which contributed to improved margins. Since pro services were down, margins also decreased. We are currently hiring non-billable resources, which has negatively impacted our utilization rates to some extent. On the other hand, the Connected Services business continues to excel; a year ago, we were about 10 points lower, and now we are solidly in the mid-70s for non-GAAP gross margins in that area. I expect this trend to continue. For pro services, we anticipate staying in the mid-teens to high-teens range for the full year. This quarter, pro services were in the single digits on a non-GAAP basis due to revenue decline and ongoing training for new hires, which has impacted utilization rates. Overall, license gross margins should remain in the historical 97% to 98% range. We’ve seen a positive trend in Connected, reaching 77% this past quarter. For pro services, we are still optimistic about meeting our full-year target in the mid-teens to high-teens.

That's very helpful. Regarding the annual revenue guidance, you noted that prepaid revenue might be flat or slightly up instead of down, which contributes to the positive outlook. I'd like to discuss the New Connected revenue, which was $12 million this quarter, reflecting a 51% increase year-over-year. It seems to be on track to reach around $50 million to $51 million for the year compared to $34 million last year. This suggests potentially significant annual growth for New Connected revenue. What are your thoughts on that? Also, how should we approach the Legacy Connected revenue as we move through the year?

I believe the Legacy Connected revenue will remain stable at around $15 million, so I would project that to stay flat. However, starting in the next fiscal year, we anticipate beginning to see declines in that revenue. On the other hand, New Connected revenue is expected to show strong growth year-over-year, having increased by 51% this quarter. I expect to see additional growth in that category for the remainder of the year. Some of the potential upside will depend on various factors. Despite the pressure from semiconductor shortages, we are noticing increasing penetration and new Standard Operating Procedures being implemented in the second half of the year, which we are incorporating into our forecasts.

Yes. To follow up on that, while the variable revenue is linked to auto production, it is growing at a rate that exceeds auto production. Are you observing an increase in the attach rate for your embedded licensing in vehicle head units that is surpassing the number of cars shipped? Could you elaborate on that compared to last year? Additionally, regarding the New Connected revenue, what drivers are we noticing throughout the year? Thank you.

Yes, we are observing strong attach rates and maintaining favorable win rates. As Sanjay mentioned during the call, there haven't been any significant losses. Regarding the New Connected segment, our recent investment in the One Cloud architecture is expected to enhance our competitive edge in that area. Overall, we are witnessing positive momentum across various aspects.

Thank you.

Your next question comes from the line of Mark Delaney with Goldman Sachs.

Yes, good morning and thanks very much for taking the question. You spoke about some of the progress the company has made with its products and the ability to work with Android Automotive. And I think we've had some prior discussions on this with Ford and Google, as one example, starting to work together more closely. But maybe you can talk a little bit more qualitatively what you may be seeing now that you've made some progress with the capability of Cerence with the Android ecosystem. What other OEMs we may be seeing? And maybe what that leads you to think in terms of your thesis around being able to coexist with big tech?

So Mark the thesis – we believe in the thesis. Our customers most importantly believe in the thesis. And it's a thesis that we built based on customer feedback, right? And I think, we have always said that there is – what the consumers and the drivers want is a seamless experience from their life – digital life outside the car to the digital life inside the car. And a core part of the thesis is that no single big tech company can provide the full bridge to the complete digital life of a consumer because the consumer digital life includes multiple different big tech experiences. And finally, the reason OEMs believe in this thesis is because they want to own the brand experience. You can't outsource the core brand experience and voice and voice AI is an integral part of that core brand experience. So the thesis is we believe in the thesis and we are working with various different big tech companies, including on the Google platform with Android automotive and so on. I think, reason we highlighted this in our earnings is because we released our – the GAS coexistence on Android Automotive, as a product in Q2. And so we wanted to basically make sure that we highlight that. But the core thesis we're making progress on that.

That's helpful. Thanks. And for my second question, Microsoft is planning to acquire your former parent company Nuance, and I realize, there's a field of use restriction around mobility. Can you remind investors when that expires? And what's your current thought process that this transaction is completed? Did you think over time that there's going to be increased competition? And does it change at all how you think about trying to go to market? Thank you.

No. We're firstly very happy for Nuance and Nuance shareholders and our ex-colleagues for this partnership with Microsoft. Makes a lot of sense and it's very clever of Microsoft to acquire Nuance. So very happy to hear that announcement. It once again kind of strongly outlined the importance of the technology that both Nuance and Cerence are working on. Our field-of-use agreement with Nuance is for five years from the date of spin. That basically means, we're getting close to ending the second year now. So there are three more years left onto this field-of-use agreement. And under this agreement, Cerence has to stay within transportation and mobility with its technology and Nuance has to stay within health care and enterprise, just so that the two companies don't compete and step on each other for five years. The second year is almost over. So there are three more years to go. In terms of our understanding of Microsoft acquisition of Nuance, we don't expect any more competition for Cerence because this acquisition is purely driven and was focused around health care.

Thank you. Your next question comes from David Kelley from Jefferies.

Hi. Good morning everyone. And thanks for taking my questions. Maybe a first one for Sanjay, realizing the KPIs are skewed a bit by a unique last 12 months here, but you did see another step-up in average contract duration you've ramped from, I believe five years to six and now 6.5 in the last year plus or so. Can you talk about some of the drivers of that? And then, maybe, how you are thinking about the longer-term opportunity, as the market continues to shift to cloud connectivity?

Certainly. David, you are absolutely correct. The increase is primarily due to a rise in cloud contracts, which typically have a longer duration and impact that key performance indicator. We're noticing significant advancements in our cloud and connected services, highlighted by bookings exceeding $100 million in the current quarter. The cloud is becoming increasingly vital to our strategy, and we're confident in our offerings, having updated our One Cloud initiative to Cerence Drive 2.0. We've also enhanced our connected services portfolio and introduced new apps. Our new core platform version is robust and excels in accuracy and latency, complemented by a rich array of connected services that engage with various major tech players. I believe we will continue to observe improvement in that key performance indicator.

Okay. Great. Thank you. That's helpful. And then, maybe one for Mark, Mark I was hoping you could give us a sense of the cost action benefits in the quarter. And I believe you're lapping about $12 million in temporary cost reductions into the back half of this year, assuming some of that is embedded into the second half margin outlook. But could you also talk about some of the puts and takes as we think about the margin guide going forward?

We are indeed adding back those expenses and are right on track with our plans. We mentioned that we would be adding a couple of million per quarter, and this quarter we're looking at around an additional $3 million in operating expenses, mainly affecting the R&D line. Looking ahead to Q4, we anticipate adding another $2 million to $3 million. All of this has been accounted for, and we're closely following our strategy to gradually reinstate the expenses we cut last year. For the first six months, we are very much aligned with our plans, which remain unchanged. We will continue to reintegrate those expenses, and we're monitoring the projects that support these investments closely. Should any projects experiences delays or changes, we will adjust as necessary. Overall, things are unfolding as we expected.

Okay, really helpful. Thank you, Mark.

Thank you. Your next question comes from Jeff Van Rhee from Craig-Hallum.

On the RFPs, just wonder if you could expand a little bit. I'm kind of curious, how the finalists in terms of the RFPs over the last six, 12 months have changed. It sounds like your win rates have remained extremely high. But I'm just wondering about the variance and who you believe was your finalist in those key deals. And then also as again, as you kind of look in the rearview mirror and you look at the pace of RFPs and the aggression within those RFPs for Connected Services, did it meet your expectations? Any surprises in the kinds of services that the customers are looking for in those RFPs?

So the RFPs in terms of competition, very similar landscape that we have shared with you and the investors previously. There are the companies like iFlytek, SoundHound, Sensory and others that we run into. And then in many of these discussions, how the big tech coexistence will work around kind of enhanced CD experience for CarPlay or Google experience or Amazon Alexa experience and all that stuff basically comes in. The multiple big tech coexistence is there. I'm referring to, for example, there are two main RFPs going on right now, as we speak. And when I look at kind of what the OEMs are wanting in those and the experiences that they want to be addressed. What I just said is what they're asking for. So, yes, a very similar landscape. In terms of what other new things they're thinking about, I briefly touched it in response to Chris' question earlier, which is more and more discussion about kind of combining voice AI with vision AI, something that we are experiencing more and more mostly around kind of safety functions.

Fair enough. And then, as it relates to renewals, I think you may have had a few on the connected side. But just curious, when you'll start to get glimpses, as you're lapping some of those deals to see what renewals look like on connected?

Mark?

Yes. I believe it's still a bit further down the road. We did have one specific instance, but I think you probably won't see significant movements until 2022 and into 2023. That's when we can expect to see more renewals coming up. We still lack the data points we need to provide specific guidance on our economic outlook. However, as time progresses, we will be gathering more of those data points.

Got it. Fair enough. Great quarter, guys. Thanks.

Thank you.

Thank you.

Thank you. This concludes your Q&A session.

Well, thank you everyone for joining us on the call this morning and we look forward to engaging with you with upcoming virtual events. Thank you and have a good day.

Thank you.

Thank you.

This concludes today's conference. You may now disconnect.