Good day, and thank you for standing by. Welcome to the Cerence Third Quarter 2025 Earnings Call. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Kate Hickman, Vice President of Corporate Communications and Investor Relations. Please go ahead.

Hello, everyone, and welcome to Cerence's Third Quarter 2025 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, 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 25, 2024. 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 Investors 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 Investors section of our website. Before handing the call over to Brian, I would like to mention that we will be participating in the Raymond James Industrial and Energy Showcase on August 13 and 14 and the Needham Virtual Semiconductor and SemiCap Conference on August 20 and 21. Now on to the call. Brian?

Thank you, Kate. Good afternoon, everyone, and welcome to the Q3 2025 Cerence earnings call. I'm excited to speak with you today. We are very pleased with our strong results this quarter, exceeding the high end of our guidance with revenue of $62.2 million and adjusted EBITDA of $9 million. Importantly, we generated strong free cash flow of $16.1 million, marking our fifth consecutive quarter of positive free cash flow. And for the full fiscal year, we are raising and narrowing revenue guidance to $244 million to $249 million. This brings the low end of our guidance range above the previous midpoint, and Tony will provide further details on our results later in the call. We continue to make progress on our three key deliverables for 2025, advancing our AI road map, growing our business with new and existing customers, and continuing our transformation and cost management. First, we continue to advance the development of Cerence xUI, our next-generation hybrid Agentic AI assistant platform. While we previously differentiated between xUI Gen 1 and Gen 2, it's important to understand that xUI is not a static product, but rather a dynamic platform that is continuously evolving with new capabilities and features like multimodality and emotion detection rolling out over a strategic multiyear road map. In addition, xUI is designed to scale alongside our OEM customers' development cycles, ensuring alignment with their evolving go-to-market strategies and technical road maps. We are firmly on schedule with the major milestones on this road map, highlighting our disciplined execution and commitment to delivering long-term scalable value through AI innovation. And with that, we reached several important milestones for xUI within the quarter, including increasing language availability and advancing the platform's contextual reasoning capabilities. In addition, we continue to expand our partnerships with chip providers like Arm, enabling us to flexibly distribute and share computational loads between CPUs and GPUs to deliver improved speed and performance on the edge. We believe this approach makes xUI one of the most powerful and flexible agentic AI platforms in the automotive space. We are gearing up for another exciting milestone in September when we will showcase xUI at the International Auto Show in Munich. In Q3, we also continued to define and advance our AI agentic strategy within xUI. We're focused on developing our own standalone agents, namely a real-time knowledge agent and an integrated navigation and EV charging agent, as well as empowering OEMs to integrate their own agents. Our calm family of proprietary language models is critical to this effort, enabling streamlined interoperability by serving as the orchestrator that helps ensure consistent behavior and seamless integration across agents to deliver a seamless user experience. We believe that the flexibility and openness of our architecture alongside our unmatched automotive expertise continue to be differentiators for Cerence, especially as OEMs navigate the complexity and ambiguity of the current market while still looking for ways to improve the user experience in their vehicles. OEMs continue to choose Cerence and are excited by xUI for three main reasons: one, our deep automotive expertise, which allows us to quickly and efficiently integrate into the OEM's hardware to access vehicle data and manage vehicle functions. There are up to thousands of automotive-specific operations and commands, along with complex hardware and software that require intelligent integration to function. Two, our open agnostic architecture and business model. Technology is evolving rapidly, making it difficult for OEMs to predict the future. At the same time, their customers are expecting LLM-based solutions in their vehicles today. This puts automakers in a difficult position, having to make decisions today without knowing what the future will hold. This is a tailwind for Cerence as we offer the architectural and operational flexibility and domain expertise that can help them bridge this gap, enabling OEMs to bring LLM-powered capabilities to customers today and in the future while also maintaining ownership over their brand experience and data. Three, our team. We believe we are the best in the industry working at Cerence AI, and the majority of our team have long relationships with our automaker customers. This makes us easy to work with as we know the ins and outs of how our customers work. As a result, we continue to see strong customer interest in xUI. In fiscal Q3, we signed a deal within the Volkswagen Group for one of its brands to have xUI as the basis of its next-gen system. We also expanded our work with JLR, bringing additional generative AI capabilities to their current platform as we work in parallel to build their future in-car experience based on xUI. We're continuing to see an increased PPU with these deals, and we continue to have a robust pipeline of ongoing customer interest with a steady stream of proof-of-concept programs across North America, Germany, Japan, and China. Continuing on our deliverables for 2025, the second is to further grow our business with new and existing customers. We have strong global momentum with our customers, including new design wins with Daihatsu and Hyundai, as well as program extensions and renewals with Great Wall Motors and GM. Six major customer programs started production this quarter, including a BYD program outside of China that spans 14 languages, illustrating that Chinese OEMs continue to look at Cerence to support their global expansion. The previously announced generative AI program with smart, as well as programs with Audi, Geely, Mahindra, Nissan, and PSA also went live within fiscal Q3. Our commitment to partnering and supporting our customers is being recognized. We received formal letters of appreciation from two major customers in China, and we signed a new professional services agreement with Mercedes-Benz. Our work with Mercedes-Benz signals our ability to deliver core foundational technology in coexistence with Big Tech and OEMs, evolving agentic AI strategies as evidenced by our work on the latest generation of MBUX that first rolled out in the new electric CLA. We continue our efforts outside of automotive as well with a deep focus on identifying new verticals where we think we have a solid value proposition and can win. We're being careful to understand these markets and the existing players within them, and we're working with vertical partners to help us with go-to-market technology. This process, along with executing proof-of-concept programs, ensures we don't overinvest before we know we have a good product and a market. For example, we have developed a call center agent and are working to identify a go-to-market partner for this offering. At this time, the agent is focused on service-related customer interactions in the car, where we can use our vast car knowledge and already ingested vehicle data to support incoming calls and requests. We could see this solution being applied across a myriad of industries. We also formally announced our partnership with LG, which is leveraging our cloud, neural, and edge text-to-speech to power voice interaction across its global television lineup, spanning 65 voices and languages across tens of millions of households. Cerence TTS enables LG TVs to quickly respond to user inquiries via natural spoken words, creating a more natural human-like user experience and simplifying users' interactions as they search for content and programming. For example, the user could say, 'find me movies with Tom Cruise,' and the TV can respond out loud while displaying options on the screen, saying something like, 'You must like Tom Cruise. I looked up some of his movies. Do any of them interest you?' Beyond the clear user experience benefits, Cerence TTS also enables LG to meet increasing accessibility requirements worldwide by ensuring that its television can be easily operated by people of all abilities. As a reminder, we believe the impact of our work to expand beyond automotive will be seen in our revenue and profitability in late fiscal 2026 and beyond. The third key deliverable for 2025 is to continue our transformation and cost management. As you can see from our continued strong cash performance, we are seeing the real benefits from this work, and it is being delivered to the bottom line for our shareholders. We continue to identify opportunities for further cost savings. Importantly, as we stated in our last earnings call, we did not see a meaningful impact from tariffs on this quarter's results. For fiscal Q4 and therefore, for fiscal 2025, we believe the impacts will remain limited. However, it's important to note that the situation remains fluid and may evolve over the remainder of the year. We are seeing third-party projections of vehicle volumes down approximately 2.5% for Q4, and we're seeing some programs continue to push out and be delayed. With this in mind, we're working cooperatively with our customers to find ways to optimize our partnership to best support them while also maintaining favorable conditions for Cerence. Lastly, we have a long history of investing in our technology, and we have and will continue to defend our strong IP. We want those who infringe on our intellectual property to know that we're serious about this effort. We have recently filed actions against Sony and TCL for their televisions' infringement of our voice technology patents. In conclusion, we're proud of what our team has accomplished this quarter and are encouraged by our results and our ongoing opportunities. We believe that we remain well-positioned to support our customers and differentiate by our combination of technology and innovation, our diverse and expansive customer base, and our deep automotive expertise. Our forecast for fiscal Q4 and 2025 demonstrates the strength of our products and the great work we've done to drive financial returns for our shareholders. With that, I'll turn it over to Tony.

Thank you, Brian. Good afternoon, everyone, and thank you for joining our Q3 FY '25 earnings call. We appreciate your time and interest in our company. Today, I'll be reviewing our Q3 results for fiscal 2025 and providing some guidance for our fourth quarter and the resulting full fiscal year. Let's get into the Q3 operating statement. For Q3 FY '25, we reported total revenue of $62.2 million, which was above the high end of our guidance range of $52 million to $56 million. We saw strong contributions across all of our revenue lines. Variable license revenue was $34.2 million, up 48% year-over-year, reflecting solid utilization across our customer base and reflecting more in-period revenue from license shipments as compared to the prior year quarter, given the lower level of recent fixed contracts than in historical periods. We saw higher-than-expected volumes, possibly due to manufacturers producing ahead of potential tariff impacts and received benefits from favorable exchange rates on the euro. As expected, we recognized no fixed license revenue this quarter compared to $20 million in Q3 of last year, reflecting our continued strategic shift away from large upfront license deals. To reiterate, fixed license arrangements involve customers paying early on a nonrefundable basis in exchange for discounted rates. While these deals provide short-term cash benefits and meet certain customer needs, we've made a deliberate decision over the past two years to strengthen our pricing strategy and better align revenue recognition with product delivery. Historically, fixed license revenue reached as high as $70 million annually. Last year, it totaled $30 million. For this fiscal year, we planned approximately $20 million in fiscal Q2, primarily tied to budgeting cycles of our Asian-based customers. Going forward, we are comfortable in this $20 million range annually. As a result, while total license revenue declined 20.6% year-over-year this quarter, the underlying mix continues to shift toward more recurring and scalable usage-based models versus upfront fixed license arrangements. Connected services revenue was $12.8 million, up 17% year-over-year, driven by steady growth in our connected installed base. Professional services came in at $15.2 million, down 8% from the prior year, reflecting a lower mix of custom work and greater implementation efficiency. Gross profit for the quarter was $45.9 million, yielding a gross margin of 74% compared to 72% in Q3 of fiscal 2024. The increase was largely due to a higher mix of technology revenue, offset by the absence of high-margin fixed license revenue. Non-GAAP operating expenses came in at $39.6 million, a 3% or $1.1 million reduction year-over-year. Q3 of last year benefited from a $2.4 million bad debt recovery. Otherwise, the year-over-year reduction would have been 11%. This reflects focused expense management while maintaining strategic investment in R&D. As a result, our adjusted EBITDA for the quarter was $9 million, which is well above our guidance range of $1 million to $4 million. Our GAAP net loss for Q3 was $3 million compared to a net loss of $314 million for the same quarter last year. In Q3 of last fiscal year, the company recorded a goodwill impairment charge of $357 million. This was a noncash charge that only affected our GAAP results. From a metric standpoint, we shipped 12.4 million units this quarter, an increase from 12.1 million in the prior year. We also grew our number of connected cars shipped by 12%, underscoring the continued momentum in vehicle connectivity. We captured 52% of worldwide auto production, remaining in line with our historical penetration. Adjusted total billings were $226 million, an increase of 3.5% year-over-year and consistent with plan. As a reminder, 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 the shipments from fixed licenses where the 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 $43.2 million, which were higher by $3.5 million as compared to $39.7 million in Q3 of last year. However, the consumption of our previous fixed license contracts totaled $9.1 million this quarter, lower than the same quarter last year by about 7% and in line with expectations. This drops more of the pro forma royalties into revenue in the current period as compared to a year ago. As discussed in previous calls, we anticipate a lower level of consumption given our lower level of fixed contracts than in historical periods. Our PPU metric increased to $4.91 for the trailing 12-month period, up from $4.47 for the same period last year, reflecting continued implementation of our improved pricing strategy and an increase in the adoption of connected solutions. When evaluating our liquidity position this fiscal year, we have been successful in reducing our total debt by $87.5 million using cash on hand. In Q1, we repurchased $27.4 million in principal value of our 2025 convertible notes and fully repaid the remaining $60.1 million in June. Combined with our $16.1 million of positive free cash flow during the quarter, our fifth consecutive quarter of generating positive free cash flow, we ended the quarter with $79.1 million in cash and marketable securities. We're comfortable in operating the business at these levels, supported by the expectation of continued positive cash flow. Now turning to our guidance. For Q4, we currently expect revenue to be in the range of $53 million to $58 million. As mentioned, we believe some portion of the Q3 upside was due to higher-than-expected production within the quarter, possibly due to OEMs producing ahead of tariff impacts in Q4. In addition, we expect no material fixed license revenue to be signed in Q4, and we expect to see normal seasonality where volumes in Q4 tend to be lower than Q3. With no fixed license revenue forecast in Q4, we expect gross margins to be in the range of 68% to 69%; GAAP net loss to be in the range of $18 million to $22 million; and adjusted EBITDA to be in the range of $2 million to $6 million. With that, given our strong performance in Q3 and our Q4 guidance, ranges for full fiscal year expectations for revenue, adjusted EBITDA, and free cash flow have improved and narrowed. Revenue guidance is moving from a range between $236 million and $247 million to a range between $244 million and $249 million. This brings the low end of our guidance range above the previous midpoint. In addition, we are raising our adjusted EBITDA guidance range to $42 million to $46 million, and our expected free cash flow range has increased to $38 million to $42 million. To summarize, we believe our Q3 performance demonstrates meaningful progress across variable revenue, recurring connected services, and expense discipline. We remain confident in our long-term strategy, and we are actively managing our expenses while continuing to invest in innovation and customer value. Thank you again for your continued support. With that, I will turn it back to Brian to close our remarks.

Thanks, Tony. In closing, we're pleased with our results this quarter and proud of what our team has accomplished. Through the remainder of fiscal 2025, we remain focused on our key deliverables: advancing our AI road map, growing our business with new and existing customers, and continuing our transformation and cost management. We look forward to sharing more on our view for fiscal 2026 in the next quarter's call. We'll now open it up for questions.

Our first question comes from Nick Doyle with Needham.

Congrats on the PPU progress. Can you expand on what drove the increases this quarter? Was that across both license and connected services? And you talked about six programs, these Gen AI programs going into production. But it's right to think that's too early for that to really impact the PPU line this quarter. So any more detail there would be great.

Sure. And you're right, it's too early for those to impact PPU. As we know, it's a trailing 12-month number, and those will come in as we really deliver against that. But yes, on the delivery for Q3, it was across all three lines. So if you think about the embedded side, we saw more volume from the embedded license this quarter. And if you remember from previous discussions on revenue recognition for the embedded licenses that are shipped, those will get recognized in the quarter. So we saw a higher volume there. Because of that higher volume, the way the fair value works for fair value accounting is some of it when we originally booked these contracts, some of that value goes to professional services. So when we saw higher value on the embedded side, we also had an increase in the usage side of professional services. So you saw embedded up, you saw professional services up as well. And then from a connected side, we saw an increase as we noted, but that was really kind of in line with expectations. Remember that our customers self-report their royalty volumes. We have to accrue a certain amount until we get those royalty reports. In some periods, we have catch-up kind of true-ups to what we've accrued to what this actually came in. We also had some additional true-ups, which impacted the embedded line and the professional services line as well. Those are normal for the business, but they were a little bit higher than normal this quarter. Lastly, we saw an increase in the euro exchange, the dollar that benefited all of the line items as well.

Yes. Nick, I think part of the rest of your question was six new programs, are they affecting PPU this quarter? You're right. No, they'll go into implementation over the next quarter or two, depending on the program. We are seeing, as Tony said, more connected devices or vehicles. We're seeing some upgrades as OEMs choose to push out some of the newer programs, but then we can offer them upgrades through the cloud, things like that, that are driving that PPU. So more connected, more features. The cloud gives us the option to really have that flexibility to offer them things that we can download overnight literally.

And then a clarification. I mean, sometimes you call out what that true-up number was. Was it not material enough to call it out this quarter?

Yes. And I think what we've said in the past that we have a material number with any single customer, and I think there was nothing material within a single customer. But we had true-ups across the board that were probably a little higher than in previous quarters. As we do those, it's the normal course of how we record revenue, right, as we get actuals versus what we've accrued for in the past. So nothing material for any single account, but a fair amount compared to previous quarters overall.

Understood. And a bit of a macro question here. Just what are your customers seeing in terms of auto production in the next six months? I mean, you mentioned this in your script, Tony. I think investors are concerned about weakening second half and some of that is contemplated in the guide. But are you thinking this will impact the December quarter as well? Like I guess, how much do you think was pulled in company-wide, industry-wide, just from your point of view?

Let me start and then Tony can go into more detail. But each quarter, we've kind of told you we don't see much of an impact in the next quarter in tariffs and things like that. So far, that's held. We do think there was a certain amount of build ahead in Q3 that occurred. It's a little bit hard for us to pin it down exactly how much, Nick, but that's a little bit why Q3 was so high and Q4 is kind of more of a standard quarter where that's just some of the buildup we're seeing. But in the overall year, we're actually up and we've raised our guidance and raised the bottom of our guidance above the midpoint prior. That all shows that we believe the year will end out strong, right? As we go on to next year, I'm just going to be honest with you, we're not going to try and forecast next year yet. We have some initial IHS data that suggests there's some decrease in volume. What we don't know is there's a bunch of programs; we talked about the number of POCs and new programs. We talked about the six that we won this quarter; those all have to be factored into that. So we have offsetting. We believe the connected vehicles will grow. All of those things will balance each other, and we'll sit down and figure out how 2026 and Q1 of 2026 fiscal looks as we go through this quarter, and we'll give you those numbers at the end of the quarter. Right now, we believe Q4 will hold to our numbers. It means a strong year, raising guidance, raising midpoint, raising above the midpoint of the prior forecast. So closing out the year strong.

Yes, I think that's well said. And I think if you think of our second half, when you combine Q3 and our Q4 guidance, we're ahead of kind of where our second half was. So yes, maybe a little bit of pull forward. We factored that into a little bit of volume decrease in Q4. But the other side of it is, as I mentioned, we had some true-ups across the board this quarter. Well, that part of it is a little bit of catch-up, but the other side is kind of new run rates for some of these programs that we have to bake into and since they're a little bit higher, bake those into our overall volume run rate. So a lot of puts and calls, but that's reflected in our full year guidance, which now is higher than as we said from last quarter. We pulled that guidance upward. We’ll take a look at how that impacts 2026 as we finish out the year.

Our next question comes from Colin Langan with Wells Fargo.

I guess just following up on some of the recent comments. The guide does imply, I think, about a 10% decline at the midpoint quarter-over-quarter in sales. I think you mentioned about a 2.5% production decline. It might be a little worse. But why the big move down? Is that related to some of the true-ups in the quarter? Or are there other factors we should consider?

No. We need to clarify that what we've been trying to communicate is that some of the numbers were pulled from Q4 into Q3. In Q3, we exceeded even the highest point of our guidance. We think this pull-in was due to OEMs attempting to prepare for the tariffs expected to take effect in August. So, that was largely a shift from Q4 into Q3 to get ahead of those changes. However, when looking at the entire year and considering both Q4 and Q3 together, we must remember that there will be some fluctuations from quarter to quarter as production changes a bit. This is why we are confident in raising our guidance for the year, even increasing the lower end of our expectations above the midpoint of our previous guidance. This reflects a strong combined performance in the latter half of the year. Essentially, it's just a matter of pulling ahead.

Yes, that's accurate. We consider the overall IHS projections, which indicate a growth of 2% to 2.5%. However, it's essential to also account for our specific customers within that group. Our volume has actually surpassed the IHS estimates. In Q3, our volumes were higher compared to both year-over-year and quarter-over-quarter metrics than the IHS figures. Consequently, we anticipate a slight increase above the 2% due to the amount that was pulled forward. Additionally, much of our revenue is recorded towards the end of the quarter as we receive royalty reports, and it's uncertain how the euro will perform in the last month of our fourth quarter. We expect some pullback there and also recognize that we might not see the same volume of true-ups as before. We have taken all these factors into account, which is why the revenue projection for Q4 has slightly decreased. Nonetheless, when compared to a year ago, it remains a solid Q4 without any adjustments in either quarter.

Our next question comes from Jeff Van Rhee with Craig-Hallum.

On the free cash flow, it looks great. I have a couple of questions. First, with the connected products, you have insight into the features that people want. I'm curious if there are any surprising trends in terms of what's being used or not used. Additionally, you mentioned AI and some of the capabilities. As you move into AI-centric offerings, what is the primary opportunity to stand out from major tech companies?

There's a lot I can address here. Let's focus first on your question about differentiation and what people are utilizing. We differentiate ourselves in a couple of key ways. Firstly, we believe our technology is at the forefront of innovation. We're transitioning to a multimodal environment where sensors and cameras in vehicles significantly enhance their capabilities. Secondly, we are agnostic. Unlike Big Tech companies that tend to lock customers into specific tools, we allow flexibility. For instance, when someone asks an LLM for information, that incurs costs. As market dynamics change, automotive manufacturers want the freedom to select from various LLMs to optimize features and costs. Our agnostic approach enables them to do this, which is crucial for them. It also protects them for the future, as the development in the LLM space is rapid, and it's hard to predict who will lead in a couple of years. If you're tied to a single provider like Google or Amazon, you're restricted. However, by choosing Cerence, you have the option to work with various LLMs, whatever they may be. Regarding usage, we see people finding value in these features. At the upcoming International Auto Show in Munich, we will showcase the true interactive capabilities of our technology, where the car acts as a partner and responds naturally to voice commands. Users are enjoying features like asking the system to turn on the heat when their feet are cold or to open the skylight for a view of the moon. This natural interaction is where the real value lies. It's similar to how you can ask an LG TV for a list of Tom Cruise movies, allowing for a seamless and meaningful exchange of information. That's what customers are engaging with.

Got it. Helpful. And on the sales front, can you talk about just new bookings in terms of do you feel you're taking share, holding share, or losing share? I'm curious what you're seeing there. And then just last for me, modeling related. For '26, I realize you're not giving a guide, but can you give even early thoughts on maybe the consumption you think is a reasonable gross consumption of prepaid for the year that you think is a reasonable range?

So prepaid is easy. We've said that we are very comfortable in that same $20 million. I was asking about consumption, not actual prepaid, just the consumption of licenses.

Yes, our consumption was higher in the first and second quarters, and for the last two quarters, it has been around the $9 million range. This is one reason why our variable license increased by 48%. More of it contributed to the bottom line. Some may think it's not a concern that we didn't have prepaid this quarter, but we have intentionally reduced that annual number to approximately $20 million. This shift means more variable shipments will be recognized as in-period revenue. Currently, we are at about $9 million in consumption. While we haven't provided guidance for this, we expect that year-over-year, consumption will decline based on historical fixed levels. Overall, consumption needs to decrease for the entire year.

Yes, I'd say right now, our share is kind of holding where it's been. We're not losing anything that we're currently in. There are a few RFQs out right now that we'll see over the next quarter or two that are out for bid. We're very competitive; we've typically made it past round one, and we're in the final round of selection. Right now, we're holding, but I'd say share-wise, we're flat.

Our next question comes from Mark Delaney with Goldman Sachs.

You have Aman Gupta on for Mark Delaney. Maybe just on this nonautomotive expansion that you guys are doing, and congrats on the LG news. Can you help size kind of what that looks like in terms of revenue as it ramps in fiscal '26 and onwards? And how should we think about maybe something like a PPU in a large application for the nonauto market relative to auto and how that pipeline of general nonauto deals is continuing to evolve?

Sure. So I can't give a forecast for '26, but I can give you a general view of those kinds of markets. TVs is a good one to just focus on. Typically, the price per unit is going to be less, partly because the complexity of the application is not quite there. You're not having to deal with all the car knowledge and having to do navigation along with real-time knowledge like who won the football game and things like that; you're typically just doing searches within a data set tied to your provider. The PPU tends to be a lot less, but the units are quite a bit more. If you take a look at the number of vehicles sold versus the number of TVs sold worldwide, you can far and away outpace the number of vehicles. If you add a couple of the major TV providers, you can get to a fairly large number. We look at it from that perspective in that it's going to be a lower PPU, but it's lower technology and a bit simpler of an implementation. It's mostly cloud-based and all. We're not going to do forecasts for '26 though yet. Sorry.

Yes. And thinking about that, as you know, the PPU number that we've started last quarter, given and continue this quarter is an automotive PPU that's part of our primary market. When we think about outside of automotive, I'm not concerned about a decrease in overall PPU because, effectively, as Brian mentioned, it will be a lower PPU, higher volume, but more importantly, it will be additive revenue once those markets start to progress. That's the way you should probably think about it.

That's very helpful. And then maybe for the second one, going back to the auto market. I think last quarter, Brian, you spoke about some potential pricing pressure from customers. Given some of the tariff changes, how has that evolved? Are you still seeing that pricing pressure? And then similarly related, are you seeing any continued delays with new awards or design activity? I know you mentioned some program pushouts in your prepared remarks as well.

Yes, we are still engaged in pricing discussions, but we haven't implemented any price reductions. Instead, we have focused on approaches that benefit both sides. We've communicated that by increasing our share of the business or expanding features, we can lower overall costs for our customers. This arrangement ultimately increases our revenue while providing them with more competitive pricing. We have several offers out there, and as Tony mentioned, the price per unit increased this quarter, indicating that we haven't needed to make significant price cuts. While a few programs have been delayed, there are multiple requests for quotes in the final stages, and we expect several of them to finalize this quarter. We haven't experienced any major losses in competitive situations, and we aren't trying to win back any lost business. However, we do have several pending opportunities that we hope will close in our favor, but we will need to wait until the end of the quarter to see the outcomes.

Our next question comes from Itay Michaeli with TD Cowen.

I wanted to dig into some of the xUI wins that you talked about before. Could you share some more detail around your number of models that you would launch with a particular OEM, just the penetration levels there and the kind of mix between more premium luxury models versus mass market? I think you mentioned VW as one of the wins, maybe as an example.

Sure. While I can't specify which group or models within the VW Group, we did mention JLR as an example. Generally, we are observing an increase in PPU across various brands, not limited to luxury but extending down to mid-level offerings as well. There are some low-end brands that might operate in different regions, potentially offering lower subscription levels. However, the trend appears to be fairly widespread across the brand from a model perspective. Unfortunately, I cannot disclose more specific marketing plans or announcements between the two companies beyond what I've mentioned regarding the VW Group.

No, absolutely. Totally understood. That was actually helpful. Just as a follow-up, as we think about nonauto ramping in late fiscal '26 and beyond, should we think about any incremental OpEx to support that growth as well? Or do you think you can achieve that growth with your current OpEx base?

No, I do not expect OpEx growth. For example, Tony and I did a review today on how we're becoming more efficient by using artificial intelligence internally to help us write our code to do some of our Q&A work, to build more tools that allow us to do analytics against our software at a much faster rate. We think there's just in there, we can get 15% to 20% productivity improvement within our engineering team just by doing that work over the next year and expanding that to a broader area. I'll tell you right now, we're kind of early in those stages, but we believe we can continue to grow that capability. Our goal is to push that across the company and to fund our growth through that efficiency. So, we are going through that. We have regular forums that we're reviewing at my level the group's progress in this space. We're talking about how to really make it measurable for next year so we can really see the productivity improvement. The team is excited about that because they look at this as a way to get to go and do new work and new things. It's actually fun for them to use these tools, and they don't see it as a risk to their job or anything. They see it as an enhancement in a way that they can be more productive and get more done and do things that they actually didn't have time to get done in the past but make the product and the job much better. So no, I'm not going to fund it with increased OpEx. I’m going to continue to make improvements in OpEx next year and instead fund this through productivity. So I just wanted to close with, thank you, everybody, for taking the time out of your busy days to listen to our earnings call. We're excited about the results we had in Q3. We're closing out the year strong by raising our guidance for the full year from a revenue and EBITDA and free cash flow perspective. We look forward to talking to you at the end of our fiscal Q4 and giving you the results for Q4, but also our forecast for 2026, which I know based on your questions, is what you all are looking forward to and need in order to continue to help us look at this company. Thank you very much for your time.

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