Earnings Call Transcript - CRNC Q4 2024

Operator, Operator

Good day, and welcome to Cerence’s Fourth Quarter 2024 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. As a reminder, this call may be recorded. I would now like to turn the call over to Jason Gold, Investor Relations at Cerence. Please go ahead.

Unidentified Company Representative, Unidentified Company Representative

Welcome to Cerence’s fourth quarter and fiscal year 2024 conference call. 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, estimates, assumptions, beliefs, outlook, strategy, goals, objectives, targets, and plans should be considered to be 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, as described in our SEC filings, including the Form 8-K with the press release preceding today's call, our Form 10-K filed on November 29, 2023, and our most recent Form 10-Q. 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 IR section of our website. Joining me on today's call are Brian Krzanich, CEO of Cerence; and Tony Rodriguez, Interim CFO of Cerence. Please note that the slides with further context are available in the investors section of our website. Now, on to the call. Brian?

Brian Krzanich, CEO

Thank you, Jason, and good morning, everyone, and welcome to the Q4 2024 Cerence earnings call. I'm excited to talk to you this morning as Cerence's new CEO. While Tony will walk you through the details of our Q4 and fiscal year '24 earnings, I'm very proud of what the organization has delivered for Q4. The top line revenue of $54.8 million and adjusted EBITDA of negative $1.9 million, both exceeded the high-end of our guidance. I couldn't be more proud of what the team has accomplished and the head start this gives us for 2025. Before I give you our forecast for 2025, I would like to spend a few minutes now to talk to you about my vision for Cerence, which also gives you insight into why I chose to come to the company. So Cerence is at the forefront of the revolution that is occurring in the automotive industry, as AI specifically generative AI and large language models, grow in use and importance. Cerence already has a large footprint in the automotive space with a broad range of products that bring voice assistance to the vehicle, including 28 design wins in fiscal year '24. Our vision moving forward is that every product in our solution portfolio will have artificial intelligence and specifically large language models built into them to bring simplicity and convenience to in-car interaction. This is not a transition that will happen far out in the future, but rather one that has already begun in earnest. This is evidenced by the strong momentum we've seen for our generative AI solutions with 10 customer wins and six program launches for these products in fiscal year '24, including Volkswagen, Renault, Skoda, Audi, and Smart. And importantly, more generative AI programs were shipped than any of our competitors and key wins across our solution portfolio with automakers like BMW, Great Wall Motor, and Zeekr. It's worth mentioning that in these deals we've signed so far, our generative AI solutions command unit economics that meaningfully exceed the rest of our portfolio, fueling per unit pricing growth on the cloud side. These first deployments also show an increase in overall usage and adoption, and while this is based on a small sample size and short timeframe, we are encouraged by these results. This quarter, we also signed our first customer deal for the first generation of our new AI platform, which is based on our proprietary family of language models. By the fourth quarter of this year, we will launch the second generation of this platform, which leverages large language models across the entire solution and allows us to greatly simplify and speed up how we bring new products to the market. In fact, just last week, we introduced CaLLM Edge, which builds on our strength in embedded solutions as the first large language model running in automotive on the edge, allowing for advanced and simplified voice interaction with the vehicle, even when not connected. We did this in collaboration with Microsoft. We were selected by Cerence as their preferred automotive industry partner as they announced their adapted AI models ahead of this week's Ignite conference. Microsoft is partnering with Cerence and other industry leaders, like Bayer and Siemens, to create fine-tuned models pre-trained using industry-specific data to address customers' top use cases, as was highlighted in Microsoft’s CEO Satya Nadella's keynote earlier this week at their Ignite conference. The implementation of large language models is an important transition for voice in the vehicle, and I want to take a moment to explain why. In most cars today, to interact with the various systems in the vehicle, you have to use very specific commands. For example, to enter an address, you can use navigation, or to operate systems within the vehicle like air conditioning or windows. With the implementation of large language models, we remove the need for scripts for interaction, and the assistant's ability to understand complex and multi-step commands in natural human language becomes virtually limitless. The vehicle now becomes an assistant that saves you time and simplifies your life. In addition to our deep technical expertise, the world's leading automakers and Tier 1 suppliers love to work with Cerence because we're uniquely neutral and a highly specialized supplier, living and breathing automotive and speaking the same language as our customers, unlike our competitors. As auto OEMs faced a threat of commoditization, much like what was seen in the mobile handset industry years ago, they are becoming increasingly focused on the in-cabin experience as a differentiator from their competitors, as well as the main touchpoint between their drivers and their brand. And they're also choosing to partner with Cerence to drive their in-car experiences forward. Now looking at fiscal year 2025, we're issuing initial fiscal year '25 revenue guidance of $236 million to $247 million, with related adjusted EBITDA in the range of $15 million to $26 million, and free cash flow in the range of $20 million to $30 million. This anticipates a return to profitability that represents both our strong market position, partnerships with vehicle OEMs, and the hard work the organization has already done in terms of cost reductions, which Tony will cover in detail in a few minutes. For fiscal year 2025, we will transition from broad cost cutting to simplifying and streamlining our organization and our structure to continue taking costs and spending out of Cerence. It's been my observation that Cerence has been burdened by operational and business process complexity that resulted from the company's 2019 spin from Nuance. With a new set of eyes, I believe I can provide a perspective to find more efficient and productive ways to accomplish the same task, while also finding opportunities to vastly improve our speed to market and get exceptional products into the hands of our customers at a more rapid and competitive pace. This is my first earnings call as CEO of Cerence, and I hope you see the vision and potential of the company that I do. Cerence is bringing AI and large language model capabilities to the vehicle now, not just in the future. Fiscal year 2025 will be a year of execution, streamlining the company, and bringing these industry-leading products to our partners in the market. Our fiscal year 2025 plan is to return Cerence to profitability, a critical step to fuel future growth. Cerence is a strong company with an exciting path ahead. It's now my job to turn the strong company into a great business. With that, I'll turn it over to Tony to go through the details of our quarterly numbers, our guidance, and our restructuring activities.

Tony Rodriguez, Interim CFO

Thanks, Brian. Today, I'll discuss three main topics. First, I'll review our Q4 and full year 2024 results. Then I'll delve into the details of our restructuring. Lastly, I'll offer guidance for fiscal Q1 and the entire fiscal year of 2025. Let's start with the Q4 and full year 2024 figures. In Q4, we achieved revenue of $54.8 million, surpassing our guidance high of $50 million. This quarter's revenue benefit included about $5 million from license royalty adjustments for two of our OEM customers. Customers self-report royalty volumes that align with their auto shipments utilizing our technology each quarter and periodically adjust to the actual figures. This is common, and we'll mention it when it's significant to our numbers. Our Q4 gross margin was 64%, exceeding our guidance of 60%, with approximately 4 percentage points attributable to the revenue adjustments. Looking at our income statement, our adjusted EBITDA loss of $1.9 million was significantly better than the anticipated loss of $13 million. This improvement stemmed from increased gross profit due to higher-than-expected revenue and lower operating expenses, thanks to accelerated restructuring efforts, totaling around $6 million. Year-over-year, Q4 revenue decreased by $26 million, or 32%, making year-over-year comparisons challenging. The primary reasons for this decline were the $12.8 million in fixed license revenue we signed last year in Q4 and the $9.2 million from the legacy Connected Services contract with Toyota, which was phased out in Q1 of 2024. After Q1 of 2025, we anticipate more meaningful year-over-year comparisons for our quarterly results. Our non-GAAP operating expenses totaled $39.5 million for Q4, down from $44.5 million in the same quarter of fiscal 2023. This reduction of $5 million, or 11%, reflects some of the savings from the Q4 restructuring. We concluded the quarter with $130.4 million in cash and marketable securities, an increase of $4.1 million from Q3. Our free cash flow for the quarter was $4.7 million. Overall, for the full year, we achieved revenue of $331.5 million, or $244.9 million excluding the legacy revenue of $86.6 million. Full year adjusted EBITDA was $80.6 million. Adjusting for the impact of the non-cash legacy contract, our adjusted EBITDA would have been negative $6 million, underscoring the significance of the Q4 cost restructuring efforts. Last quarter, we indicated that we identified savings of approximately $35 million to $40 million, and we are on track to meet or surpass that target. This includes cost cuts across all major drivers, including personnel and facilities. We mention savings on a net basis because we've identified costs to eliminate that exceed this amount, but we plan to reinvest a portion of these savings into driving the growth of our next-generation products. For modeling purposes, our calculations are based on an annual run rate of $189 million in non-GAAP operating expenses as we entered Q4. Additionally, we reduced certain professional services costs of goods sold by around $9 million. We implemented many, though not all, of the cost reduction strategies in Q4, with the remainder expected to be completed by the end of Q1. Consequently, we already realized some P&L benefits from these efforts in Q4, and we foresee the majority of the benefits reflected in our Q1 non-GAAP operating expense run rate of about $39 million per quarter. We identified around $16.3 million in one-time costs related to these measures, primarily made up of severance, retention bonuses, and consulting fees. We incurred $10.3 million in restructuring costs during Q4 and expect another $6 million in Q1. Our Q4 free cash flow absorbed $7.5 million of these expenses, and the fiscal '25 free cash flow guidance will take into account an additional $8.8 million in one-time restructuring costs not expected to recur in the future. We anticipate some revenue challenges from these actions, particularly in our professional services business, where we've decided to reduce staff and focus on projects that foster long-term client relationships. We've shifted away from one-off projects that lack significant long-term potential. Our revenue guidance for fiscal '25 reflects this with expected headwinds of about $5 million to $7 million. In terms of our revenue breakdown and operational metrics, variable license revenue was $25.3 million, down by $5 million, or 17%, year-over-year, but it increased from Q3. As planned, we recorded no fixed license revenue this quarter. Q4 Connected Services revenue, excluding legacy contracts, was $12.1 million, an increase of $1.3 million or 12% from $10.8 million in the same quarter last year, while our professional services revenue decreased by 6% year-over-year. As a reminder, when analyzing total licenses shipped, pro forma license royalties represent the total value of variable licenses shipped in a quarter, including fixed license shipments that recognized revenue upon contract signing. Our pro forma royalties were $42.2 million, unchanged from Q4 last year, and up from $39.6 million in Q3. Consumption of prior fixed license agreements reached $16.9 million this quarter, a 9% increase compared to the same quarter last year. However, with the annual value of fixed contracts declining over time, there will be less consumption of royalties linked to past fixed contracts, which will lead to increased variable license growth in the future. We continue to expect our consumption run rate to stabilize by the end of fiscal year '26, aligning new fixed contracts with the consumption level throughout the year. As we evaluate our key performance indicators for this quarter, our penetration in global auto production over the trailing 12 months slightly decreased to 52%, mainly due to reduced production volumes from our leading customers. We shipped about 10.6 million cars equipped with Cerence technology this quarter, a 14% decline compared to the previous year, while IHS production for the same period fell by 5%. Quarter-over-quarter, we experienced an 11% decrease, while IHS production dropped by 3%. The number of cars produced using our Connected Services rose by 16% on a trailing 12-month basis versus the previous year, as programs that were delayed previously started to ramp up in production. Total adjusted billings, totaling $220.7 million, adjusted to exclude professional services, prepaid billings, and prepaid consumption, increased by 1 percentage point over the trailing 12 months compared to the prior year. Our five-year backlog stands at approximately $969 million. Now turning to our guidance. The current street consensus for revenue for fiscal year 2025 is $234 million, with Q1 projected at $57 million. Keep in mind that any single quarter can significantly be influenced by fixed license revenue signed during that period. For Q1, we do not anticipate any fixed license revenue. We currently expect revenue between $47 million and $50 million for Q1, accounting for estimated headwinds of around $1 million due to the de-emphasis of professional service projects. We project Q1 adjusted EBITDA to be between negative $9 million and negative $6 million, and free cash flow between negative $4 million and zero, incorporating about $6 million in one-time restructuring costs. For the fiscal year 2025, we foresee revenue in the range of $236 million to $247 million, accounting for headwinds of approximately $5 million to $7 million related to the reduced emphasis on professional service projects. We currently expect adjusted EBITDA to fall between $15 million and $26 million, with free cash flow estimates between $20 million and $30 million, factoring in costs related to our restructuring. I would like to share additional insights to help you understand our business and the upcoming 2025 model. At the guidance midpoint, we plan for $20 million in new fixed licenses for fiscal year 2025. Maintaining our fixed license plan at 2024 levels of $30 million would reflect a 3% growth rate in fiscal year '25 over 2024. We also anticipate modest growth in our Connected Services run rate. All of our new products are designed to be connected. When we recognize new contracts, units shipped get recorded as deferred revenue, which we typically amortize over 12 to 20 quarters. Therefore, as these products gain traction, variable license and Connected Services billings will increasingly reflect our business's progress. Over the coming period, I will ensure to highlight our leading metrics. For 2025, we are predicting high-single digit growth in variable license and Connected Services billings. Our fiscal year '25 gross margins are expected to fall between 67% and 69%. Now, regarding our convertible notes, we have $87.5 million of convertible notes maturing in June 2025. Given our current cash position and the anticipated cash flow for 2025, we believe it is in the shareholders' best interest to pay off a portion of these notes when they come due. However, we also consider that refinancing some of this debt may better position us to execute our long-term strategic vision while allowing us to preserve cash reserves and maintain flexibility. As such, we are exploring options to refinance a portion of these notes and expect to provide further updates in our next earnings call. Overall, we are pleased with the results for Q4, and as we begin fiscal year '25, we believe we are on the right path to improve our financial performance and strengthen our balance sheet going forward.

Brian Krzanich, CEO

Thanks, Tony. In closing, we're happy with and motivated by this quarter's results. We remain focused on execution, business process improvement and cost reduction, and advancing our generative AI roadmap. We take our commitments seriously, and we are committed to streamlining our reporting so that investors can understand the trends in the business. We believe in our ability to deliver on our fiscal '25 guidance and fuel our growth for fiscal '26 and beyond. We look forward to continuing to share our progress. We'll now open it up for questions.

Operator, Operator

Thank you. Our first question comes from Jeff Van Rhee with Craig Hallum Capital Group. Your line is open.

Jeff Van Rhee, Analyst

Good morning, everyone. I appreciate your time. I have a few questions to ask. To begin, I want to discuss the AI aspect. You mentioned that the economics of AI are becoming more appealing. I'm interested in understanding how the margins stack up for AI-related deals since that was a key inquiry. Additionally, you talked about pricing increases; could you provide some insight into the extent of the pricing uplift associated with AI?

Brian Krzanich, CEO

Sure, I can start and then Tony can add some details. Generally, we don't provide specific pricing, but overall, we are seeing an increase in prices. Most of the generative AI models have development and operational costs comparable to our current models, which means margins are improving with these applications. We are experiencing margin growth with these products. It is early in the process as these are the first deals and proofs of concept that we've initiated, but the outlook is promising. Customers appreciate the value of being able to communicate naturally, such as saying, "My seat is cold," and the system understands to activate the seat heater. Requests like "open the window" are handled intuitively, with the window opening in increments. The models are becoming adept at interpreting natural language, and this is recognized by users. This creates opportunities for developing more advanced assistance features around the product. Overall, we are witnessing improved margins and, importantly, a strong demand and interest from our customers. Tony, can you elaborate?

Tony Rodriguez, Interim CFO

Yeah. I mean, a couple of things on the margins. Yes. They're improving. Remember that these are our Connected Services products. You'll see that the margin that we're anticipating next year is higher than our margin for 2024 overall, primarily when you take out the legacy revenue, and that's really a product mix for next year, more licenses and less professional services. But the connected service and these bookings that we're looking at now with higher margins really won't come into play until the latter half of '25 and into '26 that we'll start seeing connected service margin increase. So we'll really see that benefit in the '26 year and beyond.

Jeff Van Rhee, Analyst

Okay. Brian, regarding the topic of connected, you've inherited a business that has been discussed for years. There have been many bookings and backlogs, yet the revenue has not increased. I understand your comments about the time it takes for contracts and the nuances of revenue recognition. However, the stagnation in that area over the past several years raises concerns about the competitive landscape, potential share loss, and functionality. I'm interested in your deeper perspective on your competitive position in the connected space and your chances of success. You've mentioned AI as a potential factor going forward. Beyond that, how would you describe the connected opportunity and your competitive standing?

Tony Rodriguez, Interim CFO

Hey. This is Tony, and I'll start with a comment on growth, and then Brian can address the second part of that question. We've discussed in previous calls that there's some variability in our P&L when looking at year-over-year comparisons. However, if you examine the fourth quarter of last year and exclude the non-cash legacy revenue from Toyota related to connected, we actually saw a 12% year-over-year growth in the connected business. We expect this growth to continue in fiscal '25 and beyond, supported by new bookings from the third and fourth quarters of this year as we progress into the next quarter. This area of the business is expanding, and we foresee it as a key growth segment moving forward.

Brian Krzanich, CEO

Let me address the second part of your question regarding our position in that business. Our product is quite robust, specifically designed for the automotive sector. For instance, there are 23,000 different instructions that need to be understood and managed by our large language models to operate a car, covering everything from windows and seats to charging ports and various automotive-specific functions. We collaborate closely with OEMs to introduce these features, and our partnership is strong. Additionally, we are willing and able to customize and create the experience that each OEM desires, which sets us apart from most of our competitors, particularly the larger ones. They usually offer a single solution or structure, whereas we can maintain connectivity while being tailored to the OEM's needs. For example, if an OEM prefers to use their own private language models for business strategies instead of public ones, we can structure the requests accordingly. Our competitors often default to public options, but our customization, along with our capability to work in multiple languages, allows us to offer a more tailored experience for the OEM. This is where we excel and why OEMs typically choose us for their solutions.

Jeff Van Rhee, Analyst

Understood. And one last brief one, if I could, Brian. As it relates to you coming in and taking the reins here, and I realize this is somewhat unfair because you just got in and you're getting your hands around what the business is and where we're headed. But if you look over the last handful of years, the pro forma royalty number, which adjusts for all the prepaids and everything else, should have been relatively flattish. And clearly some things have worked, many have not, but you're sizing up the business. Essentially, why do you think if you look at the last five years as a company not been able to grow? Is this fundamentally a product market fit? Is it a go-to-market sales function? Is it something else? Just your early takes on kind of the brief history lesson of what hasn't worked and what you think you can get working?

Brian Krzanich, CEO

I'm still looking into our past and have been cautious about focusing too much on it. The previous model was quite different; it centered on driving bookings and growing rapidly without much emphasis on product differentiation against competitors. Moving forward, large language models and AI applications are significantly changing our approach. One major change is the way large language models are incorporated into the end-user experience. We've discussed this a lot, but we haven't delved deeply into how these models are affecting product creation. Our development time has been reduced from eight to twelve months to just four months to customize our products for customers. This is transformative for our business. We are able to charge more, enhance the end-user experience with advanced language models, and by integrating these models into our product development, we are achieving faster, cheaper, and more effective customization to meet customer needs. This shift away from traditional software, which made differentiation and speed more challenging, marks a significant improvement. We’ve already seen price increases and are being compensated fairly for our offerings, all while our costs are decreasing as the development process becomes quicker and simpler. This, in my view, indicates a substantial change.

Jeff Van Rhee, Analyst

Got it. Great. Thanks for the thoughtful answers. I appreciate the detail.

Operator, Operator

Thank you. Our next question comes from Colin Langan with Wells Fargo. Your line is open.

Colin Langan, Analyst

Thanks for taking my questions. To start, I've noticed that shipments were down significantly both year-over-year and quarter-over-quarter. What is causing this decline? Also, if I exclude some of the fixed contracts and the exit of certain professional services, it appears that underlying growth might still be around 5%. What is contributing to this underlying growth, given that your shipments are not keeping pace with the market?

Tony Rodriguez, Interim CFO

Yes, as we consider this, it really comes down to the average price per unit. When we exclude fixed costs from our license revenue year-over-year, we see a decline in the license business, which aligns with some of the reductions in volume. However, it’s noteworthy that connected services are experiencing growth. Looking ahead, I believe the license business will see growth in 2025, mainly because there will be less fixed license consumption that year. We're currently shipping our cars, and a larger portion of that will contribute to growth. Additionally, the Connected Services business is seeing an increase in volume from those vehicles equipped with our services, which also indicates growth. So while overall volumes may be down, the combined effect of growth in connected services and a higher price per unit results in an increase in total revenue despite the decrease in volume.

Colin Langan, Analyst

Got it. And trying to frame the last time you updated the five-year backlog, but I think it was something like $1.1 billion last time, that you did the analysis. Is that right? And then that backlog is shrinking. When should we think about that as inflecting and that pressure? And I guess, Brian, from your perspective, I mean, what are your priorities? Is it right now just get the costs in line and then focus on revenue or yeah, I mean, how do we think about that?

Tony Rodriguez, Interim CFO

As we review our backlog, it is close to $1 billion. It's important to keep in mind that backlog reflects our current contracts, including the prices and expected volumes tied to those contracts. In some cases, this might involve a specific program for a car and when we expect that program to end. Therefore, the backlog doesn't fully capture the long-term relationships we have. It may appear to decrease over time as contracts conclude or programs wrap up, but I believe it remains very healthy at nearly $1 billion. Looking ahead to 2025, most of our expected revenue is already represented in that backlog, as long as we meet our volume expectations. The next growth in backlog will likely come from our future connected billing and bookings initiatives.

Brian Krzanich, CEO

Yeah. And to add to Tony's answer, I'll address your other question, Colin, regarding priorities. When I look at '25, we mentioned in the speech that '25 is really a return to profitability. To me that means execution. There are, as Tony mentioned in his talk, there are still some things we need to do to continue to cut costs out of the organization. Most of those plans and items have already been identified, and it's just a matter of finishing out the execution and continuing to hold those costs in line, not let things creep back in. It's finishing the generative AI work. Our first-gen model brings generative AI to the end user. Our second-gen model, targeted towards the end of our fiscal year, really brings the generative AI large language models all the way through our product. And as I mentioned earlier, that really simplifies our work and reduces the workload that we have. It's critical that we finish that work. And the third priority that I'm really starting to focus on with the organization, so first is execution, finish our products, get the generative AI second one to get the generative AI products across the board. And third, we have some uses outside of automotive. We just launched with Garmin two models of the Garmin Watch. We've been working with LG on TVs. Voice and these products can go into other products, other usages. We're starting to go and ask ourselves where can that go beyond. Now that's not going to really be a '25 impact, but '25 is where we really need to figure out the one or two spaces we want to move into beyond automotive as well to continue to grow this company in voice activation.

Colin Langan, Analyst

Got it. That's very helpful. Thanks for taking my questions.

Operator, Operator

Thank you. Our next question comes from Nicholas Doyle with Needham. Your line is open.

Nicholas Doyle, Analyst

Hi, everyone. I appreciate you taking my questions. First, Professional Services saw an increase quarter-over-quarter, even though it was down year-over-year. This is notable given the cuts made in the last couple of quarters. You mentioned a shift of 5% to 7%, and I was curious if you could elaborate on the factors driving that change quarter-over-quarter. Additionally, you spoke about a headwind of $5 million to $7 million in fiscal '25. Is that figure based on the fiscal '24 numbers? Thank you.

Tony Rodriguez, Interim CFO

There is an expected reduction in professional services of $5 million to $7 million in fiscal '25 compared to '24. Year-over-year, we did see a decrease. Although there was a slight increase from Q3, we believe that the cost-cutting measures we have implemented and the reductions in headcount will allow us to focus more effectively on the professional services teams that contribute the most significant results. We expect this number to decline year-over-year, but keep in mind that some of the cuts occurred in Q4, so the impact wasn't fully realized until now, with $1 million of that headwind seen in Q1. Looking ahead, we anticipate a more focused approach.

Nicholas Doyle, Analyst

Okay. Just clarifying, so just asking, I guess again, it was up quarter-over-quarter, and I guess we expected it to be flat to down. So any explanation on what drove the strength there this quarter?

Brian Krzanich, CEO

This is Brian, Nicholas. It's going to be a bit uneven from quarter to quarter. As Tony mentioned, we're concentrating on where we can truly add value and get compensated for professional services. After evaluating the business, we decided to downsize, letting some employees go and streamlining the professional services team to align with where we see quality opportunities. That said, we've communicated to them that if good business comes in and we can be compensated for our work, we are willing to take it on. Therefore, you'll notice some variability. As projects arise and clients seek professional services because they either don't want to handle the work themselves or are unable to, and they are ready to pay us, we'll move forward. This is the nature of the variability. For the long-term and annual guidance, we believe we've adjusted the organization and workload appropriately in relation to professional services. The margins and compensation for our work are in the right place. I hope that clarifies things. I wouldn't be concerned about any single quarter.

Nicholas Doyle, Analyst

Yes. Got it. Just a little lumpy, and I know splitting hairs; it's like about a $1 million change here.

Brian Krzanich, CEO

Yes. I think it's a good question. Go ahead.

Nicholas Doyle, Analyst

Okay. Thank you. Second question, I think the license average PPU jumped to the highest level since fiscal '22. Did those generative AI rollouts this year or the past one or two quarters really drive that much of a change, or just any detail on what drove the strength this quarter in the average PPU and thoughts on fiscal '25? Thanks.

Tony Rodriguez, Interim CFO

It's challenging to simplify how we describe the business and try to focus on a price times quantity model. As we disclose some of the shipments, it can be difficult. From a license standpoint, we need to consider the fixed costs. Once we account for that and analyze our volumes, we can calculate an average price per unit since those figures are reflected in GAAP revenue on shipment. With connected products, it's more complicated. We build for certain items, and it's important to emphasize our billings as a leading metric, which reached $80 million this quarter compared to GAAP revenue of $54.5 million. However, those billings are deferred and recognized as revenue over a subscription period, making it tough to determine an average price per unit for connected volumes. Legacy deferred items and higher prices for next-generation products complicate revenue recognition until later periods. It's also critical to assess how much of a license or its components are included in that number. We need to evaluate our volumes, the shipments, and whether the shipments include more licensed components, which would indicate a higher average price per unit for those components. In summary, in the licensing area, we are experiencing higher prices per unit due to more valuable components being included in those licenses.

Nicholas Doyle, Analyst

Thank you.

Operator, Operator

Thank you. Our next question comes from Mark Delaney with Goldman Sachs. Your line is open.

Aman Gupta, Analyst

Hi. Yes. Thank you for taking our questions. You have Aman Gupta on for Mark Delaney. First, I guess last quarter, you guys provided a framework for fiscal '25 of kind of a flat to low-single digit decline for revenue year-on-year, excluding the legacy business, and the midpoint now is showing growth year-on-year. Can you kind of speak to maybe some of the puts and takes that drove that and what's driving some of that strength you're seeing?

Tony Rodriguez, Interim CFO

Yes, certainly. I think we're fairly close. We took out the legacy business. I think at that point, we were looking at a framework of mid-guidance of $238 million and right now, our guidance is $236 million to $247 million, so we are seeing some growth. It's as we look at a couple of things. One is, on the license side, looking at our volumes and making sure we right-size that backlog and the expectation of what will be shipped within the quarter. As we mentioned, Professional Services will be down, but in line with what we were kind of providing the framework, and Connected Services actually being slightly up than what we were thinking about in the framework. So but overall, I think it's actually very close to what we had guided in the framework last quarter.

Aman Gupta, Analyst

Thank you for that color. I appreciate it. And then maybe kind of a higher-level one on the AI product and appreciate the context for the first-gen versus second-gen. Given that you have kind of the second-gen product that that's supposed to be a little simpler to make, how should we think about both AI kind of launches and pipeline going through the year? Are you kind of waiting to get more of that second-gen product before you pursue kind of a higher level of AI wins or how should we think about that pipeline?

Brian Krzanich, CEO

No. What's nice is that most of our products, from Chat Pro to NextGen 1 and NextGen 2, are backward compatible. This means we can upgrade customers without slowing down the process, which is something we want to avoid. When customers look at our offerings, whether it’s Chat Pro or NextGen 1, or if they want to move directly to Gen 2 from Chat Pro, we’re able to assist them with their choices. We present the different products and our future direction, guiding them through the selection process. We discuss their desired features and experiences. Some customers prefer a solid operational experience with natural language capabilities, while others may want a true assistant in the vehicle, like Renault's avatar, Reno, which serves as an assistant and has plans for integration across their product line and beyond. In such cases, we collaborate with them to transition from current capabilities to what Gen 2 can offer. This ensures a smooth experience for customers as they engage with these products. There won't be any need to stop selling Chat Pro or Gen 1 to focus on Gen 2; we can fluidly transition between them and even offer upgrades through wire updates to enhance everyone’s experience in the future. We possess the necessary capabilities within our product line. Does that clarify your understanding of our product portfolio?

Aman Gupta, Analyst

Yes. That was super helpful. Thank you very much.

Operator, Operator

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Brian for any closing remarks.

Brian Krzanich, CEO

Thank you all for joining the call this morning. I found the questions to be very insightful, and I appreciate your interest in our business. I hope you can tell from Tony's and my comments that we are genuinely excited about the direction of the company. For 2025, our main focus will be on execution to reach the goals we discussed this morning and to return to profitability. Tony mentioned that we have plans in place to address the debt, and we anticipate having updates for you by the next quarter. The organization has successfully navigated this transition, and we are all eager about our next-generation products. Our other key focus for 2025 will be to ensure that our customers experience the benefits of these innovations. Once again, thank you all for attending this morning, and we look forward to seeing you at the end of the next quarter to share our progress. Thank you very much.

Operator, Operator

Thank you for your participation. This does conclude the program and you may now disconnect. Everyone have a great day.