Earnings Call Transcript - CRNC Q4 2020

Richard Yerganian, Vice President of Investor Relations

Thank you, Dillon. Welcome to Cerence's fourth quarter and fiscal year 2020 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 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. Once again, on this conference call, we will be demonstrating Cerence Technology. The prepared remarks will be read using our voice cloning technology driven by our neural AI-based system called Geely. What you're about to hear are computer AI-generated voice clones of Sanjay and Mark. Following the voice clone's prepared remarks, the real Sanjay and Mark will join the call for Q&A. Pay close attention to see if you can hear the difference. Before handing the call over, I would like to announce a couple of upcoming investor events. They are all virtual events, so the exact timing of our participation is subject to change. The conferences include the Wells Fargo TMT Summit 2020, Raymond James 2020 Technology Investments Conference, the Needham growth conference, and the 2021 Goldman Sachs Tech Interconnect Conference. Please visit the events page in the investors section of the Cerence website for the most up-to-date information on our participation. Now I want to turn the call over to Sanjay.

Sanjay Dhawan, President and CEO

Welcome to everyone on the call, and thank you for joining us to discuss Cerence's fourth quarter and our fiscal year results. The majority of my comments will be on the achievements of our exciting first fiscal year as a stand-alone public company, but I would be remiss if I did not first review the great results of our fourth fiscal quarter. By all accounts, our fiscal fourth quarter was the best quarter in the company's history. We had record revenue, record gross margin, record EBITDA, and record cash collections. The financial performance of the company was amazing with 10% revenue growth year-over-year and 22% revenue growth sequentially. In particular, non-GAAP earnings per share at $0.61 per share was 88% above the midpoint of our guidance of $0.33 per share. The outperformance was primarily driven by great adoption of our products and services by the auto OEMs, the strong recovery in the auto market, coupled with the prudent financial controls we have implemented in recent quarters. As you can see in the guidance that we provided in the press release, we expect our first quarter revenue to be up approximately 10% to 16% compared to the same period in the prior year. For the full year, we expect revenue to grow between 9% to 15% over fiscal '20. We recently celebrated our 1-year anniversary as an independent company. And despite the challenges from the onset of COVID-19, we are extremely pleased with the progress the company made during its first year. We separated from Nuance with minimal disruption, delivered a steady stream of new products and technologies had record bookings, including two of the company's largest contracts in its history, and delivered fiscal year results on track or better than the guidance that we provided at the beginning of the fiscal year before the arrival of the pandemic. Most importantly, we established Cerence as a leading company in the very important conversational AI space for transportation and mobility, gaining a leading role in a consumer's experience inside the car and with other forms of mobility. Our participation as an independent company at the Consumer Electronics Show earlier in the year resulted in over 500 meetings with customers, investors, and the press. By all accounts, the show placed us among the leaders for auto technology and innovation in the car. We also opened the NASDAQ market and hosted an Analyst Day to help introduce the company to investors and other stakeholders. Among the key accomplishments during Cerence's first year, we saw bookings increase by more than 70% compared to fiscal year '19, resulting in an ending backlog of over $1.8 billion. These bookings included several highly strategic competitive wins with both our traditional OEMs and also including a number of electric vehicle manufacturers, including NEO, a company many consider to be the Tesla of China. We maintained our strong position in the embedded voice-assistant market and expanded our portfolio of connected car customers. As CEO, my strategy is to drive the business with three priorities. The priorities are to drive product innovation, speed of execution, and cost control. Product innovation is the most critical element of a leading technology company, and I drive the team very hard on this. The steady stream of amazing technology and products we have introduced during the first year is very exciting. We enhanced our core technologies and leveraged our embedded position inside the infotainment system to gain access to all the sensors, cameras, and microphones. This allows us to deliver new capabilities such as gaze detection, emergency vehicle detection, and many others. We also introduced Cerence Reader, which can read articles with near human-like inflection and sound that even adjusts how it voices an article depending on if it is news, sports, or something else. One of the other key products introduced during the year was Cerence ARK, developed and first introduced in the China market, but now available in other geographic regions as a faster time to market, lower cost solution for providing leading-edge voice assistant capability in a car. Cerence ARK comes pre-integrated with cloud-based connected services and provides a turnkey solution for our customers. We have introduced two new source applications, Car Life and Cerence Pay. Car Life is a new suite of AI-powered software as a service or SaaS offerings that provide drivers with the best and most up-to-date information about their cars, helping them learn about the car's capabilities or even scheduling service appointments when needed. Cerence Pay uses voice biometrics to allow in-car purchases using your voice to initiate the transaction and will generate revenue on a transaction basis. I've only mentioned a few of the key products and technologies that we brought to market this year, which leads me to my number two priority, speed of execution. It is critically important to not only innovate, but to quickly translate that innovation into quality products and get them to market. One of the most important functions within the company is our product management group chartered with turning ideas into products. They have been extremely effective this first year. And as we look to fiscal year '21 and beyond, the new product momentum will continue to race ahead. The third priority I drive is cost control. We have to innovate, efficiently convert that innovation into new products, but also do so while keeping cost controls in mind. How successful we are at these three priorities is what ultimately leads to our financial performance as a company. And while Mark will review the details with you shortly, I want to point out some key financial achievements for the year. In February, we announced our first quarter results and updated our fiscal year guidance to reflect better profit performance on key metrics while keeping the revenue range the same. Shortly thereafter, we hosted our first Analyst Day event and introduced a midterm target model for fiscal year '24, showing a 15% CAGR from fiscal '19. Then the pandemic hit, bringing the resulting impact on the auto industry becoming quite severe as stay-at-home orders were implemented throughout the world. We quickly made adjustments to our business, saving approximately $12 million of cost in the second half of our fiscal year. With the business holding up better than expected in our third quarter, and the excellent results in our fourth, we were able to deliver better results than the guidance that we had provided pre-COVID. Another accomplishment during the year was our successful refinancing of the expensive debt that we received as part of the spin-out. This restructuring of debt is saving the company over $10 million in annual cash interest expense. Last quarter, we first presented to you a series of KPIs, which we think provide additional insight into our business. We have updated those KPIs to reflect our fourth quarter results and have also added additional ones. The new KPIs are to provide insight into the trends of using connected services by drivers of cars with our technology. Overall, our KPIs continue to indicate strong business momentum. While connected cars shipped in fiscal '20 declined 16% when compared to fiscal '19, overall car production declined 19%. Certainly, COVID had an impact on both our connected car shipments and car shipments as a whole. The 14% growth in our billings per car is primarily driven by the expansion of connected services into more and more car makes and models. This is consistent with the secular trend of increasing penetration of this technology. The new KPIs we are providing are related to the use of connected services in the car. The chart on this page shows the number of active monthly users and the number of monthly transactions. You can see the consistent growth trend over time, then interrupted by the impact of COVID and then the recovery. Overall, we would expect that as more and more cars become connected that this chart will show acceleration in both the number of active users and monthly transactions. As we look to fiscal year '21, we expect to keep the business momentum going. In a recent study published by Adobe, 92% of people that use voice technology in a car say that it makes them feel safer while driving. Providing enhanced safety in a car is a core part of our mission. The same study also reports that 86% of respondents feel that using voice technology outside the car makes them feel safer in the age of COVID. This has created additional opportunities for the application of Cerence technology to mobility solutions, such as elevators. We will continue to aggressively pursue innovation in our core technology, launch new products and applications, and expand further into adjacent markets such as two-wheel vehicles, building mobility, and others. The future for Cerence remains very bright and exciting. I would also like to thank all of our Cerence employees for their support in this successful journey. We cannot deliver these results without the dedication and support of Cerence's employees across the world. I would like to turn the call over to Mark to review the financial results of the quarter and for the year.

Mark Gallenberger, CFO

Thank you, Sanjay. I'll first review the strong performance for the fourth quarter and then review our results for the full fiscal year. I will then provide guidance for our first quarter of fiscal '21 and for the full year. By all accounts, our fourth quarter results exceeded all expectations. Revenue came in at $90.9 million, almost $11 million above the high end of our guidance. The higher revenue was driven by a strong recovery in our license business, which was up 43% over the third quarter along with a 12% sequential growth in our professional services business. Our profit performance was exceptionally strong with non-GAAP operating margin coming in at 42%, adjusted EBITDA of $40 million or 44% margin, and non-GAAP earnings per share of $0.61. The lower spending plan that we implemented in April is the key factor for the elevated margins in the second half of the fiscal year, particularly in the fourth quarter. However, these cost savings will ultimately return in fiscal year '21. So I would caution investors and analysts not to read too much into the elevated margins achieved this quarter. Regarding the breakdown of our revenues. As previously mentioned, we had a strong recovery in our license business, which was up 43% from the third quarter and up 3% from the same period last year. Our variable license revenue recovered from the low point in the third quarter and was up 64% sequentially as auto production exhibited a very strong recovery during the quarter. For the full year, our license revenue declined 5% due to the impact of COVID-19, while auto production was down 19% over the same time period according to IHS. Our fourth quarter connected services revenue grew by 9% year-over-year, driven by an increase of 23% from our new connected services. For the year, the growth for new connected services was 62% versus fiscal year '19. We expect our new connected services to be a key driver of our growth in the future, driven by a combination of the secular trend of more and more cars becoming connected as well as share gains. Our professional services business grew exceptionally well this year at 33% and tends to be a leading indicator of future growth potential for our license and connected revenues as this business represents the upfront consulting work performed to customize and integrate our software solutions prior to startup production. Not surprisingly, our strong bookings performance this year has led to growth in professional services. For the fiscal year, we were able to exceed all the key financial metrics of the guidance we provided before the onset of COVID-19. This is a significant achievement considering the impact the virus had on the auto industry. Our revenue performance reinforces our ability to continuously outperform the AUTOSAR and our decision to adapt quickly by reducing expenses enabled the business model to outperform expectations. Our fiscal year ending backlog grew approximately 32% from a year ago and is slightly over $1.8 billion versus $1.36 billion a year ago. The growth in backlog was driven by record high bookings of $836 million for the year, which is up 70% compared to the prior year. The backlog is comprised of $967 million for license, $740 million for connected, and $106 million for professional services. This represents year-over-year growth of 59% for license, 12% for connected, and 8% for pro services. Our guidance for the first quarter reflects strong year-over-year growth of 10% to 16%, while global auto production is expected to be flat to down 5%. The business model will still benefit from the COVID-19 expense reductions taken in fiscal '20 as those expenses will be added back during the course of the year. As a result, the first quarter will see enhanced margins resulting in non-GAAP gross margin of 71% to 72%, non-GAAP operating margin of 34% to 36%, adjusted EBITDA of $31 million to $35 million and non-GAAP earnings per share of $0.48 to $0.55. For the full fiscal year, we expect to grow the top line between 9% to 15%, representing another strong year of growth. The margins for the full year reflect the complete restoration of expenses that were reduced in fiscal '20 and the elimination of our hiring freeze, both to support the expected growth in the business. We expect another strong year of adjusted EBITDA and cash flow from operations generation and our non-GAAP earnings per share is expected to be in the range of $1.81 to $2.05. So in summary, we expect the momentum developed in fiscal year '20 to extend to fiscal '21 and beyond. Our employees are focused on our three priorities of innovation, speed of execution, and cost, which is keeping the company not only on a steep growth trend but doing so while delivering excellent financial results. With a strong backlog that provides visibility well into the future, a steady stream of new technology and product introductions, and a strong business model, Cerence is well-positioned for long-term profitable growth. This concludes our prepared remarks. And now we will open it up to questions.

Operator, Operator

I show our first question comes from the line of Raji Gill from Needham & Company.

Raji Gill, Analyst

Congratulations on excellent results. Sanjay, a question on the growth that you're seeing in licensing, both on the backlog but also on the sequential. I was wondering if you could maybe elaborate further in terms of what you're seeing there in terms of the attach rates. And what is kind of making you outgrow the overall automotive market, even though you're not necessarily tied to auto production? There is a certain percentage of your revenue that's tied to production and you seem to be outgrowing that. Just any color on the licensing. And then just on the connected services being down on a year-over-year basis. How do we think about connected services in terms of the attach rates for calendar '21? What kind of main application do you think will drive a higher attach rate for connected services next year? Thank you.

Sanjay Dhawan, President and CEO

In terms of the license revenue, I think we have talked about our penetration story over and over. Basically, what we see is that more and more voice conversational AI is becoming increasingly important. More than important, it's becoming strategic as a function for the automotive OEMs, and they are basically bringing that technology more and more into what used to be mid to high end cars, but also into the low end car as well. So that's the main reason why we continue to kind of increase and grow faster than the AUTOSAR. That trend will continue. We're absolutely seeing that and I cannot emphasize it more clearly than the customer discussions leading to this technology being very strategic to an auto carmaker. Regarding the connected services, same thing. As you know, our architecture is hybrid so we have a certain part of our product that runs inside the car and with cloud connectivity, we can provide even better sets of services and better interesting capabilities to the driver of the car. We see a similar trend happening there as well. The thing is that connected services get recognized as SaaS revenue. It's sold as SaaS. It's recognized as SaaS. So obviously, kind of the growth rates are slightly slower from the adoption standpoint and so on. But there is no difference from a trend standpoint. If anything, we expect connected services, as I look forward over the next three years, to be a bigger growth driver for our business than anything else. You will see some very exciting new connected services products that we'll be releasing in December, which I'm hoping will increase the growth rate even more.

Raji Gill, Analyst

And just for my follow-up, Mark, when looking at the piece parts of licensing and connected services. So just on licensing, the prepay, there was 46% growth year-over-year in prepay. How do we think about prepay going into next year? This year, obviously, because of COVID-19, there were extenuating circumstances which changed buying patterns for customers. So how do we think about that revenue stream next year? And then on the connected services side, the legacy saw some 3% growth year-over-year. How do we think about legacy revenue going into next year and how does it kind of roll off throughout the quarter?

Mark Gallenberger, CFO

As it relates to prepays. Last year, we did $54 million in fiscal year '20. The year before, it was around $43 million. If you go back to FY '18, it was around $53 million or $54 million. So we seem to be in this range of low 40s to low 50s. So going into fiscal year '21. I certainly would expect us to be within that range. If you recall, in the past, I have said that we're sort of biased towards reducing prepays. However, that's not always inside our control because we have our customers' demand as well and so that sometimes ebbs and flows. So I think going into FY '21, my view is that it would be down from fiscal year '20 but certainly, I think it's going to still be within the range that we have seen over the last several years, which is low 40s to low 50s. So long-winded answer to your question, but I think that's about the range that we're going to see for FY '21. Regarding the legacy connected revenue, we are seeing that revenue plateauing in FY '21. So last year, we did about $63 million in legacy connected revenue for the full year. I would expect for FY '21, that to be flat year-over-year. Starting in fiscal year '22, you'll start to see a decline in that legacy revenue as that program just winds down. By the time you get to fiscal year '26, fiscal year '26 should be the last year in which we'll see some revenue probably down in the $8 million range in fiscal year '26.

Operator, Operator

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

Daniel Ives, Analyst

Again, can you talk about geographically, just talk about maybe China and India as markets and sort of what that represents in terms of growth opportunity over the coming years?

Sanjay Dhawan, President and CEO

I’ll begin, and then you can add your thoughts. We've focused intensely on China for nearly a decade and have secured a substantial market share among Chinese OEMs, holding a dominant position with 80% to 90% for global OEMs shipping cars to China. This clearly sets us apart as a leader. Even while facing local competitors in China, we’re closely matched in market share. In the last quarter, we announced several new customers, including NEO among others. Overall, our progress in China has been impressive, as it remains the largest market for new car shipments annually, and we are effectively involved in that growth. India presents a smaller automotive market compared to China, but we are also making strides there. We recently partnered with one of the top three local auto OEMs, which was a significant achievement for us, and we hope to share their name soon. Although the Indian market is smaller, we’ve noted opportunities in the two-wheeler sector as well. Last quarter, we secured our first two-wheeler customer in China and are engaging with multiple two-wheeler manufacturers in both India and China. This sector is substantial, where our technology can enhance driver experience through hands-free capabilities, allowing users to access conversational AI-based services while focusing on driving. We’re actively exploring collaborations with various e-scooter companies as well. Mark?

Mark Gallenberger, CFO

The only other thing I would add is the China market for us, you've got two drivers, indigenous Chinese OEMs as well as the foreign OEMs that sell into China. I think we've got a very good market position in both of those areas. I think the introduction of some of our, as Sanjay mentioned, some of our technology for two-wheelers that's where we're going to see some good growth as well as the Cerence ARK product, which is really geared towards some of the lower-end, lower-cost markets. So that would also be, I think, a good opportunity and fertile ground for us to grow inside of markets such as China as well as India.

Operator, Operator

Our next question comes from the line of Chris Merwin from Goldman Sachs.

Chris Merwin, Analyst

Congrats on a great finish to the year. I wanted to touch on the backlog; it looks like that increased, I think, by about $400 million relative to last year. I think it's almost 30% growth. So can you just give us a sense of that incremental backlog that was generated, how much of that was license versus connected? And then also, how should we be thinking about the timing of that backlog being recognized as revenue in the coming years? Thank you.

Mark Gallenberger, CFO

The license backlog grew quite a bit; it went from about $600 million last year to over $960 million at the end of this year. So year-over-year growth on that portion was almost 60%. So pretty substantial growth there, followed by connected and then lastly, pro services. In terms of our overall growth, we had over $800 million in total bookings. When you factor out what we shipped out of backlog this year, our total growth in the backlog was about 32% to 33%. So very, very strong year for bookings. Regarding how that's going to shift in terms of revenue over the next several years, that gives us a lot of good visibility. Clearly, I would say, I don't have the numbers in front of me, but I would say 50% or more of this backlog is likely going to ship over the next three-year period. And so we've mentioned those numbers in the past. I think those numbers are still valid in terms of how much we'll ship over the next several years. And that, of course, it's not 50% every year; it's going to be much higher this year, of course. As you get further out, those percentages naturally decline a little bit. But all in all, it gives us good visibility into the business. It really sets us up for good growth in the future, gives us some predictability as to what's going to be happening over the long term. And there will be obviously ebbs and flows. We had one ebb this year, which was COVID where things kind of slowed down, but I do expect things to pick up next year and beyond.

Chris Merwin, Analyst

I just want to clarify something. It seems that licenses represented the fastest growth in the backlog, but Sanjay mentioned earlier that connected services will be a larger driver of the business moving forward. How do we reconcile these two points? Both areas of the business are performing well, but I'm trying to understand which will be the more significant driver in the future. Thank you.

Sanjay Dhawan, President and CEO

So Chris, I wanted to mention that we launched several new products last quarter and you'll notice more innovative connected services that are completely new concepts, which we are currently discussing with various OEMs. Additionally, we plan to introduce what we refer to as our 1.x cloud, which will significantly enhance our cloud performance, offerings, and services. The initial conversations with a variety of OEMs indicate strong market interest in these new products. I anticipate that the bookings and revenue growth will continue to accelerate. Looking at year-over-year data, our new connected services have increased by about 60% compared to the traditional offerings, indicating robust growth in the new connected services when excluding the legacy aspects.

Operator, Operator

I show our next question comes from the line of Chris McNally from Evercore.

Chris McNally, Analyst

Thank you for the detailed presentation and impressive demonstration. I have one question regarding the model and another about auto technology. Regarding the model, I understand that your assumptions are based on a bottoms-up approach rather than on IHS specifically. However, I'm curious about how conservative your actual global production estimates might be. For reference, IHS is projecting an increase of 13%, while LMC is estimating an increase of 15% to 16%. This is likely to benefit your licensing revenue significantly. Could you provide any additional insights on that?

Mark Gallenberger, CFO

Sure. I can start, and Sanjay, if you want to fill in. Yes, we do a bottoms-up based upon our backlog. We try to sanity check all those estimates with third-party forecast information. I think when you look at our growth in fiscal year '20, we grew 9% year-over-year while auto production for that same time period was down 19%. So we had a 28-point spread in fiscal year '20. However, when you look at some of the prepays that we did in fiscal year '20 and you adjust that to be kind of flat year-over-year, that probably accounted for about 4 points of growth. So if you adjust for that relative to our guidance for fiscal year '21, you could effectively add another 4 points just to kind of get you to an apples to apples comparison on the effects of prepays. Then, of course, you've got to factor in what I mentioned before, which is the legacy connect it is plateauing whereas historically that was growing each year. Now, we're going to see that not grow in fiscal year '21. So those two points, in conjunction with there is still a fair amount of uncertainty out there as it relates to COVID. Different flare-ups here and there may put certain forecasts at risk. So we just want to make sure that we are conservative going into the year just because COVID is still an unknown, quite frankly.

Chris McNally, Analyst

But it sounds like license is still going to be quite strong next year. If we take the sort of 10% to growth that you have for the total business and assume there's not much in professional, we can pretty much lay that maybe not equally, but it sounds like license will be a little bit stronger than even connected for next year's growth?

Mark Gallenberger, CFO

I think license will continue to show growth. I also think our pro services, even though we're coming off a very strong year, I would expect pro services to grow year-over-year as well just because we've got a very good pipeline of new opportunities and new design wins. So I don't think I would put all the growth in the license. I think also pro service is going to show good growth. Not to mention that the new connected services have also been growing. So just a smaller base, of course, but it's still showing very good growth, 62% year-over-year growth on the new connected services. I would expect all of our three line items to grow year-over-year. It's not going to be all just in license.

Chris McNally, Analyst

Maybe it's just hard to nail down a specific number, but it sounds like the growth is continuing to be good in all these. Perfect. Maybe onto the new tech, when you talked about the $75 million for 2024 in your first CMD, the new revenue streams, you have the SaaS opportunities and I think you've talked about Car Life and Cerence Pay. I think we're going to get details on maybe even the third one soon. Could you just order of magnitude, talk about the order book from those specific opportunities, maybe you can just Car Life and Cerence Pay since they've been announced, how much of the $800 million plus bookings again ballpark, just to gauge how early are we in OEM interest for those products?

Sanjay Dhawan, President and CEO

Thank you for acknowledging the demo, Chris. As an engineer, I was thrilled to see the use of Mark and my clone. I believe this was the first earnings call conducted by a clone while Mark and I were enjoying coffee and waiting for the Q&A. It was quite a unique experience. Clearly, our AI models need more training on financial terminology. I noticed that our clone got a bit nervous when it came to terms like non-GAAP. We definitely need to enhance our training on these financial terms. Great job to my team, but let’s ensure we improve our models further on this front. Regarding your question, the new SaaS number is modest. We signed our first contract with a major OEM, but it's a small agreement as they want to conduct a proof of concept and do more work on the new products before making a larger commitment. However, we did secure that contract in the last quarter. There were some larger discussions that I expected to conclude in Q4, but they have now extended into Q1 and Q2. What we've discovered, Chris, is that for some of the applications customers, the revenue-sharing transaction models are distinct from the cost of goods sold for the car. The auto OEMs are very familiar with purchasing processes for their vehicles. However, when it comes to acquiring connected services, which involve a different business model, more in-depth discussions are necessary. Nevertheless, our pipeline for new products and services remains very robust, and I look forward to sharing significant wins in fiscal '21.

Operator, Operator

Our next question comes from the line of David Kelley from Jefferies.

David Kelley, Analyst

Maybe starting with the margin guidance. It's interesting; it looks like you're effectively guiding to your longer-term 2024 target this year. Just wondering, Mark, if you could walk us through maybe the assumed timing impact of the roll-off of some of those COVID-related cost cuts? What benefits will we see this year? And then from where we stand today, do you see any upside to that 2024 EBITDA margin target of 35%, given how we're tracking thus far?

Mark Gallenberger, CFO

Sure, I'll address your last question first. Yes, considering our performance, even after excluding the short-term savings from the COVID measures, I believe our analyst model for fiscal year '24 is conservative with respect to the margin profile. It might still be a bit early to revise those figures, but I prefer to wait a little longer. Overall, those assumptions likely were slightly conservative. However, we will update those numbers during our next Analyst Day and share the information at the right time. Regarding your first question, we will start reinstating the expenses we cut back in the second half of fiscal year '20. In Q1, we anticipate adding back about $3 million to $4 million, and those expenses will remain for the entire fiscal year. Additionally, we expect to add around $2 million in Q2, another $2 million to $3 million in Q3, and approximately $1 million in Q4. So, considering how this will be implemented, that results in around a $30 million increase in fiscal year '21 operating expenses compared to our annualized run rate in Q4. This is on a non-GAAP basis, excluding stock-based compensation and depreciation and amortization. This is how I view the reinstatement of those expenses as well as the unfreezing of hiring.

David Kelley, Analyst

Could you provide some insight into the 14% growth in billings per car that you mentioned, which I believe pertains to fiscal 2020? You have discussed the additional impact of connected sales beyond licensing, but it appears we are also at the beginning of a cycle recovery that could positively affect licensing. I’m interested in your perspective on the opportunity for average selling price expansion this year in 2021.

Mark Gallenberger, CFO

I think the ASP expansion that we saw last year, you do have the layering effect on once more and more cars get connected, you're adding that revenue per vehicle on top of your embedded. That really helps drive that 14% year-over-year growth. But that's not the only thing. We're also seeing ASP expansion with, for example, our license products, because we're adding more features and functions, more bells and whistles that you can demonstrate value and customers are willing to pay for that additional value. So we are seeing expansion, not only because of the layering effect of connected services but also just because we're continuing to innovate and add more features and functions to get some growth there as well.

Operator, Operator

Our next question comes from the line of Joseph Spak from RBC Capital Markets.

Joseph Spak, Analyst

Just going back to your outperformance versus the industry, especially in a portion of the business that is tied to production. So the variable portion. You've definitely been outgrowing that over time. But very specifically in the quarter, that was down about 12%, which is actually below what vehicle production was, which was maybe down 3%. So was there something unexpected there or is that just sort of some timing of some of the programs that you guys are on?

Mark Gallenberger, CFO

I think it's a couple of things. One is a little bit of timing there, but also in Q4 of last year, there were some accounting true-ups that flowed through that revenue, that license revenue line, which I think drove that number a little bit higher in the quarter. That's why you tend to want to look at year-over-year or trend lines versus just one quarter alone because there could be certain things that could potentially skew the numbers and you arrive at the wrong conclusion. If you look at FY '20 variable license versus FY '19 variable license, we were down 15%, while the whole industry was down 19% or 20%. So we still outperformed from that four-quarter perspective. But in Q4 of last year, there were some true-ups that helped increase the revenue in that quarter of last year.

Joseph Spak, Analyst

So that's sort of the spread you would expect, the outperformance from a variable portion that you would sort of expect us to…

Mark Gallenberger, CFO

I would expect outperformance over a trend period. With the technology getting more and more penetrated inside vehicles, it should be natural to assume that over those trend periods, we should be outperforming the auto production.

Joseph Spak, Analyst

Looking at the broader perspective and future possibilities, as we consider new products like Cerence Pay, do we have any insights from discussions with automakers or customers regarding how these will function and their adoption rates? Will the automakers or dealers bear the costs, or will this be passed on to consumers? Additionally, we've received feedback during the pandemic about customers seeking more convenience, such as touchless payment options. Have you observed anything in the vehicles currently in the market or from conversations with customers that reassures you that there will be a demand for these services?

Sanjay Dhawan, President and CEO

I can absolutely say categorically that the conversational AI space is becoming more and more important from an OEM standpoint. I'm in customer discussions every week all over the world, and that's one single message that I hear again and again and again. Second, we did get our first renewal of connected services. I mentioned this in my press release comments. It's a small renewal, so not a big number to boast about, but it's a good trend that customers care about these services in the car, and these were cars that were shipped six, seven years ago. They did a renewal with us to keep the service alive in those cars, which are fairly old cars on the road. The third point I would make is that on the connected services side, there is a lot of interest, a lot of sales discussions going on. The model that I see emerging is one that you have seen many OEMs bring out. If you go to bmwusa.com connected services, you will see a whole menu of connected services, and you can purchase using a vehicle number. Basically, the cost gets back to the consumer. They package these connected services. You will see our voice as a connected service as well that when you buy a BMW after four years, you basically have to go and pay them a yearly amount to renew those services. I'm hearing from OEMs that more and more customers are getting used to buying these connected services through OEMs. Once the consumers do, a portion of the net revenue flows down to us.

Operator, Operator

I show our next question comes from the line of Jeffrey Van Rhee from Craig-Hallum.

Jeffrey Van Rhee, Analyst

A couple for me, on the connected car wins, can you talk about the competitive landscape? Who you're seeing, what a typical deal looks like? And in particular, do you feel like you're holding your market share or gaining share over time? Just a sense of how you see your share there trending? And then secondly, if you look at the pipeline coming into '21, how does the scope of the pipeline now compare to 12 months ago? Obviously, a huge bookings year. Just wondering what you can share with respect to color about the size of the pipeline at this point.

Sanjay Dhawan, President and CEO

I'll answer the second question first. The size of the pipeline is significantly larger as we enter fiscal '21. Despite a strong booking year in fiscal '20, you might expect the pipeline to be a bit depleted and in need of rebuilding. However, the positive news is that with new products, innovative technologies, and a highly engaged sales team, we're able to sustain a pipeline that is more than double what it was at the start of fiscal '20. What was your first question?

Jeffrey Van Rhee, Analyst

The connected car competitive landscape in this year.

Sanjay Dhawan, President and CEO

No major change there. We saw one OEM, we mentioned Geely adopting who owns Volvo, and that was kind of a nice win back. We have seen one or two other wins back from other competitors during the fiscal year. There are a couple of similar discussions going on right now. Overall, I'm feeling quite good about our competitive landscape and how we're competing. I think the biggest piece here is how we are competing against our niche competitors, whether it's a Silicon Valley-based SoundHound or iFlytek, based in China. I think we continue to work closely on extending the digital life of a consumer in the car and ensuring that we coexist very well with big tech companies, whether those are U.S. tech companies, Chinese tech companies, or other large tech companies. Our product strategy is completely aligned with what we are hearing from OEMs and consumers.

Jeffrey Van Rhee, Analyst

If I could just sneak in two quick ones. The two-wheeler, I don't know what you can share with respect to TAM or unit pricing, but just get a fair number of questions, people kind of wondering what the opportunity and scope of the opportunity is there. And then on connected services, in terms of looking at the bookings, the individual bookings, and when they go live. Is there anything in terms of a bubble or a wave, if you will, of units that are expected to ship as you look over the next six, 12, 18 months, any particular windows where you say a lot of prior bookings are about to go live and start shipping?

Sanjay Dhawan, President and CEO

It's a little too early for us to share the trends on the two-wheeler space. We're in active discussions with about three more OEMs right now. We're positively surprised because they see the value of this technology; one would think that the average ASP would be much, much lower than the auto just because the COG is lower than the automotive COG, but we're positively surprised. But give us a little bit more time to get a couple more deals under our belt so that we're not just making statements based on one or two deals. Mark, do you want to answer the connected services question?

Mark Gallenberger, CFO

On the connected services, we are expecting SOPs and a continued ramp-up of our revenue as well as our billings. Our connected billings would obviously be more of a leading indicator because of the amortization schedule we have with the revenues. So yes, I think for '21 you're going to see decent growth there. But I think in '22 you will start to see even more SOPs hitting and you're going to start seeing accelerated growth in our new connected billings, kind of like a steeper slope in fiscal year '22 versus '21. That's the sort of the horizon. As we've talked about in the past, fiscal year '20 and '21 would be declines in our deferred revenues, and then you'll see that flip and become a source of cash again in fiscal year '22. It's playing out the way we expected it. I think in fiscal year '20, it was a little bit more pressure just because of COVID and production being down. But in terms of the overall shape of how the change in deferred revenues is going to flip in '22, and that's largely going to be driven by a nice increase in new connected billings in fiscal year '22. We are seeing some growth in '21, but I think more growth even more so in '22.

Operator, Operator

I'm showing no further questions in the queue at this time. This concludes our Q&A. I'd like to turn the call back over to Mr. Richard Yerganian for closing remarks. Please go ahead.

Richard Yerganian, Vice President of Investor Relations

Thank you, and thank you, everyone for being on the call. Thanks for your support and interest in the company. We look forward to engaging with all of you in the near future. Have a good day. Thank you.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.