Ladies and gentlemen, thank you for standing by, and welcome to the Cerence Second Quarter 2020 Earnings Conference Call. [Operator Instructions]. It is now my pleasure to introduce Vice President of Investor Relations, Rich Yerganian.

Thank you, Andrew. Welcome to Cerence's Second Quarter 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, we 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 is Sanjay Dhawan, Cerence's CEO; and Mark Gallenberger, Cerence's CFO. As a reminder, the only authorized spokespeople for the company are Sanjay, Mark and myself. Before handing the call over to Sanjay, I'd like to announce a few upcoming investor events. We will be participating in several upcoming ones. All of them have been converted to virtual events. So the exact timing of our participation is subject to change. Please visit our Events page in the Investors section of our website for the most up-to-date information on our participation. The conferences include the Craig-Hallum, Cowen and Baird investor conferences, the Needham Automotive Investor Day and Deutsche Bank's Global Automotive Day. Now on to the call. Sanjay?

Thank you, Rich, and welcome to everyone on the call. As you can see from our earnings press release, we had a fantastic second quarter. We set a record in the first half for total bookings, signed the 2 largest contracts in the company's history, announced several other important strategic wins and delivered financial results that exceeded most of our guidance metrics. Compared to Q2 of fiscal 2019, our total revenue grew 23%. And while our gross margin was up slightly, on a non-GAAP basis, our operating margin improved 31%. Adjusted EBITDA margin improved 26% and earnings per share improved 39%. But before I comment further on our strong quarter, I'd like to take a few moments to discuss a topic that is on everyone's mind, the impact of the virus on our business and how we are adjusting to it. At Cerence, we're lucky in that across our employee base we have had only 1 person test positive for the disease, and that colleague has since fully recovered. This is very good news because the first priority for me and my executive team is to ensure the health and safety of our employees. We have created a crisis response team that meets daily and is tasked with closely monitoring the situation across the world, keeping employees informed on the latest development and planning for the necessary actions to protect our employees' health and safety as we eventually return to working in our offices. While the global mitigation efforts are having a positive impact in slowing the spread, it has also resulted in a severe disruption of global economic activity, forcing most businesses to suspend operations or at a minimum work remotely. We are fortunate that we can have a measured approach to returning to the office because as a…

Thank you, Sanjay. I'll first review the strong performance for the second quarter of fiscal year 2020 and then offer commentary on the steps we have taken in response to the impact of COVID-19 on our business. We will then take your questions. Because the impact of a virus didn't hit until late in the March quarter, we were able to deliver excellent results. As Sanjay mentioned earlier, we saw the largest bookings for the first six months in the company's history. In most cases, these bookings won't be generating license or cloud-connected revenue until approximately two years from now. As you can see from the table, we exceeded most of the metrics that we provided in our Street guidance. Specifically, we exceeded guidance on revenue, non-GAAP operating margin, adjusted EBITDA and non-GAAP earnings per share. Our GAAP revenue for the quarter was up approximately 23% compared to the same period a year ago, led by a 55% year-over-year increase in our professional services revenue, which is a leading indicator of future growth potential for our license and connected businesses. Our non-GAAP gross margin increased from 69% to 70% year-over-year. However, our gross margin came in slightly below our guidance range of 71% to 72% due to product mix, which was led by higher-than-expected pro services revenue, which is lower margin than our license and connected products. Our non-GAAP operating margin was 31%, up from 23.6% in the same period a year ago. Adjusted EBITDA was up 55% to $29 million, compared to the same period last year, and our non-GAAP earnings per share was $0.43, up from $0.31 in the same period last year. Our accounts receivable balance increased by $27 million from the prior quarter, resulting in a negative cash flow from operations of approximately $10 million. The…

[Operator Instructions]. And our first question comes from the line of John Sager [ph] with Evercore.

I had a couple of questions. Just on the prepay strategy. You saw the benefit in the quarter. So two quick questions around that. Can you just talk about how we should think about the cadence of that coming through on a quarterly basis. And then if you could talk a little bit about how that drives the strategy? And then one more question. Can you just give an idea of content per vehicle on some of the highest end vehicles where both license and connected, something like VW ID, where it's got voice, light and interior and HMI seems to be pretty extensive. Can we get content per vehicle on those platforms to be as high as $20 per car?

Sure. So I'll take the first question as it relates to prepay, and then I'll have Sanjay chime in a little bit on the -- on your second question. So as it relates to prepays, they can be lumpy from 1 quarter to the next, as you can see the large increase from Q1 to Q2. As we had stated previously, we are looking to have prepays flat to slightly down from the prior fiscal year. Prepays last year ran around $43 million. Right now, between Q1 and Q2, we're at about $23 million. So we're probably a little bit ahead of plan as it relates to prepays. Right now, I just don't know exactly what's going to happen in Q3 and Q4. But we're probably going to be at that plan or maybe even above it at this point in time. And so we don't want to expand prepays in a significant way. But we do want to be conservative in terms of changing prepays from 1 year to the next. One of the benefits that you know is that we do get these fixed contracts upfront which locks in a certain amount of licenses for vehicles that are going to ship in the future. And the other benefit is the fact that we do get the cash upfront, too. So in many cases, we'll get the cash within 30 to 60 days in many of the prepay deals, which actually would help some of our short-term cash flow as we go through this more difficult period. So there is some benefit to some of the prepays. So I'll turn it over to Sanjay to make other comments on your second question.

Sure. Thank you, Mark. Just to conclude on the prepay discussion first. The prepays are initiated by the OEMs, mostly their purchasing departments do request for discount, each purchasing group in an OEM has yearly targets. It's the way the industry works and something that we have to also participate because purchasing departments typically have a target to achieve, and they are pretty diligent about it. In Q2, at CES, I was there in that meeting when this discussion of -- with the purchasing department of one of our OEMs started, right? And what resulted into was the prepay numbers that you see on our financials. We try to control it as much as we can. But to work with the automotive OEMS, some of this is something that we have to participate in. And one of the conditions of any discount from our side is to basically get the cash upfront through this prepay mechanism. To answer your first -- the other part of your question, which is about the content per car. At the Investor Analyst Day in February, we did communicate that we plan to -- our goal is to double the content per car, the revenue per car from where it is right now to almost double in the next 2 to 3 years. And we're adding other new products to enhance that. And so getting to roughly $15 to $20 per car is the target that we are definitely going towards. And the way we are going to basically meet that is the voice platforms has a certain ASP, but we are bringing in multi-modality interactions on -- and combining that with our voice platform. So combining a product called Cerence Look, gestures and other interaction mechanisms and bringing it all together to deliver and also realize higher revenue per car.

That's great color. So if I think about double as an average, is it fair to say then that some of the super premium could be quite high?

I think the super premium will be in the range that you're talking about. But also, there is revenue on the cloud side as well, right? So there is more than the numbers that we discussed because there is a cloud and connected services component to it as well.

All right. And then just one more, if I could. You guys mentioned something about the cyclicality of the professional services division being a little less cyclical than traditional businesses. But will that go down with the furloughs in Q3? Because typically, you guys are on-site for those -- to generate those revenues, right?

No. We are not on-site. We are doing the professional services part -- 90% of it happens in our own offices, our own labs. There was a little bit of an adjustment because of COVID-19 because even the lab access of Cerence was disrupted to some extent and many of our engineers took some of the hardware home with the permission of automotive OEM so that they can continue their work from home. So we don't expect major disruptions there. And we're certainly hoping that there would be some level of opening that we have already started in Germany and in some of our European offices so that the -- our employees can maintain the social distancing, but they can still come at odd hours in the labs to do the testing and the final tuning that takes place on the car and so on and so forth.

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

Just wanted to ask about the guidance. Obviously, you've got a very strong backlog, and we see that amortize into revenue. So in terms of your, say, total revenue per given year, like how much of that is already known just based on the backlog you have, and how much is variable from new bookings ultimately coming through the P&L? Just trying to get a sense of the magnitude there, given the decision to pull guidance for the rest of the year?

Yes. So I can start with that one. As you know, our backlog is committed contracts. However, it's not committed volume. And so even though we do have a sizable amount of backlog and we can see into the future, understanding how that backlog converts into revenue is really a function of forecasts and actual auto units being manufactured. So that's what makes it difficult in short term to predict what those unit volumes and what those production units look like. And that's what makes it challenging. So we do believe that the backlog is still very strong and solid. But to try to understand how that's converting short term into revenue, especially as it relates to the licensing line, that gets to be quite challenging.

Got it. That makes sense.

Okay. Chris, let me just add a little bit more. Sorry, we're all remote. So there's a little bit of a coordination issue here between Mark and I. But just to add to that. The backlog, like Mark rightly said, there is a function to the auto SAAR, obviously, right? But we monitor our backlog with multiple different sources of information. Obviously, we get forecast from the OEM. We get forecast from IHS. And then we have our own kind of intelligence based on multiple years of history of working with various different OEMs to forecast what the -- how the backlog will convert to revenue. And although this Q2 was the second quarter as me as the CEO and as I was watching our forecasting and so on and so forth, we are very accurate in the forecasting, but the problem now is that looking forward for Q3 and Q4, because of COVID-19, the shutdowns at the factories and all that stuff and when the economy is different [indiscernible] at different times, that is kind of what's creating a little bit of a challenge for us to what otherwise was a pretty solid forecasting mechanism for us.

Got it. That makes sense. And maybe just one more question as it relates to accounts receivable, Mark, I know you mentioned in the prepared remarks, some of the factors impacting that there. But I guess as it relates to payment terms, in particular, can you maybe talk a bit about what percentage of your customers are looking for some sort of relief on payment terms? How big of an impact was that in the quarter? And maybe also anything you can say about the potential impacts of that as well in the coming quarters?

Sure. Sure. Yes. I think everybody, including us, when it comes to the payable side of the balance sheet, everyone's trying to stretch, everyone through the whole supply chain. And so it wasn't so much looking for a permanent or even a temporary concession on payment terms. It was just things that we expected to come in the second half of March, and they just simply did not materialize. And since then, we've had a very strong April collections month over $30 million. And so a lot of those just came in, in the first week, second week of the quarter, of the new quarter that is. So I don't think it's necessarily going to be a permanent dislocation here. But I just think with such a big change in working capital for many companies through the entire supply chain, everybody was scrambling to kind of stretch everybody else. And so there was just -- really just not so much that we could do to try to pull that in and just accept the fact that it's going to come in the first or second week in the new quarter. And that's what we're starting to see. So I think going forward, I think, hopefully, things will start to stabilize, and we won't have as much of that issue in future quarters. But as you know, most of our customers are large Tier 1s, large car manufacturers, and they do have the wherewithal to make the payments. So we're confident that the payments will be made. There's no question of that.

[Operator Instructions]. Our next question comes from the line of Jeff Van Rhee with Craig-Hallum.

Great. Maybe a little different angle for me here. I think as it relates to the bookings, obviously, a phenomenal quarter. I'm kind of curious, you said most development efforts are continuing unabated even though production is off. But if you look at the pipeline after what you just booked, which was tremendous revenue, what's the depth of the pipeline look like now? And in particular, within that, can you focus on the flow of connected deals, the number of deals that are up for bid, win rates. I'm just -- I'm more interested in the competitive environment and bookings backlog environment.

Let me take that. So the pipeline for new business remains very strong. Our sales team is very focused, very busy. We have tried to kind of adopt to the COVID-19, everybody working remotely. So we're doing a lot of our product capabilities and demos through video, a bit strange. Because normally, we would basically take the car in with all the new products running and show a live demo to our customers. But instead, now we're kind of using video and other mechanisms to kind of continue our sales conversations with various different customers. So our pipeline across all regions remains strong. We have not seen major delays of new platform deadlines that customers may be thinking about, right? There was -- there were a couple of weeks of kind of slowdown during late March, early April. But it has picked up. And we're having multiple customer conversations. Just to give -- to reflect my -- yesterday, I had four customer meetings, yesterday alone, right? So in 1 day. So that hopefully tells you that there is plenty of activity from a new pipeline standpoint. In terms of the win rate and other part of your question, we do think that we have mentioned previously that we have a 90% win rate. And we try to monitor that very closely to make sure that we're aware of all the -- all RFPs, and we track it and so on and so forth. I think we're maintaining that leadership still -- that's the way I'm seeing it.

Okay. Great. And then one also similar to that. The SaaS ARR focus before COVID hit or even post, I mean any other developments there? I know as you laid out your long-term model, you had some pretty decent aspirations there over the next several years of what you think that the SaaS business can become. Any updates or meaningful developments there since we last talked?

We are in discussions with about half a dozen OEMs about some of those products, the new products. We have created a dedicated team with a dedicated leader, who's going to be basically kind of focusing completely full time on to that SaaS ARR line that I discussed with all of you during our Investor Day. And we hope to shortly in the second half of this year and beyond come back with some more progress on that.

And I'm showing no further questions at this time. So with that, I'll turn the call back over to CFO, Mark Gallenberger, for closing remarks.

Okay. Well, thank you very much for everybody taking the time to spend with us this morning to discuss our results. And we really appreciate your time and interest in the company. As Rich had mentioned, we are going to be doing 5 conferences in late May and early June. So we hope to see you there virtually. Thank you very much, and have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect.