Cerence Inc. Common Stock 2026 Q3 Earnings Call

Welcome to Cerence's third quarter 2026 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, anticipations, intentions, estimates, assumptions, beliefs, outlook, strategies, goals, priorities, objectives, targets, and plans are forward-looking statements. Cerence makes no representations to update those statements after today. These statements are subject to risks and uncertainties, which may cause actual results to differ materially from such statements and expectations as described in our SEC filings, including the Form 8-K with the press release preceding today's call, our most recent Form 10-Q, and our Form 10-K filed on November 20th, 2025. 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 investor section of our website. Joining me on today's call are Brian Krzanich, CEO, and Tony Rodriguez, CFO. Please note that slides with further context are available in the investor section of our website. Before handing the call over to Brian, I would like to mention that we will be participating in the Raymond James 2026 Industrial Showcase on August 13th and the Needham Virtual Semiconductor and Semicap Conference on August 19th. On to the call. Brian?

Thank you, Kate. Good afternoon, everyone. Before we dig in, I'd like to briefly reflect on Cerence's progress as I approach my two-year anniversary as CEO in October. When I stepped into the role, we established a clear roadmap. The first year was about strengthening the foundation of the business, improving our financial profile, restoring profitability, generating cash flow, and reducing debt. I believe we delivered on those commitments. We said the second year would be about execution as we approach the end of fiscal year 2026. I believe we have delivered there as well. We advanced our technology roadmap by bringing Cerence xUI from concept to production. We improved free cash flow, and we are continuing to create value for customers and shareholders. Most importantly, we're now beginning to see the early stages of our next chapter. Cerence xUI is entering into commercialization phase.

Our Agentic AI portfolio is gaining traction. Our non-automotive initiatives are beginning to move from proof points toward revenue contribution. We believe that our fiscal third quarter results demonstrate a company executing against its strategy, delivering strong financial performance, and positioning itself for future growth. In Q3, we delivered another strong quarter with revenue of approximately $70 million, in line with our guidance. Adjusted EBITDA above the high end of our guidance at $13.5 million, and free cash flow of $20 million. Importantly, we continue to grow our recurring Connected Services business with revenue up more than 20% year-over-year. This growth further increases the recurring portion of our revenue mix, enhancing visibility into the future performance and demonstrates the value of the connected platform we've built across our installed base.

Looking ahead to the rest of the fiscal year, we're again raising our fiscal year 2026 free cash flow guidance, now to $76 million-$82 million, and narrowing most of our remaining forecasts as we approach the end of fiscal year 2026. Given the continued cash generating strength of our business, I'd like to give an update on our capital allocation strategy. As mentioned in the past, we have several core capital allocation priorities, all focused on delivering returns to our shareholders. Investing organically to support growth, reducing debt, managing equity dilution, and selectively pursuing inorganic opportunities that can enhance our long-term growth and strategic position. We evaluate these priorities based on the opportunities available to us, the strength of our balance sheet, and where we believe capital can generate attractive risk-adjusted return for shareholders.

With that, I'm pleased to share that our board has authorized Cerence's first ever share repurchase program. This reflects our confidence in the business, the progress we've made in improving profitability and cash generation, and our commitment to disciplined capital allocation. As we look ahead, we remain focused on creating long-term shareholder value through execution, strategic investment, and prudent capital allocation. The stock repurchase program adds another tool to that approach while preserving our flexibility to continue investing in growth and reducing debt, while also helping to offset dilution. Tony will provide further details on the program. Now, turning to updates and highlights from the quarter. We continue to see strong investment in next-generation AI-powered user experiences. Automakers increasingly view AI not as a discretionary investment, but as a strategic priority that reinforces their competitive position.

As vehicles become more software-defined, automakers are seeking differentiated user experiences that reinforce their brands, improve customer satisfaction, and create opportunities for recurring revenue. That's where we believe Cerence AI continues to be uniquely positioned and why we continue to win. We combine decades of automotive expertise with leading AI capabilities, enabling OEMs to bring powerful conversational experiences to market while reducing complexity, cost, and execution risk. As a result, despite the dynamic industry that OEMs are navigating, customer engagement remains strong. Our pipeline continues to grow and interest in our next-generation platform is growing. Cerence xUI, which is now available in nearly 20 languages, remains the center of our automotive strategy. In Q3, we signed a new xUI deal with Stellantis, who expects to deploy our platform across multiple brands and regions, with initial production having recently started.

Throughout the quarter, we continued to advance our xUI programs with JLR, a Volkswagen Group brand, BYD, Geely, and a major Japanese automaker. Several of these programs have started production or are expected to start production in fiscal Q4. Today, we have approximately 100,000 xUI-powered cars on the road, an important milestone in bringing this technology to market and consistent with what we've said in the past, that xUI will begin its ramp at the end of 2026 and impact revenue during fiscal year 2027 and beyond as additional programs enter production and vehicle volumes scale up. We continue to expect xUI deployments to support higher average price per unit, reflecting its broader functionality, increased software content, and expanding agentic capabilities. A testament to the value we're bringing to our customers, Cerence AI was recognized at JLR's Global Supplier Excellence Awards in June.

JLR honored us with their Exceptional Creator recognition, a special category they introduced specifically to highlight truly outstanding partners. In their nomination, the JLR team highlighted how we fast-tracked our partnership into a true AI era collaboration. They specifically called out Cerence's flexibility as a key enabler in their ability to adopt new AI capabilities faster and innovate with confidence. That execution, paired with our disciplined delivery and sharp roadmap alignment, is now their blueprint for future-facing technology. We believe this recognition validates not only our technology, but also our ability to serve as a trusted strategic partner as OEMs transition to next-generation AI platforms. During the quarter, we also advanced our Agentic AI roadmap across parking, dining, and other task-oriented experiences.

Our goal is to evolve the in-vehicle assistant from a system that primarily responds to requests into an agentic experience that can take action and help users complete tasks in context. Of note, we reached an important milestone in this strategy in Q3 by signing the first customer for our Mobile Work Agent, developed in collaboration with Microsoft. The customer is a global premium automaker and an existing Cerence customer, with rollout expected to begin in fiscal Q4. We believe this win is significant for two reasons. First, it demonstrates our ability to quickly deploy a complex agent that turns a car into a managed, trusted device with compliant access to enterprise tools in the Microsoft 365 suite. Second, it validates our strategy to sell and deploy agents on a standalone basis.

Not only can these agents be deployed within new xUI programs, but they can also be integrated into non-xUI programs and even competitive stacks. This expands our addressable opportunity and gives OEMs a flexible path to introduce agentic capabilities. We're in talks with several other automakers to deploy our Mobile Work Agent in the near future. Beyond xUI and our agent roadmap, we continue to win business across our broader technology portfolio. During the quarter, we signed our first customer for Exterior Vehicle Interaction, which extends the reach of the vehicle's voice assistant outside the cabin, allowing drivers to use their voice to perform authenticated vehicle actions like unlocking doors or opening the trunk. We also secured wins across our stack with Subaru, HKMC, and GM.

We signed an Emergency Vehicle Detection program with a Chinese robotaxi company and a Cerence Assistant program with Stellantis for their vehicles that will not initially use xUI. These programs have the potential to generate recurring business, maintain our seat at the table within the OEM technology stack, and create opportunities to expand our role over time, even when customers use multiple technologies. We are also making progress in extending our voice AI and agentic capabilities beyond the vehicle. We continue to focus on complex environments similar to the car, including commercial and industrial operations, robotics, and select IoT applications. We believe our products have the ability to serve as the trusted interaction layer across a broad range of verticals, where our edge AI, reliability, security, and domain-specific integration translate well and provide a meaningful competitive advantage.

One example of our progress is the launch of our Dealer Assist Agent live at Infiniti of Grand Rapids, Michigan, targeting a real pain point for dealerships, missed and after-hour sales and service calls that can translate into lost leads and revenue. Our AI agent provides an always-on, instant response, serving as a virtual expert on vehicle features, scheduling test drives, and booking service appointments while freeing staff from routine repetitive calls. Since the program went live, Dealer Assist Agent has delivered measurable business impact to the customer. With 100% of after-hour calls now being captured, there has been a 20% increase in sales opportunities driven by always-on lead engagement and qualification, and nearly 30% increase in service appointments booked, improving utilization and capturing additional service revenue. While this is an early deployment, we believe that it demonstrates the impact of our agentic solutions can deliver.