Q1 2024 Cerence Inc Earnings Call

Participants

Rich Yerganian; SVP, |R; Cerence Inc

Stefan Ortmanns; Director & CEO; Cerence Inc

Tom Beaudoin; CFO; Cerence Inc

Jeff Van Rhee; Analyst; Craig-Hallum Capital Group

Quinn Bolton Needham; Analyst; Needham

Mark Delaney; Analyst; Goldman Sachs

Presentation

Operator

Good day and thank you for standing by, and welcome to the Cerence First Quarter 2024 our earnings conference call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session to ask a question. During this session, you will need to press star one one on your telephone. You will then hear an automated message advising you that your hand is raised. To withdraw your question, please press star one again. Please be advised today's conference is being recorded. I would now like to turn the conference over to your speaker, Rich Yerganian, Senior Vice President of Investor Relations. Please go ahead.

Rich Yerganian

Thank you, Michelle, and welcome to Services First Quarter of 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, strategy, goals, targets and plans should be considered to be forward-looking statements. Service makes no representations to update update those statements after today. These statements are subject to the 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 in our Form 10-K filed on November 29th, 2023.
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 both measures and reconciliations of non-GAAP measures to the closest GAAP equivalent in the press release is available in the our IR section of our website.
Joining me on today's call are Stéphane appointments, CEO of Cerence, and Tom voting, CFO. Serves. As a reminder, the only authorized spokespeople for the Company are Stefaan, Tom, in the before handing the call over to Stefan, I would like to mention that we will be presenting at the Baird 2020 for vehicle technology and Mobility Conference on February 29th annual change points of Annual Institutional Investors Conference and Morgan Stanley Technology Conference on March fourth Now on to the call, Stifel.

Stefan Ortmanns

Thank you, Rich, and welcome, everyone, and thank you for joining us to discuss Cerence's first quarter results over the next few minutes. I will update you on the highlights from our first quarter and provide an update on our AI. product strategy and the exciting interest we are seeing from OEN.'s partners and press Etsy Ads, but first, a review of our Q1 highlights.
As we have briefed you on previous calls, the R&D and product teams at Cerence has been working at full speed, integrating the latest developments in generative AI and large language models into our automotive and adjacent transportation focus solution. We believe our enhanced products and future roadmap represent an industry-leading inflection point for the in-cabin experience for drivers and passengers. Not only are existing customers showing interest in deploying our new solutions as quickly as possible, but we have also seen interest in deploying our new innovations from OE. OEMs that had previously chosen alternative solutions.
Discussions with these OEMs and customers gained momentum during Q1 and COCS., resulting in a greater pipeline of business opportunities as we progress through the fiscal year. Notably, we made steady progress during the quarter in aligning our product strategy with key partners. We announced major engagements with India and Microsoft leading up to see us the hardware and tool chains available to us through these partnerships are important contributors to fulfilling our vision of creating the ultimate AI based immersive in-cabin experience.
In December, we introduced certain automotive, large language model called time content and automotive, specific large language models leveraging and BDS computing and hardware capabilities for the training of generic and OEM specific models since he's working with India to solve several key challenges, including shortening time to deployment by moving it to a high innovation speed collaboration with Microsoft, focusing on the evolving in-cabin user experience and the future of connected mobility. We are combining our deep expertise and comprehensive, a high-powered in-car assistant portfolio with the innovative technology and intelligence of Microsoft Azure OpenEye services as a first step to focus is on delivering a curated automotive-grade in-cabin experience. It leverages GBT. And as you're opening, I services, this enables OEMs to swiftly implement next-generation experiences into new car programs as well as free to actively upgrade cars on the road. This extends customer value through access to more frequent feature updates, hence creating new revenue opportunities for OEMs.
Customer highlights during the quarter included several key developments. A major North American OEM extended an existing program with Cerence as the competitor solution they had previously chosen has experienced significant delays, a Japanese OEM that has chosen a competitor's solution prior to our spin from Nuance return to Cerence for some of our key enabling technologies. This is an important first step with the OEM, and we believe it opens the door for expanded opportunities moving forward.
We have previously mentioned our success in China with OEMs who have chosen our AI technology and brought leverage language portfolio for expansion of their global footprint. We are five major platform programs went live with new Chinese OEMs in Q1. This trend continued with several more carmakers selecting Cerence to support the overseas program and is expected to drive new opportunities in the Chinese domestic markets.
We also had a key IoT design win with a North American company for Roberts as we continue to leverage our scalable technology stack beyond transportation.
And finally, for the sixth quarter in a row, we have delivered our quarterly results. As guided, our penetration in global auto production remained at 54%, and we had several new platform programs achieved start of production that we expect to ramp as we progress through the fiscal year, we had several one-time adjustments in the quarter, including the previously mentioned revenue acceleration of the Toyota legacy contract,
Which Tom will explain in further detail. Even Taking these adjustments into account, we would have delivered another strong quarter of financial performance. Much noise and hype has been made about the possibilities that generative AI and large language models will unlock across industries served as one of the few companies to swiftly and intelligently incorporate these innovative and advanced technologies into our products, adding significant value to our OEMs and end users.
As previously discussed, we have enhanced our product portfolio with generative AI and natural language models. Our advanced solutions address several key challenges regarding accuracy, speed and cost, while at the same time allowing OEMs to control and customize the solution to their unique brand and digital cockpit experience.
You can see from the chart on this slide, the number of programs in predevelopment, meaning a prerequisite for a design win and ultimately for start of production since see as the pipeline of opportunities has grown even larger.
Second, concurrent with our integration of large language models, into existing products. We are developing a new platform that is expected to fully take advantage of the promise generative AI and Dutch language models can provide.
This is based on our fine tune growing automotive dataset and comparison billions of tokens of data collected over the 20 plus years. We have been serving the industry at sea as we selectively demonstrated this product to key OEMs. And I think I can say that uniformly we at ams and tech partners were very impressed for competitive and confidentiality reasons. We are keeping the details of this product close to the vest, but we'll share more details with you in the coming months.
Overall, I'm very excited about the progress and accomplishments. Now for those of you that were not able to visit our booth at CES, we thought we would share a short video clip that gives you a sense for the energy team spirit and momentum we built during our week in Las Vegas.
Let's run the video business. (video playing)
As you all may know, CS. has become the most important tradeshow for the latest in transportation and mobility. We were very pleased when Volkswagen approached us about kicking the show of the joint press conference announcing our partnership to enhance Volkswagen's in-car experience with Cerence AI capabilities. The press conference hosted over 300 journalists and was a fantastic way to kick off the week.
Together, we have created an amazing user experience by enhancing Volkswagen's in-car assistant called either with Cerence chat Pro, bringing the best of both worlds together for execution from concept to product was done in less than 3 months. We showcased the IDA assistant at CS. in the [87] and golf, and we expect the roll out of the upgraded ASSISTANT across Volkswagen and Skoda model starting mid-calendar year 2024 an already full schedule of customer demos became even more crowded as word spreads about our product labels.
This included several representatives from multiple OEMs that had worked with a big consumer tech company after the demos, every one of these OEMs as to reengaged in discussions with us about their next-generation solutions.
These discussions are ongoing and we believe provides realistic opportunities for additional win-backs. It wasn't just OEM.s that were impressed with our demonstrations. At CES, we had over 400 references in the press, including 15 mentions as one of the best product of the show. Additionally, several influential journalists and bloggers produce videos shown the new Cerence power capabilities in action and the ID. seven, while providing very positive commentary.
CS. was a great opportunity for Cerner to showcase our AI product strategy and reinforce our belief that we are on the right track and that we remain in a leadership position for applying the promise of AI for the transportation industry.
As we look to Q2 and beyond, we have a number of priorities. We are keenly focused on first and foremost, is to capitalize on the positive momentum generated from see as our objective is to secure new business with existing customers and aggressively target the potential win-back opportunities.
Second we need to continue to hit our delivery targets for both existing and new projects, especially one that are cloud-based and provide us the opportunity to generate revenue in a shorter period of time, however, fully and controlled the final time line of the start of production for our software updates and finally, execute on services, next-gen computing platform, facilitating a truly immersive in-cabin experience.
Now I will turn it over to Tony to share our financial results. Tom?

Tom Beaudoin

Thank you, Stefaan.
Let me first discuss our Q1 FY '24 results, followed by our guidance for Q2 FY 24, our Q1 results included several one-time events. One was the acceleration of the revenue associated with the legacy contract that we had previously communicated. We came in above our revenue target, primarily due to the net effect of two additional one-time events.
Another was with a customer whose contract with Cerence provided additional services to the Toyota legacy solution this customer notified us of the decommissioning of their service in Q1, resulting in acceleration of the deferred revenue associated with their service in Q1 in the amount of approximately $9.9 million.
Additionally, a separate customer notified us in Q1. They determine they had been only reporting royalties for a period of time. This resulted in a negative onetime true up of$ 4.8 million to our license revenue. As we have reported in the past and as recently as Q4 of last fiscal year, we do get notifications from customers when they realize they have either been under or over reporting royalties to us.
While the updates we usually get our positive true up in this particular case, the customer determine they had been over reporting about royalties and therefore, we took a reserve as part of our Q1 results. Q1 revenue came in at $138.3 million, approximately $6 million above the high end of our guidance, primarily due to the factors mentioned above.
Adjusting for the items I noted earlier, our Q1 revenue still would have delivered a solid financial performance. Revenue for Q1 included no prepay contracts As communicated during our Q4 conference call. The results in the quarter were driven by our core transportation business as revenue came in above the high end of our guidance range.
Combined with our focus on operational excellence, we exceeded most financial metrics. Gaap gross margin was 81%. Gaap net income was $23.9 million and GAAP income per share was $0.53. Non-gaap gross margin was 81.5%. Non-gaap operating margin was 49.4%.
Adjusted EBITDA was $70.4 million or 58.9% margin and non-GAAP income per share was $1.12. During the quarter, we had negative cash flow of about $2.8 million. This was mainly due to the timing of customer payments we expect to receive in Q2.
We expect positive cash flow for the full fiscal year. Our balance sheet remains strong with total cash and marketable securities of approximately $116 million. This chart is our breakdown of revenue for the quarter. Core revenue drivers remained solid. Q1 license revenue includes the onetime negative true up mentioned a few minutes ago.
This was a negative impact of approximately $4.8 million. Also when comparing quarter over quarter. Our performance in Q4 included a positive true-up of about $3 million. As expected, we did not execute any fixed prepaid contracts in Q1. Our penetration of global auto production remained at 54% on a trailing 12 month basis as we continue to maintain a strong position in the market.
Connected Services revenue was up slightly from the prior quarter due to an accelerated noncash revenue associated with the legacy contract and an additional approximately $9.9 million associated with the other contract discussed earlier.
Excluding this acceleration of deferred revenue new connected revenue would have been up 5% quarter over quarter and 13% year over year. We expect a ramp in new connected services in FY '24 as several key programs that have been delayed by customers go into production. We continue to see a solid pipeline of opportunities for Connected Services, even as some expiring programs of old technology restrain the near term growth regarding the contract with a second customer who had a portion of their contract with us related to the legacy solutions.
The revenue associated with that contract has been historically reported as part of new connected revenue line, the customer who reported their overall reporting of royalties, license revenue and the other customer that required acceleration of deferred revenue related to the decommissioning of connected services associated with the Toyota solution will negatively impact our go-forward revenue by approximately $800,000 of license revenue and approximately $400,000 of new connected services revenue per quarter, respectively.
As we have previously stated, professional services will vary quarterly based on progress or completion of customer projects. We did not reprint project professional services as a revenue growth driver for the Company, but instead view it as an enabler for future license and connected services revenue.
Additionally, our newer products and solutions include improved implementation and integration features, which lowers the utilization of professional services. Moving on to our license business. Overall, the license business remains fundamentally strong. Pro forma royalties in the quarter were impacted by the negative true-up due to over reported royalties and to a lesser extent, additional program delays or slower than expected volume ramps from several customers.
As a reminder, pro forma royalties represent the value of variable licenses shipped during the quarter and those consumed as part of a fixed contract. Adjusting for onetime items, including the $3 million true-up in Q4 and a one-time volume discount. Pro forma license royalties were relatively flat quarter over quarter as we planned. We did not execute any fixed contracts in Q1, but do expect a contribution in Q2 of approximately $5 million to our draft fiscal year target of approximately $20 million.
We believe that our KPI.s continue to indicate strength in the business. As stated earlier, our penetration of global auto production for the trailing 12 months stayed steady at 54% with $12.4 million cars with Cerence technology shipped in the quarter.
This means over half of global auto production includes some level of embedded Cerence technology cars produced that include our connected services in addition to our embedded solutions, increased 36 months trailing 12 months over the prior trailing 12 months, reflecting the trend of cars being increasingly connected and our ability to successfully provide our customers with innovative cloud-based solutions.
Total adjusted billings increased 4% and we believe that this is a leading indicator of our potential future revenue growth related to our growth in cars shipping with our connected services, we once again saw a large increase in monthly active users, 30% year over year, which we believe indicates increasing popularity among the end users of our technology.
As we discussed on last quarter's conference call, we were informed by our legacy connected services customer, Toyota that they were electing to terminate the service offering effective December 31st, 2023. Prior to this change, Cerence would have reported revenue associated with this contract of approximately $8.4 million per quarter through Q1 of fiscal 2026, meaning the end of calendar year 2025.
As the service associated with the contract achieved end of life. You may recall there is no cash flow associated with the remaining deferred revenue associated with this contract. The contract came via an acquisition in 2013. While Cerence was part of Nuance, Cerence deferred revenue represents the amortization of the revenue associated with the contractual service period, which was scheduled to end December 31st, 2025 and was accelerated by such determination by Toyota to our Q1 FY '24.
Therefore, our revenue for the first quarter includes approximately $73.6 million in revenue associated with this change. The decommissioning by the other customer with a contract in support of the Toyota legacy solution also resulted in an acceleration of approximately $9.9 million of revenue in Q1 because the contract with this other customer was more than just the legacy solution. This revenue has been reported as part of our new connected services revenue. As I mentioned earlier, our new connected services revenue will be lower by approximately 400 k. per quarter moving forward.
Now turning to revenue guidance for Q2 and the fiscal year. They are guiding our Q2 revenue to be from $60 to $64 million. We expect Q2 revenue to include approximately $5 million in fixed contracts in Q2. We are in the process of negotiating final contracts with a couple of customers, which may result in our projection for Q2 to vary as we ensure we achieve satisfactory terms, the best estimate we can provide at this time would be to spread the remainder of the approximately $20 million annual amount relatively evenly throughout the balance of this fiscal year with the caveat that actual execution of fixed contracts can vary quarter to quarter.
For the full fiscal year, we continue to expect revenue to be between $355 million to $375 million. You can see on this slide the revenue guidance and the effect of the associated financial metrics. As you can see, there were updates to our guidance for the fiscal year.
Regarding our GAAP operating margin, net income, net income margin and EPS and non-GAAP net income, the adjustments to our GAAP operating margin and net income due to restructuring charges and an asset indemnification release. Non-gaap net income improved due to a four favorable foreign exchange gain in Q1.
In summary, CESI. was a resounding success for the Company with significant interest in our new products and technology from existing and potential customers alike. The goal now is to advance these discussions into new business and ultimately driving revenue growth for the Company. While in the near and near term, we remain focused on operational excellence. As a reminder, we expect to update our year backlog in conjunction with our Q2 earnings release.
This concludes our prepared remarks, and now we will open the call for questions.

Question and Answer Session

Operator

Thank you. And as a reminder to ask a question at this time, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one. Again, one moment compile our Q&A roster.
And our first question is going to come from the line of Jeff Van Rhee with Craig-Hallum Capital Group. Your line is open. Please go.

Jeff Van Rhee

Great. Thank you for taking the questions. A couple just on maybe start with the customer that left with Toyota that was apparently in new connected a And just maybe a little more color, was that a surprise given they were correlated to Toyota was the revision that somehow they were going to stay excluding Toyota? And then just again a little more color on what exactly they were doing as

Tom Beaudoin

Jeff, thank you. So they had a separate contract, so they were kind of a Tier two to that overall solution. I don't think we truly expected them to also cancel that I mean, we certainly had to wait for them to understand what their relationship was and what their activities and contractual obligations were with Toyota. So they actually notified us a little bit after we got the notification from Toyota on our legacy contract. And that's a little bit why we didn't include it in Q4 because we hadn't been informed at that time

Stefan Ortmanns

And so was the explanation that they were leaving because they simply had to because that partner was going away or because they were changing product direction and you're no longer a fit.
What was the logic to leave if it wasn't a foregone conclusion that they had that pretty much the same logic with that two and a legacy they got and funds by Toyota. We don't know exactly what their contractual arrangement was with Toyota, but they are also told that Toyota was ending that service and therefore they came back to us and informed us that they were also canceling the service associated with that.

Rich Yerganian

And maybe as a reminder, Jeff, good morning, Jeff and the Toyota legacy, a program started or in 2011 right. So it's a very old old fashion program compared to nowadays solutions, especially when looking at CS., right? And they have been informed accruing programs and came back to us here. Nevertheless, we have an excellent relationship with Toyota and we are focusing on new programs, for example, model year 24 and upcoming programs. And they have invited also us to discuss new opportunities beyond model year 24.

Jeff Van Rhee

Okay, helpful. Then if I could just sneak two other quick ones in the you referenced on time. I think in the in the script that you had headwinds remaining from some other old contracts and connected.Can you just put some bounds around how much of a revenue headwind that is on an annual basis?

Tom Beaudoin

And we haven't split out the exact amount there because know some of the programs and sometimes there is a ramp delay. So I think there are some other indicators on you know the positive momentum we're seeing in Connected Services, and I think we'll start to see that growth in the next couple of quarters in 2024. And again, there are pieces of it is some delayed some production fashion ramps by some of the OEMs.

Jeff Van Rhee

Yeah. Okay. And then just maybe last one on the very high level question here, but I guess if you look at the overall landscape, how do you as a company best gauge the satisfaction of the end users that are using your technology versus the alternatives? And obviously, you quoted 54%. So your share in the in-car systems is steady, but folks can use Apple CarPlay, Android Auto there, a lot of avenues that they have to consume or interact with the vehicle while they're in the vehicle.
So two questions. Just how are you gauging a user satisfaction of your solution versus the other solutions? And then any commentary about market share within actually what's getting used in the car because I think some of those and Apple CarPlay and Android Auto might not be measured in that 54% Thanks.

Stefan Ortmanns

So so maybe just in our view, in my view, equity, the three key pillars. First of all, we have a very diversified, strong customer base with strong engagement that was crystal clear at CS. and also post CS., right? And we're getting on some valuable feedback from lead OEMs across the globe.
And secondly, I think also with the opportunity for market and we and relevant brand customization. We have some huge advantages over the big tech giants, right? Because all OEM.s understand now, but they need to drive the immersive in-cabin experience, the digital cockpit experience, right? And they are heavily engaged also with their user is their users, right and sharing this information with us.
But equally or even more important is I mean, you know, at our last Investor Day, we said, okay, we are moving ourselves from a component supplier technology supplier to a full solution innovation partner and really I can say we have achieved this important goal for the company, right? So we are providing actually now a leading innovation computing platform now providing really a compelling incoming experience with yes, you can see commercialized hybrid launch language, one of the architecture award, and that was one of the best products at CS. and the demand from other OE.
It's just amazing and terrific, right. And with this user penetration rate of 54%, while we have no huge opportunities and upselling those solutions in the short term, but also in the mid or long term, bringing in our new hybrid natural language, monogenetic AI solution. And therefore, we are partnering also with video for extra or accelerating the roll out. I mean, languages is still a key topic, right. We are a global player compared to others in the market here, right? And our promise to the market is that we have by end of this calendar year, 20 languages supported hybrid. That means embedded and cloud-based. So overall, I think we are on a very, very good track.

Jeff Van Rhee

Okay, great. Thank you.
Thank you. And one moment if we move on to our next question.

Operator

And our next question is going to come from the line of Quinn Bolton with Needham & Company. Your line open.
Ben, please go ahead.

Quinn Bolton Needham

It is Nick on for Colin. On your adjusted it total billings growth decelerated slightly from 6% last quarter to 4% this quarter. Can you expand on that data point that sounds like it might be impacted by the additional program delays that you're talking about. And then maybe you can touch on the key reason there's things you seeing these delays, how the OEMs are thinking about SOPs this year, outlaw auto production and auto sales remain relatively strong lately?

Tom Beaudoin

Yes, Glenn, I'll take the first part and then maybe Stefan can talk about the second piece. I mean, again, we saw our growth in billings. I think we'll see accelerated growth in billings over the next few quarters. I think it's just the lower little bit of a timing and seasonality in that billings number and looking at it delayed SOPs, a twin here also here also some positive messages.
I just been informed that one of the program which hadn't laid for more than two years will go live in calendar week a 12th of this year. That's great because here we see higher PPU. It's a mass volume, OEM., right? And there was also another big OEM who had also some delays of 9 months, and they will also go live within the next 2 months, which is really great for us.
And then I said we have this diversified customer platform. You have also heard about BYOD. They're becoming a more important for the European market. And as you know, we are their preferred partner here when it comes to the and corporate experience, leveraging conversational AI.

Stefan Ortmanns

So we are on a good track, but we have still some dependencies on the oil end. And as you also said earlier, right, the OEM. defined start of production, and they will also let us know when they are doing this kind of software updates over the air.

Quinn Bolton Needham

Okay, thank you. And then what part of your technology stack drove the A. IoT win? And I guess why wasn't this piece eliminated by FOU. and can you talk about the size or the timing of the win you had? I think you had about a $5 million win with big tech company in fiscal one quarter, 2022. It's bigger than that.

Stefan Ortmanns

So over the last couple of months, we have made great progress also in the non-transportation space. What we have we have in Q1 for product launches now one in Korea for home, one in China and two in North America with well-known companies, industrial sphere, right? And we had also another big design win in North America for wearables, and we are still under the MOU. So we are selling technologies which are applicable, for example, audio AI embedded solutions and text to speech.

Tom Beaudoin

Yes. So just a little bit on that. I mean, we've said all along that there were certain elements that we were able to advance prior to the expiration of the Apple you. Those were clearly defined in the contract with new ops now Microsoft, and that's what we in the short term. That's what we've been pursuing. And then as of October, there will be no restriction.

Quinn Bolton Needham

And our focus clearly is on industrial IoT, whereabouts also health well-being. And we are also in discussion with big companies, especially in North America and smart home and office.

Tom Beaudoin

Yes. So some of those we'll have to wait until October software getting ready again.

Operator

Thank you. And again, ladies and gentlemen, if you wish to ask a question at this time, please press star one one on your telephone. One moment for our next question. And our next question comes from the line of Mark Delaney with Goldman Sachs. Your line is open. Please go ahead.

Mark Delaney

Yes, good morning, everyone.This is Brian on for Mark Delaney, and thank you for taking my question. And can you give us some additional color on OEM feedback to chat Pro, which you feature SES? And how broad-based is that OEM interest? And any color you can give on the PPU. opportunity.

Tom Beaudoin

So good morning again. Yes, it was really amazing feedback from all OEMs from North American OEMs, European OEMs and for OEMs in Korea, Japan and China. I think that's clearly a game changer with Jet Pro, but we are also going beyond chip Pro being not sure whether you have seen also our new Cerence assistant with energy plus you're right so we clearly have changed the dynamic in the market here.
A feedback was amazing. Some of the OEM.s totally actually, hey, when can we have had in our car we have various discussions also with our sales force and OEM.s,

Stefan Ortmanns

I think they want to have an ace up as soon as possible. Here, really there are huge opportunities and goes far beyond chat Pro. And when looking at the PPU., I mean, I cannot share everything here as you can imagine here. But also here, we hope that can also drive our future revenue. And as you also mentioned earlier, right, we are going to address also cars on the road. And what we can share is I mean, you saw also the press announcements from both VW and Skoda. They're trying to bring in also on cash on their own, which will also drive revenue on our side. Thanks

Mark Delaney

Thanks. Thank you. For that. And then if I can sneak in one more question. So with the added company focus on G&A, I what does that mean for the company's OpEx for the business and any additional color you can give there on kind of the gross margin opportunity for some of these new G&A opportunities or applications you all are working on?

Stefan Ortmanns

You know, we are very sensitive to co-CEO, right? So there are actually no incremental CapEx required. And your effort also about our partnership with and video, this is also part of our story here very important partner to us.
Yes. And we expect gross margin, as mentioned by Tom here, right? So overall, we are very sensitive to cost here, right? And with our partnership engagements right now, very, very good track. And it is also worth to mention here that we are using a hybrid solution, meaning embedded and cloud. And we are doing also quite a lot on the embedded side edge side, not just for privacy reasons, but also for cost efficiencies.

Mark Delaney

Thank you.

Operator

Thank you.

Stefan Ortmanns

And I would now like to turn the conference back over to Rich your gaming for any closing remarks.

Rich Yerganian

Well Thank you due to from the call this morning, and we look forward to seeing you at some of the upcoming conferences or at other times. Have a good day.

Operator

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