Cerence Inc. — Q2 FY2022 Form 10-Q
Reporting period: Three and six months ended March 31, 2022. Cerence provides AI-powered assistants and software, connected services, and professional services primarily to automotive manufacturers and suppliers. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Revenue | $86.3M | $98.7M | $180.7M | $192.3M |
| Gross profit / margin | $62.0M / 71.8% | $72.4M / 73.4% | $132.2M / 73.1% | $139.2M / 72.4% |
| Operating income / margin | $6.3M / 7.3% | $17.3M / 17.6% | $29.2M / 16.2% | $34.9M / 18.1% |
| Net income (loss) | $(0.5)M | $11.2M | $18.6M | $32.1M |
| Operating cash flow | $1.6M | $16.2M | $6.7M | $27.0M |
Q2 revenue fell 12.5%; license revenue declined 14.8% and connected-services revenue declined 30.3%, partly offset by a 24.7% increase in professional-services revenue. For the six-month period, revenue fell 6.0%. Gross margin was lower year over year in Q2 but higher for the six-month period; operating margin declined in both comparisons. Q2 net loss included a $3.4M income tax provision against $3.0M of pretax income, producing a 116% effective tax rate.
- Cash and liquidity: Cash and cash equivalents were $111.8M; marketable securities totaled $34.3M, for $146.1M combined. Current assets were $266.0M and current liabilities $156.5M. Management said liquidity was sufficient for expected needs over the next 12 months.
- Debt: Debt carrying value was $270.8M, comprising $158.5M of 3.00% convertible notes due 2025 and $112.3M under senior credit facilities. No revolving-facility borrowings were outstanding. The company reported compliance with debt covenants, including a $75M minimum-liquidity covenant.
- Cash flows: Six-month operating cash flow fell 75% to $6.7M, principally reflecting lower income before noncash charges and unfavorable working-capital movements, including cash outflows for prepaid expenses and other assets. Investing cash outflow was $6.0M; financing cash outflow was $16.3M. Cash declined $16.6M from September 30, 2021.
Material changes and notable items
- Automotive production forecasts weakened amid semiconductor supply constraints, the Russia-Ukraine conflict, and COVID-related lockdowns in China. Management expected these conditions to negatively affect results for the remainder of FY2022.
- Existing variable contracts with the largest customer were converted to minimum-purchase commitments, contributing $19.9M of Q2 revenue and $40.1M for the six-month period. Related cash is expected to be collected over the distribution period, potentially up to five years. These arrangements shifted revenue previously included in variable backlog.
- Connected-services revenue declined mainly as a legacy contract acquired through Nuance wound down. Professional-services revenue increased, supported by integration and customization work.
- Six-month restructuring and other costs were $5.4M, including a $4.0M net stock-compensation charge related to the former CEO’s resignation and award modifications. The filing also reports $2.4M of net stock-compensation expense related to the former CFO’s retirement and former General Counsel’s resignation during Q2.
- A purported securities class action filed February 25, 2022 alleges misstatements or omissions in company disclosures. Cerence intends to defend the claims; it cannot estimate a reasonably possible loss or range.
Outlook, risks, and contingencies
The filing provides no quantified revenue or earnings guidance. Management cited vehicle-production declines, semiconductor shortages, China lockdowns, COVID-19 uncertainty, inflation, rising interest rates, and the war in Ukraine as risks to demand and operations. It also noted competition for qualified employees, particularly professional-services staff, and the CEO transition. The Notes’ conditional conversion feature was triggered during the period, but the Notes were not convertible as of March 31, 2022; a future cash settlement of conversions could affect liquidity. Goodwill impairment indicators were not present at quarter-end.
Investor verification priorities
- Track auto-production forecasts and whether semiconductor, geopolitical, and China-related disruptions continue to pressure license royalties.
- Assess the durability and cash-collection timing of minimum-purchase deals, especially the largest-customer conversions and customer concentration (two customers represented 25.5% and 15.6% of six-month revenue).
- Monitor operating cash generation, working capital, and liquidity against the $75M debt-covenant minimum.
- Review the 2025 debt maturity and potential cash obligations if convertible notes become convertible.
- Follow the shareholder litigation and leadership transition, and verify any subsequent updates to expected full-year performance.