Cerence Inc. — Q1 FY2022 Form 10-Q
Reporting period: Three months ended December 31, 2021; comparisons are with the three months ended December 31, 2020. Cerence provides AI-powered virtual assistants and connected services, primarily for automotive OEMs and their suppliers.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Revenue | $94.4 million | $93.6 million | +0.8% |
| Gross profit / margin | $70.2 million / 74.3% | $66.8 million / 71.3% | Profit +5.2% |
| Operating income / margin | $22.9 million / 24.3% | $17.5 million / 18.7% | Margin +5.6 percentage points |
| Net income | $19.0 million | $20.9 million | Down $1.9 million |
| Diluted EPS | $0.47 | $0.53 | Down $0.06 |
| Operating cash flow | $5.1 million | $10.8 million | Down 52.4% |
- Revenue mix: License revenue was $46.9 million (+0.9%); connected services were $28.2 million (+8.6%); professional services were $19.4 million (−8.8%). Management attributed connected services growth to greater customer deployment of hybrid solutions. Professional services declined mainly due to contract mix and timing.
- Margins and costs: Gross profit improved primarily on license and connected services performance and lower cost of revenue. Operating expenses were $47.3 million versus $49.2 million; higher R&D and restructuring costs were offset by lower sales and marketing and general and administrative costs.
- Cash and liquidity: Cash and cash equivalents were $117.2 million and marketable securities totaled $35.6 million at December 31, 2021, or $152.9 million combined. Management reported net working capital of $205.0 million excluding deferred revenue and deferred costs and believes liquidity is sufficient for the next 12 months.
- Debt: Carrying amount was $271.1 million, including $157.4 million for the 3.00% convertible notes due 2025 and $113.7 million under senior credit facilities. The $50 million revolving facility was undrawn. Cerence was in compliance with credit covenants, including a $75 million minimum-liquidity requirement.
Material changes and notable items
- Net income fell despite higher operating income, principally because the prior-year quarter included a $9.4 million income-tax benefit; Q1 FY2022 recorded a $0.3 million tax provision. Effective tax rates were 1.5% and negative 81.7%, respectively.
- Restructuring and other costs rose to $4.9 million from $0.5 million. The charge included $4.0 million of stock-based compensation expense, net of $5.0 million in forfeitures, related to the former CEO’s resignation and modification of certain awards.
- CEO Stefan Ortmanns succeeded Sanjay Dhawan on December 15, 2021. The filing identifies leadership transition as a risk.
- Operating cash flow was pressured by working-capital outflows, including prepaid expenses and other assets, and lower deferred revenue. Management expects deferred revenue to decline further as a legacy connected-services relationship with a major OEM winds down, noting most contract cash has already been collected.
- Fixed remaining performance obligations were $309.4 million: $125.5 million expected within one year, $163.6 million in two to five years, and $20.3 million thereafter. This excludes variable usage-based royalties and connected services.
Outlook, risks, and contingencies
The filing provides no quantitative revenue or earnings guidance. Management says results for the quarter are not necessarily indicative of full-year results and believes available cash, operating cash flows, and the revolving facility can meet longer-term needs. Key uncertainties include COVID-19 and its variants, automotive semiconductor supply constraints, automotive production and demand, competition for skilled personnel, and the CEO transition. Customer concentration is notable: two customers represented 25.7% of quarterly revenue, and three countries—the United States, Germany, and Japan—each accounted for more than 10% of revenue. The convertible notes were conditionally convertible during the quarter, with none converted; cash settlement of future conversions could affect liquidity. Management reported no material accrued litigation losses and did not expect pending matters to materially affect results or financial position. No goodwill impairment indicators were identified.
Important facts for investors to verify
- Whether connected-services growth and improved gross margin continue, and how semiconductor constraints affect license volumes.
- The pace and cash-flow effects of the legacy OEM contract wind-down and related deferred-revenue decline.
- The impact of the CEO transition and any further compensation or restructuring charges.
- Convertible-note conversion and settlement terms, debt maturities, and continued compliance with credit covenants.
- Customer concentration and the extent to which reported performance-obligation balances convert into revenue, particularly because variable usage-based amounts are excluded.