Cerence Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2021, the three months ended December 31, 2020; filed February 8, 2021. Unless otherwise noted, financial figures are in U.S. dollars.
Business context
Cerence provides AI-powered voice assistants and connected-vehicle software to automakers and their suppliers. Revenue comes from software licenses, connected services, and professional services. The company reported results against the three months ended December 31, 2019.
Financial performance and position
- Revenue: $95.0 million, up 22.6% year over year. License revenue was $46.4 million (+13.9%), connected services $27.3 million (+18.4%), and professional services $21.3 million (+55.8%).
- Margins: Gross profit was $68.1 million, up 32.1%; gross margin was approximately 71.7%, versus 66.5%. Operating income was $20.3 million, compared with an operating loss of $2.1 million; operating margin improved to 21.3% from negative 2.7%.
- Profit: Net income was $21.6 million, or $0.58 per basic share and $0.54 diluted, compared with a net loss of $11.8 million. Results included a $7.4 million income tax benefit, including a $15.8 million benefit from a Netherlands tax-rate change; net income therefore merits consideration alongside pretax operating results.
- Cash flow: Operating cash flow was $10.8 million, versus $9.5 million. Investing used $8.7 million, including marketable-securities purchases; financing used $28.8 million, including $30.3 million for tax withholding on equity awards. Cash and cash equivalents decreased $25.7 million to $110.4 million. Capital expenditures were $2.4 million.
- Liquidity: Cash plus marketable securities totaled approximately $127.4 million. Management said it expected to meet liquidity needs for the next 12 months, citing cash, operating cash generation, and available revolving credit. The $50 million revolver was undrawn; the credit agreement requires at least $75 million of liquidity.
- Debt: Carrying value was $272.3 million, comprising $175 million principal of 3.00% convertible notes due 2025 and senior credit facilities. The facilities had $121.9 million principal outstanding and a $50 million revolving commitment. The company reported covenant compliance at quarter-end.
Material changes and management commentary
- Revenue increased across all three categories. Management attributed license growth mainly to higher royalties as auto production recovered from COVID-19 disruption; connected-services growth to greater adoption of hybrid solutions; and professional-services growth to integration and customization work and the timing of services delivered.
- Operating results improved substantially in part because restructuring and other costs fell to $0.05 million from $7.6 million. The prior-year period included costs to establish Cerence as a standalone public company.
- Connected-services costs declined, supporting higher segment gross profit. Professional-services revenue grew faster than its costs, but those costs also increased.
- Fixed remaining performance obligations were $377.1 million, with $156.6 million expected within one year. This excludes variable usage-based royalties and connected-services backlog.
- Management provided no specific numeric financial guidance in the supplied filing text. It said COVID-19’s duration and economic effects remained uncertain, and results for the quarter may not indicate full-year performance. Management also expected deferred revenue to decline, partly because a legacy connected-services relationship with a major OEM is winding down.
Risks, contingencies, and unusual items
- COVID-19 and possible weakness in the automotive industry could affect customer demand, operations, liquidity, and covenant compliance. Management had taken steps including reducing working capital and discretionary spending, delaying some R&D programs, and workforce reductions.
- The convertible notes became conditionally convertible for the quarter ending March 31, 2021. If holders convert, cash settlement could adversely affect liquidity unless the company elects to settle in shares, subject to the note terms.
- Foreign-exchange losses contributed to other expense; the company used forward contracts with $55.3 million aggregate notional value. It reported no goodwill impairment indicators at December 31, 2020.
- Accrued legal losses were not material, and the company did not expect pending matters to materially affect its financial statements. It reported no material off-balance-sheet arrangements.
Important facts for investors to verify
- How much of the strong quarterly net income reflects recurring operations versus the discrete tax benefit and lower standalone-company costs in the comparison period.
- Whether revenue growth and professional-services profitability continue, and how the OEM production recovery and hybrid-services demand develop.
- The pace and implications of the legacy OEM contract wind-down, including its effect on deferred revenue and future cash flows.
- Cash requirements if convertible-note holders exercise conversion rights, along with debt maturities, interest costs, and ongoing covenant headroom.
- The continuing effects of COVID-19, foreign-exchange movements, customer concentration, and the company’s ability to maintain liquidity above the $75 million covenant minimum.