Cerence Inc. — FY2021 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2021. This is an annual report; the filing does not provide a standalone fiscal fourth-quarter summary. Amounts below are in U.S. dollars.
Business context
Cerence develops white-label, AI-powered virtual-assistant software and connected services, primarily for automotive manufacturers and their tier-one suppliers. Revenue comes from software licenses, cloud-connected services and professional services. Its platform combines vehicle-embedded “edge” technology with cloud services. Cerence reported deployments in more than 400 million vehicles and estimated its technology was included in approximately 53% of cars shipped during FY2021.
Financial performance and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $387.2 million | $331.0 million |
| Gross profit / gross margin | $286.1 million / 73.9% | $223.1 million / 67.4% |
| Operating income / operating margin | $60.6 million / 15.7% | $22.4 million / 6.8% |
| Net income (loss) | $45.9 million | ($18.3 million) |
| Operating cash flow | $74.4 million | $44.8 million |
| Investing cash flow | ($41.6 million) | ($30.7 million) |
| Financing cash flow | ($41.5 million) | $121.6 million |
- Revenue grew 17.0%. License revenue rose 23.1% to $202.2 million, connected-services revenue rose 12.4% to $109.5 million, and professional-services revenue rose 9.0% to $75.5 million.
- Cost of revenue declined 6.3% to $101.1 million, which, alongside higher revenue, lifted gross profit 28.2%. Operating expenses increased 12.4% to $225.5 million; research and development expense increased 26.1% to $112.1 million.
- The effective tax rate was 4.9%. The filing attributes the rate, in part, to a $15.9 million tax benefit related to an increase in Netherlands tax rates, as well as the geographic mix of earnings and U.S. taxation of certain foreign income.
- At year-end, cash and cash equivalents were $128.4 million and marketable securities were $37.8 million, totaling $166.2 million. Net working capital, excluding deferred revenue and deferred costs, was $194.0 million.
- Debt carrying value was $271.3 million: $175.0 million principal of 3.00% convertible notes due 2025 and a term loan with $117.2 million principal outstanding. The $50 million revolving facility was undrawn. The company reported compliance with its credit-agreement covenants.
Changes, outlook and risks
- FY2021 results improved from FY2020, when the company recorded a net loss and a $19.3 million loss on debt extinguishment. FY2021 interest expense declined to $14.0 million from $22.7 million, primarily reflecting the prior-year refinancing.
- Operating cash flow increased 66.1%, but deferred revenue declined by $45.7 million during FY2021. Management expects deferred revenue to decrease further, including as a legacy connected-services relationship with a major OEM winds down; it said this is not expected to impair its ability to meet obligations.
- Backlog at September 30, 2021 was estimated at $2.0 billion: $336.4 million fixed and $1.7 billion variable, the latter based on forecast vehicle shipments and royalties. The filing cautions that backlog may not translate into actual revenue; shipments, contract changes or terminations, and currency movements can affect realization.
- Management provided no numerical FY2022 guidance in the supplied filing text. It expects R&D to remain a major operating expense as it invests in innovation and customer support, and stated it expects to meet liquidity needs over the next 12 months using cash and operating cash flow, with the revolving facility available if needed.
- Key risks include COVID-19 and automotive semiconductor supply constraints, cyclical vehicle production, pricing pressure, competition from large technology companies and focused providers, reliance on major customers, and execution risks in expanding cloud services and new applications. Toyota accounted for approximately 19% of FY2021 revenue; two customers together accounted for 29.4%.
- The convertible notes’ conditional conversion feature was triggered during FY2021; no notes had converted by year-end. Cash settlement could affect liquidity, while share settlement could dilute shareholders. Other watch items include foreign-exchange exposure and the $87.1 million of gross unrecognized tax benefits.
- Ordinary-course legal matters were disclosed; accrued losses were not material, and the company did not expect pending matters to have a material impact. The auditor issued unqualified opinions on the financial statements and internal controls; management also concluded internal control over financial reporting was effective. The company disclosed immaterial corrections to previously issued financial statements.
Important facts for investors to verify
- Whether vehicle production and semiconductor availability support forecast license royalties and the assumptions underlying the $1.7 billion variable backlog.
- The pace and profitability of connected-services growth, including the effects of the major-OEM legacy service wind-down and continued deferred-revenue declines.
- Customer concentration and the effect of Toyota or other major customers changing production, contracts or payment behavior.
- Debt repayment and conversion terms, covenant headroom, and potential cash demands or shareholder dilution from the convertible notes.
- The sustainability of FY2021 margin improvement and cash generation as R&D investment increases, and the implications of the low effective tax rate and uncertain tax positions.