Cerence Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended March 31, 2023; fiscal second quarter 2023. Unless otherwise noted, amounts are U.S. dollars. Cerence provides AI-powered virtual assistants and related software and services, primarily to automotive manufacturers and their suppliers.
Financial performance and liquidity
| Metric | Three months ended March 31, 2023 | Six months ended March 31, 2023 |
|---|---|---|
| Revenue | $68.4 million, down 20.7% year over year | $152.1 million, down 15.9% |
| Gross profit / margin | $43.4 million / 63.4%; prior-year margin 71.8% | $100.9 million / 66.3%; prior-year margin 73.1% |
| Operating income (loss) | $(20.6) million; operating margin (30.1%) | $(22.6) million; operating margin (14.9%) |
| Net income (loss) | $(26.1) million; diluted loss per share $0.65 | $(28.2) million; diluted loss per share $0.70 |
| Cash from operating activities | MD&A reports $6.6 million, versus $1.6 million | $4.4 million, versus $6.7 million |
The cash-flow statement presents six-month, not quarterly, cash flows. Six-month investing activities provided $2.2 million, financing activities used $5.4 million, and cash and cash equivalents increased $0.5 million to $95.4 million. Cash, cash equivalents and marketable securities totaled $122.7 million at quarter-end.
At March 31, 2023, total debt was $277.2 million, including $12.5 million current debt; the revolving facility had no borrowings. Debt includes $175 million principal of 3.00% convertible notes due June 2025 and senior credit facility borrowings. The senior facility’s reported effective interest rate was 8.41%. Current assets were $231.9 million and current liabilities $166.0 million.
Changes versus the prior comparable period
- Quarterly license revenue fell 33.5% to $30.8 million, primarily because minimum-purchase and prepaid deals contributed $21.0 million less revenue; higher variable royalties partly offset the decline. Six-month license revenue declined 18.2%.
- Six-month connected-services revenue declined 21.4%, mainly as a legacy contract wound down. Professional-services revenue fell 9.6% for the quarter and 3.9% for the six months.
- Lower revenue and increased cost of revenue reduced gross profit. General and administrative expense rose 39.0% for the quarter, including a $3.8 million credit-loss provision related to one international electric-vehicle maker. Six-month G&A increased 56.8%.
- Restructuring and other costs were $5.7 million for the quarter and $9.9 million for the six months. The six-month charge included $6.4 million of severance and $3.1 million of other one-time costs.
- Six-month net loss replaced prior-year net income of $18.6 million. Higher interest expense was partly offset by interest income and foreign-exchange gains.
Outlook, risks and unusual items
- Management expects a slow, gradual improvement in auto production in fiscal 2023, while identifying semiconductor shortages, shipping and production issues, inflation, and uncertain economic conditions as ongoing risks. It expects lower contributions from fixed license contracts in fiscal 2023 as it limits such contracts going forward, adversely affecting reported license revenue.
- Management expects approximately $2.0 million of additional personnel-related restructuring costs for the remainder of fiscal 2023. It says available liquidity and expected operating cash flows should meet needs over the next 12 months.
- A loan amendment temporarily revised financial covenants through the quarter ending December 31, 2023, including a $125 million minimum-liquidity requirement and a $7.5 million capital-expenditure limit; the company reported covenant compliance at March 31. The company’s stated cash, cash equivalents and marketable securities totaled $122.7 million; the filing does not reconcile that amount to the covenant liquidity calculation.
- Risks include dependence on automotive production and major customers, contract delays or cancellations, customer pricing pressure, hiring and retention, foreign-exchange and interest-rate exposure, and restrictions under debt agreements. China represented $16.7 million of six-month revenue. Two customers represented 14.7% and 13.7% of six-month revenue.
- Pending matters include a securities class action, stayed shareholder derivative actions, and a newly filed Illinois biometric-privacy class action. The company says it cannot estimate reasonably possible losses for these cases; accrued litigation losses were not material.
- The company adopted ASU 2020-06 for convertible-debt accounting on October 1, 2022, recording a $14.4 million reduction to additional paid-in capital and a corresponding balance-sheet adjustment. Management reported no goodwill impairment indicators and effective disclosure controls.
Investor facts to verify
- Reconcile the $122.7 million of cash and marketable securities with the amended credit agreement’s $125 million minimum-liquidity covenant and reported compliance.
- Track collections and credit exposure related to the $3.8 million provision for the international EV customer, including the rise in the receivables allowance to $4.1 million.
- Assess the revenue and cash-flow effects of reduced fixed license deals, variable royalty trends, and the legacy connected-services contract wind-down.
- Monitor debt service, the 2025 maturities, higher floating-rate borrowing costs, covenant requirements, and potential cash settlement if convertible notes become convertible.
- Follow developments in the securities, derivative, and biometric-privacy litigation; loss estimates are not available in the filing.