Cerence Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2023, the three months ended December 31, 2022. Cerence provides AI-powered automotive assistants and related software licenses, connected services, and professional services. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Revenue | $83.7 | $94.4 |
| Gross profit / margin | $57.5 / 68.7% | $70.2 / 74.3% |
| Operating income (loss) / margin | ($2.0) / (2.4%) | $22.9 / 24.3% |
| Net income (loss) | ($2.2) | $19.0 |
| Operating cash flow | ($2.1) | $5.1 |
- Revenue decreased 11.4%. License revenue was $45.4 million, down 3.1%; connected services revenue was $18.4 million, down 34.7%; professional services revenue was $19.8 million, up 2.2%.
- Gross profit fell 18.1%. Operating expenses rose to $59.5 million from $47.3 million, including higher research and development, sales and marketing, and general and administrative expenses. Stock-based compensation was $12.5 million, versus $5.8 million.
- Other income was $1.1 million, compared with $3.6 million of other expense in the prior-year quarter; the improvement primarily reflected foreign-exchange gains. Interest expense was $3.5 million. The income tax provision was $1.3 million despite a pretax loss, resulting in a negative 137.7% effective tax rate.
- Cash, cash equivalents, and marketable securities totaled $120.2 million at December 31, 2022. Total debt carrying value was $279.8 million, including $175.0 million principal on 3.00% convertible notes due 2025 and senior credit facility borrowings. No revolving-facility borrowings were outstanding. Cash flow used in operations, and cash and cash equivalents declined $4.2 million during the quarter to $90.7 million.
- Deferred revenue was $238.1 million; remaining performance obligations were $319.8 million, excluding variable usage-based backlog. Accounts receivable increased to $66.4 million from $45.1 million at September 30, 2022.
Material changes and unusual items
- The decline in connected services revenue was primarily due to the wind-down of a legacy contract acquired through Nuance. Management also cited lower non-automotive license revenue; higher variable license royalties partly offset the decrease.
- Professional services costs rose faster than revenue, mainly due to contractor costs and amortization of deferred costs, reducing professional services gross profit.
- Restructuring and other costs were $4.2 million, including $3.0 million of severance, $0.2 million of facility costs, and $0.9 million of other one-time charges. Management expected approximately $6.0 million of additional personnel-related restructuring costs for the remainder of FY2023.
- Adoption of ASU 2020-06 changed accounting for the convertible notes to a single liability; the filing says adoption did not materially affect the income statement or cash flows.
- Amendment No. 2 to the credit agreement temporarily adjusted financial covenants for fiscal quarters ending March 31 through December 31, 2023. During that period, requirements include minimum liquidity of $125 million, a maximum net secured leverage ratio of 4.25:1, and capital expenditures below $7.5 million; the net total leverage covenant is waived. The company reported compliance with its covenants as of December 31, 2022.
Outlook, risks, and contingencies
- Management expected reduced contributions from fixed license contracts in FY2023 after deciding to limit such contracts, negatively affecting reported license revenue. It expected a slow, gradual improvement in auto production, while noting ongoing semiconductor, shipping, production, and inflation pressures. The supplied filing text does not provide clear numerical revenue or earnings guidance.
- Management said it expected positive operating cash flows and believed available liquidity would meet needs over the next 12 months. These expectations depend on operating performance and access to liquidity; the filing identifies economic disruption, customer pricing pressure, contract losses or delays, and cash management as risks.
- The company disclosed a securities class action and related derivative actions concerning alleged past disclosures. It intends to defend the claims but could not estimate a reasonably possible loss range. It reported that accrued litigation losses were not material and did not expect pending matters to have a material financial impact.
- Three customers represented 17.6%, 12.6%, and 11.8% of accounts receivable at quarter-end; two customers represented 25.6% and 12.0% of quarterly revenue. Management reported no goodwill impairment indicators at December 31, 2022.
Important facts for investors to verify
- Whether revenue and margins stabilize as the legacy connected-services contract winds down and fixed-license contract contributions decline.
- Operating cash-flow trends, receivables collection, and the composition and availability of the reported $120.2 million of cash and marketable securities.
- Compliance with the amended credit covenants, including the temporary $125 million minimum-liquidity requirement and capital-expenditure limit.
- Progress and potential costs of the restructuring, and the outcome or estimated exposure of the securities and derivative litigation.
- Customer concentration and the timing and collectability of deferred revenue and remaining performance obligations.