Cerence Inc. — Q3 FY2021 Form 10-Q
Reporting period: Three and nine months ended June 30, 2021; filed August 9, 2021. Amounts below are in U.S. dollars. Financial statements are unaudited.
Business context
Cerence provides AI-powered voice assistants and connected software for vehicles, primarily to automakers and their tier-one suppliers. Revenue comes from software licenses, connected services, and professional services.
Key financial results
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Revenue | $96.8m | $75.2m | $289.1m | $239.7m |
| Gross profit / margin | $73.0m / 75.4% | $47.6m / 63.3% | $212.2m / 73.4% | $157.5m / 65.7% |
| Operating income (loss) / margin | $14.9m / 15.4% | $(4.3)m / (5.7%) | $49.8m / 17.2% | $6.2m / 2.6% |
| Net income (loss) | $5.8m | $(28.1)m | $37.9m | $(26.5)m |
| Diluted EPS | $0.15 | $(0.77) | $0.97 | $(0.73) |
| Cash from operating activities | $24.1m | $19.3m | $51.1m | $18.6m |
Q3 license revenue rose 54.0% to $50.0m; connected-services revenue increased 19.3% to $30.3m; professional-services revenue declined 4.7% to $16.5m. For the nine-month period, all three revenue streams grew.
At June 30, 2021, cash and cash equivalents were $120.8m, marketable securities were $36.4m, and total debt carrying value was $271.6m ($6.3m current and $265.4m long-term). Current assets were $271.7m and current liabilities $168.9m. The company reported $51.1m of operating cash flow for the nine months, used $34.7m in investing activities and $32.9m in financing activities, and ended with $120.8m cash, down $15.2m from September 30, 2020.
Changes versus comparable periods
- Q3 revenue increased 28.7%; nine-month revenue increased 20.6%. Management attributed license growth mainly to higher royalty volumes as automotive production recovered from pandemic disruption, and connected-services growth to greater customer deployment of hybrid solutions.
- Gross margin improved substantially, supported by higher license revenue and cost savings. Q3 operating income turned positive from a loss; nine-month operating income increased to $49.8m.
- Interest expense declined versus the prior periods, while the prior-year comparison included a $19.3m loss on debt extinguishment related to refinancing.
- Nine-month operating cash flow increased to $51.1m from $18.6m. Investing outflows increased, including net purchases of marketable securities and a $2.6m equity investment.
Outlook, risks and unusual items
- No specific numerical full-year revenue or earnings guidance is provided in the supplied filing text. Management said it expects to meet liquidity needs over the next 12 months, citing operating cash flows, cash balances and available revolving credit.
- Management warned that COVID-19 effects remain uncertain and that the automotive semiconductor shortage could disrupt vehicle production and license royalties. Other highlighted risks include customer pricing pressure, contract cancellations or delays, dependence on major customers, cybersecurity and data privacy, and competition.
- Two customers represented 20.0% and 13.1% of Q3 revenue. Deferred revenue declined to $289.8m from $324.7m at September 30, 2020; management expects balances to decline further, partly due to the wind-down of a legacy connected-services relationship with a major OEM.
- The $175m principal amount of 3.00% convertible notes due 2025 was conditionally convertible during Q3, but none were converted. Cash settlement of future conversions could adversely affect liquidity. A $50m revolving facility was undrawn; the company reported compliance with debt covenants, including a $75m minimum-liquidity requirement.
- Q3 tax expense was $6.1m, with a 51.1% effective tax rate; the nine-month rate was 7.0%, affected in part by a $15.8m Netherlands tax-rate-change benefit and a $3.9m stock-compensation-related tax benefit.
- The company corrected immaterial errors in previously issued financial statements and revised comparative figures. It reported no goodwill impairment indicators, no material accrued litigation losses, and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the semiconductor shortage, COVID-19 effects, and automotive production levels change license royalty volumes or customer project timing.
- Revenue and receivables concentration by customer, and the financial and revenue impact of the legacy OEM services wind-down.
- Cash conversion, deferred revenue trends, and liquidity relative to debt covenants and any potential convertible-note cash settlement.
- The sustainability of improved gross and operating margins as research and development spending and headcount grow.
- The effects of the disclosed prior-period financial-statement revisions and the assumptions underlying tax benefits and deferred tax assets.