Cerence Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended June 30, 2020. The 2020 statements are consolidated; 2019 comparative results are carve-out combined results from Nuance, so comparisons may not be fully like-for-like. Cerence provides AI-powered automotive assistants and related software licenses, connected services and professional services.
Financial performance
| Metric | Three months ended June 30, 2020 | Nine months ended June 30, 2020 |
|---|---|---|
| Revenue | $74.8 million, down 3.6% year over year | $238.8 million, up 8.4% |
| Gross profit / margin | $47.2 million / 63.1%; prior-year margin 69.5% | $156.5 million / 65.5%; prior-year margin 67.2% |
| Operating income (loss) / margin | $(4.7) million / (6.3%); prior-year margin 4.2% | $5.2 million / 2.2%; prior-year margin 2.8% |
| Net income (loss) | $(28.2) million; $(0.77) per diluted share | $(27.4) million; $(0.76) per diluted share |
| Operating cash flow | Quarterly amount not clearly stated in the provided filing text | $18.6 million, versus $68.7 million |
Quarterly revenue mix shifted: license revenue fell 26% to $32.5 million, while connected services rose 27% to $25.0 million and professional services rose 25% to $17.4 million. The nine-month increases in connected and professional services more than offset lower license revenue. Quarterly professional-services gross profit was negative $0.2 million, reflecting increased staffing and related investment.
At June 30, cash and cash equivalents were $132.8 million. Debt carrying value was $273.4 million, comprising $175 million principal of 3.00% convertible notes due 2025 and a $125 million term loan; the $50 million revolver was undrawn. Current debt was $6.25 million. Total current assets were $236.5 million and current liabilities $195.2 million. The company reported $938.7 million of stockholders’ equity.
Material changes and unusual items
- COVID-19-related automotive production and shipment declines reduced license royalties and connected-services billings. In the quarter, the license decline drove lower total revenue and gross profit despite growth in the other service lines.
- Nine-month operating cash flow declined by $50.1 million year over year. Management attributed the decline primarily to working-capital timing and lower deferred-revenue cash flows, including a $43.6 million year-over-year reduction in deferred-revenue-related cash flow.
- Refinancing in June replaced the prior facilities with the convertible notes and new senior credit facilities. Repayment of the existing facilities resulted in a $19.3 million debt-extinguishment loss; total other expense also included substantial interest expense.
- General and administrative expense rose to $14.3 million in the quarter from $6.2 million, primarily due to higher compensation, stock-based compensation and professional-services costs. Nine-month stock-based compensation was $33.0 million, compared with $21.2 million.
- COVID-19 impairment indicators prompted a March 2020 goodwill test. No impairment was recorded, but estimated reporting-unit fair value exceeded carrying value by only about $15 million, or 2%. No impairment indicators were identified at June 30.
Outlook, risks and contingencies
- Management expected license revenue to remain negatively affected in fiscal Q4 2020 and planned to emphasize professional-services work to help offset the decline. It also anticipated lower R&D expense in Q4. No numerical full-year guidance is provided in the supplied filing text.
- Management believed available cash, operating cash flows and the undrawn revolver would meet liquidity needs over the next 12 months, while noting uncertainty from the pandemic and the possibility that future financing may not be available on reasonable terms.
- The new credit agreement includes quarterly financial tests beginning September 30, 2020: maximum net secured leverage of 3.25x, maximum net total leverage of 4.25x and minimum liquidity of $75 million. Substantially all relevant assets secure the facilities.
- The company reported $403.5 million of fixed remaining performance obligations, excluding variable usage-based royalties and connected services. Deferred revenue totaled $336.1 million. Management expects deferred revenue to decline, including as a legacy connected-services relationship with a major OEM winds down.
- Key risks include the duration and severity of COVID-19 and its effects on automotive production, customer demand and collections; customer concentration; debt service, covenant compliance and potential cash settlement or dilution upon note conversion. Legal accruals were not material, and management did not expect pending matters to materially affect the financial statements.
Important facts for investors to verify
- How quickly automotive production and license royalties recover, and whether connected-services and professional-services growth can offset ongoing license weakness.
- Cash conversion and deferred-revenue trends, particularly the effects of the major OEM relationship wind-down and working-capital changes.
- Liquidity headroom and compliance with the new leverage and minimum-liquidity covenants as testing begins.
- Whether the narrow goodwill valuation cushion changes with revised forecasts or market conditions.
- The drivers and persistence of elevated stock-based compensation, general and administrative costs, and professional-services delivery costs.