Cerence Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended September 30, 2020. The filing also reports fourth-quarter results. FY2020 was Cerence’s first full fiscal year as an independent public company after its October 2019 spin-off from Nuance.
Business context
Cerence supplies AI-powered, white-label virtual-assistant software and related services, primarily to automotive manufacturers and tier-one suppliers. Revenue comes from software licenses, cloud-connected services, and professional services. Toyota represented approximately 23% of FY2020 revenue; OEMs accounted for 56% and tier-one suppliers 44%. The company estimates its technology was included in approximately 53% of cars shipped during the year.
Key financial metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $329.6 million | $303.3 million |
| Gross profit / gross margin | $221.8 million / 67.3% | $204.0 million / 67.2% |
| Operating income / operating margin | $19.3 million / 5.9% | $10.9 million / 3.6% |
| Net income (loss) | $(20.6) million | $100.3 million |
| Cash from operating activities | $44.8 million | $88.1 million |
| Cash and cash equivalents at year-end | $136.1 million | No standalone balance reported |
FY2020 revenue mix: licenses $164.3 million, connected services $96.1 million, and professional services $69.2 million. Fourth-quarter revenue was $90.9 million, gross profit $65.3 million, and net income $6.8 million.
At September 30, 2020, total assets were $1.687 billion, total liabilities $729.7 million, and stockholders’ equity $957.8 million. Current assets were $249.1 million and current liabilities $200.8 million; reported net working capital was $48.4 million. Management separately cited $153.6 million of net working capital excluding current deferred revenue and deferred costs. Marketable securities totaled $11.7 million.
Debt included $175 million principal of 3.00% convertible notes due 2025 and a senior secured term loan originally issued at $125 million; the balance-sheet carrying value of total debt was $273.1 million, net of discounts and issuance costs. A $50 million revolving facility was undrawn. The company reported compliance with its credit-agreement covenants at year-end, including a $75 million minimum-liquidity covenant.
Material changes versus prior comparable period
- Revenue increased 8.7%. Connected-services revenue rose 22.2% and professional-services revenue rose 32.5%, while license revenue fell 4.7%, mainly due to pandemic-related lower automotive production and royalties.
- Gross margin was broadly stable, while operating margin improved 2.3 percentage points. General and administrative expense increased 90.5% to $49.4 million, primarily reflecting standalone public-company costs and higher compensation and stock-based compensation.
- Operating cash flow declined 49.1% to $44.8 million, with working-capital movements including a $35.6 million reduction in deferred revenue contributing to the year’s cash-flow profile.
- Net income swung to a loss, principally reflecting $22.7 million of interest expense, a $19.3 million loss on extinguishment of debt, and $23.3 million of other expense. FY2019 net income included an $89.1 million income-tax benefit, largely related to intangible-property transfers, making the year-over-year net-income comparison unusually distorted.
- Deferred revenue decreased to $325.1 million from $353.3 million. Management expects balances to decline further, including as a legacy connected-services relationship with a major OEM winds down.
Outlook, commentary, risks, and unusual items
- Management did not provide numerical FY2021 revenue or earnings guidance in the supplied filing text. It expects R&D to again represent the majority of operating expenses, subject to the continuing effects of COVID-19.
- COVID-19 materially affected billings and recognized license and connected-services revenue in the second half of FY2020. Management said the duration and financial impact remained uncertain; it responded with spending controls, workforce reductions, deferred hiring and R&D programs, and temporary executive salary reductions.
- Management said available cash, operating cash flow, and the undrawn revolver were expected to meet liquidity needs over the next 12 months, while noting that prolonged economic disruption could affect operations, covenant compliance, liquidity, and access to financing.
- Fixed backlog was $387.5 million, including $325.1 million of remaining performance obligations and $62.4 million of unbilled contractual commitments. Estimated variable backlog was $1.42 billion; it depends on forecast vehicle shipments and royalties and is not a firm revenue commitment. Total estimated backlog was $1.81 billion.
- Principal risks include automotive cyclicality and pandemic effects, customer concentration, pricing pressure, competition from large technology companies, winning and implementing long-cycle vehicle programs, cybersecurity and privacy, foreign-exchange exposure, and debt covenants and servicing requirements.
- The auditor gave an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor was not engaged to audit internal-control effectiveness. FY2019 and FY2018 are carve-out results and may not represent Cerence’s results as an independent company. FY2018 also uses a different revenue-recognition standard, limiting comparability.
Important facts for investors to verify
- Whether automotive production recovery and customer shipment trends support renewed license and royalty growth.
- How connected-services growth, professional-services staffing, and cloud costs affect sustainable margins and cash generation.
- The quality and timing of backlog conversion, particularly the shipment-sensitive variable backlog and the major OEM relationship winding down.
- Debt repayment capacity, interest costs, convertible-note dilution or cash-settlement exposure, and ongoing covenant headroom.
- Customer concentration, including Toyota’s 23% revenue share, and any changes in major-customer receivables or payment behavior.
- The assumptions underlying deferred tax assets and uncertain tax positions; unrecognized tax benefits were $71.0 million at year-end.