Cerence Inc. — Q3 FY2023 Form 10-Q
Reporting period: Three and nine months ended June 30, 2023; fiscal year ends September 30. Cerence provides AI-powered virtual assistants and connected software for automotive and other transportation customers, primarily through software licenses, connected services, and professional services. Financial amounts below are in U.S. dollars; “Q3” refers to the three-month period.
Financial performance and position
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Revenue | $61.7m | $89.0m | $213.7m | $269.7m |
| Gross profit / margin | $40.7m / 66.0% | $64.8m / 72.8% | $141.6m / 66.3% | $197.0m / 73.0% |
| Operating income (loss) | $(8.5)m | $15.8m | $(31.1)m | $45.0m |
| Net income (loss) | $(16.5)m | $(99.3)m | $(44.7)m | $(80.7)m |
| Net loss per diluted share | $(0.41) | $(2.53) | $(1.11) | $(2.06) |
- Q3 revenue fell 30.8%; nine-month revenue fell 20.8%. Q3 license revenue declined 44.4%, connected services 7.0%, and professional services 23.7% year over year.
- For nine months, license revenue fell 26.9%, connected services 17.2%, and professional services 11.0%. Lower fixed purchase-commitment and prepaid deals weighed on licenses; variable license royalties increased. Connected-services decline reflected the wind-down of a legacy contract.
- Operating expenses were $49.2m in Q3 and $172.7m for nine months, versus $49.0m and $152.0m in the respective prior periods. Nine-month G&A rose 45.4%, including higher stock compensation and a credit-loss provision, notably $3.8m related to one international electric-vehicle maker.
- Net loss improved against Q3 2022 largely because that prior-year quarter included a $107.6m valuation allowance on Netherlands deferred tax assets. FY2023 nine-month income-tax provision was $8.0m versus $114.7m in the prior period; the comparison is not solely an operating improvement.
- Operating cash flow was a use of $3.8m for nine months, compared with $2.8m provided in the prior-year period. Investing activities used $2.4m and financing activities used $1.0m. Cash and cash equivalents declined to $86.1m from $94.8m at September 30, 2022.
- Cash, cash equivalents, and marketable securities totaled $116.0m at June 30. Current assets were $219.1m and current liabilities $168.4m. Deferred revenue totaled $228.3m; remaining fixed performance obligations were $289.0m, excluding variable usage-based backlog.
- Debt carrying value was $279.4m, including $24.7m under the revolver classified as current; stated principal totaled $302.2m. The company repaid the revolver balance on July 3, 2023. Stockholders’ equity was $702.8m.
Material changes, outlook, and risks
- In June, Cerence issued $190.0m principal amount of 1.50% convertible notes due 2028, receiving $173.6m net proceeds by quarter-end. It used proceeds in part to repay $106.3m of term-loan principal and repurchase $87.5m of 2025 notes. An additional $20.0m of 2028 notes was issued July 3. The filing states the term loan was fully repaid by June 30 and the revolver was repaid July 3.
- Management expected FY2023 reported license revenue to be negatively affected by reduced contributions from fixed license contracts as Cerence limits such deals going forward. It expected slow, gradual improvement in auto production, while noting ongoing semiconductor, shipping and production issues and inflation. No numerical revenue or earnings guidance is provided in the supplied filing text.
- Management said available liquidity and expected cash generation should meet needs over the next 12 months. This outlook depends on generating positive operating cash flow and remains exposed to market and operating uncertainty.
- Credit-agreement covenants were amended through the quarter ending December 31, 2023, including a $125m minimum-liquidity requirement and a capital-expenditure limit. Cerence reported compliance at June 30. Its revolving facility was repaid after quarter-end.
- Key risks include dependence on automotive production and customer spending, semiconductor and supply-chain disruptions, pricing pressure, customer concentration, foreign-exchange exposure, cybersecurity and data privacy, and the ability to control expenses and cash. Two customers represented 17.6% and 10.1% of Q3 revenue; two represented 14.8% and 10.8% for the nine-month period.
- Pending matters include a securities class action, stayed shareholder derivative actions, and an Illinois biometric-privacy class action. The company said accrued legal losses were not material and that it could not estimate reasonably possible losses for these cases.
- Other unusual items included $11.1m of nine-month restructuring and other costs, net, including $7.4m severance and $3.5m in third-party fees related to the 2025-note modification, offset in part by a $3.3m one-time gain.
Important facts for investors to verify
- Whether variable license royalties and vehicle production recover enough to offset the lower contribution from fixed and prepaid license deals.
- Whether operating cash flow improves, given nine-month cash usage, declining cash balances, deferred-revenue movements, and management’s positive-cash-flow expectations.
- The post-June 30 debt position and liquidity after the additional $20.0m note issuance and repayment of the $24.7m revolver, including future interest and conversion-related cash obligations.
- Developments in customer credit quality and the $3.8m credit-loss provision, as well as concentration in major customers and China-related revenue.
- Progress and potential exposure in the securities, derivative, and biometric-privacy litigation; loss estimates were not available in the filing.
- How restructuring, stock-based compensation, and the prior-year tax valuation allowance affect comparisons of reported earnings and ongoing operating performance.