Cerence Inc. — Form 10-Q Summary
Business context and reporting period
Fiscal first quarter of 2020, the three months ended December 31, 2019. Cerence provides AI-powered voice assistants and connected software services for vehicles, primarily to automotive OEMs and tier-one suppliers. Cerence completed its spin-off from Nuance on October 1, 2019. The 2019 figures are consolidated; the prior-year comparison is a carve-out combined presentation of the Cerence business within Nuance, so the periods are not fully comparable.
Financial results and liquidity
| Metric | Q1 FY2020 | Prior-year quarter |
|---|---|---|
| Revenue | $77.5 million | $72.5 million |
| Gross profit / gross margin | $51.5 million / 66.5% | $48.3 million / 66.6% |
| Operating income (loss) / margin | $(2.1) million / (2.7)% | $2.8 million / 3.9% |
| Net income (loss) | $(11.8) million | $2.3 million |
| Operating cash flow | $9.5 million | $16.7 million |
- Revenue rose 6.9%. Connected services increased 33.4% to $23.0 million and professional services increased 21.8% to $13.7 million; license revenue declined 7.4% to $40.8 million.
- Gross profit increased 6.7%, but operating results weakened as operating expenses rose, including higher general and administrative costs and standalone-company separation expenses.
- Cash and cash equivalents were $113.4 million at December 31, 2019. Current assets were $220.9 million and current liabilities $194.5 million.
- Debt carrying value was $248.4 million, including $9.4 million current and $239.0 million long-term; face principal was $270.0 million. The company had no borrowings on its $75 million revolving facility. Cash paid for interest was $3.7 million.
- Deferred revenue totaled $359.7 million. Remaining fixed performance obligations were $411.0 million, excluding variable usage-based backlog.
Material changes versus the prior comparable period
- Connected-services growth and improved connected-services gross profit supported revenue and gross-profit growth. Professional-services costs rose 38.5%, producing a gross loss of $0.8 million in that category.
- General and administrative expense doubled to $11.5 million, mainly due to higher salaries and software fees. Restructuring and other costs rose to $7.6 million from $3.1 million, primarily for establishing Cerence as a standalone public company.
- Interest expense was $6.8 million following the October 2019 debt financing. Operating cash flow declined $7.2 million, with management citing working-capital timing, including higher prepaid expenses and other assets.
- The quarter included a $153.0 million distribution to Nuance funded principally by the term loan. Financing cash flow was $107.4 million, reflecting debt proceeds and the distribution.
Outlook, commentary, risks and unusual items
- Management said cash, operating cash flows and available revolving credit were expected to meet liquidity needs over the next 12 months. The filing provides no specific revenue or earnings guidance.
- Management expects deferred revenue balances to decrease, including as a legacy connected-services relationship with a major OEM winds down; it said this is not expected to impair the company’s ability to meet obligations.
- The term loan bears interest at either the applicable base rate plus 5.00% or LIBOR plus 6.00%; quarterly principal payments were scheduled to begin March 31, 2020. The credit agreement includes a maximum net first-lien leverage ratio of 6.00 to 1.00; Cerence reported compliance at quarter-end.
- The effective tax rate was (34.3)% despite a pretax loss, reflecting jurisdictional earnings and other tax items, including an approximately $5.0 million tax benefit related to enacted Netherlands tax-rate increases.
- One customer represented 23.2% of quarterly revenue. Key stated risks include automotive-industry conditions, competition and pricing pressure, customer concentration and contract cancellations, technology and product execution, cybersecurity and data privacy, and foreign-exchange, tax and intellectual-property risks.
- Accrued legal losses were not material, and management did not expect pending legal matters to have a material effect. The filing reported no material off-balance-sheet arrangements.
Important facts for investors to verify
- How the post-spin-off cost structure and separation expenses affect normalized operating profitability.
- Whether connected-services growth can continue and improve margins while professional-services staffing costs are absorbed.
- The pace and cash-flow effect of the major OEM legacy-services wind-down and declining deferred revenue.
- Debt repayment capacity, interest-rate exposure, covenant headroom and availability of the undrawn revolver.
- The effect of customer concentration and the comparability limits of the Nuance carve-out prior-year figures.