Cerence Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2021. All financial figures are in U.S. dollars; amounts are in millions unless otherwise noted. Cerence supplies AI-powered automotive assistant software, licenses, connected services, and related professional services.
Financial performance
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Revenue | $98.7 | $86.8 | $192.3 | $164.5 |
| Gross profit | $72.4 | $58.1 | $139.2 | $109.9 |
| Operating income | $17.3 | $12.3 | $34.9 | $10.5 |
| Net income | $11.2 | $12.8 | $32.1 | $1.5 |
| Diluted EPS | $0.28 | $0.34 | $0.82 | $0.04 |
| Operating margin | 17.6% | 14.2% | 18.1% | 6.4% |
- Q2 revenue increased 13.6%; six-month revenue increased 16.9%. License revenue and connected-services revenue grew in both comparisons. Q2 professional-services revenue declined 11.7%, while six-month professional-services revenue rose 16.8%.
- Gross margin was approximately 73.4% in Q2 versus 66.9% a year earlier, and 72.4% for the six months versus 66.8%. Management attributed improvement principally to revenue growth and cost-saving initiatives, particularly in connected services.
- Q2 net income was lower despite higher operating income. The comparison includes a $6.2 million tax provision in Q2 FY2021 versus a $6.7 million tax benefit in Q2 FY2020. Six-month FY2021 results also benefited from a $15.8 million tax benefit related to an increase in the enacted Netherlands tax rate.
- Operating cash flow was $27.0 million for the six months, compared with cash used of $0.7 million in the prior-year period. Management separately reported Q2 operating cash flow of $16.2 million, versus cash used of $10.2 million; the cash-flow statement presents six-month, not quarterly, figures.
- Cash and cash equivalents were $119.5 million at March 31, 2021, down from $136.1 million at September 30, 2020. Marketable securities were $17.1 million. Total debt carrying value was $271.9 million, including $6.3 million current debt; the $175.0 million convertible notes are due 2025. No amounts were drawn on the $50 million revolving facility.
- Current assets were $254.0 million and current liabilities $161.3 million. Management reported $176.1 million of net working capital excluding current deferred revenue and deferred costs, and believes liquidity is adequate for at least the next 12 months.
Material changes and unusual items
- License revenue growth reflected higher royalty volumes as automotive production recovered from the COVID-19 downturn. Connected-services growth reflected increasing customer deployment of hybrid solutions.
- Operating expenses rose, including R&D expense up 35% in Q2 and stock-based compensation of $27.5 million for the six months versus $15.5 million. Lower restructuring and standalone-company costs partly offset the increases.
- Other income included foreign-exchange gains; Q2 other income was $3.5 million, primarily associated with the strengthening of the U.S. dollar against the euro.
- The company identified and corrected three immaterial errors in previously issued financial statements, including revenue timing, stock-based compensation, and lease-related restructuring accounting. Prior-period financial information was revised; management concluded the errors were not material.
- Fixed remaining performance obligations were $348.8 million at March 31, 2021, excluding variable usage-based royalties and connected-services backlogs.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance is provided in the supplied filing text. Management expects operating cash flow, cash balances, and available revolving credit to support longer-term cash requirements; principal expected uses include operating costs, R&D, and debt obligations.
- Management warned that the global automotive semiconductor shortage could affect vehicle production and license revenue, but said the impact could not yet be predicted. COVID-19 effects also remain uncertain and could materially affect performance, liquidity, and access to financing.
- The convertible notes’ conditional conversion feature was triggered during the six-month period. If holders convert and Cerence elects not to settle solely in shares, a cash settlement could adversely affect liquidity.
- The credit agreement requires quarterly compliance with leverage limits and minimum liquidity of $75 million. Cerence reported compliance as of March 31, 2021.
- Legal claims and accrued losses were not considered material, and the company did not expect pending matters to materially affect its financial statements. Contract indemnities may be unlimited in some cases. Goodwill was approximately $1.13 billion; no impairment indicators were identified.
Key facts investors should verify
- Whether semiconductor constraints, COVID-19 effects, or automotive production changes alter royalty volumes and connected-services growth.
- The sustainability of improved margins and operating cash flow, including the effects of deferred revenue declines and stock-based compensation.
- Debt service, covenant headroom, and potential cash or share dilution if the convertible notes become convertible and holders elect conversion.
- The assumptions behind the $348.8 million fixed performance-obligation backlog and the timing of its conversion to revenue.
- The revised comparative financial statements and management’s conclusion that the identified prior-period errors were immaterial.