Cerence Inc. — Q2 FY2024 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2024. Cerence provides AI-powered virtual assistants and connected software for vehicles, selling licenses, connected services and professional services primarily to automotive OEMs and tier-one suppliers. Unless noted otherwise, figures below are in U.S. dollars.
Financial performance
| Metric | Three months ended March 31, 2024 | Six months ended March 31, 2024 |
|---|---|---|
| Revenue | $67.8 million, down 0.8% year over year | $206.2 million, up 35.6% |
| Gross profit / margin | $46.9 million / 69.2% | $158.9 million / 77.1% |
| Operating loss | $264.4 million | $205.8 million |
| Net loss | $278.0 million; $6.66 per diluted share | $254.1 million; $6.13 per diluted share |
| Cash from (used in) operations | Quarterly figure not clearly presented in the cash flow statement | $(1.8) million, versus $4.4 million provided a year earlier |
Quarterly revenue mix: license revenue was $35.5 million, up 15.3%; connected services revenue was $13.6 million, down 28.2%; and professional services revenue was $18.7 million, essentially flat. For the six-month period, license revenue fell 26.1% to $56.4 million, while connected services rose 195.9% to $110.4 million and professional services increased 2.3% to $39.4 million.
At March 31, cash and cash equivalents were $99.2 million; marketable securities totaled $16.1 million, for combined liquidity of $115.2 million. Long-term debt had a $278.9 million carrying value and $297.5 million principal. Stockholders’ equity was $463.4 million, down from $694.9 million at September 30, 2023. Current assets were $232.7 million and current liabilities $106.7 million.
Material changes and unusual items
- Goodwill impairment: Cerence recorded a $252.1 million noncash charge after concluding that declining share price and macroeconomic conditions indicated impairment. Goodwill fell to $650.6 million from $900.3 million.
- Revenue acceleration: Two contract terminations accelerated $67.8 million and $9.9 million of deferred revenue into Q1 FY2024. The company stated these arrangements had no associated cash flow. This largely explains the six-month revenue increase and makes the year-over-year comparison atypical.
- One-time license item: Q2 license revenue included a $5.0 million deal resolving an adjustment related to a customer’s historically reported royalties.
- Credit loss: Cerence recorded a $6.1 million provision related to the bankruptcy of a fitness equipment manufacturer, primarily against a contract asset.
- Tax expense: The six-month tax provision was $46.0 million despite a pretax loss; the filing attributes the increase partly to goodwill impairment and foreign valuation allowance changes.
- Restructuring: Six-month restructuring and other costs were $5.3 million, including $4.5 million of severance. Management expects additional personnel-related restructuring costs during the remainder of FY2024.
Liquidity, debt and outlook
Management said it expects positive operating cash flow and believes available liquidity will meet needs over the next 12 months. However, operating cash flow was negative $1.8 million for the first six months, and deferred revenue declined by $73.6 million from September 30, 2023. The filing notes that deferred revenue movements can fluctuate significantly and are not a reliable indicator of future performance.
Debt principal includes $87.5 million of 3.00% convertible notes due June 2025 and $210.0 million of 1.50% notes due July 2028. No notes were convertible as of March 31, 2024. On April 12, 2024, Cerence amended its revolving-credit agreement, revising financial covenants, interest margins and facility maturity terms. The amended covenants include minimum liquidity of $50 million and specified EBITDA thresholds through March 2026. The company reported covenant compliance at March 31, before this amendment.
Management cited automotive production delays and slowdowns, higher interest rates and constrained credit availability, increasing vehicle software complexity, and slower-than-expected development in adjacent markets. It plans to focus on costs and anticipates further cost reductions. No specific revenue or earnings guidance is provided in the supplied filing text.
Risks, contingencies and other points
- Pending matters include a securities class action, shareholder derivative actions and Illinois biometric-privacy lawsuits. Cerence said it cannot estimate reasonably possible losses for these cases; one Illinois state-court motion to dismiss was denied.
- The filing identifies risks including customer concentration, contract cancellations or delays, pricing pressure, customer credit risk, competition, cybersecurity and privacy incidents, foreign exchange exposure, and potential future impairment charges.
- One customer represented 38.8% of six-month revenue, largely reflecting the accelerated deferred revenue; two customers represented 13.4% and 10.9% of Q2 revenue.
- A 10% unfavorable currency movement in the forward-contract portfolio would have produced an estimated $7.2 million unrealized loss, which the company expects to be offset by gains on underlying transactions.
Important facts for investors to verify
- How much of reported six-month revenue and gross profit reflects the $77.7 million of accelerated deferred revenue, and what recurring revenue trends remain after that effect?
- Whether the business can return to positive operating cash flow as deferred revenue and customer payment patterns change.
- Progress against the revised credit-agreement covenants, liquidity minimum and the June 2025 note maturity.
- The assumptions supporting the $463.4 million reporting-unit valuation and the risk of additional impairment.
- Potential financial exposure from the biometric-privacy and securities litigation, for which losses are not currently estimable.
- The MD&A gives a quarterly operating-cash-flow comparison that differs from the six-month cash-flow statement; reconcile the quarterly figure before relying on it.