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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number: 001-39030

 

CERENCE INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

83-4177087

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

1 Burlington Woods Drive, Suite 301A

Burlington, Massachusetts

01803

(Address of principal executive offices)

(Zip Code)

(857) 362-7300

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.01 per share

 

CRNC

 

The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

As of August 2, 2022, the registrant had 39,383,320 shares of common stock, $0.01 par value per share, outstanding.

 

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

3

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

3

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2022 and 2021

3

 

Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three and Nine Months Ended June 30, 2022 and 2021

4

 

Condensed Consolidated Balance Sheets as of June 30, 2022 and September 30, 2021

5

 

Consolidated Statements of Stockholders' Equity for the Three and Nine Months Ended June 30, 2022 and 2021

6

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2022 and 2021

8

 

Notes to Condensed Consolidated Financial Statements

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

47

Item 4.

Controls and Procedures

48

PART II.

OTHER INFORMATION

49

Item 1.

Legal Proceedings

49

Item 1A.

Risk Factors

49

Item 6.

Exhibits

51

Signatures

52

 

 

i


 

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Form 10-Q”), filed by Cerence Inc. together with its consolidated subsidiaries, “Cerence,” the “Company,” “we,” “us” or “our” unless the context indicates otherwise, contains “forward-looking statements” that involve risks and uncertainties. These statements can be identified by the fact that they do not relate strictly to historical or current facts, but rather are based on current expectations, estimates, assumptions and projections about our industry and our business and financial results. Forward-looking statements often include words such as “anticipates,” “estimates,” “expects,” “projects,” “forecasts,” “intends,” “plans,” “continues,” “believes,” “may,” “will,” “goals” and words and terms of similar substance in connection with discussions of future operating or financial performance. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances. Our actual results may vary materially from those expressed or implied in our forward-looking statements. Accordingly, undue reliance should not be placed on any forward-looking statement made by us or on our behalf. Although we believe that the forward-looking statements contained in this Form 10-Q are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those in such forward-looking statements, including but not limited to:

the duration and severity of the COVID-19 pandemic and its impact on our business and financial performance, including the impact of new variants such as Omicron;
the transition in our chief executive officer and other senior management positions;
adverse conditions in the automotive industry or the global economy more generally, including, without limitation, as a result of the COVID-19 pandemic, the conflict between Russia and Ukraine, and inflation and rising interest rates;
the continuation of the semiconductor shortage being experienced by the automotive industry;
the highly competitive and rapidly changing market in which we operate;
our employees are represented by workers councils or unions or are subject to local laws that are less favorable to employers than the laws of the U.S.;
fluctuations in our financial and operating results;
inability to control and successfully manage our expense and cash positions;
escalating pricing pressures from our customers;
the impact on our business of the transition to a lower level of fixed contracts, including, but not limited to, the failure to achieve the expected predictability and growth in our reported revenue following a transition year of fiscal 2023;
our failure to win, renew or implement service contracts;
the cancellation or postponement of service contracts after a design win;
the loss of business from any of our largest customers;
inability to recruit and retain qualified personnel;
our employees are represented by workers councils or unions or are subject to local laws that are less favorable to employers than the laws of the U.S.;
cybersecurity and data privacy incidents that damage client relations;
interruptions or delays in our services or services from data center hosting facilities or public clouds;
economic, political, regulatory, foreign exchange and other risks of international operations;
unforeseen U.S. and foreign tax liabilities;
impairment of our goodwill and other intangible assets;
the failure to protect our intellectual property or allegations that we have infringed the intellectual property of others;
defects in our software products that result in lost revenue, expensive corrections or claims against us;
our inability to quickly respond to changes in technology and to develop our intellectual property into commercially viable products;
our strategy to increase cloud services and ability to successfully introduce new products, applications or services;

1


 

a significant interruption in the supply or maintenance of our third-party hardware, software, services or data;
restrictions on our current and future operations under the terms of our debt arrangements and the use of cash to service our debt; and
certain factors discussed elsewhere in this Form 10-Q.

These and other factors are more fully discussed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2021 and elsewhere in this Form 10-Q, including Part II, “Item 1A, Risk Factors." These risks could cause actual results to differ materially from those implied by forward-looking statements in this Form 10-Q. Even if our results of operations, financial condition and liquidity and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Form 10-Q, those results or developments may not be indicative of results or developments in subsequent periods.

Any forward-looking statements made by us in this Form 10-Q speak only as of the date on which they are made. We are under no obligation to, and expressly disclaim any obligation to, update or alter our forward-looking statements, whether as a result of new information, subsequent events or otherwise, except as required by law.

2


 

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements.

CERENCE INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(unaudited)

 

 

 

Three Months Ended June 30,

 

 

Nine Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

License

 

$

46,452

 

 

$

49,980

 

 

$

139,610

 

 

$

150,765

 

Connected services

 

 

19,990

 

 

 

30,283

 

 

 

67,475

 

 

 

83,949

 

Professional services

 

 

22,599

 

 

 

16,538

 

 

 

62,662

 

 

 

54,392

 

Total revenues

 

 

89,041

 

 

 

96,801

 

 

 

269,747

 

 

 

289,106

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

License

 

 

585

 

 

 

863

 

 

 

1,692

 

 

 

2,718

 

Connected services

 

 

5,391

 

 

 

6,108

 

 

 

16,766

 

 

 

19,960

 

Professional services

 

 

18,173

 

 

 

14,985

 

 

 

51,448

 

 

 

48,632

 

Amortization of intangible assets

 

 

103

 

 

 

1,879

 

 

 

2,879

 

 

 

5,637

 

Total cost of revenues

 

 

24,252

 

 

 

23,835

 

 

 

72,785

 

 

 

76,947

 

Gross profit

 

 

64,789

 

 

 

72,966

 

 

 

196,962

 

 

 

212,159

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

26,040

 

 

 

30,370

 

 

 

81,808

 

 

 

83,365

 

Sales and marketing

 

 

8,299

 

 

 

9,534

 

 

 

22,487

 

 

 

28,097

 

General and administrative

 

 

10,614

 

 

 

13,173

 

 

 

31,941

 

 

 

38,563

 

Amortization of intangible assets

 

 

2,862

 

 

 

3,180

 

 

 

9,151

 

 

 

9,521

 

Restructuring and other costs, net

 

 

1,197

 

 

 

1,760

 

 

 

6,586

 

 

 

2,777

 

Total operating expenses

 

 

49,012

 

 

 

58,017

 

 

 

151,973

 

 

 

162,323

 

Income from operations

 

 

15,777

 

 

 

14,949

 

 

 

44,989

 

 

 

49,836

 

Interest income

 

 

243

 

 

 

34

 

 

 

416

 

 

 

68

 

Interest expense

 

 

(3,815

)

 

 

(3,294

)

 

 

(10,602

)

 

 

(10,569

)

Other (expense) income, net

 

 

(478

)

 

 

173

 

 

 

(764

)

 

 

1,432

 

Income before income taxes

 

 

11,727

 

 

 

11,862

 

 

 

34,039

 

 

 

40,767

 

Provision for income taxes

 

 

110,994

 

 

 

6,064

 

 

 

114,738

 

 

 

2,865

 

Net (loss) income

 

$

(99,267

)

 

$

5,798

 

 

$

(80,699

)

 

$

37,902

 

Net (loss) income per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(2.53

)

 

$

0.15

 

 

$

(2.06

)

 

$

1.01

 

Diluted

 

$

(2.53

)

 

$

0.15

 

 

$

(2.06

)

 

$

0.97

 

Weighted-average common share outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

39,313

 

 

 

37,825

 

 

 

39,113

 

 

 

37,664

 

Diluted

 

 

39,313

 

 

 

39,296

 

 

 

39,113

 

 

 

39,135

 

 

Refer to accompanying Notes to the unaudited condensed consolidated financial statements.

3


 

CERENCE INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In thousands)

(unaudited)

 

 

 

Three Months Ended June 30,

 

 

Nine Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(99,267

)

 

$

5,798

 

 

$

(80,699

)

 

$

37,902

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(12,013

)

 

 

3,937

 

 

 

(22,697

)

 

 

5,786

 

Pension adjustments, net

 

 

122

 

 

 

22

 

 

 

256

 

 

 

96

 

Net unrealized loss on available-for-sale securities

 

 

(81

)

 

 

(14

)

 

 

(248

)

 

 

(14

)

Total other comprehensive (loss) income

 

 

(11,972

)

 

 

3,945

 

 

 

(22,689

)

 

 

5,868

 

Comprehensive (loss) income

 

$

(111,239

)

 

$

9,743

 

 

$

(103,388

)

 

$

43,770

 

 

Refer to accompanying Notes to the unaudited condensed consolidated financial statements.

4


 

CERENCE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

 

 

 

June 30, 2022

 

 

September 30, 2021

 

 

 

(Unaudited)

 

 

 

 

ASSETS

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

108,454

 

 

$

128,428

 

Marketable securities

 

 

18,890

 

 

 

30,435

 

Accounts receivable, net of allowances of $167 and $395

 

 

62,698

 

 

 

45,560

 

Deferred costs

 

 

7,422

 

 

 

6,095

 

Prepaid expenses and other current assets

 

 

57,689

 

 

 

76,530

 

Total current assets

 

 

255,153

 

 

 

287,048

 

Long-term marketable securities

 

 

8,784

 

 

 

7,339

 

Property and equipment, net

 

 

38,027

 

 

 

31,505

 

Deferred costs

 

 

24,308

 

 

 

31,702

 

Operating lease right of use assets

 

 

16,641

 

 

 

14,901

 

Goodwill

 

 

1,114,556

 

 

 

1,128,511

 

Intangible assets, net

 

 

12,546

 

 

 

25,348

 

Deferred tax assets

 

 

49,780

 

 

 

159,293

 

Other assets

 

 

57,042

 

 

 

20,081

 

Total assets

 

$

1,576,837

 

 

$

1,705,728

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

15,370

 

 

$

11,636

 

Deferred revenue

 

 

75,166

 

 

 

78,394

 

Short-term operating lease liabilities

 

 

5,486

 

 

 

4,562

 

Short-term debt

 

 

9,375

 

 

 

6,250

 

Accrued expenses and other current liabilities

 

 

48,990

 

 

 

64,467

 

Total current liabilities

 

 

154,387

 

 

 

165,309

 

Long-term debt

 

 

261,202

 

 

 

265,093

 

Deferred revenue, net of current portion

 

 

173,519

 

 

 

198,343

 

Long-term operating lease liabilities

 

 

13,021

 

 

 

12,216

 

Other liabilities

 

 

24,596

 

 

 

32,822

 

Total liabilities

 

 

626,725

 

 

 

673,783

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

Common stock, $0.01 par value, 560,000 shares authorized; 39,316 and 38,025 shares issued and outstanding, respectively

 

 

393

 

 

 

381

 

Accumulated other comprehensive (loss) income

 

 

(21,055

)

 

 

1,634

 

Additional paid-in capital

 

 

1,023,896

 

 

 

1,002,353

 

(Accumulated deficit) Retained earnings

 

 

(53,122

)

 

 

27,577

 

Total stockholders' equity

 

 

950,112

 

 

 

1,031,945

 

Total liabilities and stockholders' equity

 

$

1,576,837

 

 

$

1,705,728

 

 

Refer to accompanying Notes to the unaudited condensed consolidated financial statements.

5


 

CERENCE INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(unaudited)

 

 

Three Months Ended June 30, 2022

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional
Paid-In
Capital

 

 

Retained Earnings
(Accumulated Deficit)

 

 

Accumulated
Other
Comprehensive
Loss

 

 

Total

 

Balance at March 31, 2022

 

 

39,305

 

 

$

393

 

 

$

1,018,731

 

 

$

46,145

 

 

$

(9,083

)

 

$

1,056,186

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(99,267

)

 

 

-

 

 

 

(99,267

)

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(11,972

)

 

 

(11,972

)

Issuance of common stock

 

 

12

 

 

 

-

 

 

 

103

 

 

 

-

 

 

 

-

 

 

 

103

 

Stock withheld to cover tax withholdings requirements upon stock vesting

 

 

(1

)

 

 

-

 

 

 

(134

)

 

 

-

 

 

 

-

 

 

 

(134

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

5,196

 

 

 

-

 

 

 

-

 

 

 

5,196

 

Balance at June 30, 2022

 

 

39,316

 

 

$

393

 

 

$

1,023,896

 

 

$

(53,122

)

 

$

(21,055

)

 

$

950,112

 

 

 

Three Months Ended June 30, 2021

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional
Paid-In
Capital

 

 

Retained Earnings

 

 

Accumulated
Other
Comprehensive
Income

 

 

Total

 

Balance at March 31, 2021

 

 

37,780

 

 

$

379

 

 

$

983,640

 

 

$

13,788

 

 

$

5,634

 

 

$

1,003,441

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,798

 

 

 

-

 

 

 

5,798

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,945

 

 

 

3,945

 

Issuance of common stock

 

 

51

 

 

 

-

 

 

 

1,637

 

 

 

-

 

 

 

-

 

 

 

1,637

 

Stock withheld to cover tax withholdings requirements upon stock vesting

 

 

(3

)

 

 

-

 

 

 

(1,889

)

 

 

-

 

 

 

-

 

 

 

(1,889

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

8,917

 

 

 

-

 

 

 

-

 

 

 

8,917

 

Balance at June 30, 2021

 

 

37,828

 

 

$

379

 

 

$

992,305

 

 

$

19,586

 

 

$

9,579

 

 

$

1,021,849

 

 

 

 

 

 

 

 

 

 

 

 

 

6


 

CERENCE INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Cont.)

(In thousands)

(unaudited)

 

Nine Months Ended June 30, 2022

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional
Paid-In
Capital

 

 

Retained Earnings
(Accumulated Deficit)

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

 

Total

 

Balance at September 30, 2021

 

 

38,025

 

 

$

381

 

 

$

1,002,353

 

 

$

27,577

 

 

$

1,634

 

 

$

1,031,945

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(80,699

)

 

 

-

 

 

 

(80,699

)

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-