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crnc-10q_20220331.htm

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 March 31, 2022

☐	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.

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 May 2, 2022, the registrant had 39,305,377 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 Six Months Ended March 31, 2022 and 2021	3
	Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three and Six Months Ended March 31, 2022 and 2021	4
	Condensed Consolidated Balance Sheets as of March 31, 2022 and September 30, 2021	5
	Consolidated Statements of Stockholders' Equity for the Three and Six Months Ended March 31, 2022 and 2021	6
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 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	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 4.	Controls and Procedures	44
PART II.	OTHER INFORMATION	45
Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	45
Item 6.	Exhibits	47
Signatures		48

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.;

•

our fluctuations in our financial and operating results;

•

escalating pricing pressures from our customers;

•

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;

•

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;

•

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 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.

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 March 31,						Six Months Ended March 31,
	2022			2021			2022			2021
Revenues:
License	$	46,308		$	54,371		$	93,158		$	100,785
Connected services		19,326			27,736			47,485			53,666
Professional services		20,646			16,555			40,063			37,854
Total revenues		86,280			98,662			180,706			192,305
Cost of revenues:
License		386			1,181			1,107			1,855
Connected services		5,651			6,839			11,375			13,852
Professional services		17,372			16,325			33,275			33,647
Amortization of intangible assets		897			1,879			2,776			3,758
Total cost of revenues		24,306			26,224			48,533			53,112
Gross profit		61,974			72,438			132,173			139,193
Operating expenses:
Research and development		29,976			28,864			55,768			52,995
Sales and marketing		8,309			9,555			14,188			18,563
General and administrative		13,800			12,956			21,327			25,390
Amortization of intangible assets		3,135			3,183			6,289			6,341
Restructuring and other costs, net		474			537			5,389			1,017
Total operating expenses		55,694			55,095			102,961			104,306
Income from operations		6,280			17,343			29,212			34,887
Interest income		83			16			173			34
Interest expense		(3,360	)		(3,476	)		(6,787	)		(7,275	)
Other income (expense), net		(34	)		3,496			(286	)		1,259
Income before income taxes		2,969			17,379			22,312			28,905
Provision for (benefit from) income taxes		3,445			6,216			3,744			(3,199	)
Net (loss) income	$	(476	)	$	11,163		$	18,568		$	32,104
Net (loss) income per share:
Basic	$	(0.01	)	$	0.30		$	0.48		$	0.85
Diluted	$	(0.01	)	$	0.28		$	0.47		$	0.82
Weighted-average common share outstanding:
Basic		39,189			37,743			39,013			37,583
Diluted		39,189			39,177			39,586			43,730

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

CERENCE INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In thousands)

(unaudited)

	Three Months Ended March 31,						Six Months Ended March 31,
	2022			2021			2022			2021

Net (loss) income	$	(476	)	$	11,163		$	18,568		$	32,104
Other comprehensive (loss) income:
Foreign currency translation adjustments		(5,295	)		(12,321	)		(10,684	)		1,849
Pension adjustments, net		61			104			134			74
Net unrealized loss on available-for-sale securities		(132	)		—			(167	)		—
Total other comprehensive (loss) income		(5,366	)		(12,217	)		(10,717	)		1,923
Comprehensive (loss) income	$	(5,842	)	$	(1,054	)	$	7,851		$	34,027

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

CERENCE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

	March 31, 2022			September 30, 2021
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	111,819		$	128,428
Marketable securities		29,810			30,435
Accounts receivable, net of allowances of $178 and $395		48,029			45,560
Deferred costs		7,418			6,095
Prepaid expenses and other current assets		68,924			76,530
Total current assets		266,000			287,048
Long-term marketable securities		4,457			7,339
Property and equipment, net		37,184			31,505
Deferred costs		26,511			31,702
Operating lease right of use assets		18,654			14,901
Goodwill		1,123,561			1,128,511
Intangible assets, net		15,947			25,348
Deferred tax assets		155,763			159,293
Other assets		54,450			20,081
Total assets	$	1,702,527		$	1,705,728
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	18,165		$	11,636
Deferred revenue		78,895			78,394
Short-term operating lease liabilities		5,844			4,562
Short-term debt		7,813			6,250
Accrued expenses and other current liabilities		45,768			64,467
Total current liabilities		156,485			165,309
Long-term debt		263,000			265,093
Deferred revenue, net of current portion		182,823			198,343
Long-term operating lease liabilities		14,749			12,216
Other liabilities		29,284			32,822
Total liabilities		646,341			673,783
Commitments and contingencies (Note 12)
Stockholders' Equity:
Common stock, $0.01 par value, 560,000 shares authorized; 39,305 and 38,025 shares issued and outstanding, respectively		393			381
Accumulated other comprehensive (loss) income		(9,083	)		1,634
Additional paid-in capital		1,018,731			1,002,353
Retained earnings		46,145			27,577
Total stockholders' equity		1,056,186			1,031,945
Total liabilities and stockholders' equity	$	1,702,527		$	1,705,728

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

CERENCE INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(unaudited)

Three Months Ended March 31, 2022
	Common Stock
	Shares			Amount		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Total
Balance at December 31, 2021		39,162		$	392	$	1,006,205		$	46,621		$	(3,717	)	$	1,049,501
Net loss		-			-		-			(476	)		-			(476	)
Other comprehensive loss		-			-		-			-			(5,366	)		(5,366	)
Issuance of common stock		144			1		2,700			-			-			2,701
Stock withheld to cover tax withholdings requirements upon stock vesting		(1	)		-		(1,538	)		-			-			(1,538	)
Stock-based compensation		-			-		11,364			-			-			11,364
Balance at March 31, 2022		39,305		$	393	$	1,018,731		$	46,145		$	(9,083	)	$	1,056,186

Three Months Ended March 31, 2021
	Common Stock
	Shares			Amount		Additional Paid-In Capital			Retained Earnings		Accumulated Other Comprehensive Income			Total
Balance at December 31, 2020		37,685		$	378	$	974,866		$	2,625	$	17,851		$	995,720
Net income		-			-		-			11,163		-			11,163
Other comprehensive loss		-			-		-			-		(12,217	)		(12,217	)
Issuance of common stock		114			1		1,381			-		-			1,382
Stock withheld to cover tax withholdings requirements upon stock vesting		(19	)		-		(1,942	)		-		-			(1,942	)
Stock-based compensation		-			-		9,335			-		-			9,335
Balance at March 31, 2021		37,780		$	379	$	983,640		$	13,788	$	5,634		$	1,003,441

CERENCE INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Cont.)

(In thousands)

(unaudited)

Six Months Ended March 31, 2022
	Common Stock
	Shares		Amount		Additional Paid-In Capital		Retained Earnings		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 income		-		-		-		18,568		-			18,568
Other comprehensive loss		-		-		-		-		(10,717	)		(10,717	)
Issuance of common stock		1,425