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10-Q

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


☐	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 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

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;

•

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.

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.

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.

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.

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

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