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crnc-10q_20210331.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, 2021

☐	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.)
15 Wayside Road 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 3, 2021, the registrant had 37,820,861 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, 2021 and 2020	3
	Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three and Six Months Ended March 31, 2021 and 2020	4
	Condensed Consolidated Balance Sheets as of March 31, 2021 and September 30, 2020	5
	Consolidated Statements of Stockholders' Equity for the Three and Six Months Ended March 31, 2021 and 2020	6
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2021 and 2020	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46
Item 4.	Controls and Procedures	46
PART II.	OTHER INFORMATION	48
Item 1.	Legal Proceedings	48
Item 1A.	Risk Factors	48
Item 6.	Exhibits	49
Signatures		50

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;

•

adverse conditions in the automotive industry or the global economy more generally, including as a result of the COVID-19 pandemic;

•

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 strategy to increase cloud services and fluctuations in our 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 inability 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, 2020 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,
	2021			2020			2021			2020
Revenues:
License	$	54,371		$	44,622		$	100,785		$	85,389
Connected services		27,736			23,459			53,666			46,726
Professional services		16,555			18,742			37,854			32,413
Total revenues		98,662			86,823			192,305			164,528
Cost of revenues:
License		1,181			843			1,855			1,524
Connected services		6,839			8,876			13,852			17,551
Professional services		16,325			16,753			33,647			31,244
Amortization of intangible assets		1,879			2,258			3,758			4,345
Total cost of revenues		26,224			28,730			53,112			54,664
Gross profit		72,438			58,093			139,193			109,864
Operating expenses:
Research and development		28,864			21,346			52,995			44,857
Sales and marketing		9,555			7,706			18,563			15,649
General and administrative		12,956			10,712			25,390			22,195
Amortization of intangible assets		3,183			3,125			6,341			6,256
Restructuring and other costs, net		537			2,870			1,017			10,424
Total operating expenses		55,095			45,759			104,306			99,381
Income from operations		17,343			12,334			34,887			10,483
Interest income		16			244			34			525
Interest expense		(3,476	)		(6,699	)		(7,275	)		(13,497	)
Other income (expense), net		3,496			226			1,259			80
Income (loss) before income taxes		17,379			6,105			28,905			(2,409	)
Provision for (benefit from) income taxes		6,216			(6,707	)		(3,199	)		(3,938	)
Net income	$	11,163		$	12,812		$	32,104		$	1,529
Net income per share:
Basic	$	0.30		$	0.35		$	0.85		$	0.04
Diluted	$	0.28		$	0.34		$	0.82		$	0.04
Weighted-average common share outstanding:
Basic		37,743			36,441			37,583			36,218
Diluted		39,177			37,392			43,730			36,693

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,
	2021			2020			2021		2020

Net income	$	11,163		$	12,812		$	32,104	$	1,529
Other comprehensive (loss) income:
Foreign currency translation adjustments		(12,321	)		(7,284	)		1,849		(2,380	)
Pension adjustments, net		104			90			74		1,016
Total other comprehensive (loss) income		(12,217	)		(7,194	)		1,923		(1,364	)
Comprehensive (loss) income	$	(1,054	)	$	5,618		$	34,027	$	165

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, 2021		September 30, 2020
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	119,546	$	136,067
Marketable securities		17,096		11,662
Accounts receivable, net of allowances of $538 and $1,394		59,091		50,900
Deferred costs		7,002		7,256
Prepaid expenses and other current assets		51,234		44,220
Total current assets		253,969		250,105
Property and equipment, net		29,544		29,529
Deferred costs		34,668		38,161
Operating lease right of use assets		19,189		20,096
Goodwill		1,130,502		1,128,198
Intangible assets, net		35,536		45,616
Deferred tax assets		167,264		160,974
Other assets		19,275		14,938
Total assets	$	1,689,947	$	1,687,617
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	4,002	$	8,447
Deferred revenue		90,402		112,156
Short-term operating lease liabilities		5,602		5,700
Short-term debt		6,250		6,250
Accrued expenses and other current liabilities		55,042		66,078
Total current liabilities		161,298		198,631
Long-term debt		265,681		266,872
Deferred revenue, net of current portion		211,399		212,573
Long-term operating lease liabilities		13,987		17,821
Other liabilities		34,141		31,649
Total liabilities		686,506		727,546
Commitments and contingencies (Note 13)
Stockholders' Equity:
Common stock, $0.01 par value, 560,000 shares authorized; 37,780 shares issued and outstanding as of March 31, 2021; 36,842 shares issued and outstanding as of September 30, 2020.		379		369
Accumulated other comprehensive income		5,634		3,711
Additional paid-in capital		983,640		974,307
Retained earnings (accumulated deficit)		13,788		(18,316	)
Total stockholders' equity		1,003,441		960,071
Total liabilities and stockholders' equity	$	1,689,947	$	1,687,617

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, 2021
	Common Stock
	Shares			Amount		Additional Paid-In Capital			Retained Earnings		Net Parent Investment		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

Three Months Ended March 31, 2020
	Common Stock
	Shares			Amount		Additional Paid-In Capital			(Accumulated Deficit) Retained Earnings			Net Parent Investment		Accumulated Other Comprehensive Loss			Total
Balance at December 31, 2019		36,403		$	364	$	945,054		$	(11,283	)	$	-	$	(7,441	)	$	926,694
Net income		-			-		-			12,812			-		-			12,812
Other comprehensive loss		-			-		-			-			-		(7,194	)		(7,194	)
Issuance of common stock		90			1		-			-			-		-			1
Stock withheld to cover tax withholdings requirements upon stock vesting		(35	)		-		(778	)		-			-		-			(778	)
Stock-based compensation		-			-		5,640			-			-		-			5,640
Balance at March 31, 2020		36,458		$	365	$	949,916		$	1,529		$	-	$	(14,635	)	$	937,175

CERENCE INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Cont.)

(In thousands)

(unaudited)

Six Months Ended March 31, 2021
	Common Stock
	Shares		Amount		Additional Paid-In Capital		(Accumulated Deficit) Retained Earnings			Net Parent Investment		Accumulated Other Comprehensive Income		Total
Balance at September 30, 2020		36,842	$	369	$	974,307	$	(18,316	)	$	—	$	3,711	$	960,071
Net income		-		-