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crnc-10q_20210630.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 June 30, 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 July 30, 2021, the registrant had 38,006,493 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, 2021 and 2020	3
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended June 30, 2021 and 2020	4
	Condensed Consolidated Balance Sheets as of June 30, 2021 and September 30, 2020	5
	Consolidated Statements of Stockholders' Equity for the Three and Nine Months Ended June 30, 2021 and 2020	6
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 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	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	46
PART II.	OTHER INFORMATION	47
Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	47
Item 6.	Exhibits	48
Signatures		49

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 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 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 June 30,						Nine Months Ended June 30,
	2021			2020			2021			2020
Revenues:
License	$	49,980		$	32,454		$	150,765		$	117,843
Connected services		30,283			25,383			83,949			72,109
Professional services		16,538			17,360			54,392			49,773
Total revenues		96,801			75,197			289,106			239,725
Cost of revenues:
License		863			820			2,718			2,344
Connected services		6,108			7,191			19,960			24,742
Professional services		14,985			17,529			48,632			48,773
Amortization of intangible assets		1,879			2,063			5,637			6,408
Total cost of revenues		23,835			27,603			76,947			82,267
Gross profit		72,966			47,594			212,159			157,458
Operating expenses:
Research and development		30,370			22,041			83,365			66,898
Sales and marketing		9,534			9,180			28,097			24,829
General and administrative		13,173			14,261			38,563			36,456
Amortization of intangible assets		3,180			3,120			9,521			9,376
Restructuring and other costs, net		1,760			3,301			2,777			13,725
Total operating expenses		58,017			51,903			162,323			151,284
Income (loss) from operations		14,949			(4,309	)		49,836			6,174
Interest income		34			38			68			563
Interest expense		(3,294	)		(5,546	)		(10,569	)		(19,043	)
Other income (expense), net		173			(20,446	)		1,432			(20,366	)
Income (loss) before income taxes		11,862			(30,263	)		40,767			(32,672	)
Provision for (benefit from) income taxes		6,064			(2,211	)		2,865			(6,149	)
Net income (loss)	$	5,798		$	(28,052	)	$	37,902		$	(26,523	)
Net income (loss) per share:
Basic	$	0.15		$	(0.77	)	$	1.01		$	(0.73	)
Diluted	$	0.15		$	(0.77	)	$	0.97		$	(0.73	)
Weighted-average common share outstanding:
Basic		37,825			36,509			37,664			36,315
Diluted		39,296			36,509			39,135			36,315

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

CERENCE INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(unaudited)

	Three Months Ended June 30,						Nine Months Ended June 30,
	2021			2020			2021			2020

Net income (loss)	$	5,798		$	(28,052	)	$	37,902		$	(26,523	)
Other comprehensive income:
Foreign currency translation adjustments		3,937			6,382			5,786			4,002
Pension adjustments, net		22			16			96			1,032
Net unrealized loss on available-for-sale securities		(14	)		—			(14	)		—
Total other comprehensive income		3,945			6,398			5,868			5,034
Comprehensive income (loss)	$	9,743		$	(21,654	)	$	43,770		$	(21,489	)

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, 2021		September 30, 2020
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	120,840	$	136,067
Marketable securities		29,100		11,662
Accounts receivable, net of allowances of $404 and $1,394		53,141		50,900
Deferred costs		7,330		7,256
Prepaid expenses and other current assets		61,328		44,220
Total current assets		271,739		250,105
Long-term marketable securities		7,348		-
Property and equipment, net		30,723		29,529
Deferred costs		33,446		38,161
Operating lease right of use assets		16,837		20,096
Goodwill		1,132,897		1,128,198
Intangible assets, net		30,618		45,616
Deferred tax assets		165,077		160,974
Other assets		20,354		14,938
Total assets	$	1,709,039	$	1,687,617
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	11,187	$	8,447
Deferred revenue		84,993		112,156
Short-term operating lease liabilities		5,497		5,700
Short-term debt		6,250		6,250
Accrued expenses and other current liabilities		60,955		66,078
Total current liabilities		168,882		198,631
Long-term debt		265,372		266,872
Deferred revenue, net of current portion		204,790		212,573
Long-term operating lease liabilities		13,157		17,821
Other liabilities		34,989		31,649
Total liabilities		687,190		727,546
Commitments and contingencies (Note 13)
Stockholders' Equity:
Common stock, $0.01 par value, 560,000 shares authorized; 37,828 shares issued and outstanding as of June 30, 2021; 36,842 shares issued and outstanding as of September 30, 2020.		379		369
Accumulated other comprehensive income		9,579		3,711
Additional paid-in capital		992,305		974,307
Retained earnings (accumulated deficit)		19,586		(18,316	)
Total stockholders' equity		1,021,849		960,071
Total liabilities and stockholders' equity	$	1,709,039	$	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 June 30, 2021
	Common Stock
	Shares			Amount		Additional Paid-In Capital			Retained Earnings		Net Parent Investment		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

Three Months Ended June 30, 2020
	Common Stock
	Shares			Amount		Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)			Net Parent Investment		Accumulated Other Comprehensive Loss			Total
Balance at March 31, 2020		36,458		$	365	$	949,916		$	1,529		$	-	$	(14,635	)	$	937,175
Net loss		-			-		-			(28,052	)		-		-			(28,052	)
Other comprehensive income		-			-		-			-			-		6,398			6,398
Issuance of common stock		96			1		-			-			-		-			1
Stock withheld to cover tax withholdings requirements upon stock vesting		(34	)		-		(696	)		-			-		-			(696	)
Convertible Senior Notes conversion feature (net of taxes of $4,678 and issuance costs of $629)							14,369											14,369
Stock-based compensation		-			-		10,423			-			-		-			10,423
Balance at June 30, 2020		36,520		$	366	$	974,012		$	(26,523	)	$	-	$	(8,237	)	$	939,618

CERENCE INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Cont.)

(In thousands)

(unaudited)

Nine Months Ended June 30, 2021

Common Stock