10-Q
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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 December 31, 2023

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.)

25 Mall Road, Suite 416

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 January 31, 2024, the registrant had 41,674,637 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 Months Ended December 31, 2023 and 2022

3

Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended December 31, 2023 and 2022

4

 

Condensed Consolidated Balance Sheets as of December 31, 2023 and September 30, 2023

5

 

Consolidated Statements of Stockholders' Equity for the Three Months Ended December 31, 2023 and 2022

6

Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2023 and 2022

7

Notes to Condensed Consolidated Financial Statements

8

Item 2.

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

25

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

36

Item 4.

Controls and Procedures

38

PART II.

OTHER INFORMATION

39

Item 1.

Legal Proceedings

39

Item 1A.

Risk Factors

40

Item 5

Other Information

40

Item 6.

Exhibits

41

Signatures

42

 

 

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, plans and projections about our business, operations, industry, financial results, financial condition, strategy, goals or prospects. 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 our business and 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:

adverse conditions in the automotive industry or the global economy more generally, including as a result of the COVID-19 pandemic, the conflict between Russia and Ukraine and the ongoing conflict between Israel and Hamas, and inflation and rising interest rates;
the continuation of the semiconductor shortage being experienced by the automotive industry;
the duration and severity of the COVID-19 pandemic and its impact on our business and financial performance, including the impact of new variants;
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;
our 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;
cybersecurity and data privacy incidents that damage client relations;
interruption 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;
increases or decreases to valuation allowances recorded against deferred tax assets;
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 and deploy generative AI and large language models (LLMs);
a significant interruption in the supply or maintenance of our third-party hardware, software, services or data;

1


 

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, 2023 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 December 31,

 

 

 

2023

 

 

2022

 

Revenues:

 

 

 

 

 

 

License

 

$

20,823

 

 

$

45,417

 

Connected services

 

 

96,820

 

 

 

18,394

 

Professional services

 

 

20,692

 

 

 

19,847

 

Total revenues

 

 

138,335

 

 

 

83,658

 

Cost of revenues:

 

 

 

 

 

 

License

 

 

1,604

 

 

 

1,614

 

Connected services

 

 

7,303

 

 

 

6,542

 

Professional services

 

 

17,325

 

 

 

17,924

 

Amortization of intangible assets

 

 

103

 

 

 

103

 

Total cost of revenues

 

 

26,335

 

 

 

26,183

 

Gross profit

 

 

112,000

 

 

 

57,475

 

Operating expenses:

 

 

 

 

 

 

Research and development

 

 

33,306

 

 

 

29,494

 

Sales and marketing

 

 

6,071

 

 

 

9,162

 

General and administrative

 

 

12,793

 

 

 

14,257

 

Amortization of intangible assets

 

 

545

 

 

 

2,350

 

Restructuring and other costs, net

 

 

705

 

 

 

4,189

 

Total operating expenses

 

 

53,420

 

 

 

59,452

 

Income (loss) from operations

 

 

58,580

 

 

 

(1,977

)

Interest income

 

 

1,432

 

 

 

870

 

Interest expense

 

 

(3,236

)

 

 

(3,514

)

Other income, net

 

 

1,422

 

 

 

3,713

 

Income (loss) before income taxes

 

 

58,198

 

 

 

(908

)

Provision for income taxes

 

 

34,341

 

 

 

1,250

 

Net income (loss)

 

$

23,857

 

 

$

(2,158

)

Net income (loss) per share:

 

 

 

 

 

 

Basic

 

$

0.58

 

 

$

(0.05

)

Diluted

 

$

0.53

 

 

$

(0.05

)

Weighted-average common share outstanding:

 

 

 

 

 

 

Basic

 

 

41,186

 

 

 

39,962

 

Diluted

 

 

49,255

 

 

 

39,962

 

 

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

3


 

CERENCE INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(unaudited)

 

 

 

Three Months Ended December 31,

 

 

 

2023

 

 

2022

 

 

 

 

 

 

 

Net income (loss)

 

$

23,857

 

 

$

(2,158

)

Other comprehensive income:

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

4,280

 

 

 

9,162

 

Pension adjustments, net

 

 

27

 

 

 

26

 

Net unrealized gains on available-for-sale securities

 

 

163

 

 

 

99

 

Total other comprehensive income

 

 

4,470

 

 

 

9,287

 

Comprehensive income

 

$

28,327

 

 

$

7,129

 

 

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

4


 

CERENCE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

 

 

December 31, 2023

 

 

September 30, 2023

 

 

(Unaudited)

 

 

 

 

ASSETS

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

98,736

 

 

$

101,154

 

Marketable securities

 

 

9,784

 

 

 

9,211

 

Accounts receivable, net of allowances of $4,050 and $4,044

 

 

58,693

 

 

 

61,270

 

Deferred costs

 

 

5,568

 

 

 

6,935

 

Prepaid expenses and other current assets

 

 

55,580

 

 

 

47,157

 

Total current assets

 

 

228,361

 

 

 

225,727

 

Long-term marketable securities

 

 

7,755

 

 

 

10,607

 

Property and equipment, net

 

 

32,625

 

 

 

34,013

 

Deferred costs

 

 

19,849

 

 

 

20,299

 

Operating lease right of use assets

 

 

12,347

 

 

 

11,961

 

Goodwill

 

 

906,396

 

 

 

900,342

 

Intangible assets, net

 

 

3,374

 

 

 

3,875

 

Deferred tax assets

 

 

16,607

 

 

 

46,601

 

Other assets

 

 

37,594

 

 

 

44,165

 

Total assets

 

$

1,264,908

 

 

$

1,297,590

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

19,179

 

 

$

16,873

 

Deferred revenue

 

 

43,392

 

 

 

77,068

 

Short-term operating lease liabilities

 

 

5,676

 

 

 

5,434

 

Accrued expenses and other current liabilities

 

 

51,732

 

 

 

48,718

 

Total current liabilities

 

 

119,979

 

 

 

148,093

 

Long-term debt

 

 

277,419

 

 

 

275,951

 

Deferred revenue, net of current portion

 

 

100,913

 

 

 

145,531

 

Long-term operating lease liabilities

 

 

8,066

 

 

 

7,947

 

Other liabilities

 

 

27,398

 

 

 

25,193

 

Total liabilities

 

 

533,775

 

 

 

602,715

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

Common stock, $0.01 par value, 560,000 shares authorized; 41,237 and 40,423 shares issued and outstanding, respectively

 

 

412

 

 

 

404

 

Accumulated other comprehensive loss

 

 

(23,496

)

 

 

(27,966

)

Additional paid-in capital

 

 

1,064,022

 

 

 

1,056,099

 

Accumulated deficit

 

 

(309,805

)

 

 

(333,662

)

Total stockholders' equity

 

 

731,133

 

 

 

694,875

 

Total liabilities and stockholders' equity

 

$

1,264,908

 

 

$

1,297,590

 

 

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 December 31, 2023

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional
Paid-In
Capital

 

 

Accumulated Deficit

 

 

Accumulated
Other
Comprehensive
Loss

 

 

Total

 

Balance at September 30, 2023

 

 

40,423

 

$

404

 

 

$

1,056,099

 

 

$

(333,662

)

 

$

(27,966

)

 

$

694,875

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

23,857

 

 

 

-

 

 

 

23,857

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,470

 

 

 

4,470

 

Issuance of common stock

 

 

814

 

 

 

8

 

 

 

6,193

 

 

 

-

 

 

 

-

 

 

 

6,201

 

Stock withheld to cover tax withholdings requirements upon stock vesting

 

 

-

 

 

 

-

 

 

 

(6,209

)

 

 

-

 

 

 

-

 

 

 

(6,209

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

7,939

 

 

 

-

 

 

 

-

 

 

 

7,939

 

Balance at December 31, 2023

 

 

41,237

 

 

$

412

 

 

$

1,064,022

 

 

$

(309,805

)

 

$

(23,496

)

 

$

731,133

 

 

 

Three Months Ended December 31, 2022

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional
Paid-In
Capital

 

 

Accumulated Deficit

 

 

Accumulated
Other
Comprehensive
Loss

 

 

Total

 

Balance at September 30, 2022

 

 

39,430

 

 

$

394

 

 

$

1,029,542

 

 

$

(283,249

)

 

$

(33,737

)

 

$

712,950

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,158

)

 

 

-

 

 

 

(2,158

)

Cumulative effect adjustment due to adoption of ASU 2020-06

 

 

-

 

 

 

-

 

 

 

(14,371

)

 

 

5,841

 

 

 

-

 

 

 

(8,530

)

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

9,287

 

 

 

9,287

 

Issuance of common stock

 

 

644

 

 

 

7

 

 

 

1,716

 

 

 

-

 

 

 

-

 

 

 

1,723

 

Stock withheld to cover tax withholdings requirements upon stock vesting

 

 

(57

)

 

 

(1

)

 

 

(2,642

)

 

 

-

 

 

 

-

 

 

 

(2,643

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

9,222

 

 

 

-

 

 

 

-

 

 

 

9,222

 

Balance at December 31, 2022

 

 

40,017

 

 

$

400

 

 

$

1,023,467

 

 

$

(279,566

)

 

$

(24,450

)

 

$

719,851

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6


 

CERENCE INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

 

 

 

Three Months Ended December 31,

 

 

 

2023

 

 

2022

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income (loss)

 

$

23,857

 

 

$

(2,158

)

Adjustments to reconcile net income (loss) to net cash used in operations:

 

 

 

 

 

 

Depreciation and amortization

 

 

2,686

 

 

 

5,008

 

Stock-based compensation

 

 

8,380

 

 

 

12,472

 

Non-cash interest expense

 

 

1,468

 

 

 

444

 

Deferred tax provision (benefit)

 

 

30,298

 

 

 

(164

)

Unrealized foreign currency transaction gains

 

 

(2,012

)

 

 

(6,084

)

Other

 

 

382

 

 

 

104

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

4,933

 

 

 

(16,651

)

Prepaid expenses and other assets

 

 

1,170

 

 

 

3,261

 

Deferred costs

 

 

2,589

 

 

 

1,586

 

Accounts payable

 

 

2,382

 

 

 

7,820

 

Accrued expenses and other liabilities

 

 

3,712

 

 

 

(255

)

Deferred revenue

 

 

(82,660

)

 

 

(7,501

)

Net cash used in operating activities

 

 

(2,815

)

 

 

(2,118

)

Cash flows from investing activities:

 

 

 

 

 

 

Capital expenditures

 

 

(931

)

 

 

(683

)

Purchases of marketable securities

 

 

-

 

 

 

(7,081

)

Sale and maturities of marketable securities

 

 

2,442

 

 

 

9,500

 

Other investing activities

 

 

(322

)

 

 

(219

)

Net cash provided by investing activities

 

 

1,189

 

 

 

1,517

 

Cash flows from financing activities:

 

 

 

 

 

 

Payments for long-term debt issuance costs

 

 

-

 

 

 

(403

)

Principal payments of long-term debt

 

 

-

 

 

 

(1,563

)

Common stock repurchases for tax withholdings for net settlement of equity awards

 

 

(6,209

)

 

 

(2,643

)

Principal payment of lease liabilities arising from a finance lease

 

 

(122

)

 

 

(165

)

Proceeds from the issuance of common stock

 

 

6,201

 

 

 

1,723

 

Net cash used in financing activities

 

 

(130

)

 

 

(3,051

)

Effects of exchange rate changes on cash and cash equivalents

 

 

(662

)

 

 

(538

)

Net change in cash and cash equivalents

 

 

(2,418

)

 

 

(4,190

)

Cash and cash equivalents at beginning of period

 

 

101,154

 

 

 

94,847

 

Cash and cash equivalents at end of period

 

$

98,736

 

 

$

90,657

 

Supplemental information:

 

 

 

 

 

 

Cash paid for income taxes

 

$

3,104

 

 

$

2,459

 

Cash paid for interest

 

$

3,003

 

 

$

4,341

 

 

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

7


 

CERENCE INC.

Notes to Condensed Consolidated Financial Statements

Note 1. Business Overview

Business

Cerence Inc. (referred to in this Quarterly Report on Form 10-Q as “we,” “our,” “us,” “ourselves,” the “Company” or “Cerence”) is a global, premier provider of AI-powered assistants and innovations for connected and autonomous vehicles. Our customers include all major automobile original equipment manufacturers (“OEMs”), or their tier 1 suppliers worldwide. We deliver our solutions on a white-label basis, enabling our customers to deliver customized virtual assistants with unique, branded personalities and ultimately strengthening the bond between automobile brands and end users. We generate revenue primarily by selling software licenses and cloud-connected services. In addition, we generate professional services revenue from our work with OEMs and suppliers during the design, development and deployment phases of the vehicle model lifecycle and through maintenance and enhancement projects.

Note 2. Significant Accounting Policies

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company, as well as those of our wholly owned subsidiaries. All significant intercompany transactions and balances are eliminated in consolidation.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by GAAP for complete financial statements.

The condensed consolidated financial statements reflect all adjustments considered necessary for a fair presentation of the consolidated results of operations and financial position for the interim periods presented. All such adjustments are of a normal recurring nature. The results of operations for the three months ended December 31, 2023 are not necessarily indicative of the results to be expected for any other interim period or for the fiscal year ending September 30, 2024. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023.

Use of Estimates

The financial statements are prepared in accordance with GAAP, which requires management to make estimates and assumptions. These estimates, judgments and assumptions can affect the reported amounts in the financial statements and the footnotes thereto. Actual results could differ materially from these estimates.

On an ongoing basis, we evaluate our estimates, assumptions and judgments. Significant estimates inherent to the preparation of financial statements include: revenue recognition; allowance for credit losses; accounting for deferred costs; accounting for internally developed software; the valuation of goodwill and intangible assets; accounting for business combinations; accounting for stock-based compensation; accounting for income taxes; accounting for leases; accounting for convertible debt; and loss contingencies. We base our estimates on historical experience, market participant fair value considerations, projected future cash flows, and various other factors that are believed to be reasonable under the circumstances. Actual amounts could differ significantly from these estimates.

Concentration of Risk

Financial instruments that potentially subject us to significant concentrations of credit risk primarily consist of trade accounts receivable. We perform ongoing credit evaluations of our customers’ financial condition and limit the amount of credit extended when deemed appropriate. Two customers accounted for 11.8% and 10.7% of our Accounts receivable, net balance at December 31, 2023. Two customers accounted for 10.8% and 10.1% of our Accounts receivable, net balance at September 30, 2023.

Allowance for Credit Losses

We are exposed to credit losses primarily through our sales of software licenses and services to customers. We determine credit ratings for each customer in our portfolio based upon public information and information obtained directly from our customers. A credit limit for each customer is established and in certain cases we may require collateral or prepayment to mitigate credit risk. Our expected loss methodology is developed using historical collection experience, current customer credit information, current and future economic and market conditions and a review of the current status of the customer's account balances. We monitor our ongoing credit

 


 

exposure through reviews of customer balances against contract terms and due dates, current economic conditions, and dispute resolution. Estimated credit losses are written off in the period in which the financial asset is no longer collectible.

The change in the allowance for credit losses for the three months ended December 31, 2023 is as follows (dollars in thousands):

 

 

Allowance for Credit Losses

 

Balance as of September 30, 2023

 

$

4,131

 

Effect of foreign currency translation

 

 

9

 

Balance as of December 31, 2023

 

$

4,140

 

Inventory

Inventory, consisting primarily of finished goods related to our Cerence Link product, is accounted for using the first in, first out method, and is valued at the lower of cost and net realizable value. Inventory is included within Prepaid expenses and other current assets. As of December 31, 2023 and September 30, 2023, inventory was $0.9 million and $0.5 million, respectively.

Recently Adopted Accounting Standards

None.

Issued Accounting Standards Not Yet Adopted

In November 2023, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” (“ASU 2023-07”), to expand reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amendments in the ASU require that a public entity disclose, on an annual and interim basis, significant segment expenses that are regularly provided to an entity's chief operating decision maker (“CODM”), a description of other segment items by reportable segment, and any additional measures of a segment's profit or loss used by the CODM when deciding how to allocate resources. ASU 2023-07 applies to entities with a single reportable segment. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024. A public entity should apply ASU 2023-07 retrospectively to all prior periods presented in the financial statements, with early adoption permitted. We are currently in the process of evaluating the effects of this pronouncement on our condensed consolidated financial statements and disclosures.

In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” (“ASU 2023-09”), which requires greater disaggregation of income tax disclosures related to the income tax rate reconciliation and income taxes paid and is effective for fiscal years beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued. The amendments should be applied on a prospective basis although retrospective application is permitted. We are currently in the process of evaluating the effects of this pronouncement on our condensed consolidated financial statements and disclosures.

 

9


 

Note 3. Revenue Recognition

We primarily derive revenue from the following sources: (1) royalty-based software license arrangements, (2) connected services, and (3) professional services. Revenue is reported net of applicable sales and use tax, value-added tax and other transaction taxes imposed on the related transaction including mandatory government charges that are passed through to our customers. We account for a contract when both parties have approved and committed to the contract, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

(a) Disaggregated Revenue

Revenues, classified by the major geographic region in which our customers are located, for the three months ended December 31, 2023 and 2022 (dollars in thousands):

 

 

 

Three Months Ended December 31,

 

 

 

2023

 

 

2022

 

Revenues:

 

 

 

 

 

 

United States

 

$

99,469

 

 

$

21,356

 

Other Americas

 

 

84

 

 

 

26

 

Germany

 

 

19,133

 

 

 

18,164

 

Other Europe, Middle East and Africa

 

 

4,775

 

 

 

3,672

 

Japan

 

 

5,623

 

 

 

25,841

 

Other Asia-Pacific

 

 

9,251

 

 

 

14,599

 

Total net revenues

 

$

138,335

 

 

$

83,658

 

 

For the three months ended December 31, 2022, revenues within China were $9.6 million, which were over 10% of revenues.

Revenues relating to one customer accounted for $78.4 million, or 56.7% of revenues for the three months ended December 31, 2023. On October 31, 2023, we entered into an early termination agreement relating to a legacy contract acquired by Nuance Communications Inc. (“Nuance”) through a 2013 acquisition. Previously the term of the contract ended on December 31, 2025, whereas the agreement signed on October 31, 2023, updated the termination date to December 31, 2023. There is no cash flow associated with this legacy contract. The effect of this change is to accelerate $67.8 million of deferred revenue into the first quarter of fiscal year 2024.

Revenues relating to two customers accounted for $21.4 million, or 25.6%, and $10.0 million, or 12.0%, of revenues for the three months ended December 31, 2022.

(b) Contract Acquisition Costs

We are required to capitalize certain contract acquisition costs. The capitalized costs primarily relate to paid commissions. The current and noncurrent portions of contract acquisition costs are included in Prepaid expenses and other current assets and in Other assets, respectively. As of December 31, 2023 and September 30, 2023, we had $8.0 million of contract acquisition costs. We had amortization expense of $0.7 million and $0.8 million related to these costs during the three months ended December 31, 2023 and 2022, respectively. There was no impairment related to contract acquisition costs.

(c) Capitalized Contract Costs

We capitalize incremental costs incurred to fulfill our contracts that (i) relate directly to the contract, (ii) are expected to generate resources that will be used to satisfy our performance obligation under the contract, and (iii) are expected to be recovered through revenue generated under the contract. The current and noncurrent portions of capitalized contract fulfillment costs are presented as Deferred costs.

We had amortization expense of $4.1 million and $2.7 million related to these costs during the three months ended December 31, 2023 and 2022, respectively. There was no impairment related to contract costs capitalized.

(d) Trade Accounts Receivable and Contract Balances

We classify our right to consideration in exchange for deliverables as either a receivable or a contract asset. A receivable is a right to consideration that is unconditional (i.e., only the passage of time is required before payment is due). We present such receivables in Accounts receivable, net at their net estimated realizable value. Accounts receivable, net as of September 30, 2023 and 2022 was $61.3 million and $45.1 million, respectively. We maintain an allowance for credit losses to provide for the estimated amount of receivables and contract assets that may not be collected.

10


 

Our contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period.

Contract assets include unbilled amounts from long-term contracts when revenue recognized exceeds the amount billed to the customer, and right to payment is not solely subject to the passage of time. The current and noncurrent portions of contract assets are included in Prepaid expenses and other current assets and Other assets, respectively. The table below shows significant changes in contract assets (dollars in thousands):

 

 

 

Contract assets

 

Balance as of September 30, 2023

 

$

56,708

 

Revenues recognized but not billed

 

 

8,865

 

Amounts reclassified to Accounts receivable, net

 

 

(11,987

)

Effect of foreign currency translation

 

 

2,531

 

Balance as of December 31, 2023

 

$

56,117

 

 

Our contract liabilities, which we present as deferred revenue, consist of advance payments and billings in excess of revenues recognized. We classify deferred revenue as current or noncurrent based on when we expect to recognize the revenues. The table below shows significant changes in deferred revenue (dollars in thousands):

 

 

 

Deferred revenue

 

Balance as of September 30, 2023

 

$

222,599

 

Amounts billed but not recognized

 

 

23,525

 

Revenue recognized

 

 

(105,634

)

Effect of foreign currency translation

 

 

3,815

 

Balance as of December 31, 2023

 

$

144,305

 

 

(e) Remaining Performance Obligations

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied at December 31, 2023 (dollars in thousands):

 

 

 

Within One
Year

 

 

Two to Five
Years

 

 

Greater
than
Five Years

 

 

Total

 

Total revenue

 

$

102,682

 

 

$

81,132

 

 

$

22,034

 

 

$

205,848

 

 

The table above includes fixed remaining performance obligations and does not include contingent usage-based activities, such as royalties and usage-based connected services. On October 31, 2023, we entered into an early termination agreement relating to a legacy contract acquired by Nuance through a 2013 acquisition. Previously the term of the contract ended on December 31, 2025, whereas the agreement signed on October 31, 2023, updated the termination date to December 31, 2023. There is no cash flow associated with this legacy contract. The effect of this change is to accelerate $67.8 million of deferred revenue into the first quarter of fiscal year 2024. We provided services to a separate customer, who in turn provided services to our legacy customer. Our customer terminated services on October 31, 2023. There is no cash flow associated with this contract. The effect of this termination is to accelerate $9.9 million of deferred revenue into the first quarter of fiscal year 2024.

 

Note 4. Earnings Per Share

Basic earnings per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that would have been outstanding had potential dilutive shares of common stock been issued. The dilutive effect of restricted stock units is reflected in diluted net income (loss) per share by applying the treasury stock method.

11


 

The dilutive effect of the Notes (as defined in Note 14) is reflected in net income (loss) per share by application of the “if-converted” method. The “if-converted” method is only assumed in periods where such application would be dilutive. In applying the “if-converted” method for diluted net income (loss) per share, we would assume conversion of the Notes at the respective conversion ratio as further described in Note 14. Assumed converted shares of our common stock are weighted for the period the Notes were outstanding.

The following table presents the reconciliation of the numerator and denominator for calculating net income (loss) per share:

 

 

 

Three Months Ended December 31,

 

in thousands, except per share data

 

2023

 

 

2022

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

Net income (loss) - basic

 

$

23,857

 

 

$

(2,158

)

Interest on the Notes, net of tax

 

 

2,250

 

 

 

-

 

Net income (loss) - diluted

 

$

26,107

 

 

$

(2,158

)

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

 

41,186

 

 

 

39,962

 

Dilutive effect of contingently issuable stock awards

 

 

574

 

 

 

-

 

Dilutive effect of the Notes

 

 

7,495

 

 

 

-

 

Weighted average common shares outstanding - diluted

 

 

49,255

 

 

 

39,962

 

 

 

 

 

 

 

Net income (loss) per common share:

 

 

 

 

 

 

Basic

 

$

0.58

 

 

$

(0.05

)

Diluted

 

$

0.53

 

 

$

(0.05

)

We exclude weighted-average potential shares from the calculations of diluted net income (loss) per share during the applicable periods when their inclusion is anti-dilutive. The following table sets forth potential shares that were considered anti-dilutive during the three months ended December 31, 2023 and 2022.

 

 

 

Three Months Ended December 31,

 

in thousands

 

2023

 

 

2022

 

Contingently issuable stock awards

 

 

-

 

 

 

103

 

Conversion option of our Notes

 

 

-

 

 

 

4,677

 

Note 5. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques must maximize the use of observable inputs and minimize the use of unobservable inputs. When determining fair value measurements for assets and liabilities recorded at fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use in pricing the asset or liability.

The classification of a financial asset or liability within the hierarchy is based upon the lowest level input that is significant to the fair value measurement as of the measurement date as follows:

Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity.

The following table presents information about our financial assets that are measured at fair value and indicates the fair value hierarchy of the valuation inputs used (dollars in thousands) as of:

 

12


 

 

 

December 31, 2023

 

 

 

Fair Value

 

 

Cash and Cash Equivalents

 

 

Marketable Securities

 

Level 1:

 

 

 

 

 

 

 

 

 

Money market funds $65,753 at cost (a)

 

$

65,753

 

 

$

65,753

 

 

$

-

 

Government securities $2,897 at cost (b)

 

 

2,879

 

 

 

-

 

 

 

2,879

 

Level 2:

 

 

 

 

 

 

Government securities $5,065 at cost (b)

 

 

5,058

 

 

 

-

 

 

 

5,058

 

Time deposits, $8,295 at cost (a)

 

 

8,295

 

 

 

8,295

 

 

 

-

 

Corporate bonds, $9,633 at cost (b)

 

 

9,602

 

 

 

-

 

 

 

9,602

 

Debt securities, $2,000 at cost (c)

 

 

2,909

 

 

 

-

 

 

 

-

 

Total assets

 

$

94,496

 

 

$

74,048

 

 

$

17,539

 

 

 

 

September 30, 2023

 

 

Fair Value

 

 

Cash and Cash Equivalents

 

 

Marketable Securities

 

Level 1:

 

 

 

 

 

 

 

 

Money market funds $66,349 at cost (a)

 

$

66,349

 

 

$

66,349

 

 

$

-

 

Government securities $4,421 at cost (b)

 

 

4,375

 

 

 

-

 

 

 

4,375

 

Level 2:

 

 

 

 

 

 

 

 

Government securities $5,046 at cost (b)

 

 

5,000

 

 

 

-

 

 

 

5,000

 

Time deposits, $8,536 at cost (a)

 

 

8,536

 

 

 

8,536

 

 

 

-

 

Commercial paper, $496 at cost (b)

 

 

496

 

 

 

-

 

 

 

496

 

Corporate bonds, $10,073 at cost (b)

 

 

9,947

 

 

 

-

 

 

 

9,947

 

Debt securities, $2,000 at cost (c)

 

 

2,847

 

 

 

-

 

 

 

-

 

Total assets

 

$

97,550

 

 

$

74,885

 

 

$

19,818

 

 

(a)
Money market funds and other highly liquid investments with original maturities of 90 days or less are included within Cash and cash equivalents in the Condensed Consolidated Balance Sheets.

 

(b)
Government securities, commercial paper and corporate bonds with original maturities greater than 90 days are included within Marketable securities in the Condensed Consolidated Balance Sheets and classified as current or noncurrent based upon whether the maturity of the financial asset is less than or greater than 12 months.

 

(c)
Debt securities within the Condensed Consolidated Balance Sheets are classified as current or noncurrent based upon whether the maturity of the financial asset is less than or greater than 12 months.

During the three months ended December 31, 2023 and 2022, we recorded unrealized gains related to our marketable securities of $0.2 million and $0.1 million, respectively, within Accumulated other comprehensive loss.

The carrying amounts of certain financial instruments, including cash held in banks, accounts receivable, and accounts payable, approximate fair value due to their short-term maturities and are excluded from the fair value tables above.

Derivative financial instruments are recognized at fair value using quoted forward rates and prices and classified within Level 2 of the fair value hierarchy. See Note 6 – Derivative Financial Instruments for additional details.

 

Long-term debt

The estimated fair value of our Long-term debt is determined by Level 2 inputs and is based on observable market data including prices for similar instruments. As of December 31, 2023 and September 30, 2023, the estimated fair value of our Notes was $233.1 million and $257.4 million, respectively. The Notes are recorded at face value less transaction costs on our Condensed Consolidated Balance Sheets.

 

Equity securities

We have equity securities in a privately held company obtained as part of a non-cash transaction. These equity securities are recognized at fair value and are classified within Level 2 of the fair value hierarchy.

We have non-controlling equity investments in privately held companies. We evaluated the equity investments under the voting model and concluded consolidation was not applicable. We accounted for the investments by electing the measurement alternative for investments without readily determinable fair values and for which we do not have the ability to exercise significant influence. The non-marketable equity securities are carried at cost less any impairment, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer, which is recorded within the Condensed Consolidated Statements of Operations.

13


 

Investments without readily determinable fair values were $2.6 million as of December 31, 2023 and September 30, 2023. The investments are included within Other assets on the Condensed Consolidated Balance Sheets. No impairment was recorded for the three months ended December 31, 2023 and 2022.

 

Note 6. Derivative Financial Instruments

We operate internationally and, in the normal course of business, are exposed to fluctuations in foreign currency exchange rates related to third-party vendor and intercompany payments for goods and services within our non-U.S. subsidiaries. We use foreign exchange forward contracts that are not designated as hedges to manage currency risk. The contracts can have maturities up to three years. As of December 31, 2023 and September 30, 2023, the total notional amount of forward contracts was $98.3 million and $98.0 million, respectively. As of December 31, 2023 and September 30, 2023, the weighted-average remaining maturity of these instruments was approximately 11.5 and 11.6 months, respectively.

The following table summarizes the fair value and presentation in the Condensed Consolidated Balance Sheet for derivative instruments as of December 31, 2023 and September 30, 2023 (dollars in thousands):

 

 

 

 

 

Fair Value

 

Derivatives not designated as hedges

 

Classification

 

December 31, 2023

 

 

September 30, 2023

 

Foreign currency forward contracts

 

 Prepaid expenses and other current assets

 

$

358

 

 

$

477

 

Foreign currency forward contracts

 

 Other assets

 

 

113

 

 

 

256

 

Foreign currency forward contracts

 

 Accrued expenses and other current liabilities

 

 

1,430

 

 

 

1,613

 

Foreign currency forward contracts

 

 Other liabilities

 

 

478

 

 

 

460

 

 

The following tables display a summary of the loss related to foreign currency forward contracts for the three months ended December 31, 2023 and 2022 (dollars in thousand):

 

 

 

 

 

Loss recognized in earnings

 

 

 

 

 

Three Months Ended December 31,

 

Derivatives not designated as hedges

 

Classification

 

2023

 

 

2022

 

Foreign currency forward contracts

 

Other income, net

 

$

(329

)

 

$

(1,453

)

 

Note 7. Goodwill and Other Intangible Assets

(a) Goodwill

We believe our Chief Executive Officer (“CEO”) is our CODM. Our CEO approves all major decisions, including reorganizations and new business initiatives. Our CODM reviews routine consolidated operating information and makes decisions on the allocation of resources at this level, as such, we have concluded that we have one operating segment.

All goodwill is assigned to one or more reporting units. A reporting unit represents an operating segment or a component within an operating segment for which discrete financial information is available and is regularly reviewed by segment management for performance assessment and resource allocation. Upon consideration of our components, we have concluded that our goodwill is associated with one reporting unit.

On December 31, 2023, we concluded that no goodwill impairment indicators were present.

The changes in the carrying amount of goodwill for the three months ended December 31, 2023 are as follows (dollars in thousands):

 

 

 

Total

 

Balance as of September 30, 2023

 

$

900,342

 

Effect of foreign currency translation

 

 

6,054

 

Balance as of December 31, 2023

 

$

906,396

 

(b) Intangible Assets, Net

14


 

The following tables summarizes the gross carrying amounts and accumulated amortization of intangible assets by major class (dollars in thousands):

 

 

 

December 31, 2023

 

 

 

Gross
Carrying
Amount

 

 

Accumulated
Amortization

 

 

Net
Carrying
Amount

 

 

Weighted Average
Remaining Life
(Years)

 

Customer relationships

 

$

108,285

 

 

$

(104,911

)

 

$

3,374

 

 

 

1.2

 

Technology and patents

 

 

90,000

 

 

 

(90,000

)

 

 

-

 

 

 

-

 

Total

 

$

198,285

 

 

$

(194,911

)

 

$

3,374