8-K
Cerence Inc. (CRNC)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 4, 2022
CERENCE INC.
(Exact name of Registrant as Specified in Its Charter)
| Delaware | 001-39030 | 83-4177087 |
|---|---|---|
| (State or Other Jurisdiction<br> <br>of Incorporation) | (Commission<br> <br>File Number) | (IRS Employer<br> <br>Identification No.) |
| 1 Burlington Woods Drive, Suite 301A Burlington, MA | 01803 | |
| --- | --- | |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s Telephone Number, Including Area Code: (857) 362-7300
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| ☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
|---|---|
| ☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
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| ☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
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| ☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
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Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading<br> <br>Symbol(s) | Name of each exchange<br> <br>on which registered |
|---|---|---|
| Common stock, $0.01 par value | CRNC | The NASDAQ Stock Market LLC |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).
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. ☐
| Item 2.02 | Results of Operations and Financial Condition. |
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On February 7, 2022, Cerence Inc. (the “Company”) announced its financial results for the fiscal quarter ended December 31, 2021. The press release, including the financial information contained therein, is furnished herewith as Exhibit 99.1, and is incorporated herein by reference.
Also on February 7, 2022, the Company used a presentation on its call with investors, discussing its financial results for the fiscal quarter ended December 31, 2021, and such earnings release presentation is furnished herewith as Exhibit 99.2. The press release and earnings release presentation include certain non-GAAP financial measures. A description of the non-GAAP measures, the reasons for their use, and GAAP to non-GAAP reconciliations are included in the press release and earnings release presentation.
The information in this Item 2.02 and the exhibits attached hereto are being furnished and shall not be deemed to be “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section, nor shall they be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, regardless of any general incorporation language in such filing.
| Item 5.02 | Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensation Arrangements of Certain Officers. |
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On February 7, 2022, the Company announced that Mark Gallenberger, Chief Financial Officer of the Company, intends to retire from the Company effective March 11, 2022. Mr. Gallenberger advised the Company that his decision to retire did not involve any disagreement with the Company. In connection with his retirement and to assist with an orderly transition of his responsibilities, the Company and Mr. Gallenberger entered into a transitional assistance and retirement agreement on February 4, 2022, pursuant to which Mr. Gallenberger has agreed to remain with the Company in an advisory role and provide transitional assistance as requested by the Company from March 11, 2022 through November 15, 2022. During this transitional advisory period, Mr. Gallenberger’s restricted stock units that are scheduled to vest on October 1, 2022 and November 15, 2022 (consisting of 32,204 restricted stock units with time-based vesting and 32,203 restricted stock units with performance-based vesting) will be eligible for continued vesting in accordance with their terms. The agreement also contains a reaffirmation of Mr. Gallenberger’s confidentiality obligations to the Company and other restrictive covenants, as well as a general release of claims by Mr. Gallenberger. The Company has commenced a search for a new Chief Financial Officer.
| Item 9.01 | Financial Statements and Exhibits. |
|---|---|
| Exhibit<br> <br>Number | Description |
| --- | --- |
| 99.1 | Press release announcing financial results dated February 7, 2022 |
| 99.2 | Earnings release presentation dated February 7, 2022 |
| 104 | Cover page interactive data file (embedded within the Inline XBRL document) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Cerence Inc. | ||
|---|---|---|
| Date: February 7, 2022 | By: | /s/ Stefan Ortmanns |
| Name: | Stefan Ortmanns | |
| Title: | Chief Executive Officer |
EX-99.1
Exhibit 99.1
Cerence Announces First Quarter Fiscal Year 2022 Results
Headlines
| • | Delivered second largest bookings quarter in the Company’s history |
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| • | Exceeded most profitability metrics for the quarter |
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| • | Secured initial revenue contribution from fitness products, a new mobility market |
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| • | Won another China-based two-wheeler customer<br> |
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| • | Company lowers FY2022 guidance |
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BURLINGTON, Mass., February 7, 2022 – Cerence Inc. (NASDAQ: CRNC), AI for a world in motion, today reported its first quarter fiscal year 2022 results for the quarter ended December 31, 2021.
Results Summary ^(1)^
(in millions, except per share data)
| Three Months EndedDecember 31, | ||||||
|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||
| GAAP Revenue | $ | 94.4 | $ | 93.6 | ||
| GAAP Gross Margin | 74.3 | % | 71.3 | % | ||
| Non-GAAP Gross Margin | 77.5 | % | 75.0 | % | ||
| GAAP Operating Margin | 24.3 | % | 18.7 | % | ||
| Non-GAAP Operating Margin | 36.8 | % | 38.9 | % | ||
| GAAP Net Income | $ | 19.0 | $ | 20.9 | ||
| Non-GAAP Net Income | $ | 25.3 | $ | 23.6 | ||
| Adjusted EBITDA | $ | 36.9 | $ | 39.0 | ||
| Adjusted EBITDA Margin | 39.1 | % | 41.6 | % | ||
| GAAP Net Income per Share—diluted | $ | 0.47 | $ | 0.53 | ||
| Non-GAAP Net Income per Share—diluted | $ | 0.59 | $ | 0.57 | ||
| ^(1)^ | Please refer to the “Discussion of Non-GAAP Financial<br>Measures” and “Reconciliations of GAAP Financial Measures to Non-GAAP Financial Measures” included elsewhere in this release for more information regarding our use of non-GAAP financial measures. | |||||
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Stefan Ortmanns, Chief Executive Officer at Cerence commented, “We had a strong start to the fiscal year. Our results underscore the strength of our business and reinforces Cerence as the global leader in unique, moving experiences for the mobility world. We’ve delivered important innovations and leading AI mobility solutions to customers in key markets, and our employees have demonstrated great commitment to supporting our customers and each other.”
Ortmanns continued, “We remain focused on the markets, customers, and products that will deliver long-term sustainable growth and that everything we do reinforces our vision of leadership in AI for mobility. We are intensely focused on bold innovation and executing at speed for our customers.”
Cerence. All rights reserved
Cerence Key Performance Indicators
To help investors gain further insight into the Cerence business and its performance, management provides a set of key performance indicators that includes:
| Key Performance Indicator^1^ | Q1FY22 | ||
|---|---|---|---|
| Percent of worldwide auto production with Cerence Technology (TTM) | 52 | % | |
| Average contract duration—years (TTM): | 7.9 | ||
| Repeatable software contribution (TTM): | 81 | % | |
| Change in number of Cerence connected cars<br>shipped^2^ (TTM over prior year TTM) | 11 | % | |
| Growth in billings per car (TTM over prior year TTM) (excludes legacy contract^3^) | 0 | % | |
| (1) | Please refer to the “Key Performance Indicators” included elsewhere in this release for more<br>information regarding the definition and our use of key performance indicators. | ||
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| (2) | Based on IHS Markit data, global auto production increased 2% over the same time period ended December 31,<br>2021. | ||
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| (3) | Legacy contract is a connected services contract with Toyota acquired by Nuance through a 2013 acquisition<br> | ||
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Second Quarter and Full Year Fiscal 2022 Outlook
With recent changes in leadership, year-to-date performance, and further analysis of the business and market conditions, the company is providing guidance for Q2 2022 and updated guidance for the full fiscal year.
Key factors include:
| • | The rapidly evolving conditions within the automotive industry affecting vehicle production and delivery,<br>including but not limited to ongoing supply chain challenges driven by the semiconductor shortage, and the still unknown and ongoing impact of Covid-19 variants such as Omicron affecting the delivery of new<br>vehicles, factory shutdowns and labor shortages. |
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| • | Analysis of each business unit’s plans, forecasts and assumptions that suggest the conversion from bookings<br>to revenue will take longer than expected for new products. These new products remain attractive revenue streams and are expected to contribute to future growth, but will take longer than originally expected to recognize revenue.<br> |
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| • | Prior guidance assumed a number of one-time technology license<br>opportunities in fiscal 2022. Although attractive opportunities remain, these may not all be realized during our fiscal year as previously expected. |
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For the fiscal quarter ending March 31, 2022, revenue is expected to be in the range of $82 million to $86 million. Adjusted EBITDA is expected to be in the range of approximately $22 million to $26 million. The adjusted EBITDA guidance excludes acquisition-related costs, amortization of acquired intangible assets, stock-based compensation, and restructuring and other costs.
The full-year guidance is for revenue to be in the range of $365 million to $385 million representing a 9% decrease at the midpoint compared to the initial FY22 guidance provided on November 22, 2021, and a 3% decrease at the mid-point compared to last year’s actual revenue of $387 million. Adjusted EBITDA for the full year is expected to be in the range of approximately $119 million to $139 million. The adjusted EBITDA guidance excludes acquisition-related costs, amortization of acquired intangible assets, stock-based compensation, and restructuring and other costs.
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Additional details regarding guidance will be provided on the earnings call.
First Quarter Conference Call
The company will host a live conference call and webcast with slides to discuss the results today at 8:30 a.m. Eastern Time/5:30 a.m. Pacific Time. Interested investors and analysts are invited to dial into the conference call by using 844.467.7116 (domestic) or +1.409.983.9838 (international) and entering the pass code 8094176. Webcast access will be available on the Investor Information section of the company’s website at https://www.cerence.com/investors/events-and-resources.
The teleconference replay will be available through February 14, 2022. The replay dial-in number is 1.855.859.2056 (domestic) or +1.404.537.3406 (international) using pass code 8094176. A replay of the webcast can be accessed by visiting our web site 90 minutes following the conference call at https://www.cerence.com/investors/events-and-resources.
Forward Looking Statements
Statements in this presentation regarding Cerence’s future performance, results and financial condition, expected growth, business and market trends, and innovation and our management’s future expectations, beliefs, goals, plans or prospects constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements that are not statements of historical fact (including statements containing the words “believes,” “plans,” “anticipates,” “expects,” “intends” or “estimates” or similar expressions) should also be considered to be forward-looking statements. Although we believe forward-looking statements are based upon reasonable assumptions, such statements involve known and unknown risk, uncertainties and other factors, which may cause actual results or performance of the company to be materially different from any future results or performance expressed or implied by such forward-looking statements including but not limited to: impacts of the COVID-19 pandemic on our and our customer’s businesses; the highly competitive and rapidly changing market in which we operate; adverse conditions in the automotive industry, the related supply chain, or the global economy more generally; our ability to control and successfully manage our expenses and cash position; our strategy to increase cloud offerings; escalating pricing pressures from our customers; our failure to win, renew or implement service contracts; the loss of business from any of our largest customers; effects of customer defaults; our inability to successfully introduce new products, applications and services; the inability to recruit and retain qualified personnel; cybersecurity and data privacy incidents; fluctuating currency rates; and the other factors discussed in our most recent Annual Report on Form 10-K, quarterly reports on Form 10-Q, and other filings with the Securities and Exchange Commission. We disclaim any obligation to update any forward-looking statements as a result of developments occurring after the date of this document.
Discussion of Non-GAAP FinancialMeasures
We believe that providing the non-GAAP information in addition to the GAAP presentation, allows investors to view the financial results in the way management views the operating results. We further believe that providing this information allows investors to not only better understand our financial performance, but more importantly, to evaluate the efficacy of the methodology and information used by management to evaluate and measure such performance. The non-GAAP information should not be considered superior to, or a substitute for, financial statements prepared in accordance with GAAP.
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We utilize a number of different financial measures, both GAAP and non-GAAP, in analyzing and assessing the overall performance of the business, for making operating decisions and for forecasting and planning for future periods. While our management uses these non-GAAP financial measures as a tool to enhance their understanding of certain aspects of our financial performance, our management does not consider these measures to be a substitute for, or superior to, the information provided by GAAP financial statements.
Consistent with this approach, we believe that disclosing non-GAAP financial measures to the readers of our financial statements provides such readers with useful supplemental data that, while not a substitute for GAAP financial statements, allows for greater transparency in the review of our financial and operational performance. In assessing the overall health of the business during the three months ended December 31, 2021 and 2020, our management has either included or excluded the following items in general categories, each of which is described below.
Adjusted EBITDA
Adjusted EBITDA is defined as net income attributable to Cerence Inc. before net income (loss) attributable to income tax (benefit) expense, other income (expense) items, net, depreciation and amortization expense, and excluding acquisition-related costs, amortization of acquired intangible assets, stock-based compensation, and restructuring and other costs, net or impairment charges related to fixed and intangible assets and gains or losses on the sale of long-lived assets, if any. From time to time we may exclude from Adjusted EBITDA the impact of events, gains, losses or other charges (such as significant legal settlements) that affect the period-to-period comparability of our operating performance. Other income (expense) items, net include interest expense, interest income, and other income (expense), net (as stated in our Condensed Consolidated Statement of Operations). Our management and Board of Directors use this financial measure to evaluate our operating performance. It is also a significant performance measure in our annual incentive compensation programs.
Restructuring and other costs, net.
Restructuring and other charges, net include restructuring expenses as well as other charges that are unusual in nature, are the result of unplanned events, and arise outside the ordinary course of our business such as employee severance costs, costs for consolidating duplication facilities, and separation costs directly attributable to the Cerence business becoming a standalone public company.
Acquisition-related costs, net.
In the past, we have completed a number of acquisitions, which result in operating expenses, which would not otherwise have been incurred. We provide supplementary non-GAAP financial measures, which exclude certain transition, integration and other acquisition-related expense items resulting from acquisitions, to allow more accurate comparisons of the financial results to historical operations, forward looking guidance and the financial results of less acquisitive peer companies. We consider these types of costs and adjustments, to a great extent, to be unpredictable and dependent on a significant number of factors that are outside of our control. Furthermore, we do not consider these acquisition-related costs and adjustments to be related to the
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organic continuing operations of the acquired businesses and are generally not relevant to assessing or estimating the long-term performance of the acquired assets. In addition, the size, complexity and/or volume of past acquisitions, which often drives the magnitude of acquisition related costs, may not be indicative of the size, complexity and/or volume of future acquisitions. By excluding acquisition-related costs and adjustments from our non-GAAP measures, management is better able to evaluate our ability to utilize our existing assets and estimate the long-term value that acquired assets will generate for us. We believe that providing a supplemental non-GAAP measure, which excludes these items allows management and investors to consider the ongoing operations of the business both with, and without, such expenses.
These acquisition-related costs fall into the following categories: (i) transition and integration costs; (ii) professional service fees and expenses; and (iii) acquisition-related adjustments. Although these expenses are not recurring with respect to past acquisitions, we generally will incur these expenses in connection with any future acquisitions. These categories are further discussed as follows:
| (i) | Transition and integration costs. Transition and integration costs include retention payments, transitional<br>employee costs, and earn-out payments treated as compensation expense, as well as the costs of integration-related activities, including services provided by third-parties. |
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| (ii) | Professional service fees and expenses. Professional service fees and expenses include financial advisory,<br>legal, accounting and other outside services incurred in connection with acquisition activities, and disputes and regulatory matters related to acquired entities. |
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| (iii) | Acquisition-related adjustments. Acquisition-related adjustments include adjustments to acquisition-related<br>items that are required to be marked to fair value each reporting period, such as contingent consideration, and other items related to acquisitions for which the measurement period has ended, such as gains or losses on settlements of pre-acquisition contingencies. |
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Amortization of acquired intangible assets.
We exclude the amortization of acquired intangible assets from non-GAAP expense and income measures. These amounts are inconsistent in amount and frequency and are significantly impacted by the timing and size of acquisitions. Providing a supplemental measure which excludes these charges allows management and investors to evaluate results “as-if” the acquired intangible assets had been developed internally rather than acquired and, therefore, provides a supplemental measure of performance in which our acquired intellectual property is treated in a comparable manner to our internally developed intellectual property. Although we exclude amortization of acquired intangible assets from our non-GAAP expenses, we believe that it is important for investors to understand that such intangible assets contribute to revenue generation. Amortization of intangible assets that relate to past acquisitions will recur in future periods until such intangible assets have been fully amortized. Future acquisitions may result in the amortization of additional intangible assets.
Non-cash expenses.
We provide non-GAAP information relative to the following non-cash expenses: (i) stock-based compensation; and (ii) non-cash interest. These items are further discussed as follows:
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| (i) | Stock-based compensation. Because of varying valuation methodologies, subjective assumptions and the variety of<br>award types, we exclude stock-based compensation from our operating results. We evaluate performance both with and without these measures because compensation expense related to stock-based compensation is typically<br>non-cash and awards granted are influenced by the Company’s stock price and other factors such as volatility that are beyond our control. The expense related to stock-based awards is generally not<br>controllable in the short-term and can vary significantly based on the timing, size and nature of awards granted. As such, we do not include such charges in operating plans. Stock-based compensation will continue in future periods.<br> |
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| ii) | Non-cash interest. We exclude<br>non-cash interest because we believe that excluding this expense provides management, as well as other users of the financial statements, with a valuable perspective on the cash-based performance and health of<br>the business, including the current near-term projected liquidity. Non-cash interest expense will continue in future periods. |
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Other expenses.
We exclude certain other expenses that result from unplanned events outside the ordinary course of continuing operations, in order to measure operating performance and current and future liquidity both with and without these expenses. By providing this information, we believe management and the users of the financial statements are better able to understand the financial results of what we consider to be our organic, continuing operations. Included in these expenses are items such as other charges (credits), net, losses from extinguishment of debt, and changes in indemnification assets corresponding with the release of pre-spin liabilities for uncertain tax positions.
Bookings.
Bookings is defined as the amount of revenue we expect to earn from an agreement with our customers for products and services. To count as a booking, we expect there to be persuasive evidence of an arrangement, which may be evidenced by a legally binding document or documents, and that the collectability of the amounts payable under the arrangement are reasonably assured. The revenue we may actually recognize from our estimated bookings is subject to multiple factors, including but not limited to the timing of satisfying performance obligations, potential terminations, or changes in the scope of programs utilizing our technology and currency fluctuations. There is no comparable GAAP financial measure.
Key performance indicators
We believe that providing key performance indicators (“KPIs”), allows investors to gain insight into the way management views the performance of the business. We further believe that providing KPIs allows investors to better understand information used by management to evaluate and measure such performance. KPIs should not be considered superior to, or a substitute for, operating results prepared in accordance with GAAP. In assessing the performance of the business during the three months ended December 31, 2021, our management has reviewed the following KPIs, each of which is described below:
| • | Percent of worldwide auto production with Cerence Technology: The number of Cerence enabled cars shipped<br>as compared to IHS Markit car production data. |
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| Cerence. All rights reserved | |
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| • | Average contract duration: The weighted average annual period over which we expect to recognize the<br>estimated revenues from new license and connected contracts signed during the quarter, calculated on a trailing twelve months (“TTM”) basis and presented in years. |
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| • | Repeatable software contribution: The percentage of repeatable revenues as compared to total GAAP revenue<br>in the quarter on a TTM basis. Repeatable revenues are defined as the sum of License and Connected Services revenues. |
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| • | Change in number of Cerence connected cars shipped: The year over year change in the number of cars<br>shipped with Cerence connected solutions. Amounts calculated on a TTM basis. |
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| • | Growth in billings per car: The rate of growth calculated from the average billings per car based on a TTM<br>basis, excluding legacy contract and adjusted for prepay usage. |
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See the tables at the end of this press release for non-GAAP reconciliations to the most directly comparable GAAP measures.
To learn more about Cerence, visit www.cerence.com, and follow the company on LinkedIn and Twitter.
About Cerence Inc.
Cerence (NASDAQ: CRNC) is the global industry leader in creating unique, moving experiences for the mobility world. As an innovation partner to the world’s leading automakers and mobility OEMs, it is helping advance the future of connected mobility through intuitive, powerful interaction between humans and their cars, two-wheelers, and even elevators, connecting consumers’ digital lives to their daily journeys no matter where they are. Cerence’s track record is built on more than 20 years of knowledge and more than 400 million cars shipped with Cerence technology. Whether it’s connected cars, autonomous driving, e-vehicles, or buildings, Cerence is mapping the road ahead. For more information, visit www.cerence.com.
Contact Information
Rich Yerganian
Cerence Inc.
Tel: 617-987-4799
Email: richard.yerganian@cerence.com
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CERENCE INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
| Three Months Ended | ||||||
|---|---|---|---|---|---|---|
| December 31, | ||||||
| 2021 | 2020 | |||||
| Revenues: | ||||||
| License | $ | 46,850 | $ | 46,414 | ||
| Connected services | 28,159 | 25,930 | ||||
| Professional services | 19,417 | 21,299 | ||||
| Total revenues | 94,426 | 93,643 | ||||
| Cost of revenues: | ||||||
| License | 721 | 674 | ||||
| Connected services | 5,724 | 7,013 | ||||
| Professional services | 15,903 | 17,322 | ||||
| Amortization of intangible assets | 1,879 | 1,879 | ||||
| Total cost of revenues | 24,227 | 26,888 | ||||
| Gross profit | 70,199 | 66,755 | ||||
| Operating expenses: | ||||||
| Research and development | 25,792 | 24,131 | ||||
| Sales and marketing | 5,879 | 9,008 | ||||
| General and administrative | 7,527 | 12,434 | ||||
| Amortization of intangible assets | 3,154 | 3,158 | ||||
| Restructuring and other costs, net | 4,915 | 480 | ||||
| Total operating expenses | 47,267 | 49,211 | ||||
| Income from operations | 22,932 | 17,544 | ||||
| Interest income | 90 | 18 | ||||
| Interest expense | (3,427 | ) | (3,799 | ) | ||
| Other income (expense), net | (252 | ) | (2,237 | ) | ||
| Income before income taxes | 19,343 | 11,526 | ||||
| Provision for (benefit from) income taxes | 299 | (9,415 | ) | |||
| Net income | $ | 19,044 | $ | 20,941 | ||
| Net income per share: | ||||||
| Basic | $ | 0.49 | $ | 0.56 | ||
| Diluted | $ | 0.47 | $ | 0.53 | ||
| Weighted-average common share outstanding: | ||||||
| Basic | 38,839 | 37,180 | ||||
| Diluted | 44,370 | 43,363 | ||||
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CERENCE INC.
Condensed Consolidated Balance Sheets
(in thousands, except per share amounts)
| September 30, | ||||
|---|---|---|---|---|
| 2021 | ||||
| ASSETS | ||||
| Current assets: | ||||
| Cash and cash equivalents | 117,236 | 128,428 | ||
| Marketable securities | 27,905 | 30,435 | ||
| Accounts receivable, net of allowances of 181 and 395 | 37,765 | 45,560 | ||
| Deferred costs | 5,894 | 6,095 | ||
| Prepaid expenses and other current assets | 92,352 | 76,530 | ||
| Total current assets | 281,152 | 287,048 | ||
| Long-term marketable securities | 7,720 | 7,339 | ||
| Property and equipment, net | 34,437 | 31,505 | ||
| Deferred costs | 29,882 | 31,702 | ||
| Operating lease right of use assets | 16,525 | 14,901 | ||
| Goodwill | 1,125,648 | 1,128,511 | ||
| Intangible assets, net | 20,138 | 25,348 | ||
| Deferred tax assets | 157,833 | 159,293 | ||
| Other assets | 19,090 | 20,081 | ||
| Total assets | 1,692,425 | $ | 1,705,728 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||
| Current liabilities: | ||||
| Accounts payable | 8,322 | $ | 11,636 | |
| Deferred revenue | 71,215 | 78,394 | ||
| Short-term operating lease liabilities | 5,386 | 4,562 | ||
| Short-term debt | 6,250 | 6,250 | ||
| Accrued expenses and other current liabilities | 50,309 | 64,467 | ||
| Total current liabilities | 141,482 | 165,309 | ||
| Long-term debt | 264,831 | 265,093 | ||
| Deferred revenue, net of current portion | 193,443 | 198,343 | ||
| Long-term operating lease liabilities | 12,998 | 12,216 | ||
| Other liabilities | 30,170 | 32,822 | ||
| Total liabilities | 642,924 | 673,783 | ||
| Stockholders’ Equity: | ||||
| Common stock, 0.01 par value, 560,000 shares authorized; 39,162 and 38,025 shares issued and<br>outstanding, respectively | 392 | 381 | ||
| Accumulated other comprehensive (loss) income | (3,717 | ) | 1,634 | |
| Additional paid-in capital | 1,006,205 | 1,002,353 | ||
| Retained earnings | 46,621 | 27,577 | ||
| Total stockholders’ equity | 1,049,501 | 1,031,945 | ||
| Total liabilities and stockholders’ equity | 1,692,425 | $ | 1,705,728 |
All values are in US Dollars.
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CERENCE INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
| Three Months Ended | ||||||
|---|---|---|---|---|---|---|
| December 31, | ||||||
| 2021 | 2020 | |||||
| Cash flows from operating activities: | ||||||
| Net income | $ | 19,044 | $ | 20,941 | ||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
| Depreciation and amortization | 7,210 | 7,624 | ||||
| Benefit from credit loss reserve | (418 | ) | (410 | ) | ||
| Stock-based compensation expense | 5,841 | 13,325 | ||||
| Non-cash interest expense | 1,301 | 1,230 | ||||
| Deferred tax benefit | (1,455 | ) | (16,137 | ) | ||
| Other | 551 | — | ||||
| Changes in operating assets and liabilities: | ||||||
| Accounts receivable | 7,555 | (7,155 | ) | |||
| Prepaid expenses and other assets | (19,707 | ) | 1,025 | |||
| Deferred costs | 1,509 | 2,051 | ||||
| Accounts payable | (3,153 | ) | (3,655 | ) | ||
| Accrued expenses and other liabilities | (2,797 | ) | (1,527 | ) | ||
| Deferred revenue | (10,336 | ) | (6,503 | ) | ||
| Net cash provided by operating activities | 5,145 | 10,809 | ||||
| Cash flows from investing activities: | ||||||
| Capital expenditures | (4,410 | ) | (2,369 | ) | ||
| Purchases of marketable securities | (3,593 | ) | (6,358 | ) | ||
| Sale and maturities of marketable securities | 5,706 | — | ||||
| Other investing activities | 559 | — | ||||
| Net cash used in investing activities | (1,738 | ) | (8,727 | ) | ||
| Cash flows from financing activities: | ||||||
| Payments for long-term debt issuance costs | — | (520 | ) | |||
| Principal payments of long-term debt | (1,563 | ) | (1,563 | ) | ||
| Common stock repurchases for tax withholdings for net settlement of equity awards | (44,573 | ) | (30,258 | ) | ||
| Principal payments of lease liabilities arising from a finance lease | (155 | ) | (101 | ) | ||
| Proceeds from the issuance of common stock | 32,139 | 3,663 | ||||
| Net cash used in financing activities | (14,152 | ) | (28,779 | ) | ||
| Effects of exchange rate changes on cash and cash equivalents | (447 | ) | 990 | |||
| Net change in cash and cash equivalents | (11,192 | ) | (25,707 | ) | ||
| Cash and cash equivalents at the beginning of the period | 128,428 | 136,067 | ||||
| Cash and cash equivalents at the end of the period | $ | 117,236 | $ | 110,360 | ||
| Cerence. All rights reserved | ||||||
| --- |
CERENCE INC.
Reconciliations of GAAP Financial Measures to Non-GAAP Financial Measures
(unaudited - in thousands)
| Three Months Ended | ||||||
|---|---|---|---|---|---|---|
| December 31, | ||||||
| 2021 | 2020 | |||||
| GAAP revenue | $ | 94,426 | **** | $ | 93,643 | **** |
| GAAP gross profit | $ | 70,199 | **** | $ | 66,755 | **** |
| Stock-based compensation | 1,092 | 1,592 | ||||
| Amortization of intangible assets | 1,879 | 1,879 | ||||
| Non-GAAP gross profit | $ | 73,170 | **** | $ | 70,226 | **** |
| GAAP gross margin | **** | 74.3 | % | **** | 71.3 | % |
| Non-GAAP gross margin | **** | 77.5 | % | **** | 75.0 | % |
| GAAP operating income | $ | 22,932 | **** | $ | 17,544 | **** |
| Stock-based compensation* | 1,841 | 13,325 | ||||
| Amortization of intangible assets | 5,033 | 5,037 | ||||
| Restructuring and other costs, net* | 4,915 | 480 | ||||
| Non-GAAP operating income | $ | 34,721 | **** | $ | 36,386 | **** |
| GAAP operating margin | **** | 24.3 | % | **** | 18.7 | % |
| Non-GAAP operating margin | **** | 36.8 | % | **** | 38.9 | % |
| GAAP net income | $ | 19,044 | **** | $ | 20,941 | **** |
| Stock-based compensation* | 1,841 | 13,325 | ||||
| Amortization of intangible assets | 5,033 | 5,037 | ||||
| Restructuring and other costs, net* | 4,915 | 480 | ||||
| Depreciation | 2,177 | 2,587 | ||||
| Total other income (expense), net | (3,589 | ) | (6,018 | ) | ||
| Provision for (benefit from) income taxes | 299 | (9,415 | ) | |||
| Adjusted EBITDA | $ | 36,898 | **** | $ | 38,973 | **** |
| GAAP net income margin | **** | 20.2 | % | **** | 22.4 | % |
| Adjusted EBITDA margin | **** | 39.1 | % | **** | 41.6 | % |
| * | - $4.0 million in stock-based compensation is included in Restructuring and other costs, net<br> | |||||
| --- | --- | |||||
| Cerence. All rights reserved | ||||||
| --- |
CERENCE INC.
Reconciliations of GAAP Financial Measures to Non-GAAP Financial Measures (cont.)
(unaudited - in thousands, except per share data)
| Three Months Ended | ||||||
|---|---|---|---|---|---|---|
| December 31, | ||||||
| 2021 | 2020 | |||||
| GAAP net income | $ | 19,044 | **** | $ | 20,941 | **** |
| Stock-based compensation* | 1,841 | 13,325 | ||||
| Amortization of intangible assets | 5,033 | 5,037 | ||||
| Restructuring and other costs, net* | 4,915 | 480 | ||||
| Non-cash interest expense | 1,301 | 1,230 | ||||
| Indemnification asset release | 1,302 | — | ||||
| Adjustments to income tax expense | (8,108 | ) | (17,416 | ) | ||
| Non-GAAP net income | $ | 25,328 | **** | $ | 23,597 | **** |
| Adjusted EPS: | ||||||
| GAAP Numerator: | ||||||
| Net income attributed to common shareholders | $ | 19,044 | **** | $ | 20,941 | **** |
| Interest on Convertible Senior Notes, net of tax | 1,911 | 1,831 | ||||
| Net income attributed to common shareholders—diluted | $ | 20,955 | **** | $ | 22,772 | **** |
| Non-GAAP Numerator: | ||||||
| Net income attributed to common shareholders | $ | 25,328 | $ | 23,597 | ||
| Interest on Convertible Senior Notes, net of tax | 1,019 | 1,005 | ||||
| Net income attributed to common shareholders—diluted | $ | 26,347 | **** | $ | 24,602 | **** |
| GAAP Denominator: | ||||||
| Weighted-average common shares outstanding—basic | 38,839 | 37,180 | ||||
| Adjustment for diluted shares | 5,531 | 6,183 | ||||
| Weighted-average common shares outstanding—diluted | **** | 44,370 | **** | **** | 43,363 | **** |
| Non-GAAP Denominator: | ||||||
| Weighted-average common shares outstanding- basic | 38,839 | 37,180 | ||||
| Adjustment for diluted shares | 5,531 | 6,183 | ||||
| Weighted-average common shares outstanding—diluted | **** | 44,370 | **** | **** | 43,363 | **** |
| GAAP net income per share—diluted | $ | 0.47 | **** | $ | 0.53 | **** |
| Non-GAAP net income pershare—diluted | $ | 0.59 | **** | $ | 0.57 | **** |
| GAAP net cash provided by operating activities | $ | 5,145 | **** | $ | 10,809 | **** |
| Capital expenditures | (4,410 | ) | (2,369 | ) | ||
| Free Cash Flow | $ | 735 | **** | $ | 8,440 | **** |
| * | - $4.0 million in stock-based compensation is included in Restructuring and other costs, net<br> | |||||
| --- | --- | |||||
| Cerence. All rights reserved | ||||||
| --- |
CERENCE INC.
Reconciliations of GAAP Financial Measures to Non-GAAP Financial Measures (cont.)
(unaudited - in thousands)
| Q1FY22 | Q4FY21 | Q3FY21 | Q2FY21 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| GAAP revenues | $ | 94,426 | **** | $ | 98,076 | $ | 96,801 | $ | 98,662 |
| Less: Professional services revenue | 19,417 | 21,073 | 16,538 | 16,555 | |||||
| Non-GAAP Repeatable revenues | $ | 75,009 | **** | $ | 77,003 | $ | 80,263 | $ | 82,107 |
| GAAP revenues TTM | $ | 387,965 | **** | ||||||
| Less: Professional services revenue TTM | 73,583 | ||||||||
| Non-GAAP Repeatable revenues TTM | $ | 314,382 | **** | ||||||
| Repeatable software contribution | **** | 81 | % | ||||||
| Cerence. All rights reserved | |||||||||
| --- |
CERENCE INC.
Reconciliations of GAAP Financial Measures to Non-GAAP Financial Measures (cont.)
(unaudited - in thousands)
| Q2 2022 | FY2022 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Low | High | Low | High | |||||||||
| GAAP revenue | $ | 82,000 | **** | $ | 86,000 | **** | $ | 365,000 | **** | $ | 385,000 | **** |
| GAAP gross profit | $ | 58,400 | **** | $ | 62,400 | **** | $ | 267,900 | **** | $ | 287,900 | **** |
| Stock-based compensation | 1,200 | 1,200 | 4,700 | 4,700 | ||||||||
| Amortization of intangible assets | 900 | 900 | 3,000 | 3,000 | ||||||||
| Non-GAAP gross profit | $ | 60,500 | **** | $ | 64,500 | **** | $ | 275,600 | **** | $ | 295,600 | **** |
| GAAP gross margin | **** | 71 | % | **** | 73 | % | **** | 73 | % | **** | 75 | % |
| Non-GAAP gross margin | **** | 74 | % | **** | 75 | % | **** | 76 | % | **** | 77 | % |
| GAAP operating income | $ | 5,400 | **** | $ | 9,400 | **** | $ | 59,300 | **** | $ | 79,300 | **** |
| Stock-based compensation | 9,000 | 9,000 | 28,400 | 28,400 | ||||||||
| Amortization of intangible assets | 4,100 | 4,100 | 14,700 | 14,700 | ||||||||
| Restructuring and other costs, net | 500 | 500 | 6,300 | 6,300 | ||||||||
| Non-GAAP operating income | $ | 19,000 | **** | $ | 23,000 | **** | $ | 108,700 | **** | $ | 128,700 | **** |
| GAAP operating margin | **** | 7 | % | **** | 11 | % | **** | 16 | % | **** | 21 | % |
| Non-GAAP operating margin | **** | 23 | % | **** | 27 | % | **** | 30 | % | **** | 33 | % |
| GAAP net income | $ | 1,300 | **** | $ | 3,700 | **** | $ | 34,400 | **** | $ | 49,200 | **** |
| Stock-based compensation | 9,000 | 9,000 | 28,400 | 28,400 | ||||||||
| Amortization of intangible assets | 4,100 | 4,100 | 14,700 | 14,700 | ||||||||
| Restructuring and other costs, net | 500 | 500 | 6,300 | 6,300 | ||||||||
| Depreciation | 2,500 | 2,500 | 10,000 | 10,000 | ||||||||
| Total other income (expense), net | (3,300 | ) | (3,300 | ) | (13,500 | ) | (13,500 | ) | ||||
| Provision for income taxes | 800 | 2,400 | 11,400 | 16,600 | ||||||||
| Adjusted EBITDA | $ | 21,500 | **** | $ | 25,500 | **** | $ | 118,700 | **** | $ | 138,700 | **** |
| GAAP net income margin | **** | 2 | % | **** | 4 | % | **** | 9 | % | **** | 13 | % |
| Adjusted EBITDA margin | **** | 26 | % | **** | 30 | % | **** | 33 | % | **** | 36 | % |
| Cerence. All rights reserved | ||||||||||||
| --- |
CERENCE INC.
Reconciliations of GAAP Financial Measures to Non-GAAP Financial Measures (cont.)
(unaudited - in thousands, except per share data)
| Q2 2022 | FY2022 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Low | High | Low | High | |||||||||
| GAAP net income | $ | 1,300 | **** | $ | 3,700 | **** | $ | 34,400 | **** | $ | 49,200 | **** |
| Stock-based compensation | 9,000 | 9,000 | 28,400 | 28,400 | ||||||||
| Amortization of intangibles | 4,100 | 4,100 | 14,700 | 14,700 | ||||||||
| Restructuring and other costs, net | 500 | 500 | 6,300 | 6,300 | ||||||||
| Non-cash interest expense | 1,300 | 1,300 | 5,300 | 5,300 | ||||||||
| Adjustments to income tax expense | (3,400 | ) | (2,800 | ) | (13,100 | ) | (12,100 | ) | ||||
| Non-GAAP net income | $ | 12,800 | **** | $ | 15,800 | **** | $ | 76,000 | **** | $ | 91,800 | **** |
| Adjusted EPS: | ||||||||||||
| GAAP Numerator: | ||||||||||||
| Net income attributed to common shareholders | $ | 1,300 | **** | $ | 3,700 | **** | $ | 34,400 | **** | $ | 49,200 | **** |
| Non-GAAP Numerator: | ||||||||||||
| Net income attributed to common shareholders | $ | 12,800 | $ | 15,800 | $ | 76,000 | $ | 91,800 | ||||
| Interest on Convertible Senior Notes, net of tax | 1,000 | 1,000 | 4,000 | 4,000 | ||||||||
| Net income attributed to common shareholders - diluted | $ | 13,800 | **** | $ | 16,800 | **** | $ | 80,000 | **** | $ | 95,800 | **** |
| GAAP Denominator: | ||||||||||||
| Weighted-average common shares outstanding - basic | 39,200 | 39,200 | 39,100 | 39,100 | ||||||||
| Adjustment for diluted shares | 600 | 600 | 700 | 700 | ||||||||
| Weighted-average common shares outstanding - diluted | **** | 39,800 | **** | **** | 39,800 | **** | **** | 39,800 | **** | **** | 39,800 | **** |
| Non-GAAP Denominator: | ||||||||||||
| Weighted-average common shares outstanding - basic | 39,200 | 39,200 | 39,100 | 39,100 | ||||||||
| Adjustment for diluted shares | 5,200 | 5,200 | 5,300 | 5,300 | ||||||||
| Weighted-average common shares outstanding - diluted | **** | 44,400 | **** | **** | 44,400 | **** | **** | 44,400 | **** | **** | 44,400 | **** |
| GAAP net income per share—diluted | $ | 0.03 | **** | $ | 0.09 | **** | $ | 0.86 | **** | $ | 1.24 | **** |
| Non-GAAP net income pershare—diluted | $ | 0.31 | **** | $ | 0.38 | **** | $ | 1.80 | **** | $ | 2.16 | **** |
| Cerence. All rights reserved | ||||||||||||
| --- |
EX-99.2
Exhibit 99.2 Cerence Q1FY22 Earnings Call Presentation • Stefan Ortmanns, CEO • Mark Gallenberger, CFO • Rich Yerganian, SVP of IR February 7, 2022
Forward-Looking Statements This material and any oral statements made in connection with this material include forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Statements made which provide the Company’s or management’s intentions, beliefs, expectations or predictions for the future are forward-looking statements and are inherently uncertain. The opinions, forecasts, projections or other statements other than statements of historical fact, including, without limitation, plans and objectives of management of the Company are forward- looking statements. It is important to note that actual results could differ materially from those discussed in such forward-looking statements. Important factors that could cause actual results to differ materially include the risk factors and other cautionary statements contained from time to time in the Company’s SEC filings, which may be obtained by contacting the Company or the SEC. These filings are also available through the Company’s web site at http://www.cerence.com or through the SEC’s Electronic Data Gathering and Analysis Retrieval System (EDGAR) at http://www.sec.gov. We undertake no obligation to publicly update or revise any forward-looking statement. 2 © 2022 Cerence Inc.
Executive Summary
Automotive Industry at a Tipping Point More cars powered by electricity will accelerate the transition to a fully digital cockpit and cabin, transforming the driver and passenger experience 4 © 2022 Cerence Inc.
Positioned to Lead the Dynamic Field of Conversational AI Critical part of Work with Industry-leading Global delivery World-class the connected incumbent car technology team helping employees car ecosystem makers and new customers electric vehicle create unique makers experiences 5 © 2022 Cerence Inc.
74.3% $19.0M $0.47 $5.1M $94.4M 1 Revenue GAAP Gross GAAP GAAP CFFO (1) CFFO equals GAAP Margin Net Income EPS -diluted net cash provided by operating activities Cerence Delivers Strong Q1FY22 Exceeded quarterly guidance on most profitability metrics despite industry headwinds 77.5% $36.9M $0.59 1% Year Over Non-GAAP 39.1% Adjusted Non-GAAP Year Growth Gross Margin EBITDA EPS-diluted NOTE: Refer to the Appendix for more information on GAAP to non-GAAP reconciliations 6 © 2022 Cerence Inc.
Largest contract in company history Building a Second highest bookings quarter in company history Strong Foundation Initial contribution from fitness, a new mobility market for Growth Won a new China-based two-wheeler customer 7 © 2022 Cerence Inc.
Financial Summary
Q1 Exceeded Guidance on Most Profitability Metrics Q1FY22 Q1FY22 Q1FY21 In millions, except per share amounts Actual Results Guidance Actual Results Revenue $91 - $96 $94.4 $93.6 GAAP Gross Margin 74.3% 73% - 74% 71.3% (a) Non-GAAP Gross Margin 77.5% 76% - 77% 75.0% GAAP Operating Margin 13% - 16% 24.3% 18.7% (a) Non-GAAP Operating Margin 36.8% 32% - 34% 38.9% GAAP Net Income $8 - $10 $19.0 $20.9 (a) Adjusted EBITDA $36.9 $31 - $35 $39.0 (a) Adjusted EBITDA Margin 39.1% 34% - 36% 41.6% GAAP Net Income per share – diluted $0.20 - $0.26 $0.47 $0.53 (a) Non-GAAP EPS – diluted $0.59 $0.47 - $0.53 $0.57 CFFO $5.1 n/a $10.8 Footnote: a) Non-GAAP excludes acquisition-related costs, amortization of acquired intangible assets, restructuring expense, and stock-based compensation. Refer to the Appendix for more information on GAAP to non-GAAP reconciliations 9 © 2022 Cerence Inc.
Detailed Revenue Breakdown Q1FY22 Q4FY21 Q1FY21 QoQ YoY▪ YoY variable license decline was caused by In millions 1 increase in consumption of Fixed licenses. License: $46.9 $51.4 $46.4 (9%) +1% ▪ Other Markets revenue in Q1 is a 1-time Variable $21.6 $20.8 $36.3 +4% (40%) volume commit of $5.2M with a fitness customer. Q4 revenue of $5.2M was with a 1 Fixed $20.1 $25.4 $10.1 (21%) +99% big tech giant. Other Markets $5.2 $5.2 - +0% n/a ▪ New connected revenue was up +23% YoY, including a $0.9m on-premise deal. Excluding Connected on-premise, new connected was up 14% $28.2 $25.6 $25.9 +10% +9% Services: YoY. $9.5 +28% New $12.2 $9.9 +23% 2▪ New connected revenue was up +28% QoQ. $11.2 +9% Excluding the $0.9M on-premise deal in Q1 and the $1.7M accounting adjustment in Q4, Legacy $16.0 $16.1 $16.0 (1%) 0% QoQ growth was +1%. Professional $19.4 $21.1 $21.3 (8%) (9%) Services Total Revenue: $94.4 $98.1 $93.6 (4%) +1% 1 Fixed license revenue includes prepaid and minimum commitment deals. 2 Excluding a one-time accounting adjustment of $1.7M to correct an amortization schedule. 10 © 2022 Cerence Inc.
Cerence Guidance Considerations 2 1 3 Bookings to Macro Conditions License Deals Revenue Analysis of each BU suggests Rapidly evolving conditions in Prior guidance assumed a bookings to revenue conversion automotive, including supply number of one-time technology for new products will take longer chain challenges, license opportunities in fiscal than expected. Offerings semiconductor shortage and 2022. Although attractive ongoing impact of Covid-19 / provide compelling revenue opportunities remain, these may streams and can contribute to Omicron affecting delivery of not all be realized during our future growth, vehicles, factory shutdowns and fiscal year as previously but will take longer than labor shortages. expected. expected to recognize revenue. 11 © 2022 Cerence Inc.
FY22 Full Year Guidance Update FY22E FY21 In millions except per share amounts Low High Actual Revenue $365 $385 $387.2 GAAP Gross Margin 73% 75% 73.9% (a) Non-GAAP Gross Margin 76% 77% 77.3% GAAP Operating Margin 16% 21% 15.7% (a) Non-GAAP Operating Margin 30% 33% 37.8% GAAP Net Income $34 $49 $45.9 (a) Adjusted EBITDA $119 $139 $155.9 (a) Adjusted EBITDA Margin 33% 36% 40.3% GAAP EPS – diluted $0.86 $1.24 $1.17 (a) Non-GAAP EPS – diluted $1.80 $2.16 $2.53 Footnote: (a) Non-GAAP excludes acquisition-related costs, amortization of acquired intangible assets, restructuring expense, and stock-based compensation. Refer to the Appendix for more information on GAAP to non-GAAP reconciliations 12 © 2022 Cerence Inc.
Q2FY22 Guidance Q2FY22E Q2FY21 In millions except per share amounts Low High Actual Revenue $82 $86 $98.7 GAAP Gross Margin 71% 73% 73.4% (a) Non-GAAP Gross Margin 74% 75% 77.5% GAAP Operating Margin 7% 11% 17.6% (a) Non-GAAP Operating Margin 23% 27% 37.6% GAAP Net Income $1 $4 $11.2 (a) Adjusted EBITDA $22 $26 $39.3 (a) Adjusted EBITDA Margin 26% 30% 39.9% GAAP EPS – diluted $0.03 $0.09 $0.28 (a) Non-GAAP EPS – diluted $0.31 $0.38 $0.69 Footnote: a) Non-GAAP excludes acquisition-related costs, amortization of acquired intangible assets, restructuring expense, and stock-based compensation. Refer to the Appendix for more information on GAAP to non-GAAP reconciliations 13 © 2022 Cerence Inc.
Long-Term Goal | Key Provider of AI for Mobility Road AI Driver Cabin 14 © 2022 Cerence Inc.
Thank you. 15 © 2022 Cerence Inc.
Appendix
Adoption KPIs on a Strong Positive Trend 180,000,000 14,000,000 Initial Covid-19 160,000,000 Impact 12,000,000 140,000,000 10,000,000 120,000,000 8,000,000 100,000,000 80,000,000 6,000,000 60,000,000 4,000,000 40,000,000 2,000,000 20,000,000 0 0 Transactions Monthly Active Users Transactions are defined as the number of initiated user interactions with the Company's cloud computing platforms. 17 © 2022 Cerence Inc.
Non-GAAP Financial Measures – Definitions Discussion of Non-GAAP Financial Measures We believe that providing the non-GAAP information in addition to the GAAP presentation, allows investors to view the financial results in the way management views the operating results. We further believe that providing this information allows investors to not only better understand our financial performance, but more importantly, to evaluate the efficacy of the methodology and information used by management to evaluate and measure such performance. The non-GAAP information should not be considered superior to, or a substitute for, financial statements prepared in accordance with GAAP. We utilize a number of different financial measures, both GAAP and non-GAAP, in analyzing and assessing the overall performance of the business, for making operating decisions and for forecasting and planning for future periods. While our management uses these non-GAAP financial measures as a tool to enhance their understanding of certain aspects of our financial performance, our management does not consider these measures to be a substitute for, or superior to, the information provided by GAAP financial statements. Consistent with this approach, we believe that disclosing non-GAAP financial measures to the readers of our financial statements provides such readers with useful supplemental data that, while not a substitute for GAAP financial statements, allows for greater transparency in the review of our financial and operational performance. In assessing the overall health of the business during the three months December 31, 2021 and 2020, our management has either included or excluded the following items in general categories, each of which is described below. Adjusted EBITDA Adjusted EBITDA is defined as net income attributable to Cerence Inc. before net income (loss) attributable to income tax (benefit) expense, other income (expense) items, net, depreciation and amortization expense, and excluding acquisition-related costs, amortization of acquired intangible assets, stock- based compensation, and restructuring and other costs, net or impairment charges related to fixed and intangible assets and gains or losses on the sale of long-lived assets, if any. From time to time we may exclude from Adjusted EBITDA the impact of events, gains, losses or other charges (such as significant legal settlements) that affect the period-to-period comparability of our operating performance. Other income (expense) items, net include interest expense, interest income, and other income (expense), net (as stated in our Condensed Consolidated Statement of Operations). Our management and Board of Directors use this financial measure to evaluate our operating performance. It is also a significant performance measure in our annual incentive compensation programs. 18 © 2022 Cerence Inc.
Non-GAAP Financial Measures – Definitions Restructuring and other costs, net. Restructuring and other charges, net include restructuring expenses as well as other charges that are unusual in nature, are the result of unplanned events, and arise outside the ordinary course of our business such as employee severance costs, costs for consolidating duplication facilities, and separation costs directly attributable to the Cerence business becoming a standalone public company. Acquisition-related costs, net. In recent years, we have completed a number of acquisitions, which result in operating expenses, which would not otherwise have been incurred. We provide supplementary non-GAAP financial measures, which exclude certain transition, integration and other acquisition-related expense items resulting from acquisitions, to allow more accurate comparisons of the financial results to historical operations, forward looking guidance and the financial results of less acquisitive peer companies. We consider these types of costs and adjustments, to a great extent, to be unpredictable and dependent on a significant number of factors that are outside of our control. Furthermore, we do not consider these acquisition-related costs and adjustments to be related to the organic continuing operations of the acquired businesses and are generally not relevant to assessing or estimating the long-term performance of the acquired assets. In addition, the size, complexity and/or volume of past acquisitions, which often drives the magnitude of acquisition related costs, may not be indicative of the size, complexity and/or volume of future acquisitions. By excluding acquisition-related costs and adjustments from our non-GAAP measures, management is better able to evaluate our ability to utilize our existing assets and estimate the long-term value that acquired assets will generate for us. We believe that providing a supplemental non-GAAP measure, which excludes these items allows management and investors to consider the ongoing operations of the business both with, and without, such expenses. These acquisition-related costs fall into the following categories: (i) transition and integration costs; (ii) professional service fees and expenses; and (iii) acquisition-related adjustments. Although these expenses are not recurring with respect to past acquisitions, we generally will incur these expenses in connection with any future acquisitions. These categories are further discussed as follows: • Transition and integration costs. Transition and integration costs include retention payments, transitional employee costs, and earn-out payments treated as compensation expense, as well as the costs of integration-related activities, including services provided by third-parties. • Professional service fees and expenses. Professional service fees and expenses include financial advisory, legal, accounting and other outside services incurred in connection with acquisition activities, and disputes and regulatory matters related to acquired entities. • Acquisition-related adjustments. Acquisition-related adjustments include adjustments to acquisition-related items that are required to be marked to fair value each reporting period, such as contingent consideration, and other items related to acquisitions for which the measurement period has ended, such as gains or losses on settlements of pre-acquisition contingencies. 19 © 2022 Cerence Inc.
Non-GAAP Financial Measures – Definitions Amortization of acquired intangible assets. We exclude the amortization of acquired intangible assets from non-GAAP expense and income measures. These amounts are inconsistent in amount and frequency and are significantly impacted by the timing and size of acquisitions. Providing a supplemental measure which excludes these charges allows management and investors to evaluate results “as-if” the acquired intangible assets had been developed internally rather than acquired and, therefore, provides a supplemental measure of performance in which our acquired intellectual property is treated in a comparable manner to our internally developed intellectual property. Although we exclude amortization of acquired intangible assets from our non-GAAP expenses, we believe that it is important for investors to understand that such intangible assets contribute to revenue generation. Amortization of intangible assets that relate to past acquisitions will recur in future periods until such intangible assets have been fully amortized. Future acquisitions may result in the amortization of additional intangible assets. Non-cash expenses. We provide non-GAAP information relative to the following non-cash expenses: (i) stock-based compensation; and (ii) non-cash interest. These items are further discussed as follow: • (i)Stock-based compensation. Because of varying valuation methodologies, subjective assumptions and the variety of award types, we exclude stock- based compensation from our operating results. We evaluate performance both with and without these measures because compensation expense related to stock-based compensation is typically non-cash and awards granted are influenced by the Company’s stock price and other factors such as volatility that are beyond our control. The expense related to stock-based awards is generally not controllable in the short-term and can vary significantly based on the timing, size and nature of awards granted. As such, we do not include such charges in operating plans. Stock-based compensation will continue in future periods. • ii)Non-cash interest. We exclude non-cash interest because we believe that excluding this expense provides management, as well as other users of the financial statements, with a valuable perspective on the cash-based performance and health of the business, including the current near-term projected liquidity. Non-cash interest expense will continue in future periods. Other expenses. We exclude certain other expenses that result from unplanned events outside the ordinary course of continuing operations, in order to measure operating performance and current and future liquidity both with and without these expenses. By providing this information, we believe management and the users of the financial statements are better able to understand the financial results of what we consider to be our organic, continuing operations. Included in these expenses are items such as other charges (credits), net, losses from extinguishment of debt, and changes in indemnification assets corresponding with the release of pre-spin liabilities for uncertain tax positions. 20 © 2022 Cerence Inc.
KPI Measures – Definitions Key performance indicators We believe that providing key performance indicators (“KPIs”), allows investors to gain insight into the way management views the performance of the business. We further believe that providing KPIs allows investors to better understand information used by management to evaluate and measure such performance. KPIs should not be considered superior to, or a substitute for, operating results prepared in accordance with GAAP. In assessing the performance of the business during the three months ended December 31, 2021, our management has reviewed the following KPIs, each of which is described below: • Percent of worldwide auto production with Cerence Technology: The number of Cerence enabled cars shipped as compared to IHS Markit car production data. • Average contract duration: The weighted average annual period over which we expect to recognize the estimated revenues from new license and connected contracts signed during the quarter, calculated on a trailing twelve months (“TTM”) basis and presented in years. • Repeatable software contribution: The percentage of repeatable revenues as compared to total GAAP revenue in the quarter on a TTM basis. Repeatable revenues are defined as the sum of License and Connected Services revenues. • Change in number of Cerence connected cars shipped: The year over year change in the number of cars shipped with Cerence connected solutions. Amounts calculated on a TTM basis. • Growth in billings per car: The rate of growth calculated from the average billings per car based on a trailing twelve month comparison while excluding legacy contract and adjusted for prepay usage. 21 © 2022 Cerence Inc.
Q1FY22 Reconciliations of GAAP to non-GAAP Results Three Months Ended Three Months Ended December 31, December 31, (unaudited - in thousands, except per share data) (unaudited - in thousands, except per share data) 2021 2020 2021 2020 GAAP net income $ 19,044 $ 20,941 GAAP revenue $ 94,426 $ 93,643 Stock-based compensation* 1,841 13,325 Amortization of intangible assets 5,033 5,037 GAAP gross profit $ 70,199 $ 66,755 Restructuring and other costs, net* 4,915 480 Stock-based compensation 1,092 1,592 Non-cash interest expense 1,301 1,230 Amortization of intangible assets 1,879 1,879 Indemnification asset release 1,302 - Non-GAAP gross profit $ 73,170 $ 70,226 Adjustments to income tax expense (8,108 ) (17,416 ) GAAP gross margin 74.3 % 71.3 % Non-GAAP net income $ 25,328 $ 23,597 Non-GAAP gross margin 77.5 % 75.0 % Adjusted EPS: GAAP operating income $ 22,932 $ 17,544 GAAP Numerator: Net income attributed to common shareholders $ 19,044 $ 20,941 Stock-based compensation* 1,841 13,325 Interest on Convertible Senior Notes, net of tax 1,911 1,831 Amortization of intangible assets 5,033 5,037 Net income attributed to common shareholders - diluted $ 20,955 $ 22,772 Restructuring and other costs, net* 4,915 480 Non-GAAP operating income $ 34,721 $ 36,386 Non-GAAP Numerator: GAAP operating margin 24.3 % 18.7 % Net income attributed to common shareholders $ 25,328 $ 23,597 Non-GAAP operating margin 36.8 % 38.9 % Interest on Convertible Senior Notes, net of tax 1,019 1,005 Net income attributed to common shareholders - diluted $ 26,347 $ 24,602 GAAP net income $ 19,044 $ 20,941 Stock-based compensation* 1,841 13,325 GAAP Denominator: Weighted-average common shares outstanding - basic 38,839 37,180 Amortization of intangible assets 5,033 5,037 Adjustment for diluted shares 5,531 6,184 Restructuring and other costs, net* 4,915 480 Weighted-average common shares outstanding - diluted 44,370 43,364 Depreciation 2,177 2,587 Total other income (expense), net (3,589 ) (6,018 ) Non-GAAP Denominator: Provision for (benefit from) income taxes 299 (9,415 ) Weighted-average common shares outstanding- basic 38,839 37,180 Adjusted EBITDA $ 36,898 $ 38,973 Adjustment for diluted shares 5,531 6,184 GAAP net income margin 20.2 % 22.4 % Weighted-average common shares outstanding - diluted 44,370 43,364 Adjusted EBITDA margin 39.1 % 41.6 % GAAP net income per share - diluted $ 0.47 $ 0.53 Non-GAAP net income per share - diluted $ 0.59 $ 0.57 GAAP net cash provided by operating activities $ 5,145 $ 10,809 Capital expenditures (4,410 ) (2,369 ) Free Cash Flow $ 735 $ 8,440
Q2FY22 and FY22 Reconciliations of GAAP to non-GAAP Guidance (unaudited
- in thousands, except per share data) Q2 2022 FY2022 Low High Low High GAAP revenue $ 82,000 $ 86,000 $ 365,000 $ 385,000 GAAP gross profit $ 58,400 $ 62,400 $ 267,900 $ 287,900 Stock-based compensation 1,200 1,200 4,700 4,700 Amortization of intangible assets 900 900 3,000 3,000 Non-GAAP gross profit $ 60,500 $ 64,500 $ 275,600 $ 295,600 GAAP gross margin 71 % 73 % 73 % 75 % Non-GAAP gross margin 74 % 75 % 76 % 77 % GAAP operating income $ 5,400 $ 9,400 $ 59,300 $ 79,300 Stock-based compensation 9,000 9,000 28,400 28,400 Amortization of intangible assets 4,100 4,100 14,700 14,700 Restructuring and other costs, net 500 500 6,300 6,300 Non-GAAP operating income $ 19,000 $ 23,000 $ 108,700 $ 128,700 GAAP operating margin 7 % 11 % 16 % 21 % Non-GAAP operating margin 23 % 27 % 30 % 33 % GAAP net income $ 1,300 $ 3,700 $ 34,400 $ 49,200 Stock-based compensation 9,000 9,000 28,400 28,400 Amortization of intangible assets 4,100 4,100 14,700 14,700 Restructuring and other costs, net 500 500 6,300 6,300 Depreciation 2,500 2,500 10,000 10,000 Total other income (expense), net (3,300 ) (3,300 ) (13,500 ) (13,500 ) Provision for income taxes 800 2,400 11,400 16,600 Adjusted EBITDA $ 21,500 $ 25,500 $ 118,700 $ 138,700 GAAP net income margin 2 % 4 % 9 % 13 % Adjusted EBITDA margin 26 % 30 % 33 % 36 %
Q2FY22 and FY22 Reconciliations of GAAP to non-GAAP Guidance (unaudited
- in thousands) Q2 2022 FY2022 Low High Low High GAAP net income $ 1,300 $ 3,700 $ 34,400 $ 49,200 Stock-based compensation 9,000 9,000 28,400 28,400 Amortization of intangibles 4,100 4,100 14,700 14,700 Restructuring and other costs, net 500 500 6,300 6,300 Non-cash interest expense 1,300 1,300 5,300 5,300 Adjustments to income tax expense (3,400 ) (2,800 ) (13,100 ) (12,100 ) Non-GAAP net income $ 12,800 $ 15,800 $ 76,000 $ 91,800 Adjusted EPS: GAAP Numerator: Net income attributed to common shareholders $ 1,300 $ 3,700 $ 34,400 $ 49,200 Non-GAAP Numerator: Net income attributed to common shareholders $ 12,800 $ 15,800 $ 76,000 $ 91,800 Interest on Convertible Senior Notes, net of tax 1,000 1,000 4,000 4,000 Net income attributed to common shareholders - diluted $ 13,800 $ 16,800 $ 80,000 $ 95,800 GAAP Denominator: Weighted-average common shares outstanding - basic 39,200 39,200 39,100 39,100 Adjustment for diluted shares 600 600 700 700 Weighted-average common shares outstanding - diluted 39,800 39,800 39,800 39,800 Non-GAAP Denominator: Weighted-average common shares outstanding- basic 39,200 39,200 39,100 39,100 Adjustment for diluted shares 5,200 5,200 5,300 5,300 Weighted-average common shares outstanding - diluted 44,400 44,400 44,400 44,400 GAAP net income per share - diluted $ 0.03 $ 0.09 $ 0.86 $ 1.24 Non-GAAP net income per share - diluted $ 0.31 $ 0.38 $ 1.80 $ 2.16