Cerence 20% Drop is a Buying Opportunity
Cerence Inc. (NASDAQ:CRNC) share price dropped more than 20% on Monday following the company’s Q4 results, which raised concerns around New Connected Services growth after a 34% quarter-over-quarter decline. Analysts at Berenberg Bank think this significant decline in share prices is a good opportunity to buy the stock. The analysts advised investors to keep the following key point in mind:
(1) management has a track record of conservative guidance,
(2) Management reiterated 2024 targets, with $700 million revenue and 37% EBITDA margins,
(3) 2024 targets include $155 million from nascent New Connected Services/Apps and markets,
(4) The order backlog offers line of sight to a meaningful portion of targeted New Connected revenue.
| Symbol | Price | %chg |
|---|---|---|
| CRM.BA | 20424 | 0.4 |
| GOTO.JK | 50 | 0 |
| 263750.KQ | 43100 | -2.78 |
| GOOGL.SW | 1077.82 | 0 |
Cerence Inc. (CRNC:NASDAQ) Q2 Fiscal Year 2024 Financial Results Overview
On Thursday, May 9, 2024, Cerence Inc. (CRNC:NASDAQ) unveiled its financial outcomes for the second quarter of the fiscal year 2024, which concluded on March 31, 2024. The company disclosed an earnings per share (EPS) of -6.66, significantly trailing the anticipated -0.23. Despite this shortfall, CRNC's revenue for the quarter stood at $67.83 million, outperforming the forecast of $62.15 million. This result demonstrates a mixed financial picture for Cerence, with a notable EPS miss but a commendable achievement in revenue generation.
Cerence's success in surpassing revenue forecasts, as noted by Zacks Investment Research, is attributed to its effective adjustments with Original Equipment Manufacturers (OEMs). This revenue success, despite the reported loss, underscores the company's potential in the competitive AI for automotive applications sector. The reported revenue exceeding guidance range tops reflects positively on Cerence's operational efficiency and market demand for its offerings.
However, the quarter presented its challenges. Cerence reported a significant Goodwill impairment charge of approximately $252 million, contributing to the substantial loss per share. This charge is a pivotal consideration as it affects the company's financial health and investor perceptions. Despite this, Cerence remains optimistic about its future growth, especially with its new generative AI products, which have secured six design wins, indicating early market acceptance and potential for future revenue growth.
The strategic adjustments mentioned by Stefan Ortmanns, the Chief Executive Officer of Cerence, underscore the company's proactive stance in addressing its challenges. Following a comprehensive review of its backlog and initial royalty reports indicating some downward trends, Cerence has made strategic decisions aimed at stabilizing and growing its business. These decisions, including lowering its fiscal year 2024 guidance and withdrawing its multi-year plan, reflect the company's commitment to adapting its strategies in light of market and operational realities.
Financial metrics such as the price-to-sales ratio (TTM) of approximately 0.83 and the enterprise value to sales ratio (TTM) of about 1.38 provide additional context to Cerence's valuation. These ratios suggest that investors are valuing CRNC at a level that reflects its sales performance, albeit with a significant valuation in terms of its operating cash flow, as indicated by an enterprise value to operating cash flow ratio (TTM) of approximately 373.78. The debt-to-equity ratio (TTM) of roughly 0.63 and a current ratio (TTM) of about 2.18 further provide insights into the company's financial structure, indicating a moderate level of debt and a good ability to cover short-term liabilities with its short-term assets.
Cerence CEO Resigns, Shares Down 14%
Cerence Inc. (NASDAQ:CRNC) shares were trading more than 14% lower Wednesday afternoon following the CEO resignation announcement.
According to the company’s announcement, Sanjay Dhawan has resigned as CEO of the company and Dr. Stefan Ortmanns has been promoted to President & CEO.
In the short term, analysts at Berenberg Bank see risk that the new CEO could use the current volatility in the share price as a chance to pull or lower management’s long-term financial targets in order to set a less ambitious bar. That said, the analysts are already modeling below management’s target numbers for 2024 and believe that the current valuation is baking in that risk.
Berenberg Bank estimates a 19% revenue CAGR (management’s target is 22%), around 37% EBITDA margins, and around 40% annual FCF growth through 2024.
Cerence Upgraded to Outperform at RBC Capital
Analysts at RBC Capital upgraded Cerence Inc. (NASDAQ:CRNC) to outperform from sector perform, lowering their price target to $110 from $112.
According to the brokerage the company’s stock sell-off from its 8/11 high, which is mostly macro concern related (auto concerns and SaaS/software decline), looks overdone. The analysts see little change to the long-term story and believe the path to 2024 targets of $700 million in revenue and $260 million in EBITDA is there and see potential upside to the targets. As such, they view the current level as attractive for long-term investors.
