Cerence Inc. (CRNC) on Q2 2022 Results - Earnings Call Transcript

Operator: Good day, and thank you for standing by. Welcome to the Cerence Q2 2022 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, Rich Yerganian, Senior Vice President of Investor Relations. Please go ahead. Rich Yerganian : Thank you, Christie. Welcome to Cerence's Second Quarter Fiscal Year 2022 Conference Call. Before we begin, I would like to remind you that this call may involve certain forward-looking statements. These statements are subject to risks and uncertainties as described in the press release preceding today's call. Cerence makes no representations to update those statements after today. In addition, the company may refer to certain non-GAAP measures, key performance indicators and pro forma financial information during this call. Please refer to today's press release for further details of the definitions, limitations and uses of those measures and reconciliations of non-GAAP measures to the closest GAAP equivalent. Joining me on today's call are Stefan Ortmanns, CEO of Cerence; and Tom Beaudoin, CFO of Cerence. As a reminder, the only authorized spokespeople for the company are Stefan, Tom and myself. Before handing the call over to Stefan, I would like to announce several upcoming investor events. The exact timing of our participation is subject to change, so please go to the Events section of our IR website for the latest information. The conferences include the virtual 19th Annual Craig-Hallum Institutional Investor Conference on June 1, the Baird 2022 Global Consumer Technology and Services Conference on June 6 in New York and the 6th Annual Needham Virtual Automotive Tech Conference on June 7. Now on to the call. Stefan? Stefan Ortmanns: Thank you, Rich. Welcome, everyone, and thank you for joining us to discuss our second quarter earnings. As you saw in our release this morning, we delivered solid results for the quarter against a backdrop of continuing disruptions in auto production. We either met or were at the high end of the range for most key financial metrics in the quarter. In addition to the quarterly matrix, we delivered very strong bookings in the first half of the year, up 53% from the same period in the prior year. We see a strong pipeline of potential bookings for the second half of the year, including several competitive takeaway opportunities. I'm especially pleased with our performance. Since every day, we see news about the market conditions playing a major role in our industry: semiconductor shortages, factory and city shutdowns due to COVID-19 and the impact from in the Ukraine, all continue to contribute to challenges in auto production. We are carefully managing the business through these headwinds, and despite the challenges, we remain confident in our full year guidance. Before we dig into our performance and outlook, I want to welcome our new executive officers. First, I'm pleased to welcome Jennifer Salinas to Cerence as our new General Counsel. We are fortunate to have Jennifer on the Cerence team. She is an experienced and progressive public company legal leader, who most recently served as General Counsel of the Infrastructure Solutions Group and Global Head of Litigation at Lenovo. In just 6 weeks, Jennifer has proven to be a tremendous addition to the team. Second, I'm excited to welcome Tom Beaudoin as our new CFO with the departure of Mark Marc Montagner. I've known Tom for years, and I'm confident that he will be instrumental to our operations and in helping us execute. Tom has a proven track record of driving change and significant experience leading finance in the software and automotive industries. Many of you recall Tom from his time at Nuance, where he was CFO and then led its business transformation office. He knows our business extremely well, first, in his role leading the successful Cerence spin from Nuance and then for the last 2.5 years as a very active director on our Board. It's my pleasure to welcome Tom an operational role and have him join us today. You will hear from him in a moment. But before I turn it over, I will share a few highlights and observations. At the beginning of the call, I mentioned our strong first half bookings performance. At $448 million, our first half bookings were up 53% compared to the same period last year. For additional perspective on the achievement, bookings for our entire fiscal year 2021 were at $590 million. Our continued success in accounts and markets is due to our strong competitive position in the automotive industry and our ability to reach beyond traditional automotive markets. Regarding our competitive position, 80% of our first half bookings were with existing customers, including a significant expansion with an American OEM for its current and next-gen platforms. It also includes, we previously announced a significant contract, the largest in our history with a large European OEM that called us to help with their expansion program underway in Greater China. Aside from traditional automotive, we have also seen acceleration in newer areas. Of note, we secured several important wins with EV car companies, signing 5 new contracts, including 4 in China, the world's hottest EV market. These Chinese EV makers turn to Cerence to create a unique AI experience as they expand out of China into other regions. We are the only supplier with the portfolio and language coverage to support the aggressive plans and deliver the experience they want in their vehicles. Another prime example of our expansion is our growing success in trucking. A major European heavy truck supplier recently signed on for our Cerence Assistant offering. This new contract represents the fourth customer in this space. Our Cerence Drive product continues to attract new 2-wheeler customers. This offering combines our core AI innovation with new capabilities such as a group ride function, transforming the 2-wheeler experience as ridership grows worldwide. We added 4 new customers, including some of the top 2-wheeler manufacturers. And finally, as we mentioned on our last conference call, we won a new fitness customer, which falls under our new mobility market opportunities. Collectively, these wins and bookings are a strong sign for the business with new connected services now comprising more than 40% of our backlog. As a reminder, at the end of fiscal '21, we reported backlog of approximately $2.1 billion. And after such a solid first half of the fiscal year, I'm pleased that the pipeline for the second half remains robust. With our strength in the second quarter and attractive pipeline, we are now focused on the second half and several key priorities. First, we are deeply focused on accelerating design wins and new bookings momentum across the market we serve by leveraging our strong pipeline. These are the single biggest contributor to our future, and we plan to capitalize on every opportunity. Second, we remain intensely committed to delighting our customers by continuing to deliver high-quality products and implementations on schedule and on budget. We are intently focused on bringing several key customer programs to successful launches, which will position us for future success. And part of this, we expect a significant increase in professional services revenue for the second half of the year, which is another leading indicator for future business potential. Third, we are prioritizing and allocating funds to innovation and areas of our business that generate the highest return -- rates of return. And finally, we will continue advancing our strategy and operational plans in a manner that best positions the company to achieve long-term sustainable growth. And with that, I will now turn the call over to Tom to review the financial results of the quarter. Tom, please? Tom Beaudoin: Thank you, Stefan. As Stefan mentioned, I know the business in the company extremely well, from the role I played in separating the business from Nuance, and most recently, serving on the Cerence Board since the spin. I know firsthand the exciting opportunities ahead for the company and look forward to working with Stefan and the team to maximize the future growth potential of Cerence. I look forward to meeting all of you. I'll now review our performance for the quarter and then I'll provide guidance for our third quarter and review our full year guidance. Revenue came in at $86.3 million, slightly above the high end of our guidance due to a stronger-than-expected contribution from professional services. Our profitability metrics performed well as most of the key profitability metrics came in at the midpoint of guidance. Non-GAAP gross margin was 74.7%. Non-GAAP operating margin was 25.2%. Adjusted EBITDA was $24 million or 27.9% margin, and non-GAAP earnings per share were $0.33. During the quarter, we generated approximately $2 million of cash flow from operations, and our balance sheet remains strong with total cash and marketable securities of approximately $146 million. Now let's review a detailed breakdown of our revenue. We have added some additional insight into the breakout of our fixed licenses, separating the prepay fixed contracts from the minimum commitment contracts. As previously communicated, revenue recognition for each is the same. The full value of the contract is taken at the time of signing and delivery. The difference between the 2 types of contracts is mainly the timing of cash collection. For prepaid contracts, the cash is typically paid upfront, and for our minimum commitment contract, the cash per license is paid at the time of auto production. Our variable license revenue was down 46% from the same quarter last year due to the combined effects of lower auto production and consumption of fixed license contracts. Connected Services revenue was down 8% from last year, driven primarily by the drop-off of revenue from our legacy contract, which was expected and previously communicated as well as lower auto production. Our new Connected Services revenue was down because of expiring contracts for older technology, and therefore, not candidates for renewal. For the full fiscal year, these expiring contracts create about a $5 million headwind to Connected Services growth. We don't expect this to negatively affect growth next fiscal year. Finally, our professional services revenue was up 25% year-over-year and 6% quarter-over-quarter. Growth in professional services is a key indicator of future license and connected services revenue as the pro services team are the individuals directly interfacing with customers to customize and implement Cerence technology in our customers' next-generation platforms. Moving into our guidance for Q3. Our third quarter guidance detailed on this slide takes into consideration the cause and uncertainties of the semiconductor device shortages, factory shutdowns and the effects of the Ukraine war that are affecting auto production. However, as we have seen in the past, the impact from these events on our business can shift quickly. Collectively, our Q3 guidance represents continuing positive trends in the business over Q2. We are affirming guidance for the full fiscal year. So in summary, we had another quarter of good financial performance. While we remain cautious in the near term due to the factors impacting the auto industry, as outlined above, our long-term prospects remain upbeat. Our focus is on innovation and growth, while at the same time, driving a profitable business model that will benefit the company and our shareholders well into the future. This concludes our prepared remarks, and now we will open the call for questions. Thank you. Operator: And your first question comes from David Kelley, Jefferies. David Kelley: Maybe I wanted to dig into the revenue drivers for the quarter a bit, and maybe starting with the Connected Services, specifically the subscription pullback. Clearly, it's been a tough couple of years for underlying auto production, so we think about the compounding impact there. But at the same time, there's been a mix shift to premium and luxury and we've seen kind of ongoing vehicle technology adoption. So can you talk about maybe what you're seeing in the Connected Services subscription business, the drivers of that decline year-over-year? Tom Beaudoin: Maybe, first of all, let me just make sure we all understand the financials, and then I think Stefan can talk a little bit about the business parameters. So we have provided a little further breakout of Connected Services. So we, I think, historically have separated the new Connected Services from the legacy contract that we had talked about previously. So I think probably people understand the trends in the legacy. With respect to the new Connected Services, we've split out the 2 elements. And one of the factors affecting that is that we have these old contracts that are Cerence pre-spin, some of them were through acquisitions at Nuance, that are creating this $5 million headwind for FY '22. And as I noted, we don't expect that to continue into next year. Stefan Ortmanns: Okay. Thanks, Tom, and good morning, David. So let me also add a few more words to Connected Services. As you have heard, we had a fantastic first half of bookings, and we had also signed with one of the European OEMs the largest contract in our history. It is already to connected. And as we have mentioned also, new Connected Services comprising now more than 40% of the total backlog. At the end of last year, we had 2 at $1 billion. So we are well positioned also for new Connected Services. We see a lot of traction also in our new products with respect to Connected Services, right? But overall, I think it depends heavily also on the recovery of the auto production, and yes, we are well positioned here especially on connected. David Kelley: Okay. Got it. That's helpful. And then you noted the ongoing consumption of the fixed license contracts. Can you give us a bit more color on the impact of that headwind in the quarter? And maybe how you're thinking about the ongoing impact here into the back half of the year? Stefan Ortmanns: Yes. Let me go first, and then I will also ask Tom for his view. I think it's a long-standing practice in our business, and when looking back over the last couple of years, the range for fixed licenses have been within 15% to 20% of the total revenue over the last couple of years, yes? Now we saw for the first half of the fiscal year, a tick up of to 25%, yes? And based on recent customer request, we expect that the trend will continue for the second half of the year. Now in some regions and also for some of our customer, it's a common practice. They actually prefer these types of contracts, and we all know that some of the first tier supplier are under tremendous pressure. So the benefit to them is cost savings, especially given their raising material costs. The benefits to us are, one, we are winning in a highly competitive environment; two, we are cementing our relationships with our customers, right; and three, we have huge upsell potential during the course of a specific program. And for example, this was also reflected in our strong first half bookings year. Tom Beaudoin: Yes. So I have been involved with the auto and mobility business, which was a very large division within Nuance since 2008. And this has been a buying pattern and a contracting patent with, as Stefan noted, particularly some regional customers but also some customers that have been doing this practice for a very long time. And I think a lot of the factors contributed from what I can see to that tick up that Stefan talked about from about 15% to 20% to up to 25%. All the auto manufacturers are under pressure to manage costs, particularly in this environment. They all have very strong purchasing organizations. I would note that the discounts that we provide on the minimum commitments is quite smaller than the discounts we provide on the prepaids. Now of course, it does have a different cash flow impact, but I would point out the discounts are quite lower than on the prepaid. Operator: And your next question comes from Raji Gill from Needham. Raji Gill: Just a follow-up on the fixed contracts. I think in the past, it seemed like that customers were entering fixed pay contracts because they're getting more price discounts because they wanted to drive down the cost. And I just want to clarify. So the -- you're expecting 6 contracts to kind of maintain that higher level at 25% of sales for the second half of the fiscal year so that would be indicative that the customers are continuing to kind of enter into these type of contracts in order to benefit from the price discounts. That customer behavior seems to be continuing. Is that a fair assessment? Tom Beaudoin: Yes. That's what we're seeing in the pipeline from some of, as I said, customers that we've seen prefer this contractual way. And I think our sales team has done a good job of maybe trying to minimize the discounts there. And we are in a strong capital position. So we do get that cash over time. Raji Gill: So you mentioned that there was -- again trying to see the difference between the fixed contract versus the prepay contract. You said there was a change in the discount. Maybe you can kind of elaborate a little bit on that because, I mean, I think the challenge will be how much of a discount are you offering customers to get these contracts and then this is kind of more indicative of a longer-term trend? And did that impact the gross margins and the pricing as you go forward? Tom Beaudoin: Yes. Just to be clear, and we've broken this out on the information provided, what we broke out this time which is new is the 2 types of contracts that are both under fixed contracts: that prepaves, which is a cash more upfront; and then the minimum commitments, where the cash is as the autos are produced. The prepaids have historically had a higher discount. The minimum commitments have a fairly significantly lower discount. It still benefits the customers. And as we said, we've ticked up a little as an overall percentage of revenue. We expect that to continue in the second half. And then, of course, we'll be assessing that as we develop our long-range plan over the next couple of months, few months. Raji Gill: I see. Okay. And then on the Connected Services portion of the business, the legacy is dropping to kind of $8 million. So is that kind of the range we should be kind of forecasting on a go-forward basis? And then the -- you mentioned that despite the $5 million headwind in overall connected, that you still expect to grow in -- sorry, the new connected revenue. Can you just kind of talk about what's driving that growth above and beyond that $5 million headwind? Tom Beaudoin: Yes. So let me just make sure we're clear on the elements of the Connected Services. So as you pointed out, there is that legacy contract. It's on an amortization schedule, so it's highly predictable. It has 11 quarters left. It's a contract that goes back to 2013 and that will run out. In the new subscription Connected Services, there's the $5 million headwind based on -- these are very old technology contracts. Some of them came through acquisitions done when auto was part of Nuance. Those technologies are not renewable. The customers may have moved on to a different Cerence technology platform, but of course, that wouldn't be classified as a renewal. That $5 million headwind will not exist in 2023. Raji Gill: Right, because all the contracts will be on the new technology. Tom Beaudoin: Yes, correct. And I'll let Stefan talk about the -- Stefan Ortmanns: And here, we see also some strong revenue growth vectors here, right, also with respect to new products and program expansion also original expansion, right, just referring again to the biggest deal in our history. That was for China with all various flavors for connected services. So overall, I think our new applications, our new products, what we also showed at CES are now taking off right and we see a good traction here and this keeps us confident that we will see also a growth in new Connected Services. Raji Gill: And just last question, I’ll step back in the queue. Connected Services was 20.6 – 26.7. So you mentioned that’s going to ramp in the second half. Can you give us kind of a sense of kind of what you’re thinking about in terms of magnitude? A –Tom Beaudoin: Well, we don’t guide specifically on the elements of the revenue, yes. Operator: And your next question is from Luke Junk of Baird. Luke Junk: I want to start with the guidance. So I guess, you maintain the full year guidance, but I'm wondering if you're guiding within the range to any extent? Or maybe more importantly, if I look at implied guidance for the fourth quarter and at the midpoint, it does imply a fairly significant ramp. And I just wanted to better understand what is going on specifically later in the year from a fundamental standpoint during that assumption. Tom Beaudoin: So we had strong bookings, as we noted in the first half. We have the strong PS which will equate to implementations of programs, which will help to drive revenue. We -- through those strong bookings, we'll also see higher professional services. So it's all of those elements that we believe will allow us to achieve the guidance that we put out. Stefan Ortmanns: And maybe one additional comment. So Thomas, absolutely right. We see a strong -- we see -- we predict the strong professional services performance for the second of the fiscal year. And equally important, what we also mentioned in the last earnings call, right, that we are working on some specialty deals. Luke Junk: Okay. And then switching gears. I wanted to ask little bigger picture question for you, Stefan. The announcement of the 4 2-wheeler awards during the first half, can you just reset us on where that opportunity stands bigger picture for the company? Stefan Ortmanns: For the 2-wheelers, yes. So I think as we launched this program 1.5 years ago, right, so we see a lot of traction here on the 2-wheeler side, especially in Asia Pacific. We won also 1 of the top 2-wheeler manufacturers. So on a broader picture, I mean, also the 2-wheeler is a very attractive market to us. roughly 50 million to 60 million 2-wheelers on a yearly basis, right? And we are leveraging the core AI stack, and adding on an application level new features on it, what we just described in the call here. So overall, that's an important market for us, right? And we see a lot of potential for us in the future. And it's all a hybrid solution, meaning edge and connected cloud services. Operator: A question from Jeffrey Van Rhee of Craig Hallum. Jeffrey Van Rhee : Sure. I've got a couple. First, on the prepaid. I think the original guide last quarter given was 60 for the year. Obviously, you're 45 so far. But now you're guiding to 75 to 100. I get the explanation of the 2 different models. My question is what's changed since the last guide until now? Stefan Ortmanns: So the biggest change is actually that we are seeing a lot of inquiries from customers over the last couple of weeks, right, especially from the Asia region. Jeffrey Van Rhee : Okay. Can you talk to connected systems and particular usage of connected? You mentioned the legacy connected has got some headwinds and aren't going to renew. But you've got some more modern connected systems out there, and I'm sure you're watching the usage very closely. What observations have you got about absolute levels of usage and trends in usage? Stefan Ortmanns: So when comparing the usage in a car, right, and we're doing this with our analytics tools, right, and also with some of the OEMs, right? You can compare the usage in a car, for example, with an Amazon Echo solution, right? Same number of transactions. We see a tremendous growth in monthly active users. So overall, it's picking up, right? On the other hand, of course, we saw also a short decline in China, some cities were shut down for COVID. But overall, it's trending into the right direction. Jeffrey Van Rhee : Okay. And then just backing up a little bit to a very high level. In terms of the revolving door on the leadership front, I mean, at this point, we've got 2 CEOs and 3 CFOs in 5 months. What are the learnings here? I mean is the due diligence process broken? And how do you avoid that kind of turnover in the future? Stefan Ortmanns: I think we are working closely with the Board here. I think the process, in my view, is not broken, yes? So -- but I mean, when referring to the CFO, I think -- let me explain it in a different way, right? So Mark Gallenberger retirement in March was planned. And Mark is now serving in a consulting role until November of this calendar year, yes? And then we had a short-term interim financial consultant during the CFO search, right? And then after an extensive search, we identified Marc Montagner, but unfortunately, it wasn't a good fit. And I'm really excited and feel strongly that Tom is a natural fit for the CFO position, right? He brings in all the experience. I'm working with Tom for more than 14 years now, right? He was quite active as a Board member. And you could also hear from the call now, he knows everything. He is well connected. He knows the automotive, the mobility space, right? He is quite familiar with software, right? He -- in his role when he was running at Nuance, the Chief Transformation Office, right, he was fully responsible from the spin of Cerence from Nuance, right? And he would put everything together, including G&A and the policies. Jeffrey Van Rhee : Okay. Yes. I mean I'm certainly familiar with Tom. I've known him for , a long time. So no disagreements there. I just think when you get this many turns, the explanation sort of start to fade in relevance. It seems to point to process issues. I'll leave it there. One other brief question in terms of the bookings. You mentioned pretty strong connected bookings. I'm just curious what you've learned on implementations where you're coexisting, right, the cognitive arbitration argument. What are you seeing in win rates and connected? What are you seeing in win rates when you coexist? And then what is that leading to in pricing, in particular, when you're coexisting? Stefan Ortmanns: So I think we are uniquely positioned here for 3 reasons. One, I think the OEMs or most of the OEMs, they want their own branded experience. Two, most of the OEMs want to own the data for potential data monetization afterwards, right? And we provide an OEM-friendly platform with global multi-assistant capabilities, right? And that's a big advantage of our solutions. We have all the tools from simple to very interesting new technologies like just talk, and we are supporting the OEMs. And then the OEMs, they own the business flow and business logic. Operator: And your next question is from Mark Delaney of Goldman Sachs. Mark Delaney: First, I was hoping to understand the revenue trajectory in terms of revenue per vehicle -- increase in revenue per vehicle part of the company's long-term opportunity. You had a couple of big programs you booked that you spoke about. So maybe you can give us a sense about what kind of revenue per vehicle you're expecting when you look at a couple of these big new programs you've won and how those compare to what revenue per vehicle was with those customers on the prior contracts? Stefan Ortmanns: Yes. So we see also an uptick in our price per unit, so because we are adding more and more new applications to it. Just think about karaoke, think about browse, think about co-pilot, think about our new Cerence Assistant dce, right, which is actually a unique solution also not just for 4-wheelers, 2-wheelers but also for trucks, right, what we mentioned. And the more we can add on, right, of course, then we are going to increase also the unit price. And on the connected side, right, we are adding more and more new applications to it. It takes some time. We also discussed last earnings call, right. So the bookings to ship conversion takes what is a long-term game here, right? And also here, we are well positioned. So overall, I'm very confident with our future. Mark Delaney: Okay. That's helpful directional color. My second question is on consumption of these upfront license deals that are being struck. I think the company had talked about consumption of fixed license licenses sold in prior years was going to be in the mid-$70 million range this year. Maybe you could talk about what you expect consumption to be at this point? Has there been a change to that? But more broadly, when you think about the fixed licenses, you've sold ahead of auto production in prior years as well as your updated expectation for these licenses you're going to sell this year before out of production. When does that get consumed? Tom Beaudoin: No, we don't guide on the consumption levels. But as we said, this is a long-standing practice so there's been a flow to it. And we continue to make the assessment and the trade-offs on these particular deals. Operator: And I'm showing no further questions at this time. I would like to turn the call back over to the speakers for any further comments. Rich Yerganian : Thank you, Christie, and thank you for everyone for joining us on our call this morning, and we hope to see you or have a meeting with you at one of the upcoming conferences. Thank you, and have a good day. Operator: And this concludes today's conference call. Thank you for participating. You may now disconnect.
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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 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.

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.