Cerence Inc. (CRNC) on Q1 2021 Results - Earnings Call Transcript

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Cerence’s First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's call is being recorded. I would now like to hand the call over to Richard Yerganian, Vice President of Investor Relations for Cerence. Please go ahead. Richard Yerganian: Thank you, Michelle. Welcome to Cerence's First Quarter Fiscal Year 2021 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 the date hereof. 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. Sanjay Dhawan: Thank you, Rich. Fun to be live this time. So welcome to everyone on the call, and thank you for joining us to discuss our first quarter fiscal 2021 results. I'll first review our strong performance in Q1, followed by a summary of the key product introductions during the quarter. This will be followed by comments about the near-term business environment and update of our key performance indicators, and then I'll hand the call over to Mark to review the detailed financial results. After a record fiscal year in fiscal 2020, we are off to a fast start in fiscal 2021 as our initiatives for innovation and market expansions continue. In Q1, we again delivered record revenue of $95 million, representing 23% year-over-year growth. Our performance was driven by strong growth in our license, connected services, and in our professional services businesses. While revenue growth is an important metric for the Company, I'm extremely proud on how we drive the business to achieve profitable revenue growth. Our intense focus on this led to a non-GAAP gross margin of 75%, adjusted EBITDA of approximately $40 million or 42% margin, and non-GAAP EPS was a strong $0.59. Overall, our Q1 results surpassed expectations in every key financial metrics, and Mark will share the details later in the call. You may have seen our recent announcement further strengthening our professional services organization by hiring Sujal Shah to lead this group. Sujal comes to us from Harman and has extensive experience in the automotive space, and in particular, creating new service offerings that will lead to even more future growth opportunities in this part of our business. I want to welcome Sujal and wish him the best. Mark Gallenberger: Thank you, Sanjay. I'll first review the strong performance for the first quarter, and then I'll provide guidance for our second quarter and an update for the full year. Once again, our results came in stronger-than-expected leading us to another record revenue for the quarter. Revenue came in at $95 million, which is $5 million above the high end of our guidance and is a 23% increase from the same period last year. Our profitability metrics were very strong, and they all exceed the high end of our guidance range. Operator: Our first question comes from Joseph Spak with RBC Capital Markets. Your line is open. Joseph Spak: Thanks very much for the question. Sanjay, I just want to sort of, I guess, off the bat, talk about how you see the market here for evolving because I know nothing changes on your current programs or wins. But since the beginning of this year, we saw Amazon at CES talk about selling the underlying access to Alexa, to companies, including Stellantis. Ford moved to Android OS, and that obviously comes with Google Voice. And then on the earnings call, they talked about integrating Alexa. So I know in both of those instances, there's nothing that precludes Cerence being integrated. But it does seem like on the next gen, automakers might have more options going forward. So how do you view that development? And what is, in your view, the, if you will, like a killer feature that keeps Cerence with the automakers and potentially, more importantly, the customers using Cerence services? Sanjay Dhawan: Sure. So Joe, from my standpoint, nothing new here, we have said from day one, when we were formed as a company, that we always see big tech, multiple big tech to co-exist in the car. It would be a bad assumption to say that 22 hours of my life I spend outside the car, and I have a certain digital life. And then when I get into the car, it's a totally different digital life, which is separate. Doesn't work, right? From a user standpoint, you always want kind of seamless. And the second thing that we have always said also is that, the big tech ecosystem is not limited to one big tech company. And I would challenge anyone to think through their own digital life. And you'll get the answer that your digital life includes Amazon, includes Google, includes Apple, includes Microsoft, and so on. And so the big kind of reason for the co-exist is that we were purely with the OEMs to provide the big bet independent multi-big tech experience ecosystem bridges basically through voice, right? And so that remains kind of the key interesting thing. And the opportunities that you talked about and others basically where we -- if you look at our products like Connect, we're connecting to not just Apple IoT home ecosystems or Amazon or Google or Samsung Smart things or LG ThinQ or others, we do it all, right, basically, and we become kind of that bridge. Similarly, when you look at our Extend product, it's not only for Android, it's for Android, and it's for iOS, right? So that becomes kind of the interesting reason why the story becomes strong. Joseph Spak: I guess, my second question would just be on the guidance, and you mentioned the semi shortage and IHS is calling for the recovery in the second half, although it does seem like expectations there might be slipping a little bit. But you don't have the benefit of that December quarter that they're counting on in your guidance. So, I think it looks impressive here that you're able to, as you pointed out, Mark, raised the midpoint. So can you just walk through maybe the offset there, what you're seeing more organically that's giving you that confidence? Mark Gallenberger: Yes. So, I think the increasing penetration rates, we see that continuing that trend like in the past. And so that's not slowing down. So regardless of what's happening with short-term auto production, those penetration rates, not only on the embedded but also on the Connected, those rates are continuing to happen. So I think that gives us comfort that we are still growing above the auto SAAR. Last year, for example, we had a phenomenal year. We were well, well above auto production, which was down 19%, when our business was up about 9% year-over-year. This year, we are forecasting us to be higher as well above what's happening with auto production. But I think it really comes down to the technology and the increasing secular tailwind that we're enjoying in the auto space. Operator: Our next question comes from Raji Gill with Needham & Company. Your line is open. Rajvindra Gill: Yes. Congrats on excellent momentum in your business and in the marketplace. It's quite impressive. The growth that you're seeing in professional services, it's been kind of consistent and improving. Wondering how you think about that business line this year, but also in the future about growing that business, kind of what are the steps that you envision? I mean, along those lines, how do we think about the margins in that business? I know you talked about you would have been improving that. What are the drivers to improving the margins on the services line? Mark Gallenberger: Yes. Sure. I can start. And Sanjay, if you want to add some color. I'll start on the margin side. We are making improvements that we think are sustainable. And those improvements are really around shifting some of the actual activities that are being done into lower-cost locations, specifically in India and into China. And we think those improvements or those changes are going to help us improve the gross margins of our pro services, which we believe will be sustainable. And as I mentioned earlier, we do plan to update our longer-term target model with some improved margin assumption for the pro services business in addition to the Connected. We just want to give us a little bit more time to make sure that the new business model proves itself out before we reset expectations on those assumptions. And I think Sanjay might want to talk a little bit about the revenue, please? Sanjay Dhawan: Yes. So Raji, the main reason for our PS business is to strongly support our product integration into our customers' products. So, we stay very focused on that. And those integrations are -- exist in the car and also in the cloud. And we continue to kind of expand our PS in a footprint as well around all of that stuff. But remember, our core focus is our product business. Our license, the SaaS cloud services and so on and so forth. So while I see PS contributing strongly, and I'm very happy for that, and I'm very proud of the PS team to improving the gross margins and so on and so forth and also expanding as well because the car is getting more and more digital. So, there are more and more integrations needed with not just voice. The interesting thing about voice and conversational AI is, it's touching every part of the connected car. And so we do get involved in kind of various different integrations, including with vision and other new technologies which are coming into the car and other new sensors, which are coming into the card. And we'll continue to do that. And again, like I said, the opportunities are huge in PS, but we stay very focused on kind of making sure that the PS is very focused on our core -- supporting our core product integrations. Rajvindra Gill: And Mark, there was a 39% sequential drop in fixed prepay. Obviously, that business is lumpy. Wondering how you're thinking about prepay this year? Mark Gallenberger: Yes. So prepays can be lumpy. It's more concentrated. So, as we've seen in the past, they can go up and down and so forth. Last year, we did about $54 million in prepays, and we do expect prepays to be down this year. Historically, we've been in that range of low 40s to low 50s and I think we're going to stay in that range. So last year, we were at the higher end of that range. This year, I would estimate we'll probably be around in the middle of that range. And so, that's where we see it trending this year. Rajvindra Gill: And last question, Sanjay. How do you think about increasing ASP growth for your services? And you're obviously providing a tremendous amount of value to the OEM. You enable a myriad of applications. Yet, the ASPs are still fairly low compared to other services in the business -- other applications that are being offered in the vehicle. So, I'm wondering what are the steps that you're taking to improve the ASPs and when do you think we'll see that improvement? Sanjay Dhawan: So Raji, the core business model was set in a certain given way that the Company had -- when I first stepped in as the CEO about almost 15 months back now, right? And what we are doing very systematically is to enhance that core business model. Overnight, we cannot change that core business model because that's been in existence for many years, and OEMs are used to buying in a certain way. The core to our increasing the ASP strategy is kind of new products and new innovations. And I cannot be more proud of how our product management and R&D teams have executed over the last year. It was -- I hope you had seen the Cerence in Motion event, which was -- we brought all of our kind of new product innovations out and these are not just product announcements. As we mentioned, we're getting -- we already have multiple design wins on these, which will show up as kind of increased ASP and increased revenue in the coming quarters and years, basically. So, the cycle is slower given the way auto works, right? But having said that, we're trying very hard to bring in kind of our apps business online to contribute revenue earlier, right, and faster, we're making progress, and we're working very hard for it. Operator: Our next question comes from Mark Delaney with Goldman Sachs. Your line is open. Mark Delaney: I was hoping first to follow up about the co-existence with big tech companies and the Company talked about seeing good evidence of that. But I was hoping you could elaborate a bit more and talk about how you're seeing your content per vehicle trend when you are in one of those co-existence types as opposed to being more of a standalone technology? I think the question is about what sort of price you can get for your technology, if there's other services also being offered at the card? I realize the Company is doing a lot of new technologies and those are additional monetization opportunities. So if you could help investors short those out, perhaps some examples would be helpful? Sanjay Dhawan: Sure. So, we have not seen any major swings from a co-existence standpoint. And Mark, you can jump after me as well, I'm just thinking loud here, basically looking at almost dozen cars or so that we co-exist with a big tech or not. So, we've been able to kind of maintain our pricing position with the value-added by us and then buy our products. And then kind of the strategy, Mark, is to obviously expand with all the new cloud services and apps and other offerings, basically. There are some new discussions happening, a couple of OEMS, which are also from a co-existence standpoint. And those are a little too early for me to comment on kind of what the pricing impact would be. Obviously, our goal would be to kind of maintain and enhance, right, of the core tech and also the expanded products and technologies. Mark, anything you want to add, please? Mark Gallenberger: No, I think that's correct. Yes. Yes. I think that's accurate depiction, Sanjay. Mark Delaney: That's helpful. Thank you for you the comment there. And then for my second question, I wanted to better understand the growth in billings per car, which was very nice at the 20% growth. But you mentioned you changed the calculation about how you're coming up with that figure to be a little bit of a different time period. So would you be able to provide us with how that metric would have looked last quarter, if you'd reported under this current methodology? Mark Gallenberger: Yes, we can certainly do that. The only real difference is that last year, we were using fiscal year-to-date versus the prior fiscal year or fiscal year '19. And the reason why we did that is, we didn't have the specific data back in fiscal year '18. So, we could only use fiscal year-to-date information and comparing it to fiscal year '19. Now that we're into the new fiscal year, we can use a trailing 12-month versus the prior trailing 12-month period. And so, now we can compare it that way. But -- and so yes, we can -- last quarter was exactly the same answer because it was the full fiscal year. So, we use fiscal year '20 versus fiscal year '19. So, the actual measurement or the result would be exactly the same as what we reported last quarter because it was trailing 12 months versus the prior year trailing 12 months. Operator: Our next question comes from Chris McNally with Evercore. Your line is open. Chris McNally: Maybe if two questions. One to Mark on just the model and then Sanjay, we could talk a little bit about the long term. I guess, Mark, what we're trying to figure out is you used to have that great rule of thumb of 10% to 15% growth above production. It seems like with production moving around and obviously, such a different growth rate in connected and professional that may not be the case anymore. Is there any way that we could think about any rule of thumb for the outgrowth going forward? Even if it's on an annual basis, just something rule of thumb because, obviously, you're going to grow a lot above, but it seems like it moves around year-to-year. So, I just would love if you guys have thought anything like that through? Sanjay Dhawan: Yes. That's a tough one. It does move around. Last year, we had 28% or 28-point spread, so well above the 10% to 15%. It's almost like looking at trends, right? And if you look at the last four or five years, we've been consistently above, we still think that's the case going forward because the penetration rates are not slowing. I think last year, because we were so far above, it just makes this year a little bit tougher for compares, right? So we're probably a little bit under that spread, but still above what auto production is going to be doing, clearly still better than that. But maybe not quite as high as what we've seen historically. I think it's just going to ebb and flow. There's a few things to consider, right? One is prepays, we're planning to be lower this year. So that's going to have to be reflected in that spread. The legacy -- our legacy connected business, that's a flattening effect this year. As we all know, that program is coming to an end. So, we're not projecting any year-over-year growth for fiscal year '21 for that business versus fiscal year '20, it's flat. So that has an impact as well. So, it's hard to give you a specific rule of thumb, if you will, because it's a combination of many different factors that will ebb and flow. But I think the underlying fundamentals of the secular tailwinds, that remains intact. That's where the penetration rates are continuing for the embedded and the penetration rates are continuing for the connected. And so that's what I would suggest you kind of focus on is those penetration rates. Chris McNally: No, that makes sense. And I think going forward, we almost sort of have to think about the license business as really the only business that we can do the rule of thumb, and even there, we'll probably have to sort of take into account the year-over-year compares for the prepaid, so that make safe. And then Sanjay, I know you're going to update later in the year on 2024. I think we're all looking forward to that as it seems things are moving in the right direction. Could we maybe just focus on sort of the longest term aspect of the 2024 guide, that $75 million that you had given, looking at these future drivers, things like Car Life and Cerence Pay? Could you just talk about your confidence in that one sort of line item? Do we have enough visibility out so that we booked that much business out to 2024 or the pipeline looks extremely encouraging? Just curious, given the long-term nature and the potential there, how much visibility do we have now versus sort of we still need things to unfold over the next couple of years? Sanjay Dhawan: Yes. So in the last quarter, we booked two deals, which will contribute revenue to that line. So, these are real bookings. We don't break them down from a number standpoint, but there are significant bookings, right? So that was good. At least it started now, right? This current quarter, we have a strong pipeline and I'm expecting more than two deals that will be booked this current quarter that will also contribute towards that revenue line. We expect small revenues in this year. This year, we are only assuming very little contribution from that. But then obviously, kind of as more and more cars ship with the apps and the new connected services, the revenue goes up. So as of now, I'm feeling confident about the progress. Chris, it is hard work. We're working extremely hard and very focused to kind of take -- work step-by-step with every OEM to kind of bring these new capabilities in. Operator: Our next question comes from David Kelley with Jefferies. Your line is open. David Kelley: Maybe just wanted to start with the Stellantis announcement, can you give us a bit more color on the technology relationship there? And then maybe how you're thinking about the size of that incremental opportunity? Sanjay Dhawan: Sure. So, Mark, I'll start and maybe you can jump in on the -- to answer the size and all that. So, the opportunity was basically with the official statement that we've got clearance to mention just a few hours back was Cerence has extended its partnership agreement to the cars of next-generation of Stellantis. I'm reading it from the e-mail, from the accounts team. So that's the official statement that we're allowed to say at this stage. It's their next-gen platform. I can't go into the details of it because, obviously, it's for them to announce, right? And so that's that having a little bit difficulties, David, to kind of go into more specifics, I want to, but I can't, right? But we're extremely proud and happy to be brought in because this was one platform that we had before Cerence was formed. When Cerence was still part of Nuance auto, we had lost it to a competitor, and we're just honored and extremely proud to be brought back in, in the next gen. Mark, I don't think so we can talk much about price, right? Mark Gallenberger: Yes. Yes. Unfortunately, we can't get specific on any one particular customer unless we get their specific approval or okay. And at this point, we don't. With that said, though, it's a win that we feel is notable. We feel that because it was a win back, like in and of itself is notable. And just given that I think, given the size of this customer, I think you could sort of make an assumption that it's a notable deal that we feel like it was worth mentioning. David Kelley: Okay. That's all fair. I thought I'd give it a shot. And this may be switching gears to the Xevo announcement. You referenced the quicker bookings to revenue cycle. Just curious, maybe high level, if you could walk us through, again, you don't have to get into specifics here, but how the revenue structure of that business work? I'd assume it's more of a transaction basis. But just curious to get some color around that would be great? Mark Gallenberger: Yes. I can start, and Sanjay, I'm not sure if you want to fill in any blanks. But it's like you said, it's like a revenue-sharing or transaction-based approach, and it would get funneled through the Xevo platform. And so our arrangement would be with Xevo. And so, they would be managing those relationships. They would be doing the administrative work, what have you. And then, as those transactions occur out there in the marketplace, we would get a portion of our piece of it. And so, it's a revenue-sharing type of arrangement based upon transactions. And then we would get paid by -- paid from -- by Xevo on that transaction. Operator: Our next question comes from Jeff Van Rhee with Craig-Hallum. Your line is open. Jeff Van Rhee: Just outstanding execution here, just continuing up really solid performance. A couple for me, I know you don't quantify as it relates to the bookings or you do periodically. But can you give us some color even quantitatively about the bookings this quarter? Any observations, I think, about the size, scope, sort of different twists to what you booked or what you thought you'd book? And along those same lines, same thing on pipeline. Sort of talk about the pipeline composition, obviously, you have a lot of new products suspect you'll have some commentary about some of these new products you already have starting to fill the pipe. But any other observations, edge, connected, places you're succeeding, things that are lagging, maybe those two critical pieces, maybe a bit more color? Sanjay Dhawan: Mark? Mark Gallenberger: Yes. So yes, you're right about bookings. We don't do it quarterly. And we mentioned this, I think, last year. And as a reminder for everybody, we give midyear update for our bookings and fiscal year-end update to our bookings and our backlog. So, we're going to stick to that because bookings can be lumpy from one quarter to the next, and we think that's the right practice. But not do it once a year, but do it twice a year. And so with that said, I think we'll defer our commentary on bookings until our next earnings call. However, pipeline remains strong as we continue to expand our product offerings and also into adjacent markets. And that is naturally expanding the number of opportunities that we have going into our pipeline. And so, that's the color I can provide at this point. Jeff Van Rhee: Maybe win rates on connected deals. Can you comment on that? Mark Gallenberger: Yes. I think the win rates are unchanged. We are not seeing any difference from what we've seen historically. Jeff Van Rhee: Fair enough. Then just last one on the PS side, obviously, a very good number there and very good leading indicator for what's really going on out there. From a utilization standpoint, where are you with respect to the capacity organization? Mark Gallenberger: Sanjay, I don't have that number handy. I'm sure if you have it? Sanjay Dhawan: Yes, we're about running close to 80% utilization. So utilization has defined billed to billable and billed to available. These are the two numbers we track, Jeff, right? So bill to billable and bill to available, and we are in our 80s. Jeff Van Rhee: There is... Sanjay Dhawan: By the way, a few more percentage points that they can improve right? So with the appointment of Sujal, who's our new PS Head, he comes from Harman's PS organization and understands this extremely well. So, the trick of improving the gross margin, there are two things: number one, to look at the COGS, so basically kind of use as much offshore as possible in the right mix of offshore and onshore. So improve the COGS. And the second trick is to improve the utilization. So, those are the two things that he's focused on. Jeff Van Rhee: Okay. One last brief one, if I could, COVID. What are your assumptions now? I know you mentioned some cost return clearly when you come back to more normalized environment. What are the assumptions in the model with respect to coming back? What magnitude of sort of back in the office do you ultimately expect and any thoughts on timing? Mark Gallenberger: Yes. So, we did have some significant cost savings last year. We're starting to bring those expenses back in. I think for Q1, we were a little bit behind our hiring plan. So that was part of the benefit in Q1 as it relates to the margins. You're going to see more incremental of those expenses coming in, in Q2. Probably about the same magnitude in Q3 and then things are going to start to level off as we get into Q4, probably still going up, but not at the same rate. So by the time we're finished with this fiscal year, I would expect all of those COVID savings that we took last year to kind of find their way back into the P&L, along with the removal of the hiring freeze, which was really a cost avoidance that we had last year. And so, we will net-net have higher headcount relative to last year because we unfroze that hiring freeze. However, we did say that on the gross margin line, connected and pro services, some of those expenses, we think, are not going to be coming back just because we're making some sustainable improvements. And we'll be giving you an update to that long-term model in the coming months. Sanjay Dhawan: Yes, Jeff, but I just want to add one thing that -- I'm just extremely proud of our team of how we're executing on profitability. I tried to say that in my comments as well. I mean, there is -- you can compare us to many, many other companies and kind of delivering 42% EBITDA this year and then increasing the guidance for the whole year. Just very proud that, we're able to deliver profitable growth, that's something that Mark believes and I believe in. And we're just proud that our team is able to deliver to that. Operator: Our next question comes from Michael Filatov with Berenberg Capital Markets. Your line is open. Michael Filatov: Just one quick one, really. I believe, originally, your 2024 outlook wasn't baking in much in terms of renewals on the connected services side. So, I was just wondering if you have sort of any better visibility into sort of the expected renewal rates on the connected side and sort of where those renewals stand today? And maybe you could remind us of when both of those renewals will start to happen? Mark Gallenberger: Yes. So, you're right about our model. We were conservative, and we didn't factor in any renewals in our 2024 model, mainly because we just don't have any data points. So far, we still have that one that we announced last quarter. So that's really the only update that we've got, which we provided last quarter. I think as we get more and more, over the next year or so, we'll get more comfortable as to what those renewal rates will look like. But I think with that said, the consumer is wanting the cars to be connected. So I think just the demand and the adoption rates, that KPI that you saw in our slide deck, as those trends continue, I think the consumers are ultimately going to be pushing for that connected car and for that connectivity to continue. So, I think that should bode well for us in terms of the future ability for these renewals to come to fruition. Sanjay Dhawan: Michael, I just completely coincidence. I drive at 2017 BMW. And this weekend, I did -- personally, I paid BMW $225 for a package to -- connected services package per year to provide connectivity into my car, right? This is this weekend. So, I can share by transaction with you. And if you go to connected drive.bmw.usa.com, you will basically see kind of the packages that they have for various different connected services, and I bought the -- there's a $50 one, there's, I think, $150, and then there's a $225. So, I bought the $225 package because the connectivity in my car was -- had expired as part of the new car purchase, right? And it's a yearly subscription. Michael Filatov: I appreciate. That was great color. And I know you provided some of the moving pieces around pro services revenue and some of that was pulled forward into Q1. But maybe if you can talk about sort of the growth expectations for new connected versus the variable revenue and edge, what's really driving the growth in the updated midpoint of your fiscal year guidance, that should be helpful? Thank you. Mark Gallenberger: Yes. So, the new connective, we see that continuing. The growth trends there continue to be good. And in pro services, we had a very, very strong year last year. And year-over-year, it was up 55%. Part of that was driven by an acceleration of some PS revenue into Q1. And so, I would expect for Q2, the PS revenues to be down because of that, and that's been reflected in the guidance that we had given. But I think year-over-year, PS should be up as well. And so, I think on all fronts, whether it's the license business, the connected, the new connected business as well as our PS business, all of those businesses, we expect all of them to be up year-over-year. And so, all that's been factored into our guidance. We haven't gotten more granular on the specific revenue streams. But at the corporate level, that's how we kind of build up to our total guidance for the year being plus 12% to 15% year-over-year. And each one of those individual business lines we expect to be up as well. Operator: Our next question comes from Dan Ives with Wedbush Securities. Your line is open. Strecker Backe: This is Strecker on for Dan. So with just the recent GM headlines in electronic vehicles and then just the massive EV push overall, can you, Sanjay, talk about how that just plays into the Cerence growth story potentially over the next couple of years? Thank you. Sanjay Dhawan: Yes. So as you know, we have announced many, many GM -- many, many EV partnerships over the last many quarters, right? And from our standpoint, the core assumption in the thesis of what we do is that the car is getting more digital, which basically means it's getting more connected, more electric, more autonomous, more shared. And the user interaction using AI is going to play more and more important role. That's the core thesis behind Cerence. And as you saw in my slide that I presented to you at Cerence in Motion and also in the earnings today, we are very focused on Driver AI, Cabin AI, Road AI, right? That's our focus because our core assumption is that the car is getting more digital and connected and electric. And with that, basically, AI is going to play a very important role in the driver interactions, in the cabin interactions, in the road interactions. And what we want to do is basically be a premier company, focused on providing the AI platforms for that. That's our core thesis. Operator: There are no further questions. I'd like to turn the call back over to Rich Yerganian for any closing remarks. Richard Yerganian: Thank you very much, and thank you for joining us on the call this morning, and we hope to see you at one of our upcoming conferences over the next few weeks. Thank you, and have a good day. Sanjay Dhawan: Thank you. Operator: Ladies and gentlemen, this does conclude the conference. You may now disconnect. Everyone, have a great day.
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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.