Cerence(US:CRNC)2025-08-06 20:37PART I. FINANCIAL INFORMATION This section provides Cerence Inc.'s unaudited condensed consolidated financial statements and management's discussion and analysis Item 1. Condensed Consolidated Financial Statements (Unaudited) This section presents Cerence Inc.'s unaudited condensed consolidated financial statements and related notes for the three and nine months ended June 30, 2025 and 2024 Condensed Consolidated Statements of Operations This table summarizes Cerence Inc.'s revenues, gross profit, operating loss, net loss, and EPS for the specified periods | Metric (in millions) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Nine Months Ended June 30, 2025 | Nine Months Ended June 30, 2024 | | :-------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Total Revenues | $62.2 | $70.5 | $191.1 | $276.7 | | Gross Profit | $45.9 | $50.4 | $139.1 | $209.4 | | Loss from Operations | $(0.9) | $(354.9) | $(0.5) | $(560.7) | | Net Loss | $(2.7) | $(313.5) | $(5.4) | $(567.7) | | Basic EPS | $(0.06) | $(7.50) | $(0.12) | $(13.66) | | Diluted EPS | $(0.06) | $(7.50) | $(0.12) | $(13.66) | Condensed Consolidated Statements of Comprehensive (Loss) Income This table presents Cerence Inc.'s net loss, other comprehensive income (loss), and total comprehensive income (loss) | Metric (in millions) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Nine Months Ended June 30, 2025 | Nine Months Ended June 30, 2024 | | :-------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Net Loss | $(2.7) | $(313.5) | $(5.4) | $(567.7) | | Total Other Comprehensive Income (Loss) | $2.8 | $(1.8) | $(0.1) | $(0.6) | | Comprehensive Income (Loss) | $0.1 | $(315.4) | $(5.5) | $(568.3) | Condensed Consolidated Balance Sheets This table provides Cerence Inc.'s assets, liabilities, and stockholders' equity at June 30, 2025, and September 30, 2024 | Metric (in millions) | June 30, 2025 | September 30, 2024 | | :-------------------- | :------------ | :----------------- | | Total Current Assets | $190.1 | $265.5 | | Total Assets | $636.8 | $702.4 | | Total Current Liabilities | $107.6 | $216.8 | | Total Liabilities | $481.1 | $561.3 | | Total Stockholders' Equity | $155.7 | $141.1 | Consolidated Statements of Stockholders' Equity This table details changes in Cerence Inc.'s stockholders' equity, including common stock, additional paid-in capital, and accumulated deficit | Metric | June 30, 2025 | September 30, 2024 | | :-------------------- | :------------ | :----------------- | | Common Stock (Shares) | 43,264 | 41,924 | | Common Stock (Amount, in millions) | $0.4 | $0.4 | | Additional Paid-In Capital (in millions) | $1,108.4 | $1,088.3 | | Accumulated Deficit (in millions) | $(927.1) | $(921.7) | | Accumulated Other Comprehensive Loss (in millions) | $(26.0) | $(25.9) | | Total Stockholders' Equity (in millions) | $155.7 | $141.1 | Condensed Consolidated Statements of Cash Flows This table outlines Cerence Inc.'s cash flows from operating, investing, and financing activities for the specified periods | Metric (in millions) | Nine Months Ended June 30, 2025 | Nine Months Ended June 30, 2024 | | :-------------------- | :------------------------------ | :------------------------------ | | Net Cash Provided by Operating Activities | $48.4 | $11.1 | | Net Cash (Used in) Provided by Investing Activities | $(9.0) | $4.3 | | Net Cash (Used in) Provided by Financing Activities | $(87.4) | $0.1 | | Net Change in Cash and Cash Equivalents | $(47.8) | $14.4 | | Cash and Cash Equivalents at End of Period | $73.7 | $115.5 | Notes to Condensed Consolidated Financial Statements This section provides detailed explanatory notes supporting the condensed consolidated financial statements Note 1. Business Overview This note describes Cerence Inc.'s business as a global provider of AI-powered assistants for connected and autonomous vehicles - Cerence Inc. is a global provider of AI-powered assistants for connected and autonomous vehicles, serving major automobile OEMs and tier 1 suppliers worldwide. Revenue is primarily generated from software licenses, cloud-connected services, and professional services28 Note 2. Significant Accounting Policies This note outlines the significant accounting policies and estimates used in preparing the financial statements - The financial statements are prepared in accordance with GAAP for interim information, requiring management estimates for revenue recognition, credit losses, goodwill valuation, stock-based compensation, income taxes, leases, and convertible debt. Two customers accounted for 16.4% and 11.8% of accounts receivable at June 30, 202530323334 Allowance for Credit Losses (in millions) | Metric | Amount | | :------------------------ | :----- | | Balance as of Sep 30, 2024 | $1.6 | | Credit loss provision | $0.2 | | Write-offs, net of recoveries | $(1.7) | | Balance as of Jun 30, 2025 | $0.1 | - New accounting standards ASU 2023-07 (Segment Reporting), ASU 2023-09 (Income Tax Disclosures), and ASU 2024-03 (Income Statement Expense Disaggregation) are effective for fiscal years beginning after December 15, 2023, 2024, and 2026 respectively, and are currently being evaluated for their impact on financial statements and disclosures394041 Note 3. Revenue Recognition This note details Cerence Inc.'s revenue recognition policies, including sources, geographic distribution, and contract balances - Cerence primarily generates revenue from royalty-based software licenses, connected services, and professional services. Revenue is reported net of applicable sales and use taxes43 Revenues by Geographic Region (in millions) | Region | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Nine Months Ended June 30, 2025 | Nine Months Ended June 30, 2024 | | :------------------------------ | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | United States | $10.9 | $12.7 | $29.7 | $128.2 | | Other Americas | $0.2 | $0.3 | $0.9 | $0.5 | | Germany | $21.5 | $17.5 | $60.6 | $72.1 | | Other Europe, Middle East and Africa | $6.0 | $4.8 | $17.1 | $13.1 | | Japan | $6.4 | $25.0 | $30.8 | $35.2 | | Other Asia-Pacific | $17.3 | $10.1 | $52.1 | $27.7 | | Total revenues | $62.2 | $70.5 | $191.1 | $276.7 | - For the three months ended June 30, 2025, Korea and China contributed $8.0 million and $7.3 million, respectively, to revenues. For the nine months ended June 30, 2025, Korea contributed $26.2 million. Three customers accounted for 15.1%, 11.4%, and 11.1% of revenues for the three months ended June 30, 2025, and one customer accounted for 12.5% for the nine months ended June 30, 20254445 - Contract acquisition costs were $5.7 million at June 30, 2025, with amortization expense of $0.6 million for the three months and $1.8 million for the nine months ended June 30, 2025. Capitalized contract fulfillment costs are presented as Deferred costs474849 Contract Balances (in millions) | Metric | September 30, 2024 | June 30, 2025 | | :-------------------- | :----------------- | :------------ | | Contract Assets | $22.2 | $16.3 | | Deferred Revenue | $167.2 | $186.0 | Estimated Future Revenue from Remaining Performance Obligations (in millions) | Period | Amount | | :-------------------- | :----- | | Within One Year | $85.9 | | Two to Five Years | $82.9 | | Greater than Five Years | $55.8 | | Total Revenue | $224.5 | Note 4. Earnings Per Share This note provides details on the calculation of basic and diluted net loss per common share Net Loss Per Common Share | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Nine Months Ended June 30, 2025 | Nine Months Ended June 30, 2024 | | :------------------------------------ | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Net loss - basic and diluted (in millions) | $(2.7) | $(313.5) | $(5.4) | $(567.7) | | Weighted average common shares outstanding (in thousands) | 43,262 | 41,795 | 43,127 | 41,566 | | Basic and diluted EPS | $(0.06) | $(7.50) | $(0.12) | $(13.66) | Anti-Dilutive Potential Shares (in thousands) | Type | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Nine Months Ended June 30, 2025 | Nine Months Ended June 30, 2024 | | :-------------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Restricted stock unit awards | 669 | — | — | — | | Contingently issuable stock awards | — | — | 61 | 264 | | Conversion option of Notes | 6,270 | 7,495 | 6,822 | 7,495 | Note 5. Fair Value Measurements This note describes the categorization and valuation of financial assets and liabilities based on fair value inputs - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (observable inputs), and Level 3 (unobservable inputs)6061 Fair Value of Financial Assets (in millions) | Asset Type | Fair Value (June 30, 2025) | Cash and Cash Equivalents (June 30, 2025) | Marketable Securities (June 30, 2025) | Fair Value (September 30, 2024) | Cash and Cash Equivalents (September 30, 2024) | Marketable Securities (September 30, 2024) | | :-------------------- | :------------------------- | :---------------------------------------- | :------------------------------------ | :------------------------------ | :--------------------------------------------- | :----------------------------------------- | | Money market funds | $18.7 | $18.7 | $- | $77.8 | $77.8 | $- | | Government securities | $1.4 | $- | $1.4 | $4.0 | $- | $4.0 | | Time deposits | $6.9 | $6.9 | $- | $3.7 | $3.7 | $- | | Corporate bonds | $4.0 | $- | $4.0 | $5.0 | $- | $5.0 | | Debt securities | $3.2 | $- | $- | $3.1 | $- | $- | | Total assets | $34.2 | $25.5 | $5.5 | $93.5 | $81.5 | $9.0 | - The estimated fair value of long-term debt (Notes) was $162.4 million at June 30, 2025, down from $184.8 million at September 30, 2024, determined using Level 2 inputs. Equity securities in privately held companies are recognized at fair value (Level 2) or carried at cost less impairment for non-marketable investments66676869 Note 6. Derivative Financial Instruments This note discusses Cerence Inc.'s use of foreign exchange forward contracts to manage currency risk - Cerence uses foreign exchange forward contracts, not designated as hedges, to manage currency risk from international operations. The total notional amount of these contracts decreased from $59.1 million at September 30, 2024, to $24.2 million at June 30, 202570 Fair Value of Derivative Instruments (in millions) | Classification | June 30, 2025 | September 30, 2024 | | :------------------------------------ | :------------ | :----------------- | | Prepaid expenses and other current assets | $0.0 | $0.1 | | Other assets | $— | $0.1 | | Accrued expenses and other current liabilities | $1.2 | $0.7 | | Other liabilities | $0.1 | $0.2 | Income (Loss) from Foreign Currency Forward Contracts (in millions) | Period | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Nine Months Ended June 30, 2025 | Nine Months Ended June 30, 2024 | | :-------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Other income, net | $0.0 | $(0.4) | $(1.4) | $(0.5) | Note 7. Goodwill and Other Intangible Assets This note details changes in goodwill and intangible assets, including impairment charges and amortization - Cerence operates as a single reporting unit, with the CEO as the Chief Operating Decision Maker (CODM)727374 Changes in Goodwill Carrying Amount (in millions) | Metric | Amount | | :-------------------------- | :------- | | Balance as of Sep 30, 2024 | $296.9 | | Goodwill adjustment | $(3.8) | | Effect of foreign currency translation | $6.0 | | Balance as of Jun 30, 2025 | $299.1 | - Goodwill impairment charges of $357.1 million and $609.2 million were recorded for the three and nine months ended June 30, 2024, respectively, due to macroeconomic conditions and declines in stock price, which caused the carrying value of the reporting unit to exceed its fair value7677 Intangible Assets, Net (in millions) | Asset Class | Gross Carrying Amount (June 30, 2025) | Accumulated Amortization (June 30, 2025) | Net Carrying Amount (June 30, 2025) | Gross Carrying Amount (Sep 30, 2024) | Accumulated Amortization (Sep 30, 2024) | Net Carrying Amount (Sep 30, 2024) | Weighted Average Remaining Life (Years) (Sep 30, 2024) | | :-------------------- | :------------------------------------ | :--------------------------------------- | :---------------------------------- | :----------------------------------- | :---------------------------------------- | :--------------------------------- | :----------------------------------------------------- | | Customer relationships | $110.3 | $(110.3) | $— | $108.7 | $(107.0) | $1.7 | 0.5 | | Technology and patents | $90.6 | $(90.6) | $— | $90.0 | $(90.0) | $— | — | | Total | $200.8 | $(200.8) | $— | $198.7 | $(197.0) | $1.7 | | - Amortization expense for intangible assets was $0.6 million for both three-month periods and $1.7 million and $1.8 million for the nine-month periods ended June 30, 2025 and 2024, respectively. Acquired technology and patents were fully amortized by December 31, 2024, and customer relationships by June 30, 202579183 Note 8. Leases This note provides information on Cerence Inc.'s operating and finance leases, including terms, discount rates, and future payments Lease Term and Discount Rates | Metric | June 30, 2025 | September 30, 2024 | | :------------------------------------ | :------------ | :----------------- | | Weighted-average remaining lease term (months) - Operating leases | 47.3 | 46.0 | | Weighted-average remaining lease term (months) - Finance leases | 5.8 | 13.4 | | Weighted-average discount rate - Operating leases | 7.3% | 6.6% | | Weighted-average discount rate - Finance leases | 4.4% | 4.4% | Lease Expense (in millions) | Lease Type | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Nine Months Ended June 30, 2025 | Nine Months Ended June 30, 2024 | | :-------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Finance lease costs | $0.1 | $0.1 | $0.3 | $0.3 | | Operating lease cost | $2.0 | $1.6 | $4.8 | $4.8 | | Variable lease cost | $0.2 | $0.3 | $1.1 | $1.8 | | Sublease income | $(0.1) | $(0.1) | $(0.2) | $(0.2) | | Total lease cost | $2.2 | $1.9 | $6.0 | $6.8 | Future Minimum Lease Payments (in millions) as of June 30, 2025 | Year Ending September 30, | Operating Leases | Financing Leases | Total | | :------------------------ | :--------------- | :--------------- | :---- | | 2025 | $1.0 | $0.1 | $1.1 | | 2026 | $5.7 | $0.1 | $5.8 | | 2027 | $5.3 | $— | $5.3 | | 2028 | $4.5 | $— | $4.5 | | 2029 | $3.2 | $— | $3.2 | | Thereafter | $1.2 | $— | $1.2 | | Total future minimum lease payments | $21.0 | $0.2 | $21.1 | | Less effects of discounting | $(3.0) | $(0.0) | $(3.0) | | Total lease liabilities | $18.0 | $0.2 | $18.2 | | Reported as of June 30, 2025: | | | | | Short-term lease liabilities | $4.2 | $0.2 | $4.3 | | Long-term lease liabilities | $13.8 | $— | $13.8 | | Total lease liabilities | $18.0 | $0.2 | $18.2 | Note 9. Accrued Expenses and Other Liabilities This note details the components of Cerence Inc.'s accrued expenses and other current liabilities Accrued Expenses and Other Current Liabilities (in millions) | Category | June 30, 2025 | September 30, 2024 | | :-------------------------- | :------------ | :----------------- | | Compensation | $27.3 | $18.8 | | Professional fees | $5.0 | $4.0 | | Cost of revenue related liabilities | $3.1 | $2.9 | | Sales and other taxes payable | $1.9 | $3.7 | | Interest payable | $1.6 | $1.7 | | Legal settlement | $— | $30.0 | | Other | $5.8 | $7.4 | | Total | $44.6 | $68.4 | - At September 30, 2024, a $30.0 million legal settlement for the Securities Action was recorded, which was fully funded by insurance proceeds in Q1 FY202582 Note 10. Restructuring and Other Costs, Net This note outlines Cerence Inc.'s restructuring activities and associated costs, including personnel and transformation initiatives Restructuring Reserves Accrual Activity (in millions) for Nine Months Ended June 30, 2025 | Category | Personnel | Other | Total | | :-------------------------- | :-------- | :---- | :---- | | Balance as of Sep 30, 2024 | $3.8 | $0.6 | $4.3 | | Restructuring and other costs, net | $12.1 | $2.6 | $14.7 | | Non-cash adjustments | $(3.0) | $— | $(3.0) | | Cash payments | $(12.7) | $(1.0) | $(13.7) | | Balance at Jun 30, 2025 | $0.2 | $2.2 | $2.5 | Restructuring and Other Costs, Net (in millions) | Category | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Nine Months Ended June 30, 2025 | Nine Months Ended June 30, 2024 | | :-------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Personnel | $0.1 | $0.4 | $12.1 | $4.9 | | Facilities | $— | $(0.3) | $— | $0.0 | | Other | $0.7 | $1.4 | $2.6 | $1.8 | | Total | $0.9 | $1.5 | $14.7 | $6.7 | - For the nine months ended June 30, 2025, restructuring costs totaled $14.7 million, primarily due to $12.1 million for personnel elimination (including $3.0 million in stock-based compensation for former senior management) and $2.6 million for transformation initiatives. This reflects ongoing efforts to optimize cost structure and align with generative AI and LLM product roadmap86195 Note 11. Stockholders' Equity This note details Cerence Inc.'s equity incentive plans, employee stock purchase plan, and stock-based compensation - Cerence's Equity Incentive Plan and Employee Stock Purchase Plan allow for the issuance of common stock, with shares available for issuance increasing annually. The Inducement Plan's authorized shares were increased from 600,000 to 4,500,000 during fiscal year 20248990 Non-Vested Restricted Stock Units (RSUs) for Nine Months Ended June 30, 2025 | Metric | Time-Based Shares | Performance-Based Shares | Total Shares | Weighted Average Grant-Date Fair Value | | :-------------------------- | :---------------- | :----------------------- | :----------- | :------------------------------------- | | Non-vested at Sep 30, 2024 | 2,587,386 | 1,119,437 | 3,706,823 | $23.51 | | Granted | 3,327,503 | 2,130,431 | 5,457,934 | $10.23 | | Vested | (1,073,647) | (267,890) | (1,341,537) | $28.75 | | Forfeited | (433,978) | (681,420) | (1,115,398) | $21.45 | | Non-vested at Jun 30, 2025 | 4,407,264 | 2,300,558 | 6,707,822 | $13.05 | | Expected to vest | | | 6,707,822 | $13.05 | Stock-Based Compensation (in millions) | Category | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Nine Months Ended June 30, 2025 | Nine Months Ended June 30, 2024 | | :-------------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Cost of connected services | $0.1 | $0.1 | $0.2 | $0.2 | | Cost of professional services | $0.5 | $0.6 | $1.4 | $1.7 | | Research and development | $2.7 | $3.3 | $7.1 | $9.7 | | Sales and marketing | $0.9 | $0.6 | $2.3 | $1.6 | | General and administrative | $2.2 | $1.7 | $6.1 | $6.0 | | Restructuring and other costs, net | $— | $— | $3.0 | $— | | Total | $6.3 | $6.2 | $20.0 | $19.3 | - Stock-based compensation for the nine months ended June 30, 2025, included $2.6 million due to the termination of the former CEO and $0.4 million for another former senior management employee, resulting in accelerated vesting of awards92 Note 12. Commitments and Contingencies This note outlines Cerence Inc.'s legal proceedings, including shareholder actions, class action lawsuits, and patent infringement claims - Cerence is involved in various legal proceedings, including shareholder derivative actions, a class action lawsuit under the Illinois Biometric Information Privacy Act (BIPA), and a patent infringement complaint against Samsung. The Securities Action was settled for $30.0 million, paid by insurance proceeds. Derivative actions in federal and Delaware courts have been dismissed9495969798100 - The BIPA class action alleges violations related to biometric data collection via Cerence's Drive Platform technology, seeking statutory damages. Cerence cannot estimate the reasonably possible loss due to the preliminary stage of the case9899 - Cerence indemnifies customers and business partners for intellectual property infringement and contractual breaches, with liability often limited but sometimes unlimited. Directors and officers are also indemnified. Letters of credit for facility leases totaled $0.7 million as of June 30, 2025101102103 Note 13. Income Taxes This note provides details on Cerence Inc.'s income tax provision, effective tax rates, and related adjustments Income (Loss) Before Income Taxes (in millions) | Region | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Nine Months Ended June 30, 2025 | Nine Months Ended June 30, 2024 | | :-------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Domestic | $(7.5) | $(305.7) | $(15.8) | $(510.5) | | Foreign | $6.7 | $(50.3) | $12.4 | $(53.8) | | Loss before income taxes | $(0.8) | $(356.1) | $(3.4) | $(564.2) | Provision for (Benefit from) Income Taxes (in millions) | Region | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Nine Months Ended June 30, 2025 | Nine Months Ended June 30, 2024 | | :-------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Domestic | $0.3 | $(34.7) | $0.8 | $(2.6) | | Foreign | $1.6 | $(7.9) | $1.2 | $6.0 | | Provision for (benefit from) income taxes | $1.9 | $(42.6) | $2.0 | $3.4 | | Effective income tax rate | (244.9)% | 11.9% | (59.6)% | (0.6)% | - The effective tax rate for the three months ended June 30, 2025, was -244.9% (vs. 11.9% in 2024), and for the nine months was -59.6% (vs. -0.6% in 2024). These differences are primarily due to goodwill impairment in 2024 and a change in interim tax estimation methodology107109 - A non-cash out-of-period adjustment of $3.8 million was recorded to increase deferred tax assets and decrease goodwill, correcting a prior period error deemed immaterial108 - The recently signed One Big Beautiful Bill Act, making permanent key elements of the 2017 Tax Cuts and Jobs Act, is being evaluated for its impact on the company's financial statements111 Note 14. Long-Term Debt This note details Cerence Inc.'s long-term debt, including convertible senior notes and senior credit facilities Long-Term Debt (in millions) | Description | Maturity Date | Coupon Rate | Effective Interest Rate | Principal (June 30, 2025) | Unamortized Discount (June 30, 2025) | Deferred Issuance Costs (June 30, 2025) | Carrying Value (June 30, 2025) | Principal (Sep 30, 2024) | Unamortized Discount (Sep 30, 2024) | Deferred Issuance Costs (Sep 30, 2024) | Carrying Value (Sep 30, 2024) | | :-------------------- | :------------ | :---------- | :---------------------- | :------------------------ | :----------------------------------- | :-------------------------------------- | :----------------------------- | :----------------------- | :---------------------------------- | :------------------------------------- | :---------------------------- | | 2025 Modified Notes | 7/1/2028 | 1.50% | 5.49% | $87.5 | $(2.0) | $(7.7) | $77.8 | $87.5 | $— | $(0.4) | $87.1 | | 2028 Notes | 7/1/2028 | 1.50% | 1.91% | $122.5 | $— | $(1.5) | $121.0 | $122.5 | $— | $(1.8) | $120.7 | | Total debt | | | | $210.0 | $(2.0) | $(9.2) | $198.8 | $297.5 | $(2.8) | $(12.8) | $281.9 | - Cerence issued $210.0 million in 1.50% Convertible Senior Notes due 2028 (2028 Notes) in June/July 2023. $87.5 million of these notes were considered a modification of the existing 2025 Notes (2025 Modified Notes) due to concurrent repurchase and issuance with the same investors114121122 - The 2028 Notes are senior, unsecured, accrue 1.50% interest, and mature on July 1, 2028. They are convertible into cash, common stock, or a combination, at Cerence's election, under specific conditions. The initial conversion price is approximately $40.72 per share115116117 - The remaining $61.0 million principal balance of the 3.00% Senior Convertible Notes due 2025 was repaid in full at maturity during the three months ended June 30, 2025. Earlier, $27.4 million of 2025 Notes were repurchased for $27.0 million cash, resulting in a $0.3 million gain on extinguishment126127 Interest Expense Related to Notes (in millions) | Category | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Nine Months Ended June 30, 2025 | Nine Months Ended June 30, 2024 | | :-------------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Contractual interest expense | $1.1 | $1.4 | $3.7 | $4.3 | | Amortization of debt discount | $0.2 | $0.3 | $0.8 | $0.8 | | Amortization of issuance costs | $1.1 | $1.2 | $3.6 | $3.7 | | Total interest expense related to the Notes | $2.4 | $2.9 | $8.1 | $8.7 | - The Senior Credit Facilities, including a $125.0 million Term Loan Facility and a $50.0 million Revolving Facility, were terminated on December 31, 2024. All principal and interest on the Term Loan Facility had been paid in full prior to termination128129130 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Cerence Inc.'s financial condition and operating results, highlighting revenue trends, operating margins, and liquidity for the periods presented Overview This section provides a general overview of Cerence Inc.'s business, products, and market dynamics - Cerence Inc. develops AI-powered virtual assistants for the mobility/transportation market, primarily automotive, but also expanding to two-wheel vehicles, planes, tractors, cruise ships, elevators, and AIoT. The company's software platform combines edge and cloud-connected components to enable natural conversational interactions134135 - Revenue is generated from per-unit perpetual software licenses (edge components), subscription fees for cloud-connected services, and professional services for design, development, and deployment. Contracts are typically multi-year, providing some revenue visibility, though subject to automotive production delays, macroeconomic conditions, and pricing pressures136 - The company expects continued impact from global automotive industry dynamics, including production delays and slowdowns, increased pricing pressure, and slower-than-anticipated development in adjacent markets. Cerence plans to focus on cost management and process optimization, including a restructuring plan substantially completed by Q1 FY2025148195 Basis of Presentation This section explains that the unaudited financial statements adhere to U.S. GAAP and SEC interim reporting rules - The unaudited condensed consolidated financial statements are prepared in accordance with U.S. GAAP and SEC rules for interim reporting, reflecting all necessary adjustments for fair presentation. Operating results for the interim periods are not necessarily indicative of the full fiscal year137138139 Key Financial Metrics This section highlights Cerence Inc.'s key financial performance indicators and their year-over-year changes Key Financial Metrics (YoY Change) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Change (YoY) | Nine Months Ended June 30, 2025 | Nine Months Ended June 30, 2024 | Change (YoY) | | :-------------------------- | :------------------------------- | :------------------------------- | :----------- | :------------------------------ | :------------------------------ | :----------- | | Total Revenue | $62.2 million | $70.5 million | (11.8)% | $191.1 million | $276.7 million | (30.9)% | | Operating Margin | (1.5)% | (503.1)% | +501.6 pp | (0.3)% | (202.6)% | +202.4 pp | | Cash Provided by Operating Activities | $23.7 million | $12.9 million | +$10.8 million | $48.4 million | $11.1 million | +$37.3 million | Operating Results This section provides a detailed analysis of Cerence Inc.'s operating performance across different revenue and expense categories Three Months Ended June 30, 2025 Compared with Three Months Ended June 30, 2024 This section compares Cerence Inc.'s operating results for the three months ended June 30, 2025, against the prior year Total Revenues by Product Type (in millions) | Product Type | 2025 (3 Months) | % of Total (2025) | 2024 (3 Months) | % of Total (2024) | % Change (2025 vs 2024) | | :------------------ | :-------------- | :---------------- | :-------------- | :---------------- | :---------------------- | | License | $34.2 | 54.9% | $43.1 | 61.0% | (20.6)% | | Connected services | $12.8 | 20.6% | $10.9 | 15.5% | 17.4% | | Professional services | $15.2 | 24.5% | $16.5 | 23.5% | (8.0)% | | Total revenues | $62.2 | | $70.5 | | (11.8)% | - Total revenues decreased by 11.8% due to a $20.0 million decrease in fixed license contracts, partially offset by an $11.1 million increase in variable license contract revenue and a 17.4% increase in connected services revenue149150151 - Professional services revenue decreased by 8.0% due to increased standardization of software offerings and efficiencies, requiring less implementation effort152 Total Cost of Revenues and Gross Profits (in millions) | Metric | 2025 (3 Months) | 2024 (3 Months) | % Change (2025 vs 2024) | | :-------------------- | :-------------- | :-------------- | :---------------------- | | Total cost of revenues | $16.3 | $20.1 | (18.7)% | | Total gross profit | $45.9 | $50.4 | (9.0)% | | License gross profit | $33.1 | $41.3 | (19.8)% | | Connected services gross profit | $8.0 | $5.2 | 53.9% | | Professional services gross profit | $4.7 | $4.0 | 20.1% | - Total cost of revenues decreased by 18.7%, leading to a 9.0% decrease in total gross profit, primarily due to lower fixed contract volumes. Connected services gross profit increased by 53.9% due to higher revenues, while professional services gross profit increased by 20.1% due to reduced costs159163166 Nine Months Ended June 30, 2025 Compared with Nine Months Ended June 30, 2024 This section compares Cerence Inc.'s operating results for the nine months ended June 30, 2025, against the prior year Total Revenues by Product Type (in millions) | Product Type | 2025 (9 Months) | % of Total (2025) | 2024 (9 Months) | % of Total (2024) | % Change (2025 vs 2024) | | :------------------ | :-------------- | :---------------- | :-------------- | :---------------- | :---------------------- | | License | $108.4 | 56.7% | $99.4 | 35.9% | 9.0% | | Connected services | $39.2 | 20.5% | $121.4 | 43.9% | (67.7)% | | Professional services | $43.6 | 22.8% | $55.9 | 20.2% | (22.1)% | | Total revenues | $191.1 | | $276.7 | | (30.9)% | - Total revenues decreased by 30.9% primarily due to an $82.2 million decrease in connected services revenue, largely from the early termination of a legacy contract and related services in Q1 FY2024, which accelerated $86.6 million of deferred revenue. License revenue increased by 9.0% due to higher variable contract volumes154155156 - Professional services revenue decreased by 22.1% due to increased standardization of software offerings and process efficiencies157 Total Cost of Revenues and Gross Profits (in millions) | Metric | 2025 (9 Months) | 2024 (9 Months) | % Change (2025 vs 2024) | | :-------------------- | :-------------- | :-------------- | :---------------------- | | Total cost of revenues | $52.0 | $67.3 | (22.8)% | | Total gross profit | $139.1 | $209.4 | (33.5)% | | License gross profit | $103.1 | $94.6 | 9.0% | | Connected services gross profit | $23.1 | $103.0 | (77.6)% | | Professional services gross profit | $13.0 | $11.9 | 8.9% | - Total cost of revenues decreased by 22.8%, but total gross profit decreased by 33.5% due to the significant decline in connected services revenue. License gross profit increased by 9.0% and professional services gross profit increased by 8.9% due to revenue increases and cost reductions, respectively168170174 Operating Expenses This section analyzes Cerence Inc.'s research and development, sales and marketing, general and administrative, and other operating expenses R&D Expenses (in millions) | Period | 2025 | 2024 | % Change | | :-------------------- | :----- | :----- | :------- | | Three Months Ended June 30 | $27.2 | $31.2 | (12.9)% | | Nine Months Ended June 30 | $71.4 | $96.3 | (25.9)% | - R&D expenses decreased by 12.9% for the three months and 25.9% for the nine months, driven by reductions in third-party contract labor, international tax credits, compensation-related expenditures, and increased capitalization of internally developed software costs176178 Sales & Marketing Expenses (in millions) | Period | 2025 | 2024 | % Change | | :-------------------- | :----- | :----- | :------- | | Three Months Ended June 30 | $5.9 | $5.2 | 13.6% | | Nine Months Ended June 30 | $15.6 | $16.9 | (7.6)% | - Sales and marketing expenses increased by 13.6% for the three months due to higher compensation, but decreased by 7.6% for the nine months due to reduced travel, marketing, and third-party contract labor costs179180 General & Administrative Expenses (in millions) | Period | 2025 | 2024 | % Change | | :-------------------- | :----- | :----- | :------- | | Three Months Ended June 30 | $12.3 | $9.8 | 25.5% | | Nine Months Ended June 30 | $36.3 | $39.3 | (7.6)% | - General and administrative expenses increased by 25.5% for the three months due to a credit loss provision reversal in 2024, but decreased by 7.6% for the nine months, primarily from lower compensation and credit loss provisions, partially offset by increased contract labor and professional services181182 Amortization of Intangible Assets (in millions) | Period | 2025 | 2024 | % Change | | :-------------------- | :----- | :----- | :------- | | Three Months Ended June 30 | $0.6 | $0.6 | 5.1% | | Nine Months Ended June 30 | $1.7 | $1.8 | (4.8)% | - Amortization expense for intangible assets decreased by 4.8% for the nine months, as certain assets (acquired technology, patents, and customer relationships) were fully amortized during fiscal years 2024 and 2025185 Restructuring and Other Costs, Net (in millions) | Period | 2025 | 2024 | % Change | | :-------------------- | :----- | :----- | :------- | | Three Months Ended June 30 | $0.9 | $1.5 | (43.0)% | | Nine Months Ended June 30 | $14.7 | $6.7 | 118.6% | Goodwill Impairment (in millions) | Period | 2025 | 2024 | % Change | | :-------------------- | :----- | :----- | :------- | | Three Months Ended June 30 | $— | $357.1 | (100.0)% | | Nine Months Ended June 30 | $— | $609.2 | (100.0)% | - Restructuring and other costs, net, decreased by 43.0% for the three months but increased by 118.6% for the nine months, reflecting personnel elimination and transformation initiatives. No goodwill impairment was recorded in 2025, compared to $357.1 million and $609.2 million in 2024188190191195196197 Total Other Expense, Net This section analyzes Cerence Inc.'s interest income, interest expense, and other non-operating income and expenses Total Other Income (Expense), Net (in millions) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | % Change | Nine Months Ended June 30, 2025 | Nine Months Ended June 30, 2024 | % Change | | :-------------------------- | :------------------------------- | :------------------------------- | :------- | :------------------------------ | :------------------------------ | :------- | | Interest income | $0.9 | $1.3 | (30.5)% | $3.3 | $3.9 | (16.9)% | | Interest expense | $(2.4) | $(3.1) | (22.4)% | $(8.5) | $(9.5) | (9.9)% | | Other income, net | $1.7 | $0.6 | 167.3% | $2.4 | $2.0 | 20.8% | | Total other income (expense), net | $0.2 | $(1.2) | (113.4)% | $(2.8) | $(3.5) | (19.7)% | - Total other expense, net, shifted from a $1.2 million expense to a $0.2 million income for the three months, driven by foreign exchange gains and lower interest expense due to reduced principal on 2025 Notes. For the nine months, total other expense decreased by 19.7%, also due to lower interest expense from the 2025 Notes and termination of Senior Credit Facilities, and a $0.3 million gain on debt extinguishment200201 Provision For (Benefit From) Income Taxes This section discusses Cerence Inc.'s income tax provision or benefit and effective tax rates for the periods presented Provision For (Benefit From) Income Taxes (in millions) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | % Change | Nine Months Ended June 30, 2025 | Nine Months Ended June 30, 2024 | % Change | | :-------------------------- | :------------------------------- | :------------------------------- | :------- | :------------------------------ | :------------------------------ | :------- | | Provision for (benefit from) income taxes | $1.9 | $(42.6) | (104.5)% | $2.0 | $3.4 | (41.8)% | | Effective income tax rate % | (244.9)% | 11.9% | | (59.6)% | (0.6)% | | - The effective income tax rate for the three months ended June 30, 2025, was -244.9% (vs. 11.9% in 2024), and for the nine months was -59.6% (vs. -0.6% in 2024). This significant change is primarily attributed to the goodwill impairment in 2024 and a shift in interim tax estimation methodology from annual to year-to-date202203 Liquidity and Capital Resources This section analyzes Cerence Inc.'s cash position, material cash requirements, and cash flow activities - As of June 30, 2025, Cerence had $79.1 million in cash, cash equivalents, and marketable securities. The company believes it can meet its liquidity needs for the next 12 months based on current cash and expected positive cash flows from operations204206 Material Cash Requirements Due by Period (in millions) | Requirement | 2025 | 2026-2027 | 2028-2029 | Thereafter | Total | | :-------------------------- | :--- | :-------- | :-------- | :--------- | :------ | | 2028 Notes | $— | $— | $122.5 | $— | $122.5 | | Cash interest payable on the 2028 Notes | $0.9 | $3.7 | $1.8 | $— | $6.4 | | 2025 Modified Notes | $— | $— | $87.5 | $— | $87.5 | | Cash interest payable on the 2025 Modified Notes | $0.7 | $2.6 | $1.3 | $— | $4.6 | | Operating leases | $1.0 | $11.0 | $7.7 | $1.2 | $21.0 | | Financing leases | $0.1 | $0.1 | $— | $— | $0.2 | | Total material cash requirements | $2.7 | $17.3 | $220.9 | $1.2 | $242.1 | - The company may seek additional liquidity through equity or debt offerings, but cannot guarantee favorable terms, especially given economic disruptions, high interest rates, and trade policy volatility209 Cash Flows (in millions) | Metric | Nine Months Ended June 30, 2025 | Nine Months Ended June 30, 2024 | % Change | | :------------------------------------ | :------------------------------ | :------------------------------ | :------- | | Net cash provided by operating activities | $48.4 | $11.1 | 337.0% | | Net cash (used in) provided by investing activities | $(9.0) | $4.3 | 308.2% | | Net cash (used in) provided by financing activities | $(87.4) | $0.1 | 150817.2% | | Net changes in cash and cash equivalents | $(47.8) | $14.4 | 432.8% | - Net cash provided by operating activities increased by $37.3 million (337.0%) due to a $54.9 million decrease in income before non-cash charges, a $4.4 million increase from unfavorable working capital changes, and an $87.8 million increase from deferred revenue changes226228 - Net cash used in investing activities increased by $13.3 million (308.2%) due to a $5.7 million decrease in marketable securities and $7.8 million in additional capital expenditures227 - Net cash used in financing activities increased by $87.5 million (150817.2%) due to $87.1 million in principal payments for short-term debt, an $8.4 million decrease in common stock issuance proceeds, and a $7.7 million decrease in tax withholdings for equity awards228229230 Critical Accounting Estimates This section identifies key accounting estimates that require significant management judgment and can materially affect financial results - Critical accounting estimates include revenue recognition, allowance for credit losses, deferred costs, internally developed software, goodwill and intangible asset valuation, stock-based compensation, income taxes, convertible debt, and loss contingencies. These estimates involve significant judgment and can materially impact financial results232 Recently Adopted Accounting Pronouncements and Recent Accounting Pronouncements To Be Adopted This section refers to Note 2 for details on new and upcoming accounting standards and their potential impact - Refer to Note 2 for details on recently adopted and future accounting standards that may impact financial results233 Item 3. Quantitative and Qualitative Disclosures About Market Risk Cerence Inc. is exposed to market risks from fluctuations in foreign currency exchange rates and interest rates. The company manages these risks through operational activities and derivative financial instruments, specifically foreign exchange forward contracts. A 10% unfavorable exchange rate movement would result in $2.4 million in unrealized losses on foreign currency contracts, offset by gains in underlying transactions. Interest rate sensitivity analysis indicates a 1% increase in interest rates would increase interest income on highly liquid investments by $0.3 million annually - Cerence is exposed to foreign currency exchange rate fluctuations, primarily in Canadian dollar, Chinese yuan, Euro, and Japanese yen. Foreign exchange forward contracts are used to hedge this risk, with a total notional amount of $24.2 million at June 30, 2025235236237 - A 10% unfavorable exchange rate movement in foreign currency contracts would result in $2.4 million in unrealized losses, which would be offset by corresponding gains in the underlying hedged transactions237 - The company is exposed to interest rate risk on its cash and cash equivalents ($73.7 million at June 30, 2025). A 1% increase in interest rates would lead to an annual increase of $0.3 million in interest income238 Item 4. Controls and Procedures Cerence Inc.'s management, including the CEO and CFO, evaluated the effectiveness of its disclosure controls and procedures as of June 30, 2025, and concluded they were effective. There were no material changes in internal control over financial reporting during the most recent fiscal quarter. The company acknowledges that control systems provide reasonable, not absolute, assurance - Management, including the CEO and CFO, concluded that Cerence's disclosure controls and procedures were effective as of June 30, 2025239 - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter240 PART II. OTHER INFORMATION This section provides additional information, including legal proceedings, risk factors, and other disclosures Item 1. Legal Proceedings This section details Cerence Inc.'s ongoing legal proceedings, including derivative actions, a class action lawsuit under the Illinois Biometric Information Privacy Act (BIPA), and a patent infringement complaint against Samsung. Several derivative actions have been dismissed, while the BIPA case and the Samsung patent infringement case are still in preliminary stages, with potential outcomes and losses currently inestimable - Federal shareholder derivative actions, consolidated in the U.S. District Court for the District of Massachusetts, were dismissed without leave to amend on June 18, 2025244 - Three similar shareholder derivative complaints filed in the Delaware Court of Chancery have also been dismissed, with one voluntarily dismissed with prejudice and two dismissed without prejudice by stipulation or request245 - A class action lawsuit alleges Cerence violated the Illinois Biometric Information Privacy Act (BIPA) through its Drive Platform technology, seeking statutory damages. Cerence has filed motions to dismiss, which were denied in Circuit Court, and cannot estimate the reasonably possible loss246247 - Cerence filed a patent infringement complaint against Samsung, which counterclaimed alleging infringement of four patents. Trial is scheduled for April 2026, and the reasonably possible loss cannot be estimated at this preliminary stage247248 Item 1A. Risk Factors This section updates the risk factors from the Annual Report on Form 10-K, emphasizing the company's dependence on the highly cyclical global automotive industry and broader economic conditions. Key risks include adverse conditions in the automotive industry (e.g., production delays, trade policies, tariffs), general global economic weakness (e.g., reduced demand, higher borrowing costs, liquidity issues), and significant period-to-period fluctuations in operating results due to customer contracts, product mix, competition, and potential goodwill impairment. The company also highlights risks related to unauthorized use of its intellectual property and the high costs of litigation - Cerence's business is highly dependent on the global automotive industry, which is cyclical and affected by economic conditions, consumer preferences, interest rates, fuel costs, governmental incentives, and trade policies251 - Increased economic uncertainty, including falling demand, reduced credit availability, and higher borrowing costs, can negatively impact Cerence's profitability and liquidity, leading to increased pricing pressure and reduced spending from customers252254 - Operating results may fluctuate significantly due to factors like large customer contracts, product mix (variable vs. fixed), new product introductions, pricing pressures, and potential impairment of goodwill or intangible assets256257258 - The company's success relies on protecting its intellectual property. Unauthorized use or infringement by competitors, along with expensive and unpredictable litigation, could harm the business and financial results259260 Item 5. Other Information This section discloses information regarding Rule 10b5-1 trading plans. During the three months ended June 30, 2025, no directors or officers adopted or terminated such plans. However, Jennifer Salinas, Executive Vice President, Chief Administrative Officer and General Counsel, entered into a 10b5-1 plan on February 11, 2025, for the sale of up to 168,776 shares, effective after the report date and terminating by February 11, 2026, or earlier - No directors or officers adopted or terminated Rule 10b5-1 trading arrangements during the three months ended June 30, 2025262 - Jennifer Salinas, EVP, Chief Administrative Officer and General Counsel, entered a 10b5-1 plan on February 11, 2025, to sell up to 168,776 shares, effective after the report date and terminating by February 11, 2026262 Item 6. Exhibits This section lists the exhibits filed or furnished as part of the Quarterly Report on Form 10-Q, including certifications from the Principal Executive Officer and Principal Financial Officer (pursuant to Sections 302 and 906 of Sarbanes-Oxley Act), and Inline XBRL documents - The report includes certifications from the Principal Executive Officer and Principal Financial Officer under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002266 - Inline XBRL Instance Document and Taxonomy Extension Schema are filed as exhibits266 Signatures The report is duly signed on August 6, 2025, by Brian Krzanich, Chief Executive Officer, and Tony Rodriquez, Executive Vice President, Chief Financial Officer, on behalf of Cerence Inc - The report was signed on August 6, 2025, by Brian Krzanich (CEO) and Tony Rodriquez (EVP, CFO)270