# Cerence Inc.: Form 10-Q for the period ended Dec 31, 2023

- Company: [Cerence Inc.](/companies/crnc.md) (CIK 1768267)
- Form: 10-Q
- Filed: 2024-02-08
- Accepted by EDGAR: Feb 8, 2024, 18:22 ET
- Period: 2023-12-31
- Accession: 0000950170-24-012642
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1768267/000095017024012642/crnc-20231231.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1768267/000095017024012642/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-12-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-10-01 to 2023-12-31 | $138.3m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-10-01 to 2023-12-31 | $26.3m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-10-01 to 2023-12-31 | $112.0m | us-gaap:GrossProfit |
| Research and development | 3 months, 2023-10-01 to 2023-12-31 | $33.3m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2023-10-01 to 2023-12-31 | $58.6m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-10-01 to 2023-12-31 | $3.2m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-10-01 to 2023-12-31 | $34.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-10-01 to 2023-12-31 | $23.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-10-01 to 2023-12-31 | $0.53 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-10-01 to 2023-12-31 | $0.58 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-10-01 to 2023-12-31 | 49,255,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2023-10-01 to 2023-12-31 | −$2.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2023-10-01 to 2023-12-31 | $931.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 3 months, 2023-10-01 to 2023-12-31 | $6.2m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Current assets | at 2023-12-31 | $228.4m | us-gaap:AssetsCurrent |
| Total assets | at 2023-12-31 | $1.26bn | us-gaap:Assets |
| Current liabilities | at 2023-12-31 | $120.0m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-12-31 | $533.8m | us-gaap:Liabilities |
| Long-term debt | at 2023-12-31 | $277.4m | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2023-12-31 | $731.1m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 48,565 characters.

*You should read the following discussion and analysis of our financial condition and results of operations together with our Unaudited Condensed Consolidated Financial Statements, and the related notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q (“Quarterly Report”), and our consolidated financial statements and the related notes and other financial information included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023, filed with the Securities and Exchange Commission (“SEC”) on November 29, 2023. Some of the information contained in this discussion and analysis or elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business, our performance and future success, our liquidity and capital resources, the impact of the COVID-19 pandemic on our business, results of operations and financial condition, macroeconomic conditions, the semiconductor shortage, trends in the global auto industry, including shipping and production issues and expected production improvements, and tax estimates and other tax matters, includes forward-looking statements that involve risks and uncertainties. See “Cautionary Statement Concerning Forward-Looking Statements.” You should review the “Risk Factors” section in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2023 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Note that the results of operations for the three months ended December 31, 2023 are not necessarily indicative of what our operating results for the full fiscal year will be. In this Item, “we,” “us,” “our,” “Cerence” and the “Company” refer to Cerence Inc. and its consolidated subsidiaries, collectively.*

### Overview

Cerence builds AI powered virtual assistants for the mobility/transportation market. Our primary target is the automobile market, but our solutions can apply to all forms of transportation, including, but not limited to, two-wheel vehicles, planes, tractors, cruise ships and elevators. Our solutions power natural conversational and intuitive interactions between automobiles, drivers and passengers, and the broader digital world. We possess one of the world’s most popular software platforms for building automotive virtual assistants. Our customers include all major original equipment manufacturers (“OEMs”) or their tier 1 suppliers worldwide. We deliver our solutions on a white-label basis, enabling our customers to deliver customized virtual assistants with unique, branded personalities and ultimately strengthening the bond between automobile brands and end users. Our vision is to enable a more enjoyable, safer journey for everyone.

Our principal offering is our software platform, which our customers use to build virtual assistants that can communicate, find information, and take action across an expanding variety of categories. Our software platform has a hybrid architecture combining edge software components with cloud-connected components. Edge software components are installed on a vehicle’s head unit and can operate without access to external networks and information. Cloud-connected components are comprised of certain speech and natural language understanding related technologies, AI-enabled personalization and context-based response frameworks, and content integration platform.

We generate revenue primarily by selling software licenses and cloud-connected services. Our edge software components are typically sold under a traditional per unit perpetual software license model, in which a per unit fee is charged on a variable basis for each software instance installed on an automotive head unit. We typically license cloud-connected software components in the form of a service to the vehicle end user, which is paid for in advance. In addition, we generate professional services revenue from our work with our customers during the design, development, and deployment phases of the vehicle model lifecycle and through maintenance and enhancement projects. We have existing relationships with all major OEMs or their tier 1 suppliers, and while our customer contracts vary, they generally represent multi-year engagements, giving us some level of visibility into future revenue.

### Basis of Presentation

The financial information presented in the accompanying unaudited condensed consolidated financial statements has been prepared in accordance with U.S. GAAP and in accordance with rules and regulations of the SEC regarding interim financial reporting. Accordingly, the financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

The condensed consolidated balance sheet data as of September 30, 2023 was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting primarily of normal recurring accruals, necessary for a fair presentation of our financial position and results of operations. The operating results for the three months ended December 31, 2023 are not necessarily indicative of the results expected for the full fiscal year ending September 30, 2024.

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company, as well as those of its wholly owned subsidiaries. All significant intercompany transactions and balances are eliminated in consolidation.

### Key Metrics

In evaluating our financial condition and operating performance, we focus on revenue, operating margins, and cash flow from operations.

For the three months ended December 31, 2023 as compared to the three months ended December 31, 2022:

- Total revenue increased by $54.6 million, or 65.4%, to $138.3 million from $83.7 million.
- Operating margin increased 44.7 percentage points to 42.3% from negative 2.4%.
- Cash used in operating activities was $2.8 million, a net change of $0.7 million from cash used in operating activities of $2.1 million.

### Operating Results

The following table shows the Condensed Consolidated Statements of Operations for the three months ended December 31, 2023 and 2022 (dollars in thousands):

| Revenue: | Three Months Ended December 31, 2023 | 2022 |
| --- | ---: | ---: |
| License | $20,823 | $45,417 |
| Connected services | 96,820 | 18,394 |
| Professional services | 20,692 | 19,847 |
| Total revenues | 138,335 | 83,658 |
| Cost of revenue: |  |  |
| License | 1,604 | 1,614 |
| Connected services | 7,303 | 6,542 |
| Professional services | 17,325 | 17,924 |
| Amortization of intangible assets | 103 | 103 |
| Total cost of revenues | 26,335 | 26,183 |
| Gross profit | 112,000 | 57,475 |
| Operating expenses: |  |  |
| Research and development | 33,306 | 29,494 |
| Sales and marketing | 6,071 | 9,162 |
| General and administrative | 12,793 | 14,257 |
| Amortization of intangible assets | 545 | 2,350 |
| Restructuring and other costs, net | 705 | 4,189 |
| Total operating expenses | 53,420 | 59,452 |
| Income (loss) from operations | 58,580 | (1,977) |
| Interest income | 1,432 | 870 |
| Interest expense | (3,236) | (3,514) |
| Other income, net | 1,422 | 3,713 |
| Income (loss) before income taxes | 58,198 | (908) |
| Provision for income taxes | 34,341 | 1,250 |
| Net income (loss) | $23,857 | $(2,158) |

Our revenue consists primarily of license revenue, connected services revenue and revenue from professional services. License revenue primarily consists of license royalties associated with our edge software components. Our edge software components are typically sold under a traditional per unit perpetual software license model, in which a per unit fee is charged for each software instance installed on an automotive head unit. Our contracts contain variable, fixed prepaid or fixed minimum purchase commitment components. Revenue is recognized and cash is collected for variable contracts over the license distribution period. The fixed contracts typically provide the customer with a price discount and can include the conversion of a variable contract that is already in our variable backlog. Revenue for fixed contracts is recognized when the software is made available to the customer, which has typically occurred at the time the contract is signed. Cash is typically expected to be collected for a fixed prepaid deal at the inception of the contract. Cash is expected to be collected for a fixed minimum commitment deal over the license distribution period. Going forward, we will continue to assess the levels of fixed license contracts and make adjustments, as necessary. See Note 3 to the accompanying unaudited condensed consolidated financial statements for further discussion of our revenue, deferred revenue performance obligations and the timing of revenue recognition. Costs of license revenue primarily consists of third-party royalty expenses for certain external technologies we leverage and costs associated with our Cerence Link product.

Connected services revenue primarily represents the subscription fee that provides access to our connected services components, including the customization and construction of our connected services solutions. We also derive revenue within our connected services business from usage contracts and there can be instances where a customer purchases a software license that allows them to take possession of the software to enable hosting by the customer or a third-party. Subscription and usage contracts typically have a term of one to five years. Subscription revenue is recognized over the subscription period and cash is expected to be collected at the start of the subscription period. Usage based revenue is recognized and cash is collected as the service is used. If the customer takes possession of the software to have it hosted by the customer or a third-party, revenue is recognized, and cash is collected at the time the license is delivered. On October 31, 2023, we entered into an early termination agreement relating to a legacy contract acquired by Nuance through a 2013 acquisition. Previously the term of the contract ended on December 31, 2025, whereas the agreement signed on October 31, 2023, updated the termination date to December 31, 2023. The effect of this change was to accelerate $67.8 million of deferred revenue into the first quarter of fiscal year 2024. There is no cash flow associated with this legacy contract. We provided services to a separate customer, who in turn provided services to our legacy customer. Our customer terminated services on October 31, 2023. There is no cash flow associated with this contract. The effect of this termination is to accelerate $9.9 million of deferred revenue into the first quarter of fiscal year 2024. See Note 3 to the accompanying unaudited condensed consolidated financial statements for further discussion of our revenue, deferred revenue performance obligations and the timing of revenue recognition. Cost of connected service revenue primarily consists of labor costs of software delivery services, infrastructure, and communications fees that support our connected services solutions.

Professional services revenue is primarily comprised of porting, integrating, and customizing our embedded solutions, with costs primarily consisting of compensation for services personnel, contractors and overhead.

Our operating expenses include R&D, sales and marketing and general and administrative expenses. R&D expenses primarily consist of salaries, benefits, and overhead relating to research and engineering staff. Sales and marketing expenses includes salaries, benefits, and commissions related to our sales, product marketing, product management, and business unit management teams. General and administrative expenses primarily consist of personnel costs for administration, finance, human resources, general management, fees for external professional advisers including accountants and attorneys, and provisions for credit losses.

Amortization of acquired patents and core technology are included within cost of revenues whereas the amortization of other intangible assets, such as acquired customer relationships, trade names and trademarks, are included within operating expenses. Customer relationships are amortized over their estimated economic lives based on the pattern of economic benefits expected to be generated from the use of the asset. Other identifiable intangible assets are amortized on a straight-line basis over their estimated useful lives.

Restructuring and other costs, net include restructuring expenses as well as other charges that are unusual in nature, are the result of unplanned events, and arise outside the ordinary course of our business.

Total other (expense) income, net consists primarily of foreign exchange gains (losses), interest income and interest expense related to the Notes and Senior Credit Facilities.

### Three Months Ended December 31, 2023 Compared with Three Months Ended December 31, 2022

#### Total Revenues

The following table shows total revenues by product type, including the corresponding percentage change, for the three months ended December 31, 2023 and 2022 (dollars in thousands):

|  | Three Months Ended December 31, 2023 | % of Total | 2022 | % of Total | % Change 2023 vs. 2022 |
| --- | ---: | ---: | ---: | ---: | ---: |
| License | $20,823 | 15.1% | $45,417 | 54.3% | (54.2)% |
| Connected services | 96,820 | 70.0% | 18,394 | 22.0% | 426.4% |
| Professional services | 20,692 | 14.9% | 19,847 | 23.7% | 4.3% |
| Total revenues | $138,335 |  | $83,658 |  | 65.4% |

Total revenues for the three months ended December 31, 2023 were $138.3 million, an increase of $54.6 million, or 65.4%, from $83.7 million for the three months ended December 31, 2022. The increase in revenues was driven by connected services revenue due to the early termination of a legacy contract acquired by Nuance through a 2013 acquisition and the termination of services provided to a separate customer, who in turn provided services to our legacy customer. The increase was partially offset by decreases in license revenue primarily related to minimum purchase commitments and prepaid deals and a one-time adjustment relating to a change in a customer’s historically reported royalties based on new information provided by the customer in the first quarter of fiscal year 2024.

#### License Revenue

License revenue for the three months ended December 31, 2023 was $20.8 million, a decrease of $24.6 million, or 54.2%, from $45.4 million for the three months ended December 31, 2022. The decrease in license revenue was driven by a $19.1 million decrease in minimum purchase commitments and prepaid deals and the remaining $5.5 million decrease in variable license revenue mainly due to a one-time adjustment relating to a change in a customer’s historically reported royalties based on new information provided by the customer in the first quarter of fiscal year 2024. As a percentage of total revenues, license revenue decreased 39.2 percentage points from 54.3% for the three months ended December 31, 2022 to 15.1% for the three months ended December 31, 2023.

#### Connected Services Revenue

Connected services revenue for the three months ended December 31, 2023 was $96.8 million, an increase of $78.4 million, or 426.4%, from $18.4 million for the three months ended December 31, 2022. This increase was primarily driven by the early termination of a legacy contract acquired by Nuance through a 2013 acquisition and the termination of services provided to a separate customer, who in turn provided services to our legacy customer. The effect of these changes was an acceleration of $67.8 million and $9.9 million of deferred revenue into the first quarter of fiscal year 2024. As a percentage of total revenues, connected services revenue increased by 48.0 percentage points from 22.0% for the three months ended December 31, 2022 to 70.0% for the three months ended December 31, 2023.

#### Professional Services Revenue

Professional service revenue for the three months ended December 31, 2023 was $20.7 million, an increase of $0.9 million, or 4.3%, from $19.8 million for the three months ended December 31, 2022. This increase was primarily driven by our arrangements and the related timing of fulfilling performance obligations under the contracts. As a percentage of total revenues, professional services revenue decreased by 8.8 percentage points from 23.7% for the three months ended December 31, 2022 to 14.9% for the three months ended December 31, 2023.

### Three Months Ended December 31, 2023 Compared with Three Months Ended December 31, 2022

#### Total Cost of Revenues and Gross Profits

The following table shows total cost of revenues by product type and the corresponding percentage change (dollars in thousands):

|  | Three Months Ended December 31, 2023 | 2022 | % Change 2023 vs. 2022 |
| --- | ---: | ---: | ---: |
| License | $1,604 | $1,614 | (0.6)% |
| Connected services | 7,303 | 6,542 | 11.6% |
| Professional services | 17,325 | 17,924 | (3.3)% |
| Amortization of intangibles | 103 | 103 | — |
| Total cost of revenues | $26,335 | $26,183 | 0.6% |

The following table shows total gross profit by product type and the corresponding percentage change (dollars in thousands):

|  | Three Months Ended December 31, 2023 | 2022 | % Change 2023 vs. 2022 |
| --- | ---: | ---: | ---: |
| License | $19,219 | $43,803 | (56.1)% |
| Connected services | 89,517 | 11,852 | 655.3% |
| Professional services | 3,367 | 1,923 | 75.1% |
| Amortization of intangibles | (103) | (103) | — |
| Total gross profit | $112,000 | $57,475 | 94.9% |

Total cost of revenues for the three months ended December 31, 2023 were $26.3 million, an increase of $0.1 million, or 0.6%, from $26.2 million for the three months ended December 31, 2022.

We experienced an increase in total gross profit of $54.5 million, or 94.9%, from $57.5 million for the three months ended December 31, 2022 to $112.0 million for the three months ended December 31, 2023. The increase was primarily driven by the increase in connected service revenue due to the early termination of a legacy contract acquired by Nuance through a 2013 acquisition and the termination of services provided to a separate customer, who in turn provided services to our legacy customer.

#### Cost of License Revenue

Cost of license revenue for the three months ended December 31, 2023 and 2022 remained flat at $1.6 million. Cost of license revenues are primarily due to costs associated with our Cerence Link product. As a percentage of total cost of revenues, cost of license revenue decreased by 0.1 percentage points from 6.2% for the three months ended December 31, 2022 to 6.1% for the three months ended December 31, 2023.

License gross profit decreased by $24.6 million, or 56.1%, for the three months ended December 31, 2023 when compared to the three months ended December 31, 2022, primarily due to declines in license revenue.

#### Cost of Connected Services Revenue

Cost of connected services revenue for the three months ended December 31, 2023 was $7.3 million, an increase of $0.8 million, or 11.6%, from $6.5 million for the three months ended December 31, 2022. Cost of connected services revenue increased primarily due to a $0.9 million increase in amortization of costs previously deferred and a $0.2 million increase in our cloud infrastructure costs. The increase was partially offset by a $0.3 million decrease in salary-related expenditures. During the first quarter of fiscal year 2024, we had an acceleration of $2.0 million of expenses associated with the termination of the legacy contract acquired by Nuance through a 2013 acquisition. As a percentage of total cost of revenues, cost of connected service revenue increased by 2.7 percentage points from 25.0% for the three months ended December 31, 2022 to 27.7% for the three months ended December 31, 2023.

Connected services gross profit increased $77.6 million, or 655.3%, from $11.9 million for the three months ended December 31, 2022 to $89.5 million for the three months ended December 31, 2023, primarily due to the increase in connected service revenue due to the early termination of a legacy contract acquired by Nuance through a 2013 acquisition and the termination of services provided to a separate customer, who in turn provided services to our legacy customer.

#### Cost of Professional Services Revenue

Cost of professional services revenue for the three months ended December 31, 2023 was $17.3 million, a decrease of $0.6 million, or 3.3%, from $17.9 million for the three months ended December 31, 2022. Cost of professional services revenue decreased primarily due to a $1.6 million decrease in salary-related expenditures and a $0.6 million decrease in stock-based compensation. The decrease was partially offset by a $1.2 million increase in third-party contractor costs. As a percentage of total cost of revenues, cost of professional services revenue decreased by 2.7 percentage points from 68.5% for the three months ended December 31, 2022 to 65.8% for the three months ended December 31, 2023.

Professional services gross profit increased $1.5 million, or 75.1%, from $1.9 million for the three months ended December 31, 2022 to $3.4 million for the three months ended December 31, 2023, which was primarily due to the composition of our professional service arrangements.

#### Operating Expenses

The tables below show each component of operating expense. Total other (expense) income, net and provision for income taxes are non-operating expenses and presented in a similar format (dollars in thousands).

#### R&D Expenses

### Three Months Ended December 31, 2023 Compared with Three Months Ended December 31, 2022

|  | Three Months Ended December 31, 2023 | 2022 | % Change 2023 vs. 2022 |
| --- | ---: | ---: | ---: |
| Research and development | $33,306 | $29,494 | 12.9% |

Historically, R&D expenses are our largest operating expense as we continue to build on our existing software platforms and develop new technologies. R&D expenses for the three months ended December 31, 2023 were $33.3 million, an increase of $3.8 million, or 12.9%, from $29.5 million for the three months ended December 31, 2022. The increase was primarily attributable to a $4.4 million increase in salary-related expenditures and a $1.6 million increase in third-party contractor costs. The increase was partially offset by a $1.7 million decrease in internally allocated labor and a $0.6 million decrease in stock-based compensation costs. As a percentage of total operating expenses, R&D expenses increased by 12.7 percentage points from 49.6% for the three months ended December 31, 2022 to 62.3% for the three months ended December 31, 2023.

#### Sales & Marketing Expenses

### Three Months Ended December 31, 2023 Compared with Three Months Ended December 31, 2022

|  | Three Months Ended December 31, 2023 | 2022 | % Change 2023 vs. 2022 |
| --- | ---: | ---: | ---: |
| Sales and marketing | $6,071 | $9,162 | (33.7)% |

Sales and marketing expenses for the three months ended December 31, 2023 were $6.1 million, a decrease of $3.1 million, or 33.7%, from $9.2 million for the three months ended December 31, 2022. The decrease in sales and marketing expenses was primarily attributable to a $1.4 million decrease in salary-related expenditures, a $0.9 million decrease in stock-based compensation costs, a $0.3 million decrease in professional services, and a $0.2 million decrease in travel expenditures. As a percentage of total operating expenses, sales and marketing expenses decreased by 4.0 percentage points from 15.4% for the three months ended December 31, 2022 to 11.4% for the three months ended December 31, 2023.

#### General & Administrative Expenses

### Three Months Ended December 31, 2023 Compared with Three Months Ended December 31, 2022

|  | Three Months Ended December 31, 2023 | 2022 | % Change 2023 vs. 2022 |
| --- | ---: | ---: | ---: |
| General and administrative | $12,793 | $14,257 | (10.3)% |

General and administrative expenses for the three months ended December 31, 2023 were $12.8 million, a decrease of $1.5 million, or 10.3%, from $14.3 million for the three months ended December 31, 2022. The decrease in general and administrative expenses was primarily attributable to a $1.8 million decrease in stock-based compensation costs. The decrease was partially offset by a $0.6 million increase in salary-related expenditures. As a percentage of total operating expenses, general and administrative expenses decreased by 0.1 percentage points from 24.0% for the three months ended December 31, 2022 to 23.9% for the three months ended December 31, 2023.

#### Amortization of Intangible Assets

### Three Months Ended December 31, 2023 Compared with Three Months Ended December 31, 2022

|  | Three Months Ended December 31, 2023 | 2022 | % Change 2023 vs. 2022 |
| --- | ---: | ---: | ---: |
| Cost of revenues | $103 | $103 | — |
| Operating expense | 545 | 2,350 | (76.8)% |
| Total amortization | $648 | $2,453 | (73.6)% |

Intangible asset amortization for the three months ended December 31, 2023 was $0.6 million, a decrease of $1.9 million, or 73.6%, from $2.5 million for the three months ended December 31, 2022. The decrease in amortization relates to certain intangible assets having been fully amortized during fiscal year 2023. Amortization expense for acquired technology and patents is included in the cost of revenues in the accompanying Condensed Consolidated Statements of Operations. Amortization expense for customer relationships is included in operating expenses in the accompanying Condensed Consolidated Statements of Operations.

As a percentage of total cost of revenues, intangible asset amortization within cost of revenues remained flat at 0.4% for the three months ended December 31, 2023 and 2022. As a percentage of total operating expenses, intangible asset amortization expenses within operating expenses decreased by 3.0 percentage points from 4.0% for the three months ended December 31, 2022 as compared to 1.0% for the three months ended December 31, 2023.

#### Restructuring and Other Costs, Net

### Three Months Ended December 31, 2023 Compared with Three Months Ended December 31, 2022

|  | Three Months Ended December 31, 2023 | 2022 | % Change 2023 vs. 2022 |
| --- | ---: | ---: | ---: |
| Restructuring and other costs, net | $705 | $4,189 | (83.2)% |

31

### Fiscal Year 2024

For the three months ended December 31, 2023, we recorded restructuring and other costs, net of $0.7 million which included a $0.1 million severance charge related to the elimination of personnel, a $0.1 million charge resulting from the closure of facilities that will no longer be utilized, and $0.4 million related to other one-time charges. For the remainder of fiscal year 2024, we expect approximately $6.5 million of personnel-related restructuring costs.

### Fiscal Year 2023

For the three months ended December 31, 2022, we recorded restructuring and other costs, net of $4.2 million, which included a $3.0 million severance charge related to the elimination of personnel, a $0.2 million charge resulting from the closure of facilities that will no longer be utilized, and $0.9 million related to other one-time charges.

As a percentage of total operating expenses, restructuring and other costs, net decreased by 5.7 percentage points from 7.0% for the three months ended December 31, 2022 to 1.3% for the three months ended December 31, 2023.

#### Total Other (Expense) Income, Net

### Three Months Ended December 31, 2023 Compared with Three Months Ended December 31, 2022

|  | Three Months Ended December 31, 2023 | 2022 | % Change 2023 vs. 2022 |
| --- | ---: | ---: | ---: |
| Interest income | $1,432 | $870 | 64.6% |
| Interest expense | (3,236) | (3,514) | (7.9)% |
| Other income, net | 1,422 | 3,713 | (61.7)% |
| Total other (expense) income, net | $(382) | $1,069 | (135.7)% |

Total other (expense) income, net for the three months ended December 31, 2023 was expense of $0.4 million, a change of $1.5 million from $1.1 million of income for the three months ended December 31, 2022. The increase in interest income was primarily attributable to returns on investments. The decrease in interest expense was primarily attributable to lower applicable interest rate on our Notes. The change in other income, net was primarily driven by foreign exchange gains. For further information, see “Liquidity and Capital Resources” below.

#### Provision For Income Taxes

### Three Months Ended December 31, 2023 Compared with Three Months Ended December 31, 2022

|  | Three Months Ended December 31, 2023 | 2022 | % Change 2023 vs. 2022 |
| --- | ---: | ---: | ---: |
| Provision for income taxes | $34,341 | $1,250 | 2647.3% |
| Effective income tax rate % | 59.0% | (137.7)% |  |

Our effective income tax rate for the three months ended December 31, 2023 was 59.0%, compared to negative 137.7% for the three months ended December 31, 2022. Our provision for income taxes for the three months ended December 31, 2023 was $34.3 million, a net change of $33.0 million from a provision for income taxes of $1.3 million for the three months ended December 31, 2022. This difference was attributable to the change in income tax expense related to foreign valuation allowance.

### Liquidity and Capital Resources

### Financial Condition

As of December 31, 2023, we had $116.3 million in cash, cash equivalents, and marketable securities. Cash equivalents include highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less. Marketable securities include commercial paper, corporate bonds, and government securities. As of December 31, 2023, our net working capital, excluding deferred revenue and deferred costs, was $146.2 million. This balance is representative of the short-term net cash inflows based on the working capital at that date.

### Sources and Material Cash Requirements

Our principal sources of liquidity are our cash, cash equivalents, and marketable securities, as well as the cash flows we generate from our operations. The primary uses of cash include costs of revenues, funding of R&D activities, capital expenditures and debt obligations.

Our ability to fund future operating needs will depend on our ability to generate positive cash flows from operations and finance additional funding in the capital and debt markets as needed. Based on our expectations to generate positive cash flows and the $116.3 million of cash, cash equivalents, and marketable securities as of December 31, 2023, we believe that we will be able to meet our liquidity needs over the next 12 months. We believe that we will meet longer-term expected future cash requirements and obligations, through a combination of cash flows from operating activities, available cash balances, and available credit via our Revolving Facility (as described below).

The following table presents our material cash requirements for future periods (dollars in thousands):

|  | Material Cash Requirements Due by Period 2024 | 2025-2026 | 2027-2028 | Thereafter | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| 2028 Notes | $- | $- | $122,500 | $- | $122,500 |
| Cash interest payable on the 2028 Notes (a) | 1,378 | 3,672 | 3,220 | - | 8,270 |
| 2025 Modified Notes | - | 87,500 | 87,500 | - | 175,000 |
| Cash interest payable on the 2025 Modified Notes (a) | 2,954 | 4,370 | 2,300 | - | 9,624 |
| Operating leases | 4,854 | 6,818 | 2,782 | 746 | 15,200 |
| Operating leases under restructuring (b) | 103 | 379 | 190 | - | 672 |
| Financing leases | 312 | 415 | - | - | 727 |
| Total material cash requirements | $9,601 | $103,154 | $218,492 | $746 | $331,993 |

(a) Interest per annum is due and payable semiannually and is determined based on the outstanding principal as of December 31, 2023.

(b) Contractual lease commitments are shown net of sublease income related to certain facilities. As of December 31, 2023, we anticipate sublease income of $0.4 million through fiscal year 2024.

Should we need to secure additional sources of liquidity, we believe that we could finance our needs through the issuance of equity securities or debt offerings. However, we cannot guarantee that we will be able to obtain financing through the issuance of equity securities or debt offerings on acceptable terms. Inflation and rising interest rates, and disruptions and instability in the banking industry have negatively impacted the global economy and created significant volatility and disruption of financial markets. An extended period of economic disruption, market volatility or recent bank failures, could materially affect our business, results of operations, ability to meet debt covenants, access to sources of liquidity and financial condition.

### 1.50% Senior Convertible Notes due 2028

On June 26, 2023, we issued $190.0 million in aggregate principal amount of 2028 Notes, which are governed by the 2028 Indenture, in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act. On July 3, 2023, we issued an additional $20.0 million in aggregate principal amount of 2028 Notes. The initial net proceeds from the issuance of the 2028 Notes were $193.2 million after deducting transaction costs.

The 2028 Notes are senior, unsecured obligations and accrue interest payable semiannually in arrears on January 1 and July 1 of each year at a rate of 1.50% per year. The 2028 Notes will mature on July 1, 2028, unless earlier converted, redeemed, or repurchased. The 2028 Notes are convertible into cash, shares of our common stock or a combination of cash and shares of our common stock, at our election.

The conversion rate is 24.5586 shares of our common stock per $1,000 principal amount of 2028 Notes (equivalent to an initial conversion price of approximately $40.72 per share of our common stock). The conversion rate is subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest.

In connection with the offering of the 2028 Notes, we repurchased $87.5 million in aggregate principal amount of the 2025 Notes in a privately negotiated transaction. We specifically negotiated the repurchase of the 2025 Notes with investors who concurrently purchased the 2028 Notes. We evaluated the transaction to determine whether the exchange should be accounted for as a modification or extinguishment under the provisions of ASC 470-50, which allows for an exchange of debt instruments between the same debtor and creditor to be accounted for as a modification so long as the instruments do not have substantially different terms. Because the concurrent redemption of the 2025 Notes and a portion of issuance of the 2028 Notes were executed with the same investors, we evaluated the transaction as a debt modification, on a creditor by creditor basis. The repurchase of the 2025 Notes and issuance of the 2028 Notes were deemed to not have substantially different terms on the basis that (1) the present value of the cash flows under the terms of the new debt instrument were less than 10% different from the present value of the remaining cash flows under the terms of the original instrument and (2) the fair value of the conversion feature did not change by more than 10% of the carrying value of the 2025 Notes, and therefore, the repurchase of the 2025 Notes was accounted for as a debt modification.

As a result, $87.5 million of the 2028 Notes are considered a modification of the 2025 Notes and are included in the balances of the 2025 Notes along with the remaining $87.5 million of the 2025 Notes (together the "2025 Modified Notes") that were not repurchased as part of the transaction. We recorded $14.3 million of fees paid directly to the lenders as deferred debt issuance costs, and $3.8 million of fees paid to third-parties were expensed in the period. As of December 31, 2023, the carrying amount of the 2025 Modified Notes was $157.1 million, net of unamortized costs of $17.9 million.

If a convertible debt instrument is modified or exchanged in a transaction that is not accounted for as an extinguishment, an increase in the fair value of the embedded conversion option shall reduce the carrying amount of the debt instrument with a corresponding increase in Additional paid-in capital. We recognized the increase in the fair value of the embedded conversion feature of $4.1 million as Additional paid-in capital and an equivalent discount that reduced the carrying value of the 2025 Modified Notes.

We accounted for $122.5 million of the 2028 Notes, that were not negotiated with the investors of the 2025 Notes, as a single liability. We incurred transaction costs of $2.4 million relating to the issuance of the 2028 Notes, which were recorded as a direct deduction from the face amount of the 2028 Notes and are being amortized as interest expense over the term of the 2028 Notes using the interest method. As of December 31, 2023, the carrying amount of the 2028 Notes was $120.3 million and unamortized issuance costs of $2.2 million. As of December 31, 2023, the 2028 Notes were not convertible.

### 3.00% Senior Convertible Notes due 2025

On June 2, 2020, we issued $175.0 million in aggregate principal amount of 2025 Notes, including the initial purchasers’ exercise in full of their option to purchase $25.0 million principal amount of the 2025 Notes, which are governed by the 2025 Indenture, in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The net proceeds from the issuance of the 2025 Notes were $169.8 million after deducting transaction costs.

The 2025 Notes are senior, unsecured obligations and accrue interest payable semiannually in arrears on June 1 and December 1 of each year at a rate of 3.00% per year. The 2025 Notes will mature on June 1, 2025, unless earlier converted, redeemed, or repurchased. The 2025 Notes are convertible into cash, shares of our common stock or a combination of cash and shares of our common stock, at our election.

The conversion rate is 26.7271 shares of our common stock per $1,000 principal amount of 2025 Notes (equivalent to an initial conversion price of approximately $37.42 per share of our common stock). The conversion rate is subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date or if we deliver a notice of redemption, we will, in certain circumstances, increase the conversion rate for a holder who elects to convert its 2025 Notes in connection with such a corporate event or convert its 2025 Notes called for redemption in connection with such notice of redemption, as the case may be.

See “1.50% Senior Convertible Notes due 2028” section above for discussion on modification of the 2025 Notes as part of the offering of the 2028 Notes.

The interest expense recognized related to the Notes for the three months ended December 31, 2023 and 2022 was as follows (dollars in thousands):

|  | Three Months Ended December 31, 2023 | 2022 |
| --- | ---: | ---: |
| Contractual interest expense | $1,442 | $1,322 |
| Amortization of debt discount | 251 | - |
| Amortization of issuance costs | 1,217 | 280 |
| Total interest expense related to the Notes | $2,910 | $1,602 |

34

The conditional conversion feature of the Notes was not triggered during the three months ended December 31, 2023. As of December 31, 2023, the Notes were not convertible. As of this Quarterly Report, no Notes have been converted by the holders. Whether any of the Notes will be converted in future quarters will depend on the satisfaction of one or more of the conversion conditions in the future. If one or more holders elect to convert their Notes at a time when any such Notes are convertible, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional shares), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity.

### Senior Credit Facilities

On June 12, 2020, we entered into a Term Loan Facility. The net proceeds from the issuance of the Term Loan Facility were $123.0 million. We also entered into the Revolving Facility, which would be drawn on in the event that our working capital and other cash needs are not supported by our operating cash flow. In connection with the issuance of the 2028 Notes, in the third quarter of fiscal year 2023, we borrowed $24.7 million under our Revolving Facility and paid $106.3 million towards our Term Loan Facility. As a result, we recorded $104.9 million extinguishment of debt and $1.3 million loss on the extinguishment of debt. All principal and interest on the Term Loan Facility have been paid in full. As of December 31, 2023 and September 30, 2023, there were no amounts outstanding under the Revolver Facility.

The Credit Agreement contains certain affirmative and negative covenants customary for financings of this type that, among other things, limit our and our subsidiaries’ ability to incur additional indebtedness or liens, to dispose of assets, to make certain fundamental changes, to designate subsidiaries as unrestricted, to make certain investments, to prepay certain indebtedness and to pay dividends, or to make other distributions or redemptions/repurchases, in respect of our and our subsidiaries’ equity interests. In addition, the Credit Agreement contains financial covenants, each tested quarterly, (1) a net secured leverage ratio of not greater than 3.25 to 1.00; (2) a net total leverage ratio of not greater than 4.25 to 1.00; and (3) minimum liquidity of at least $75 million. The Credit Agreement also contains events of default customary for financings of this type, including certain customary change of control events.

On November 22, 2022, we entered into Amendment No. 2 to the Credit Agreement. Amendment No. 2 modified certain financial covenants between the fiscal quarter ended March 31, 2023 to the fiscal quarter ended December 31, 2023. During the covenant adjustment period, each tested quarterly, we are required to maintain (1) a net secured leveraged ratio of not greater than 4.25 to 1.00; (2) minimum liquidity of at least $125 million; and (3) aggregate capital expenditures less than $7.5 million. The net total leverage ratio will be waived during the covenant adjustment period. At the conclusion of the covenant adjustment period, the original financial covenants will resume. As of December 31, 2023, we were in compliance with all Credit Agreement covenants.

Total interest expense relating to the Senior Credit Facilities for the three months ended December 31, 2023 and 2022 was $0.1 million and $1.9 million, respectively. Amounts reflect the coupon and accretion of the discount.

### Cash Flows

Cash flows from operating, investing and financing activities for the three months ended December 31, 2023 and 2022, as reflected in the unaudited Condensed Consolidated Statements of Cash Flows included in Item 1 of this Form 10-Q, are summarized in the following table (dollars in thousands):

|  | Three Months Ended December 31, 2023 | 2022 | % Change 2023 vs. 2022 |
| --- | ---: | ---: | ---: |
| Net cash used in operating activities | $(2,815) | $(2,118) | 32.9% |
| Net cash provided by investing activities | 1,189 | 1,517 | (21.6)% |
| Net cash used in financing activities | (130) | (3,051) | (95.7)% |
| Effect of foreign currency exchange rates on cash and cash equivalents | (662) | (538) | 23.0% |
| Net changes in cash and cash equivalents | $(2,418) | $(4,190) | (42.3)% |

#### Net Cash Used in Operating Activities

Net cash used in operating activities for the three months ended December 31, 2023 was $2.8 million, a net change of $0.7 million, or 32.9%, from net cash used in operating activities of $2.1 million for the three months ended December 31, 2022. The change in cash flows were primarily due to:

- An increase of $55.4 million from income before non-cash charges;
- An increase of $19.0 million due to favorable changes in working capital primarily related to accounts receivable; and
- A decrease of $75.2 million from changes in deferred revenue.

Deferred revenue represents a significant portion of our net cash used in or provided by operating activities and, depending on the nature of our contracts with customers and foreign currency exchange rates, this balance can fluctuate significantly from period to period. Fluctuations in deferred revenue are not a reliable indicator of future performance and the related revenue associated with these contractual commitments. We do not expect any changes in deferred revenue to affect our ability to meet our obligations.

#### Net Cash Provided by Investing Activities

Net cash provided by investing activities for the three months ended December 31, 2023 was $1.2 million, a net change of $0.3 million, or 21.6%, from $1.5 million of cash provided by investing activities for the three months ended December 31, 2022. The change in cash flows were primarily due to an increase of $0.2 million in capital expenditures.

#### Net Cash Used in Financing Activities

Net cash used in financing activities for the three months ended December 31, 2023 was $0.1 million, a net change of $3.0 million, from cash used in financing activities of $3.1 million for the three months ended December 31, 2022. The change in cash flows were primarily due to:

- An increase of $4.5 million in proceeds from the issuance of our common stock;
- An increase of $3.6 million in payments of tax related withholdings due to the net settlement of equity awards;
- A decrease of $1.6 million in principal payments of long-term debt; and
- A decrease of $0.4 million in payments for long-term debt issuance costs.

### Critical Accounting Estimates

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that have a material impact on the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and various other factors we believe to be reasonable under the circumstances, the results of which form the basis for judgments about the carrying values of assets and liabilities and the amounts of revenues and expenses. Actual results may differ from these estimates.

We believe that our critical accounting estimates are those related to revenue recognition; allowance for credit losses; accounting for deferred costs; accounting for internally developed software; the valuation of goodwill and intangible assets; accounting for stock-based compensation; accounting for income taxes; accounting for convertible debt; and loss contingencies. We believe these estimates are critical because they most significantly affect the portrayal of our financial condition and results of operations and involve our most complex and subjective estimates and judgments. A discussion of our critical accounting estimates may be found in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023 in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Estimates.”

### Recently Adopted Accounting Pronouncements and Recent Accounting Pronouncements To Be Adopted

Refer to Note 2 to the accompanying unaudited condensed consolidated financial statements for a description of certain issued accounting standards that have been recently adopted and are expected to be adopted by us and may impact our results of operations in future reporting periods.

## Market risk

As filed, 3,116 characters.

We are exposed to market risk from changes in foreign currency exchange rates and interest rates which could affect our operating results, financial position and cash flows. We manage our exposure to these market risks through our regular operating and financing activities, and through the use of derivative financial instruments.

### Exchange Rate Sensitivity

We are exposed to changes in foreign currency exchange rates. Any foreign currency transaction, defined as a transaction denominated in a currency other than the local functional currency, will be reported in the functional currency at the applicable exchange rate in effect at the time of the transaction. A change in the value of the functional currency compared to the foreign currency of the transaction will have either a positive or negative impact on our financial position and results of operations.

Assets and liabilities of our foreign entities are translated into U.S. dollars at exchange rates in effect at the balance sheet date and income and expense items are translated at average rates for the applicable period. Therefore, the change in the value of the U.S. dollar compared to foreign currencies will have either a positive or negative effect on our financial position and results of operations. Historically, our primary exposure has been related to transactions denominated in the Canadian dollar, Chinese yuan, Euro, and Japanese yen.

We use foreign currency forward contracts to hedge the foreign currency exchange risk associated with forecasted foreign denominated payments related to our ongoing business. The aggregate notional amount of our outstanding foreign currency forward contracts was $98.3 million at December 31, 2023. Foreign currency forward contracts are sensitive to changes in foreign currency exchange rates. A 10% unfavorable exchange rate movement in our portfolio of foreign currency contracts would have resulted in unrealized losses of $7.4 million at December 31, 2023. Such losses would be offset by corresponding gains in the remeasurement of the underlying transactions being hedged. We believe these foreign currency forward exchange contracts and the offsetting underlying commitments, when taken together, do not create material market risk.

### Interest Rate Sensitivity

We are exposed to interest rate risk as a result of our cash and cash equivalents and indebtedness related to the Senior Credit Facilities.

At December 31, 2023, we held approximately $98.7 million of cash and cash equivalents consisting of cash and highly liquid investments, including money-market funds and time deposits. Assuming a 1% increase in interest rates, our interest income on our highly liquid investments would increase by $0.7 million per annum, based on December 31, 2023 reported balances.

The borrowings under our Senior Credit Facilities are subject to interest rates based on SOFR. As of December 31, 2023, assuming a 1% increase in interest rates and our Revolving Facility being fully drawn, our interest expense on our Senior Credit Facilities would increase by approximately $0.5 million per annum.

## Controls and procedures

As filed, 1,805 characters.

*Evaluation of disclosure controls and procedures.* Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Quarterly Report. Based on this evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of December 31, 2023 to ensure that all material information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to them as appropriate to allow timely decisions regarding required disclosure and that all such information is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

*Changes in internal control over financial reporting.* There were no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

*Limitations of the effectiveness of internal control.* A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal control system are met. Because of the inherent limitations of any internal control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.

## Risk factors

As filed, 819 characters.

In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023, which could materially affect our business, financial condition or future results of operations. The risks described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023 are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. There are no material changes to the risk factors described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023.

Filed Feb 8, 2024.
Source: SEC EDGAR, the filing index for accession 0000950170-24-012642. Last ingested by Listed: Oct 24, 2026, 15:15 ET. No prices; not investment advice.