Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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 and combined 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, 2021, filed with the Securities and Exchange Commission (“SEC”) on November 23, 2021. 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, 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, 2021, as updated by Part II, Item 1A of this Quarterly Report, 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 and nine months ended June 30, 2022 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.
Impact of COVID-19 on our Business
The COVID-19 pandemic has resulted in, and may continue to result in, additional governmental restrictions and regulations, which has adversely affected, and may continue to adversely affect our business and financial results. For example, pandemic related lockdowns have been experienced in China throughout 2022, which resulted in loss of automotive production. We have seen, and anticipate that we will continue to see, supply chain challenges in the automotive industry related to semiconductor devices that are used in automobiles. The current macroeconomic conditions have also increased competition for qualified employees in our industry, particularly for members of our professional service teams, and we, along with automotive OEMs, face significant competition in hiring and retaining them. In addition, a recession, depression or other sustained adverse market impact resulting from COVID-19 or other market factors could materially and adversely affect our business, our access to needed capital and liquidity, and the value of our common stock. Even after the COVID-19 pandemic has lessened or subsided, we may continue to experience adverse impacts on our business and financial performance as a result of its global economic impact.
27
As the full impact of the COVID-19 pandemic on our business continues to develop, we are closely monitoring the global situation. We are unable at this time to predict the full impact of COVID-19 on our operations, liquidity, and financial results, and, depending on the magnitude and duration of the COVID-19 pandemic, such impact may be material. Accordingly, current results and financial condition discussed herein may not be indicative of future operating results and trends. While we are unable to accurately predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures, these measures have impacted, and may continue to impact, our business, as well as our customers and consumers. For further discussion of the business risks associated with COVID-19, see Item 1A, Risk Factors, within our Annual Report on Form 10-K for the fiscal year ended September 30, 2021, as updated by Part II, Item 1A of this Quarterly Report.
Basis of Presentation
The financial information presented in the accompanying unaudited condensed consolidated financial statements has been prepared in accordance with U.S. generally accepted accounting principles (“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, 2021 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 and nine months ended June 30, 2022 are not necessarily indicative of the results expected for the full fiscal year ending September 30, 2022.
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 June 30, 2022 as compared to the three months ended June 30, 2021:
•Total revenue decreased by $7.8 million, or 8.0%, to $89.0 million from $96.8 million.
•Operating margin increased 2.3 percentage points to 17.7% from 15.4%.
•Cash used in operating activities was $3.9 million, a decrease of $28.0 million from cash provided by operating activities of $24.1 million.
For the nine months ended June 30, 2022 as compared to the nine months ended June 30, 2021:
•Total revenue decreased by $19.4 million, or 6.7%, to $269.7 million from $289.1 million.
•Operating margin decreased 0.5 percentage points to 16.7% from 17.2%.
•Cash provided by operating activities was $2.8 million, a decrease of $48.3 million from cash provided by operating activities of $51.1 million.
28
Operating Results
The following table shows the Condensed Consolidated Statement of Operations for the three and nine months ended June 30, 2022 and 2021 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Nine Months Ended June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
License |
|
$ |
46,452 |
|
|
$ |
49,980 |
|
|
$ |
139,610 |
|
|
$ |
150,765 |
|
Connected services |
|
|
19,990 |
|
|
|
30,283 |
|
|
|
67,475 |
|
|
|
83,949 |
|
Professional services |
|
|
22,599 |
|
|
|
16,538 |
|
|
|
62,662 |
|
|
|
54,392 |
|
Total revenues |
|
|
89,041 |
|
|
|
96,801 |
|
|
|
269,747 |
|
|
|
289,106 |
|
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
License |
|
|
585 |
|
|
|
863 |
|
|
|
1,692 |
|
|
|
2,718 |
|
Connected services |
|
|
5,391 |
|
|
|
6,108 |
|
|
|
16,766 |
|
|
|
19,960 |
|
Professional services |
|
|
18,173 |
|
|
|
14,985 |
|
|
|
51,448 |
|
|
|
48,632 |
|
Amortization of intangible assets |
|
|
103 |
|
|
|
1,879 |
|
|
|
2,879 |
|
|
|
5,637 |
|
Total cost of revenues |
|
|
24,252 |
|
|
|
23,835 |
|
|
|
72,785 |
|
|
|
76,947 |
|
Gross profit |
|
|
64,789 |
|
|
|
72,966 |
|
|
|
196,962 |
|
|
|
212,159 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
26,040 |
|
|
|
30,370 |
|
|
|
81,808 |
|
|
|
83,365 |
|
Sales and marketing |
|
|
8,299 |
|
|
|
9,534 |
|
|
|
22,487 |
|
|
|
28,097 |
|
General and administrative |
|
|
10,614 |
|
|
|
13,173 |
|
|
|
31,941 |
|
|
|
38,563 |
|
Amortization of intangible assets |
|
|
2,862 |
|
|
|
3,180 |
|
|
|
9,151 |
|
|
|
9,521 |
|
Restructuring and other costs, net |
|
|
1,197 |
|
|
|
1,760 |
|
|
|
6,586 |
|
|
|
2,777 |
|
Total operating expenses |
|
|
49,012 |
|
|
|
58,017 |
|
|
|
151,973 |
|
|
|
162,323 |
|
Income from operations |
|
|
15,777 |
|
|
|
14,949 |
|
|
|
44,989 |
|
|
|
49,836 |
|
Interest income |
|
|
243 |
|
|
|
34 |
|
|
|
416 |
|
|
|
68 |
|
Interest expense |
|
|
(3,815 |
) |
|
|
(3,294 |
) |
|
|
(10,602 |
) |
|
|
(10,569 |
) |
Other (expense) income, net |
|
|
(478 |
) |
|
|
173 |
|
|
|
(764 |
) |
|
|
1,432 |
|
Income before income taxes |
|
|
11,727 |
|
|
|
11,862 |
|
|
|
34,039 |
|
|
|
40,767 |
|
Provision for income taxes |
|
|
110,994 |
|
|
|
6,064 |
|
|
|
114,738 |
|
|
|
2,865 |
|
Net (loss) income |
|
$ |
(99,267 |
) |
|
$ |
5,798 |
|
|
$ |
(80,699 |
) |
|
$ |
37,902 |
|
29
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. During the fourth quarter of fiscal year 2022 and fiscal year 2023, we expect a reduction in contributions from our fixed license contracts due to our decision to limit the level of such contracts on a go-forward basis. As a result, we expect a negative impact on reported license revenue for the fourth quarter of fiscal year 2022 and fiscal year 2023. 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.
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. 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, net consists primarily of foreign exchange gains (losses), losses on the extinguishment of debt and interest expense related to the Notes, the Senior Credit Facilities, and the Credit Agreement, dated October 1, 2019, by and among the Company, the lenders and issuing banks party thereto and Barclays Bank PLC, as administrative agent, which we repaid using proceeds from the issuance of the Notes.
Three Months Ended June 30, 2022 Compared with Three Months Ended June 30, 2021
Total Revenues
The following table shows total revenues by product type, including the corresponding percentage change, for the three months ended June 30, 2022 and 2021 (dollars in thousands):
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
% Change |
|
|
|
2022 |
|
|
% of Total |
|
2021 |
|
|
% of Total |
|
2022 vs. 2021 |
|
License |
|
$ |
46,452 |
|
|
52.2% |
|
$ |
49,980 |
|
|
51.6% |
|
|
(7.1 |
)% |
Connected services |
|
|
19,990 |
|
|
22.5% |
|
|
30,283 |
|
|
31.3% |
|
|
(34.0 |
)% |
Professional services |
|
|
22,599 |
|
|
25.3% |
|
|
16,538 |
|
|
17.1% |
|
|
36.6 |
% |
Total revenues |
|
$ |
89,041 |
|
|
|
|
$ |
96,801 |
|
|
|
|
|
(8.0 |
)% |
31
Total revenues for the three months ended June 30, 2022 were $89.0 million, a decrease of $7.8 million, or 8.0%, from $96.8 million for the three months ended June 30, 2021. The decrease in revenues was driven by decreases in licensing revenues and decreased demand for our connected services. Our license revenue is highly dependent on vehicle production. Over the course of the past year, third-party light vehicle production forecasts for calendar year 2022 have decreased in response to the ongoing semiconductor shortage, conflict between Russia and Ukraine, and the effects of lockdowns in mainland China driven by COVID-19. While we cannot predict the full impact of the forecasted decline in production to our business, we do expect our operating results to be negatively impacted for the remainder of the fiscal year.
License Revenue
License revenue for the three months ended June 30, 2022 was $46.5 million, a decrease of $3.5 million, or 7.1%, from $50.0 million for the three months ended June 30, 2021. Variable license revenue decreased by $9.5 million primarily due to a lower volume of licensing royalties. This decrease, which was due in part to consumption of fixed license contracts, was partially offset by an $5.1 million increase in minimum purchase commitment and prepaid deals with customers. As a percentage of total revenues, license revenue increased 0.6 percentage points from 51.6% for the three months ended June 30, 2021 to 52.2% for the three months ended June 30, 2022.
Connected Services Revenue
Connected services revenue for the three months ended June 30, 2022 was $20.0 million, a decrease of $10.3 million, or 34.0%, from $30.3 million for the three months ended June 30, 2021. This decrease was primarily driven by the winding down of a legacy contract acquired by Nuance Communications, Inc. (“Nuance”) through a 2013 acquisition. As a percentage of total revenues, connected services revenue decreased by 8.8 percentage point from 31.3% for the three months ended June 30, 2021 to 22.5% for the three months ended June 30, 2022.
Professional Services Revenue
Professional service revenue for the three months ended June 30, 2022 was $22.6 million, an increase of $6.1 million, or 36.6%, from $16.5 million for the three months ended June 30, 2021. This increase was primarily driven by our continued focus on integration and customization services related to our edge software and timing of services rendered. As a percentage of total revenues, professional services revenue increased by 8.2 percentage points from 17.1% for the three months ended June 30, 2021 to 25.3% for the three months ended June 30, 2022.
Nine Months Ended June 30, 2022 Compared with Nine Months Ended June 30, 2021
Total Revenues
The following table shows total revenues by product type, including the corresponding percentage change, for the nine months ended June 30, 2022 and 2021 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, |
|
% Change |
|
|
|
2022 |
|
|
% of Total |
|
2021 |
|
|
% of Total |
|
2022 vs. 2021 |
|
License |
|
$ |
139,610 |
|
|
51.8% |
|
$ |
150,765 |
|
|
52.1% |
|
|
(7.4 |
)% |
Connected services |
|
|
67,475 |
|
|
25.0% |
|
|
83,949 |
|
|
29.0% |
|
|
(19.6 |
)% |
Professional services |
|
|
62,662 |
|
|
23.2% |
|
|
54,392 |
|
|
18.9% |
|
|
15.2 |
% |
Total revenues |
|
$ |
269,747 |
|
|
|
|
$ |
289,106 |
|
|
|
|
|
(6.7 |
)% |
32
Total revenues for the nine months ended June 30, 2022 were $269.7 million, a decrease of $19.4 million, or 6.7%, from $289.1 million for the nine months ended June 30, 2021. The decrease in revenues was driven by decreases in licensing revenues and decreased demand for our connected services. Our license revenue is highly dependent on vehicle production. Over the course of the past year, third-party light vehicle production forecasts for calendar year 2022 have decreased in response to the ongoing semiconductor shortage, conflict between Russia and Ukraine, and the effects of lockdowns in mainland China driven by COVID-19. While we cannot predict the full impact of the forecasted decline in production to our business, we do expect our operating results to be negatively impacted for the remainder of the fiscal year.
License Revenue
License revenue for the nine months ended June 30, 2022 was $139.6 million, a decrease of $11.2 million, or 7.4%, from $150.8 million for the nine months ended June 30, 2021. Variable license revenue decreased by $41.1 million primarily due to a lower volume of licensing royalties. This decrease, which was due in part to consumption of fixed license contracts, was partially offset by a $23.5 million increase in minimum purchase commitment and prepaid deals and $5.2 million from a one-time volume commitment deal with a fitness customer. During the nine months ended June 30, 2022, certain existing variable long-term contracts with our largest customer were converted into minimum purchase commitment deals that accounted for $47.1 million of revenue during such nine-month period. The cash associated with these deals is expected to be collected over the distribution period, which could be up to five years. The estimated future revenue related to these long-term contracts was previously included in our variable backlog. As a percentage of total revenues, license revenue decreased by 0.3 percentage points from 52.1% for the nine months ended June 30, 2021 to 51.8% for the nine months ended June 30, 2022.
Connected Services Revenue
Connected services revenue for the nine months ended June 30, 2022 was $67.5 million, a decrease of $16.4 million, or 19.6% from $83.9 million for the nine months ended June 30, 2021. This decrease was primarily driven by the winding down of a legacy contract acquired by Nuance through a 2013 acquisition. As a percentage of total revenues, connected services revenue decreased by 4.0 percentage points from 29.0% for the nine months ended June 30, 2021 to 25.0% for the nine months ended June 30, 2022.
Professional Services Revenue
Professional service revenue for the nine months ended June 30, 2022 was $62.7 million, an increase of $8.3 million, or 15.2%, from $54.4 million for the nine months ended June 30, 2021. This increase was primarily driven by our continued focus on integration and customization services related to our edge software and timing of services rendered. As a percentage of total revenues, professional services revenue increased by 4.3 percentage points from 18.9% for the nine months ended June 30, 2021 to 23.2% for the nine months ended June 30, 2022.
Three Months Ended June 30, 2022 Compared with Three Months Ended June 30, 2021
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 June 30, |
|
|
% Change |
|
|
|
2022 |
|
|
2021 |
|
|
2022 vs. 2021 |
|
License |
|
$ |
585 |
|
|
$ |
863 |
|
|
|
(32.2 |
)% |
Connected services |
|
|
5,391 |
|
|
|
6,108 |
|
|
|
(11.7 |
)% |
Professional services |
|
|
18,173 |
|
|
|
14,985 |
|
|
|
21.3 |
% |
Amortization of intangibles |
|
|
103 |
|
|
|
1,879 |
|
|
|
(94.5 |
)% |
Total cost of revenues |
|
$ |
24,252 |
|
|
$ |
23,835 |
|
|
|
1.7 |
% |
The following table shows total gross profit by product type and the corresponding percentage change (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
% Change |
|
|
|
2022 |
|
|
2021 |
|
|
2022 vs. 2021 |
|
License |
|
$ |
45,867 |
|
|
$ |
49,117 |
|
|
|
(6.6 |
)% |
Connected services |
|
|
14,599 |
|
|
|
24,175 |
|
|
|
(39.6 |
)% |
Professional services |
|
|
4,426 |
|
|
|
1,553 |
|
|
|
185.0 |
% |
Amortization of intangibles |
|
|
(103 |
) |
|
|
(1,879 |
) |
|
|
94.5 |
% |
Total gross profit |
|
$ |
64,789 |
|
|
$ |
72,966 |
|
|
|
(11.2 |
)% |
33
Total cost of revenues for the three months ended June 30, 2022 were $24.3 million, an increase of $0.5 million, or 1.7%, from $23.8 million for the three months ended June 30, 2021.
We experienced a decrease in total gross profit of $8.2 million, or 11.2%, from $73.0 million for the three months ended June 30, 2021 to $64.8 million for the three months ended June 30, 2022. The decrease was primarily driven by a decline in license and connected services revenues.
Cost of License Revenue
Cost of license revenue for the three months ended June 30, 2022 was $0.6 million, a decrease of $0.3 million, or 32.2%, from $0.9 million for the three months ended June 30, 2021. Cost of license revenues decreased due to third-party royalty expenses associated with external technologies we leverage in our edge software components. As a percentage of total cost of revenues, cost of license revenue decreased by 1.2 percentage points from 3.6% for the three months ended June 30, 2021 to 2.4% for the three months ended June 30, 2022.
License gross profit decreased by $3.2 million, or 6.6%, for the three months ended June 30, 2022 when compared to the three months ended June 30, 2021, primarily due to decreases in license revenues.
Cost of Connected Services Revenue
Cost of connected services revenue for the three months ended June 30, 2022 was $5.4 million, a decrease of $0.7 million, or 11.7%, from $6.1 million for the three months ended June 30, 2021. Cost of connected services revenue decreased primarily due to a $0.7 million decrease in amortization of costs previously deferred and $0.4 million decrease in salary-related expenditures. The decrease was partially offset by a $0.3 million increase in our cloud infrastructure costs. As a percentage of total cost of revenues, cost of connected service revenue decreased by 3.4 percentage points from 25.6% for the three months ended June 30, 2021 to 22.2% for the three months ended June 30, 2022.
Connected services gross profit decreased $9.6 million, or 39.6%, from $24.2 million for the three months ended June 30, 2021 to $14.6 million for the three months ended June 30, 2022, driven by decreases in connected services revenue due to the winding down of a legacy contract.
Cost of Professional Services Revenue
Cost of professional services revenue for the three months ended June 30, 2022 was $18.2 million, an increase of $3.2 million, or 21.3%, from $15.0 million for the three months ended June 30, 2021. Cost of professional services revenue increased primarily due to a $3.1 million increase in third-party contractor costs, $0.9 million higher internal allocated labor costs, and $0.3 million increase in amortization of costs previously deferred. The increase was partially offset by a $0.9 million decrease in stock-based compensation costs and a $0.3 million decrease in salary-related expenditures. As a percentage of total cost of revenues, cost of professional services revenue increased by 12.0 percentage points from 62.9% for the three months ended June 30, 2021 to 74.9% for the three months ended June 30, 2022.
Professional services gross profit increased $2.8 million, or 185.0%, from $1.6 million for the three months ended June 30, 2021 to $4.4 million for the three months ended June 30, 2022, which was due to an increase in professional services revenues and cost savings initiatives implemented during the first half of fiscal year 2022.
Nine Months Ended June 30, 2022 Compared with Nine Months Ended June 30, 2021
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, |
|
|
% Change |
|
|
|
2022 |
|
|
2021 |
|
|
2022 vs. 2021 |
|
License |
|
$ |
1,692 |
|
|
$ |
2,718 |
|
|
|
(37.7 |
)% |
Connected services |
|
|
16,766 |
|
|
|
19,960 |
|
|
|
(16.0 |
)% |
Professional services |
|
|
51,448 |
|
|
|
48,632 |
|
|
|
5.8 |
% |
Amortization of intangibles |
|
|
2,879 |
|
|
|
5,637 |
|
|
|
(48.9 |
)% |
Total cost of revenues |
|
$ |
72,785 |
|
|
$ |
76,947 |
|
|
|
(5.4 |
)% |
34
The following table shows total gross profit by product type and the corresponding percentage change (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, |
|
|
% Change |
|
|
|
2022 |
|
|
2021 |
|
|
2022 vs. 2021 |
|
License |
|
$ |
137,918 |
|
|
$ |
148,047 |
|
|
|
(6.8 |
)% |
Connected services |
|
|
50,709 |
|
|
|
63,989 |
|
|
|
(20.8 |
)% |
Professional services |
|
|
11,214 |
|
|
|
5,760 |
|
|
|
94.7 |
% |
Amortization of intangibles |
|
|
(2,879 |
) |
|
|
(5,637 |
) |
|
|
48.9 |
% |
Total gross profit |
|
$ |
196,962 |
|
|
$ |
212,159 |
|
|
|
(7.2 |
)% |
35
Total cost of revenues for the nine months ended June 30, 2022 were $72.8 million, a decrease of $4.1 million, or 5.4%, from $76.9 million for the nine months ended June 30, 2021.
We experienced a decrease in total gross profit of $15.2 million, or 7.2%, from $212.2 million for the nine months ended June 30, 2021 to $197.0 million for the nine months ended June 30, 2022. The decrease was primarily driven by a decline in license and connected services revenues.
Cost of License Revenue
Cost of license revenue for the nine months ended June 30, 2022 was $1.7 million, a decrease of $1.0 million, or 37.7%, from $2.7 million for the nine months ended June 30, 2021. Cost of license revenues decreased due to third-party royalty expenses associated with external technologies we leverage in our edge software components. As a percentage of total cost of revenues, cost of license revenue decreased by 1.2 percentage points from 3.5% for the nine months ended June 30, 2021 to 2.3% for the nine months ended June 30, 2022.
License gross profit decreased by $10.1 million, or 6.8%, for the nine months ended June 30, 2022 when compared to the nine months ended June 30, 2021, primarily due to decreases in license revenues.
Cost of Connected Services Revenue
Cost of connected services revenue for the nine months ended June 30, 2022 was $16.8 million, a decrease of $3.2 million, or 16.0%, from $20.0 million for the nine months ended June 30, 2021. Cost of connected services revenue decreased primarily due to a $1.4 million decrease in salary-related expenditures, $0.6 million decrease in amortization of costs previously deferred, $0.5 million decrease in stock-based compensation, $0.4 million decrease in internal allocated labor costs, $0.2 million decrease in third-party contractor costs and $0.2 million decrease in depreciation costs, offset by $1.1 million increase in our cloud infrastructure costs. As a percentage of total cost of revenues, cost of connected service revenue decreased by 2.9 percentage points from 25.9% for the nine months ended June 30, 2021 to 23.0% for the nine months ended June 30, 2022.
Connected services gross profit decreased $13.3 million, or 20.8%, from $64.0 million for the nine months ended June 30, 2021 to $50.7 million for the nine months ended June 30, 2022, driven by decreases in connected services revenue due to the winding down of a legacy contract.
Cost of Professional Services Revenue
Cost of professional services revenue for the nine months ended June 30, 2022, was $51.4 million, an increase of $2.8 million, or 5.8%, from $48.6 million for the nine months ended June 30, 2021. Cost of professional services revenue increased primarily due to a $7.4 million increase in third-party contractor costs. The increase was partially offset by a $2.8 million decrease in internal allocated labor, $1.1 million decrease in stock-based compensation costs, and $0.7 million decrease in amortization of costs previously deferred. As a percentage of total cost of revenues, cost of professional services revenue increased by 7.5 percentage points from 63.2% for the nine months ended June 30, 2021 to 70.7% for the nine months ended June 30, 2022.
Professional services gross profit increased $5.4 million, or 94.7%, from $5.8 million for the nine months ended June 30, 2021 to $11.2 million for the nine months ended June 30, 2022, which was due to an increase in professional services revenues and cost savings initiatives implemented during the first half of fiscal year 2022.
Operating Expenses
The tables below show each component of operating expense. Total other income (expense), net and provision for (benefit from) income taxes are non-operating expenses and presented in a similar format (dollars in thousands).
R&D Expenses
Three Months Ended June 30, 2022 Compared with Three Months Ended June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
% Change |
|
|
|
2022 |
|
|
2021 |
|
|
2022 vs. 2021 |
|
Research and development |
|
$ |
26,040 |
|
|
$ |
30,370 |
|
|
|
(14.3 |
)% |
36
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 June 30, 2022 were $26.0 million, a decrease of $4.4 million, or 14.3%, from $30.4 million for the three months ended June 30, 2021. We shifted a portion of our R&D workforce to support our professional service teams, which contributed to the decline in R&D expenses. The decrease was primarily attributable to a $2.2 million decrease in stock-based compensation costs, an $1.1 million increase in labor allocated to support our customer projects, a $0.8 million decrease in salary-related expenditures, and an $0.3 million increase in capitalized costs associated with internally developed software. As a percentage of total operating expenses, R&D expenses increased by 0.8 percentage points from 52.3% for the three months ended June 30, 2021 to 53.1% for the three months ended June 30, 2022.
Nine Months Ended June 30, 2022 Compared with Nine Months Ended June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, |
|
|
% Change |
|
|
|
2022 |
|
|
2021 |
|
|
2022 vs. 2021 |
|
Research and development |
|
$ |
81,808 |
|
|
$ |
83,365 |
|
|
|
(1.9 |
)% |
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 nine months ended June 30, 2022 were $81.8 million, a decrease of $1.6 million, or 1.9%, from $83.4 million for the nine months ended June 30, 2021. The decrease was primarily attributable to a $4.7 million decrease in stock-based compensation costs and a $2.1 million increase in capitalized costs associated with internally developed software. The decrease was partially offset by a $3.3 million decrease in labor allocated to support our customer projects, $0.5 million increase in hardware and software costs, and $0.5 million increase in third party contractor costs. As a percentage of total operating expenses, R&D expenses increased by 2.4 percentage points from 51.4% for the nine months ended June 30, 2021 to 53.8% for the nine months ended June 30, 2022.
Sales & Marketing Expenses
Three Months Ended June 30, 2022 Compared with Three Months Ended June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
% Change |
|
|
|
2022 |
|
|
2021 |
|
|
2022 vs. 2021 |
|
Sales and marketing |
|
$ |
8,299 |
|
|
$ |
9,534 |
|
|
|
(13.0 |
)% |
Sales and marketing expenses for the three months ended June 30, 2022 were $8.3 million, a decrease of $1.2 million, or 13.0%, from $9.5 million for the three months ended June 30, 2021. The decrease in sales and marketing expenses was primarily attributable to a $1.5 million decrease in stock-based compensation and $0.2 million decrease in salary-related expenses partially offset by an increase of $0.2 million related to travel-related expenditures. As a percentage of total operating expenses, sales and marketing expenses increased by 0.5 percentage points from 16.4% for the three months ended June 30, 2021 to 16.9% for the three months ended June 30, 2022.
Nine Months Ended June 30, 2022 Compared with Nine Months Ended June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, |
|
|
% Change |
|
|
|
2022 |
|
|
2021 |
|
|
2022 vs. 2021 |
|
Sales and marketing |
|
$ |
22,487 |
|
|
$ |
28,097 |
|
|
|
(20.0 |
)% |
37
Sales and marketing expenses for the nine months ended June 30, 2022 were $22.5 million, a decrease of $5.6 million, or 20.0%, from $28.1 million for the nine months ended June 30, 2021. The decrease in sales and marketing expenses was primarily attributable to a $6.3 million decrease in stock-based compensation and $0.9 million decrease in salary-related expenses partially offset by an increase of $0.7 million in travel-related expenditures, and $0.4 million related to commission expense. As a percentage of total operating expenses, sales and marketing expenses decreased by 2.5 percentage points from 17.3% for the nine months ended June 30, 2021 to 14.8% for the nine months ended June 30, 2022.
General & Administrative Expenses
Three Months Ended June 30, 2022 Compared with Three Months Ended June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
% Change |
|
|
|
2022 |
|
|
2021 |
|
|
2022 vs. 2021 |
|
General and administrative |
|
$ |
10,614 |
|
|
$ |
13,173 |
|
|
|
(19.4 |
)% |
General and administrative expenses for the three months ended June 30, 2022 were $10.6 million, a decrease of $2.6 million, or 19.4%, from $13.2 million for the three months ended June 30, 2021. The decrease in general and administrative expenses was primarily attributable to a $3.7 million decrease in stock-based compensation costs. The decrease was partially offset by a $0.2 million increase in salary-related expenditures, $0.2 million increase in third-party professional services, and $0.2 million increase in travel-related expenditures. As a percentage of total operating expenses, general and administrative expenses decreased by 1.0 percentage points from 22.7% for the three months ended June 30, 2021 to 21.7% for the three months ended June 30, 2022.
Nine Months Ended June 30, 2022 Compared with Nine Months Ended June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, |
|
|
% Change |
|
|
|
2022 |
|
|
2021 |
|
|
2022 vs. 2021 |
|
General and administrative |
|
$ |
31,941 |
|
|
$ |
38,563 |
|
|
|
(17.2 |
)% |
General and administrative expenses for the nine months ended June 30, 2022 were $31.9 million, a decrease of $6.7 million, or 17.2%, from $38.6 million for the nine months ended June 30, 2021. The decrease in general and administrative expenses was primarily attributable to a $10.6 decrease in stock-based compensation costs. The decrease was partially offset by a $2.2 million increase in professional services, $1.0 million increase in salary-related expenditures, and $0.3 million increase in travel-related expenditures. As a percentage of total operating expenses, general and administrative expenses decreased by 2.8 percentage points from 23.8% for the nine months ended June 30, 2021 to 21.0% for the nine months ended June 30, 2022.
Amortization of Intangible Assets
Three Months Ended June 30, 2022 Compared with Three Months Ended June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
% Change |
|
|
|
2022 |
|
|
2021 |
|
|
2022 vs. 2021 |
|
Cost of revenues |
|
$ |
103 |
|
|
$ |
1,879 |
|
|
|
(94.5 |
)% |
Operating expense |
|
|
2,862 |
|
|
|
3,180 |
|
|
|
(10.0 |
)% |
Total amortization |
|
$ |
2,965 |
|
|
$ |
5,059 |
|
|
|
(41.4 |
)% |
38
Intangible asset amortization for the three months ended June 30, 2022 was $3.0 million, a decrease of $2.1 million, or 41.4%, from $5.1 million for the three months ended June 30, 2021. The decrease in amortization relates to certain intangible assets having been fully amortized during fiscal 2022. 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 decreased by 7.5 percentage points from 7.9% for the three months ended June 30, 2021 to 0.4% for the three months ended June 30, 2022. As a percentage of total operating expenses, intangible asset amortization expenses within operating expenses increased by 0.3 percentage points from 5.5% for the three months ended June 30, 2021 as compared to 5.8% for the three months ended June 30, 2022.
Nine Months Ended June 30, 2022 Compared with Nine Months Ended June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, |
|
|
% Change |
|
|
|
2022 |
|
|
2021 |
|
|
2022 vs. 2021 |
|
Cost of revenues |
|
$ |
2,879 |
|
|
$ |
5,637 |
|
|
|
(48.9 |
)% |
Operating expense |
|
|
9,151 |
|
|
|
9,521 |
|
|
|
(3.9 |
)% |
Total amortization |
|
$ |
12,030 |
|
|
$ |
15,158 |
|
|
|
(20.6 |
)% |
Intangible asset amortization for the nine months ended June 30, 2022 was $12.0 million, a decrease of $3.2 million, or 20.6%, from $15.2 million for the nine months ended June 30, 2021. The decrease in amortization relates to certain intangible assets having been fully amortized during fiscal 2022. 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 decreased by 3.3 percentage points from 7.3% for the nine months ended June 30, 2021 to 4.0% for the nine months ended June 30, 2022. As a percentage of total operating expenses, intangible asset amortization expenses within operating expenses increased by 0.1 percentage points from 5.9% for the three months ended June 30, 2021 as compared to 6.0% for the three months ended June 30, 2022.
Restructuring and Other Costs, Net
Three Months Ended June 30, 2022 Compared with Three Months Ended June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
% Change |
|
|
|
2022 |
|
|
2021 |
|
|
2022 vs. 2021 |
|
Restructuring and other costs, net |
|
$ |
1,197 |
|
|
$ |
1,760 |
|
|
|
(32.0 |
)% |
Restructuring and other costs, net for the three months ended June 30, 2022 were $1.2 million, a decrease of $0.6 million, or 32.0%, from $1.8 million for the three months ended June 30, 2021. The decrease in restructuring and other costs, net was primarily driven by a $1.5 million decrease in one-time charges and $0.3 million decrease in charges resulting from the closure of facilities that will no longer be utilized. The decrease was partially offset by a $1.3 million severance charge related to the elimination of personnel. As a percentage of total operating expenses, restructuring and other costs, net decreased by 0.6 percentage points from 3.0% for the three months ended June 30, 2021 to 2.4% for the three months ended June 30, 2022.
Nine Months Ended June 30, 2022 Compared with Nine Months Ended June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, |
|
|
% Change |
|
|
|
2022 |
|
|
2021 |
|
|
2022 vs. 2021 |
|
Restructuring and other costs, net |
|
$ |
6,586 |
|
|
$ |
2,777 |
|
|
|
137.2 |
% |
39
Restructuring and other costs, net for the nine months ended June 30, 2022 were $6.6 million, an increase of $3.8 million, or 137.2%, from $2.8 million for the nine months ended June 30, 2021. The increase in restructuring and other costs, net was primarily driven by $4.0 million, net of $5.0 million in forfeitures, in stock-based compensation due to the resignation of our former CEO and the resulting modification of certain stock-based awards, $1.5 million severance charge related to the elimination of personnel, and $0.5 million charge resulting from the closure of facilities that will no longer be utilized. As a percentage of total operating expenses, restructuring and other costs, net increased by 2.6 percentage points from 1.7% for the nine months ended June 30, 2021 to 4.3% for the nine months ended June 30, 2022.
Total Other Expense, Net
Three Months Ended June 30, 2022 Compared with Three Months Ended June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
% Change |
|
|
|
2022 |
|
|
2021 |
|
|
2022 vs. 2021 |
|
Interest income |
|
$ |
243 |
|
|
$ |
34 |
|
|
|
614.7 |
% |
Interest expense |
|
|
(3,815 |
) |
|
|
(3,294 |
) |
|
|
15.8 |
% |
Other income (expense), net |
|
|
(478 |
) |
|
|
173 |
|
|
|
(376.3 |
)% |
Total other income (expense), net |
|
$ |
(4,050 |
) |
|
$ |
(3,087 |
) |
|
|
31.2 |
% |
Total other expense, net for the three months ended June 30, 2022 was an expense of $4.1 million, a change of $1.0 million from $3.1 million of expense for the three months ended June 30, 2021. The increase in interest income was primarily attributable to returns on investments. The increase in interest expense was primarily attributable to a higher applicable interest rate on our Term Loan Facility. The change in other income (expense), net was primarily driven by foreign exchange losses. For further information, see “Liquidity and Capital Resources” below.
Nine Months Ended June 30, 2022 Compared with Nine Months Ended June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, |
|
|
% Change |
|
|
|
2022 |
|
|
2021 |
|
|
2022 vs. 2021 |
|
Interest income |
|
$ |
416 |
|
|
$ |
68 |
|
|
|
511.8 |
% |
Interest expense |
|
|
(10,602 |
) |
|
|
(10,569 |
) |
|
|
0.3 |
% |
Other income (expense), net |
|
|
(764 |
) |
|
|
1,432 |
|
|
|
(153.4 |
)% |
Total other expense, net |
|
$ |
(10,950 |
) |
|
$ |
(9,069 |
) |
|
|
20.7 |
% |
Total other expense, net for the nine months ended June 30, 2022 was an expense of $11.0 million, a change of $1.9 million from $9.1 million of expense for the nine months ended June 30, 2021. The increase in interest income was primarily attributable to returns on investments. The change in other income (expense), net was primarily driven by foreign exchange gains offset by $1.3 million of expense related to a decrease in an asset corresponding with the release of indemnified pre-spin-off liabilities for uncertain tax positions. For further information, see “Liquidity and Capital Resources” below.
Provision For Income Taxes
Three Months Ended June 30, 2022 Compared with Three Months Ended June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
% Change |
|
|
|
2022 |
|
|
2021 |
|
|
2022 vs. 2021 |
|
Provision for income taxes |
|
$ |
110,994 |
|
|
$ |
6,064 |
|
|
|
1730.4 |
% |
Effective income tax rate % |
|
|
946.5 |
% |
|
|
51.1 |
% |
|
|
|
40
Our effective income tax rate for the three months ended June 30, 2022 was 946.5%, compared to 51.1% for the three months ended June 30, 2021. Our provision for income taxes for the three months ended June 30, 2022 was $111.0 million, a net change of $104.9 million from a provision for income taxes of $6.1 million for the three months ended June 30, 2021. During the third quarter of fiscal year 2022, we established a valuation allowance of $107.6 million against our deferred tax assets in the Netherlands, which consists of tax amortizable intellectual property and net operating loss carryforwards. We determined we had new evidence, based on updates to transfer pricing arrangements and changes to the earnings guidance for fiscal year 2022
Nine Months Ended June 30, 2022 Compared with Nine Months Ended June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, |
|
|
% Change |
|
|
|
2022 |
|
|
2021 |
|
|
2022 vs. 2021 |
|
Provision for income taxes |
|
$ |
114,738 |
|
|
$ |
2,865 |
|
|
|
3904.8 |
% |
Effective income tax rate% |
|
|
337.1 |
% |
|
|
7.0 |
% |
|
|
|
Our effective income tax rate for the nine months ended June 30, 2022 was 337.1%, compared to 7.0% for the nine months ended June 30, 2021. Our provision for income taxes for the nine months ended June 30, 2022 was $114.7 million, a net change of $111.8 million from a provision for income taxes of $2.9 million for the nine months ended June 30, 2021. During the third quarter of fiscal year 2022, we established a valuation allowance of $107.6 million against our deferred tax assets in the Netherlands, which consists of tax amortizable intellectual property and net operating loss carryforwards. We determined we had new evidence, based on updates to transfer pricing arrangements and changes to the earnings guidance for fiscal year 2022.
Liquidity and Capital Resources
Financial Condition
As of June 30, 2022, we had $136.1 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 U.S. treasury notes. As of June 30, 2022, our net working capital, excluding deferred revenue and deferred costs, was $168.5 million. This balance is representative of the short-term net cash inflows based on the working capital at that date.
During the nine months ended June 30, 2022, we converted existing variable long-term contracts into minimum purchase commitment deals with our largest customer. These minimum commitment deals accounted for $47.1 million of revenues during the nine months ended June 30, 2022. The cash associated with these deals is expected to be collected over the distribution period, which could be up to five years. The estimated future revenues related to these long-term contracts was previously included in our variable backlog.
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 markets as needed. Based on our history of generating positive cash flows and the $136.1 million of cash, cash equivalents, and marketable securities as of June 30, 2022, 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.
The following table presents our material cash requirements for future periods (dollars in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Material Cash Requirements Due by Period |
|
|
|
2022 |
|
|
2023 - 2024 |
|
|
2025 - 2026 |
|
|
Thereafter |
|
|
Total |
|
Notes |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
175,000 |
|
|
$ |
- |
|
|
$ |
175,000 |
|
Interest payable on the Notes (a) |
|
|
1,323 |
|
|
|
10,507 |
|
|
|
3,507 |
|
|
|
- |
|
|
|
15,337 |
|
Senior Credit Facilities |
|
|
1,562 |
|
|
|
23,438 |
|
|
|
87,500 |
|
|
|
- |
|
|
|
112,500 |
|
Interest payable on Senior Credit Facilities (b) |
|
|
1,109 |
|
|
|
7,895 |
|
|
|
1,682 |
|
|
|
- |
|
|
|
10,686 |
|
Operating leases |
|
|
1,762 |
|
|
|
10,615 |
|
|
|
5,069 |
|
|
|
2,377 |
|
|
|
19,823 |
|
Operating leases under restructuring (c) |
|
|
(21 |
) |
|
|
20 |
|
|
|
391 |
|
|
|
196 |
|
|
|
586 |
|
Financing leases |
|
|
104 |
|
|
|
884 |
|
|
|
415 |
|
|
|
- |
|
|
|
1,403 |
|
Total material cash requirements |
|
$ |
5,839 |
|
|
$ |
53,359 |
|
|
$ |
273,564 |
|
|
$ |
2,573 |
|
|
$ |
335,335 |
|
41
(a)Interest per annum is due and payable semiannually and is determined based on the outstanding principal as of June 30, 2022.
(b)Interest per annum is due and payable monthly and is determined based on the outstanding principal as of June 30, 2022.
(c)Contractual lease commitments are shown net of sublease income related to certain facilities. As of June 30, 2022, we anticipate sublease income of $1.8 million through fiscal year 2024.
As the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our liquidity needs. 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. The COVID-19 pandemic has negatively impacted the global economy and created significant volatility and disruption of financial markets. An extended period of economic disruption could materially affect our business, results of operations, ability to meet debt covenants, access to sources of liquidity and financial condition.
3.00% Senior Convertible Notes due 2025
On June 2, 2020, we issued $175.0 million in aggregate principal amount of Notes, including the initial purchasers’ exercise in full of their option to purchase an additional $25.0 million principal amount of the Notes, between us and the Trustee, in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The net proceeds from the issuance of the Notes were $169.8 million after deducting transaction costs.
The Notes are senior, unsecured obligations and will accrue interest payable semiannually in arrears on June 1 and December 1 of each year at a rate of 3.00% per year. The Notes will mature on June 1, 2025, unless earlier converted, redeemed, or repurchased. The 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 will initially be 26.7271 shares of our common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $37.42 per share of our common stock).
The interest expense recognized related to the Notes for the three and nine months ended June 30, 2022 and 2021 was as follows (dollars in thousands):
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Nine Months Ended June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Contractual interest expense |
|
$ |
1,308 |
|
|
$ |
1,308 |
|
|
$ |
3,924 |
|
|
$ |
3,924 |
|
Amortization of debt discount |
|
|
943 |
|
|
|
886 |
|
|
|
2,786 |
|
|
|
2,617 |
|
Amortization of issuance costs |
|
|
237 |
|
|
|
223 |
|
|
|
700 |
|
|
|
658 |
|
Total interest expense related to the Notes |
|
$ |
2,488 |
|
|
$ |
2,417 |
|
|
$ |
7,410 |
|
|
$ |
7,199 |
|
42
The conditional conversion feature of the Notes was triggered during the nine months ended June 30, 2022. As of June 30, 2022, 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 convertible 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 share), 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. As of June 30, 2022, there were no amounts outstanding under the Revolving Facility.
On December 17, 2020 (the “Amendment No. 1 Effective Date”), we entered into Amendment No. 1 to the Credit Agreement (the “Amendment”). The Amendment extended the scheduled maturity date of the revolving credit and term facilities from June 12, 2024 to April 1, 2025.
The Amendment revised certain interest rates in the Credit Agreement. Following delivery of a compliance certificate for the first full fiscal quarter after the Amendment No. 1 Effective Date, the applicable margins for the revolving credit and term facilities is subject to a pricing grid based upon the net total leverage ratio as follows: (i) if the net total leverage ratio is greater than 3.00 to 1.00, the applicable margin is LIBOR plus 3.00% or ABR plus 2.00%; (ii) if the net total leverage ratio is less than or equal to 3.00 to 1.00 but greater than 2.50 to 1.00, the applicable margin is LIBOR plus 2.75% or ABR plus 1.75%; (iii) if the net total leverage ratio is less than or equal to 2.50 to 1.00 but greater than 2.00 to 1.00, the applicable margin is LIBOR plus 2.50% or ABR plus 1.50%; (iv) if the net total leverage ratio is less than or equal to 2.00 to 1.00 but greater than 1.50 to 1.00, the applicable margin is LIBOR plus 2.25% or ABR plus 1.25%; and (v) if the net total leverage ratio is less than or equal to 1.50 to 1.00, the applicable margin is LIBOR plus 2.20% or ABR plus 1.00%. As a result of the Amendment, the applicable LIBOR floor was reduced from 0.50% to 0.00%.
From the Amendment No. 1 Effective Date until the fiscal quarter ended December 31, 2020, the interest rate was LIBOR plus 2.50%. For the three months ended March 31, 2021, the interest rate was LIBOR plus 2.25%. For the three months ended June 30, 2021, the interest rate was LIBOR plus 2.25%. For the three and nine months ended June 30, 2022, the interest rate was LIBOR plus 2.25%. Total interest expense relating to the Senior Credit Facilities for the three months ended June 30, 2022 and 2021 was $1.1 million and $0.8 million, respectively, and $2.9 million and $3.2 million for the nine months ended June 30, 2022 and 2021, respectively. Amounts reflect the coupon and accretion of the discount.
In addition, the quarterly commitment fee required to be paid based on the unused portion of the Revolving Facility is subject to a pricing grid based upon the net total leverage ratio as follows: (i) if the net total leverage ratio is greater than 3.00 to 1.00, the unused line fee is 0.500%; (ii) if the net total leverage ratio is less than or equal to 3.00 to 1.00 but greater than 2.50 to 1.00, the unused line fee is 0.450%; (iii) if the net total leverage ratio is less than or equal to 2.50 to 1.00 but greater than 2.00 to 1.00, the unused line fee is 0.400%; (iv) if the net total leverage ratio is less than or equal to 2.00 to 1.00 but greater than 1.50 to 1.00, the unused line fee is 0.350%; and (v) if the net total leverage ratio is less than or equal to 1.50 to 1.00, the unused line fee is 0.300%.
Through the fiscal quarter ending December 31, 2022, we are obligated to make quarterly principal payments in an aggregate amount equal to 1.25% of the original principal amount of the Term Loan Facility. From the fiscal quarter ending March 31, 2023 and for each fiscal quarter thereafter, we are obligated to make quarterly principal payments in an aggregate amount equal to 2.50% of the original principal amount of the Term Loan Facility, with the balance payable at the maturity date thereof.
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 leveraged 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. As of June 30, 2022, we were in compliance with all Credit Agreement covenants.
Cash Flows
43
Cash flows from operating, investing and financing activities for the nine months ended June 30, 2022 and 2021, 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):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, |
|
|
% Change |
|
|
|
2022 |
|
|
2021 |
|
|
2022 vs. 2021 |
|
Net cash provided by operating activities |
|
$ |
2,815 |
|
|
$ |
51,068 |
|
|
|
(94.5 |
)% |
Net cash used in investing activities |
|
|
(3,417 |
) |
|
|
(34,716 |
) |
|
|
(90.2 |
)% |
Net cash used in financing activities |
|
|
(17,995 |
) |
|
|
(32,942 |
) |
|
|
(45.4 |
)% |
Effect of foreign currency exchange rates on cash and cash equivalents |
|
|
(1,377 |
) |
|
|
1,363 |
|
|
|
(201.0 |
)% |
Net changes in cash and cash equivalents |
|
$ |
(19,974 |
) |
|
$ |
(15,227 |
) |
|
|
31.2 |
% |
44
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the nine months ended June 30, 2022 was $2.8 million, a net decrease of $48.3 million, or 94.5%, from net cash provided by operating activities of $51.1 million for the nine months ended June 30, 2021. The net decrease in cash provided by operating activities was primarily due to:
•A decrease of $27.1 million from income before non-cash charges;
•A decrease of $35.7 million due to unfavorable changes in working capital primarily related to cash inflows from accounts receivable and outflows from prepaid expenses and other assets; and
•An increase of $14.6 million from changes in deferred revenue.
Deferred revenue represents a significant portion of our net cash provided by operating activities and, depending on the nature of our contracts with customers, 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 expect our deferred revenue balances to decrease in the future, including due to a wind-down of a legacy connected service relationship with a major OEM, since the majority of cash from the contract has been collected. We do not expect any changes in deferred revenue to affect our ability to meet our obligations.
Net Cash Used in Investing Activities
Net cash used in investing activities for the nine months ended June 30, 2022 was $3.4 million, a net change of $31.3 million, or 90.2%, from $34.7 million of cash used in investing activities for the nine months ended June 30, 2021. The change in cash flows were driven by:
•An increase of $34.7 million net cash inflow related to marketable securities;
•A decrease of $2.0 million related to payments for equity investments; and
•An increase of $$6.4 million in capital expenditures.
Net Cash Used in Financing Activities
Net cash used in financing activities for the nine months ended June 30, 2022 was $18.0 million, a net change of $14.9 million, from cash used in financing activities of $32.9 million for the nine months ended June 30, 2021. The change in cash flows were primarily due to:
•An increase of $13.9 million in payments of tax related withholdings due to the net settlement of equity awards; and
•An increase of $28.3 million in proceeds from the issuance of our common stock.
Critical Accounting Policies, Judgments and 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 and judgments 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 policies and 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 business combinations; accounting for stock-based compensation; accounting for income taxes; accounting for leases; accounting for convertible debt; and loss contingencies. We believe these policies and 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 policies and estimates may be found in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021 in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Policies, Judgments and Estimates” and below.
Revenue Recognition
45
We primarily derive revenue from the following sources: (1) royalty-based software license arrangements, (2) connected services, and (3) professional services. Revenue is reported net of applicable sales and use tax, value-added tax and other transaction taxes imposed on the related transaction including mandatory government charges that are passed through to our customers. We account for a contract when both parties have approved and committed to the contract, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
Our arrangements with customers may contain multiple products and services. We account for individual products and services separately if they are distinct—that is, if a product or service is separately identifiable from other items in the contract and if a customer can benefit from it on its own or with other resources that are readily available to the customer.
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.
Goodwill
Goodwill is reported at the reporting unit level. Upon consideration of the discrete financial information reviewed by our CODM, we have concluded that our goodwill is associated with one reporting unit.
Goodwill is not amortized but tested annually for impairment or when interim indicators of impairment are present. The test for goodwill impairment involves an assessment of impairment indicators. If indicators are present, a quantitative test of impairment is performed. During the quantitative test, the fair value of the reporting unit is compared to its carrying value. If the fair value of the reporting unit is less than the carrying value, the difference represents an impairment. If the fair value of the reporting unit is greater than the carrying value, no impairment is recognized.
Due to the current macroeconomic conditions, we concluded that indicators of impairment were present and performed an interim quantitative impairment test as of June 30, 2022. The fair value of our reporting unit was determined using a combination of the income approach and the market approach. For the income approach, fair value was determined based on the present value of estimated future after-tax cash flows, discounted at an appropriate risk-adjusted rate. We used our internal forecasts, which were revised to reflect the anticipated impact of the semiconductor shortage, to estimate future after-tax cash flows and estimate the long-term growth rates based on our most recent views of the long-term outlook for our reporting unit. For the market approach, we used a valuation technique in which values were derived based on valuation multiples of comparable publicly traded companies. We weighted the methodologies appropriately to estimate a fair value of approximately $995 million as of June 30, 2022. The estimated fair value exceeded the $950 million carrying value of our reporting unit by approximately $45 million, or 5% of the carrying value. Based upon the results of the impairment test, no goodwill impairment was recorded as of June 30, 2022.
The full extent to which the ongoing macroeconomic conditions could adversely affects our financial performance will depend on future developments, many of which are outside of our control. These uncertainties could adversely impact the significant estimates and assumptions, which we believe to be reasonable, that are incorporated in our valuation techniques used to estimate the fair value of our reporting unit on June 30, 2022. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions, new market penetration, and determination of appropriate market comparables. Adverse impacts to the estimates and assumptions used in our valuation techniques could result in the determination that all or a portion of our goodwill may be impaired in future periods.
46
See Note 7 to the accompanying unaudited condensed consolidated financial statements for further discussion of our goodwill.
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.