Cerence Earnings: The Worst Could Be Behind It

seekingalpha11-22

Cerence Inc.'s stock is undervalued at 10x forward free cash flow despite a turbulent past and a 60% decline in 2024.The company's AI-driven in-car voice solutions, trusted by major automakers, and ...

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Richard Drury  Investment Thesis Cerence Inc. (NASDAQ:CRNC) has been a really tough investment by any stretch of a sensible discussion. Including the +100% gain on its stock yesterday, the stock is still down more than 60% in 2024. And for good reason, too. But in investing, the past is for peasants. The future is where the money is made. And for those investors predisposed to look beyond fiscal Q1 2025, and start to think about the back end of fiscal 2025 and early fiscal 2026, they are set up with a super cheap stock. For my part, I estimate the stock is priced at 8x forward free cash flow. A bargain. Rapid Recap Back in October, I made a shockingly bad call. Here's what I concluded my analysis with, [...] while Cerence's AI prospects are promising, the company's financial performance raises questions about its ability to deliver consistent and substantial returns in the near term.   Author's work on CRNC The graph above highlights the inconvenient truth. I made a truly bad, bad call with CRNC. So, what gives me the right to make a bullish call now? Well, read on. Cerence's Near-Term Prospects Cerence is a provider of voice assistance in-car solutions for the automotive industry. With expertise in AI Cerence develops technologies that transform the in-car experience into a more intuitive, human-like interaction. Its solutions simplify vehicle controls, enabling natural language commands to operate navigation, climate, and other systems. Trusted by major automakers such as Volkswagen, BMW, and Audi, Cerence is a specialized, neutral partner focused on enhancing the in-cabin experience through voice commands. Next, Cerence is leveraging cost reductions from prior restructuring efforts and plans to streamline operations further in fiscal 2025.  With fair demand for its generative AI products commanding higher margins, Cerence anticipates growing its Connected services and variable License business unit revenues by high single digits, supporting its path to profitability and cash flow generation. With that background in mind, let's now discuss its fundamentals. Revenue Growth Rates Should Improve   CRNC revenue growth rates What's not immediately obvious from the graph above is that after fiscal Q1 2025, Cerence's revenue growth rates are going to improve. Now, the main question here is not so much the cadence of each quarter, as much as whether or not Cerence can return to growth beyond fiscal 2026? Presently, I don't have enough conviction to provide you a clear answer. But what I will say is this, if Cerence can get to fiscal 2026 and start to deliver flat growth, that would be a massive improvement from the outlook into fiscal Q1 2025. And therein lies this opportunity, particularly in light of its valuation. CRNC Stock Valuation -- 10x Forward Free Cash Flow As an Inflection investor, I like to back companies that have 10% net cash to market cap. Although, sometimes, I will compromise. On this front, Cerence fares poorly, with a net debt position of roughly $155 million. This means that about 65% of its market cap is made up of net cash. Not as strong a position as I would typically back. Moving on, Cerence's fiscal 2025 guidance points to approximately $20 million of EBITDA. This is down considerably from the $81 million reported in fiscal 2024. On the surface, you'd assume this was a horrendous guidance. But here, the devil is in the detail. Let's think about this. Back in fiscal Q3 2024, Cerence had just reported $83 million of EBITDA for the first 9 months of 2024. At the time, its guidance looking into fiscal 2024 year-end pointed to approximately $70 million of EBITDA. Consequently, investors had braced themselves for negative $13 million of EBITDA. This means you had a business with erratic growth rates, plus, a leveraged balance sheet, plus an unprofitable business, at least on an EBITDA metric. What sort of multiple were investors willing to put on that sort of business? Clearly, not much. But now, its guidance for fiscal 2025, appears to point towards another rough quarter ahead, before Cerence's underlying EBITDA profile starts to improve. And this suddenly changes the company's narrative considerably. It now appears that Cerence could possibly end up delivering around $25 million of free cash flow. Think about it. Last year, in fiscal 2024, Cerence's free cash flow stood at $12 million. In the year ahead, just at the midpoint, Cerence is expecting to double its free cash flow. Moreover, management says that there are about $9 million of restructuring costs taking place in fiscal 2025 that won't recur in the future. Therefore, it's possible that Cerence could deliver $30 million of free cash flow in the following year, without any further growth! Altogether, having to pay 10x fiscal 2025 free cash flow for Cerence is probably as cheap as this stock is going to get. Investment Risks There are ample risks here. For one, this business has lost a lot of trust with investors. The new CEO has his work cut out to regain investor confidence, without any guarantees of success. In addition, its revenue growth rates are expected to improve by the end of fiscal 2025, but this is far from guaranteed. Also, its balance sheet has a fair amount of debt. If Cerence's free cash flow doesn't soon improve, investors will not be willing to even pay 8x forward free cash flow for Cerence. The Bottom Line Despite its turbulent past and lingering risks, Cerence's financial outlook suggests a compelling turnaround opportunity. With a projected doubling of free cash flow in fiscal 2025 and the potential to reach $30 million in fiscal 2026, the company appears significantly undervalued at just 10x forward free cash flow.  While challenges remain, the improving EBITDA profile and reduced restructuring costs position Cerence for an improved financial future.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2485267761"}