Cerence Prepares for Key Financial Report Amid Declining Expectations
Cerence CRNC is scheduled to unveil its fourth-quarter fiscal 2024 results on Nov. 21.
Projected revenues for the fourth quarter are estimated to be between $44 million and $50 million.
The Zacks Consensus Estimate for revenue sits at $48.14 million, marking a significant decline of 40.39% compared to last year’s figures from the same quarter.
The consensus for loss has remained consistent at 32 cents per share over the past 30 days, in contrast to last year’s earnings of 9 cents per share.
Notably, CRNC has beaten the Zacks Consensus Estimate in three of the last four quarters, with an average surprise of 83.64%, despite missing once.
Cerence Inc. Price and EPS Surprise
Cerence Inc. price-eps-surprise | Cerence Inc. Quote
Find the latest EPS estimates and surprises on Zacks Earnings Calendar.
With the earnings report approaching, let’s examine the factors influencing these results.
Key Insights for CRNC’s Q4 Earnings
Cerence’s strong presence in the generative AI (GenAI) sector, along with a growing customer base and robust partner relationships, is anticipated to bolster revenue growth.
Prominent clients, including Volkswagen, Audi, Seat, and BMW Group, have benefited from Cerence’s innovative technology. Partnerships with major firms like NVIDIA NVDA and Microsoft MSFT enhance their position in the automotive industry.
Nevertheless, the fourth-quarter results are expected to reflect lower revenues in Licensing, Connected Services, and Professional Services. There are concerns regarding diminished demand for Cerence’s technology among automotive OEMs.
In the third quarter of fiscal 2024, CRNC reported shipments of 11.7 million cars with its technology, a 6.2% decrease from the previous year but a 3% increase sequentially. This trend is likely to continue into the upcoming quarter.
Additionally, Cerence does not anticipate any further fixed License revenue during this quarter. Efforts to cut costs as part of its transformation strategy may hinder financial performance for the fourth quarter.
The Zacks Consensus Estimate for License revenues is projected at $19.70 million, representing a sharp decline of 54.3% year-over-year. Similar concerns apply to Connected Services, estimated at $10.88 million, which indicates a 43.2% drop from the previous year.
Expected Professional Services revenue is estimated to be flat or lower year over year, with a consensus of $17.57 million, reflecting a 5% decrease from last year’s figures.
Year-to-date, Cerence shares have plummeted by 85.1%, significantly underperforming the Zacks Computer & Technology sector’s gain of 25.7% and the Zacks Computers IT Services industry’s rise of 12%.
Year-to-Date Performance Chart
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Cerence’s current Value Score of C indicates that its valuation may be overstretched.
CRNC shares are trading below both the 50-day and 200-day moving averages, signaling a bearish trend.
Image Source: Zacks Investment Research
CRNC’s Expanding Auto Clientele Boosts Prospects
The company’s growth strategy focuses on an expanding automotive client list. In Q3 of fiscal 2024, CRNC achieved eight new OEM design wins, reflecting the increasing uptake of its AI-driven solutions.
During this quarter, the number of vehicles equipped with Cerence technology increased significantly, with a 19% rise in the usage of connected services over the past year.
In June, Cerence revealed that Audi, part of the Volkswagen Group, would implement its GenAI solution, Cerence Chat Pro, to enhance the in-car assistant capabilities in Audi’s MIB 3 infotainment platform and future models.
A crucial partnership with Skoda, another Volkswagen brand, aims to improve the driving experience by integrating Cerence Chat Pro with Skoda’s in-car voice assistant, Laura. This allows for interactive, conversational engagement, providing precise responses and simplifying navigation for drivers.
Strong Partner Network Fuels CRNC’s Growth
Collaboration with Smart focuses on leveraging AI to improve in-car experiences for next-generation vehicles. The introduction of the Cerence Automotive Large Language Model (CaLLM), developed with NVIDIA, aims to elevate in-car computing by addressing challenges faced by automakers and enhancing user experiences.
Additionally, CRNC’s partnership with Microsoft aims to integrate OpenAI’s ChatGPT model into vehicles using Microsoft Azure, targeting enhancements in in-car user experiences by merging Cerence’s technology with Microsoft’s cloud services.
Tuya TUYA has also formed a partnership with Cerence to offer multilingual text-to-speech capabilities for its developer platform, specifically designed for two-wheeled vehicles such as motorcycles and e-bikes.
Should Investors Buy, Sell, or Hold Before Q4?
Cerence’s transformation strategy includes projected net annualized cost savings of $35 million to $40 million by fiscal 2025. The company’s revenue target is now pegged at $237 million, excluding legacy revenues from Toyota. A reduced contribution from Professional Services is likely to enhance the gross margin profile.
Cerence aims for a positive adjusted EBITDA in the single-digit margin range soon. However, competition in the automotive voice assistance sector looms large, and concerns over its current valuation persist despite a strengthening partner network and expanding customer base.
Currently, Cerence holds a Zacks Rank #3 (Hold), indicating that waiting for a more favorable entry point might be a prudent approach to consider accumulating the stock.
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