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Small-Cap Confidential
Undiscovered stocks that can make you rich

November 18, 2020

Tyler updates us on one more stock that reported earnings recently.

Cerence (CRNC) Delivers In Q4 Fiscal 2020

Cerence (CRNC) reported Q4 and full-year 2020 results this week that came in much better than analysts expected. Revenue was up 9.5% to $91 million and beat by $11.3 million while adjusted EPS of $0.61 beat by $0.26. Adjusted gross margin was nearly 72%, up from 67.4% in the year ago quarter.

Management also gave Q1 fiscal 2021 guidance for revenue growth of 13% ($85 million to $90 million) and full year 2021 revenue growth of 12% ($360 million to $380 million). As compared to this time last year backlog is up 32% to $1.8 billion, including $967 million for license, $740 million for connected services and $106 million for professional services. This represents year-over-year growth of 59% for license, 12% for connected and 8% for pro services.

The most recent quarter was a story of a huge rebound in the auto industry … so much so that some analysts are calling for a good deal of moderation in early 2021 as the rebound slows and pricing levels off. Cerence likely benefited from some of that rebounding optimism, as well as from huge cost controls that boosted the bottom line.

However, what’s interesting here is that Cerence is working with OEMs on products that will be coming to cars in future years, not just in the next quarter or two. It’s really a story about the bigger trend toward making car infotainment systems as user friendly as the best smartphones (or even better). That means getting its technologies embedded inside the infotainment systems in as many cars as possible so Cerence can access sensors, cameras, microphones, etc. Once that equipment is in, Cerence has more flexibility to add connected car services through software upgrades.

These connected services are sold on a subscription basis so they are SaaS revenue, just like what most software companies record these days. As this revenue increases and eventually becomes one of the biggest growth drivers (if all goes well) Cerence’s stock should benefit from a higher valuation multiple.

Stepping back, the story here seems very much intact and management says it will be releasing information on new connected services in the coming months. I’m expecting good things and think the recent announcements of what the company is doing with Mercedes, NIO Limited (NIO) and other manufacturers is just the beginning. Keeping at buy, but try to buy on pullbacks. We’re up roughly 47% since I added CRNC on October 1. BUY