Here’s Why Cerence Shares Just Popped 6%

Author: Tim Phillips

September 17, 2020

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Cerence Inc (NASDAQ: CRNC) surged 6.4% on a down day for tech stocks as the leading provider of onboard tech assistants for autos struck a partnership deal with German giant Volkswagen Group (DE: VOW).

Tim’s Take:

Cerence is a relative newcomer to the markets having been spun out of Nuance Communications (NASDAQ: NUAN), a Boston-based software firm, back in November.

Cerence serves a niche market that focuses on AI solutions for the automotive market, particularly in onboard speech/voice recognition, eye tracking, touch and even gesture recognition.

The company counts the likes of Audi, BMW, Daimler, Ford, GM, Toyota, and now Volkswagen as customers.

The deal with Volkswagen will see Cerence power an innovative voice assistant in the auto giant’s fully electric ID.3 model – the first in the automaker’s new generation of electric vehicles (EVs). 

For me, the beauty of Cerence is in its competitive position within the onboard tech ecosystem. Its platform allows autos to “white label” solutions in their own vision and tailor it to users’ needs.

Leading provider of tech in cars

What’s more, the company dominates the space. Approximately 54% of global auto production comes with Cerence technology installed.

Yet with less than half of all global vehicles having connected onboard services, the growth runway for the firm is massive.

Then there’s its Software-as-a-Service angle. Cerence is increasingly getting more revenue from its “Connected Revenue” and “Professional Services” portions of the business (see below), which fall under its annual recurring revenue based on contract lengths that typically range from three to seven years.

Cerence revenue breakdown

Source: Cerence Investor Relations as of August 2020

Revenue recognition from “License Revenue”, which is based on one-off unit shipments or prepayments, is becoming less of a revenue contributor. Contract lengths are also growing.

Even though the top line fell in its latest quarter, those numbers on the subscription side point to more bookings coming good further down the line – which can only be a good thing for shareholders.

Despite the likes of Tesla Inc (NASDAQ: TSLA) making all the noise, we can forget that there are actually a whole host of automakers that are catching up in the auto tech space. And Cerence is going to a key part of that journey.

Disclaimer: ProsperUs Head of Content Tim Phillips doesn’t own shares of any companies mentioned.

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About the Author: Tim Phillips

Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth. He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. In his spare time, Tim enjoys running after his two year-old son, playing football and practicing yoga.