Cerence Inc

Previous wording

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 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, 2023, filed with the Securities and Exchange Commission (“SEC”) on November 29, 2023. 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, results of operations and financial condition, macroeconomic conditions, the semiconductor shortage, trends in the global auto industry and adjacent markets, including shipping and production issues, new products, process optimization efforts and cost management, 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” sections in Part II, Item 1A of this Quarterly Report on Form 10-Q and Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2023 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, 2024 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.

Current wording

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 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, 2024, filed with the Securities and Exchange Commission (“SEC”) on November 25, 2024. 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, including our ability to meet our liquidity needs after the repayment of the Notes due in the third quarter of fiscal 2025, results of operations and financial condition, macroeconomic conditions, the semiconductor shortage, trends in the global auto industry and adjacent markets, including shipping and production issues, new products, process optimization efforts and cost management, 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” sections in Part II, Item 1A of this Quarterly Report on Form 10-Q and Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2024 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 months ended December 31, 2024 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.

Previous wording

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.

Current wording

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 nearly 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.

Previous wording

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; however, such revenue may not materialize as expected due to delays in automobile production, changing customer forecasts, macroeconomic conditions or other factors discussed elsewhere in this Quarterly Report.

Current wording

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 nearly 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; however, such revenue may not materialize as expected due to delays in automobile production, changing customer forecasts, macroeconomic conditions or other factors discussed elsewhere in this Quarterly Report.

Previous wording

The condensed consolidated balance sheet data as of September 30, 2023 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, 2024 are not necessarily indicative of the results expected for the full fiscal year ending September 30, 2024.

Current wording

The condensed consolidated balance sheet data as of September 30, 2024 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 months ended December 31, 2024 are not necessarily indicative of the results expected for the full fiscal year ending September 30, 2025.

Previous wording

Operating margin decreased 489.3 percentage points to negative 503.1% from negative 13.8%.

Current wording

Operating margin decreased 75.6 percentage points to negative 33.3% from 42.3%.

Previous wording

The following table shows the Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2024 and 2023 (dollars in thousands):

Current wording

The following table shows the Condensed Consolidated Statements of Operations for the three months ended December 31, 2024 and 2023 (dollars in thousands):

Previous wording

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. On October 31, 2023, we entered into an early termination agreement relating to a legacy contract acquired by Nuance through a 2013 acquisition. Previously, the term of the contract ended on December 31, 2025, whereas the agreement signed on October 31, 2023 updated the termination date to December 31, 2023. The effect of this change was to accelerate $67.8 million of deferred revenue into the first quarter of fiscal year 2024. There is no cash flow associated with this legacy contract. We provided services to a separate customer, who in turn provided services to our legacy customer. This separate customer terminated services on October 31, 2023. There is no cash flow associated with this contract. The effect of this termination was to accelerate $9.9 million of deferred revenue into the first quarter of fiscal year 2024. 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.

Current wording

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. On October 31, 2023, we entered into an early termination agreement relating to a legacy contract acquired by Nuance through a 2013 acquisition. Previously, the term of the contract ended on December 31, 2025, whereas the agreement signed on October 31, 2023 updated the termination date to December 31, 2023. For the three months ended December 31, 2023, a total of $76.3 million was recognized in relation to this contract including $67.8 million of deferred revenue that was accelerated into the first quarter of fiscal year 2024 as a result of the termination. There was no cash flow associated with this legacy contract. We provided services to a separate customer, who in turn provided services to our legacy customer. This separate customer terminated services on October 31, 2023. There was no cash flow associated with this contract. For the three months ended December 31, 2023, a total of $10.3 million was recognized in relation to this contract including $9.9 million of deferred revenue that was accelerated into the first quarter of fiscal year 2024. 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.

Previous wording

We expect our revenue to continue to be impacted by the changing dynamics in the global automotive industry which have resulted in production delays and slowdowns. Macroeconomic conditions such as high interest rates and lack of credit availability have contributed to these production delays and slowdowns. In addition, the software and technology systems in automobiles have become increasingly complex, leading to substantial challenges and delays in production for some of our customers. Our business in adjacent markets, such as two-wheeled vehicles, trucks and AIoT, is also developing slower than anticipated due to the challenges of introducing different technology into a new market. In light of these challenges, we intend to focus on our cost structure and expect to take future cost reduction actions, which may result in additional restructuring costs and impairment charges. In particular, in August 2024, we announced a restructuring plan intended to reduce operating expenses and position us for profitable future growth (the “Plan”). We estimate that we will incur cash restructuring charges of approximately $18 to $22 million in connection with the Plan, consisting of severance payments, payments in lieu of notice, employee benefits and related costs. We expect to incur the majority of these expenses in the fourth quarter of fiscal year 2024 and first quarter of fiscal year 2025 and the implementation of the Plan will be substantially complete by the end of the first quarter of fiscal year 2025. Potential position eliminations are subject to legal requirements that vary by jurisdiction, which may extend this process beyond the first quarter of fiscal year 2025 in certain cases. The charges that we expect to incur are subject to a number of assumptions, including legal requirements in various jurisdictions, and actual expenses and charges may differ materially from the estimates disclosed above. For additional details, refer to the section titled “Risk Factors”.

Current wording

We expect our revenue to continue to be impacted by the changing dynamics in the global automotive industry which have resulted in production delays and slowdowns. Macroeconomic conditions such as high interest rates and lack of credit availability have contributed to these production delays and slowdowns. In addition, the software and technology systems in automobiles have become increasingly complex, leading to substantial challenges and delays in production for some of our customers. Our business in adjacent markets, such as two-wheeled vehicles, trucks and AIoT, is also developing slower than anticipated due to the challenges of introducing different technology into a new market. In light of these challenges, we intend to focus on our cost structure and expect to take future cost reduction actions, which may result in additional restructuring costs and impairment charges. In particular, in August 2024, we announced a restructuring plan intended to reduce operating expenses and position us for profitable future growth (the “Plan”). The implementation of the Plan was substantially complete by the end of the first quarter of fiscal year 2025. The charges that we incur are subject to a number of assumptions, including legal requirements in various jurisdictions. For additional details, refer to the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2024.

Previous wording

Total revenues for the three months ended June 30, 2024 were $70.5 million, an increase of $8.8 million, or 14.4%, from $61.7 million for the three months ended June 30, 2023. The increase in revenues was driven by license revenue. The increase was partly offset by decreases in connected service and professional service revenues.

Current wording

Total revenues for the three months ended December 31, 2024 were $50.9 million, a decrease of $87.4 million, or 63.2%, from $138.3 million for the three months ended December 31, 2023. The decrease in revenues was driven by a decrease in connected services and professional services revenues. The decrease was partly offset by an increase in license revenue.

Previous wording

License revenue for the three months ended June 30, 2024 was $43.1 million, an increase of $17.3 million, or 66.6%, from $25.8 million for the three months ended June 30, 2023. The increase in license revenue was driven by a $20.0 million increase in fixed contracts. The increase was partially offset by a $2.9 million decrease in variable license revenue due to lower volume of licensing royalties. As a percentage of total revenues, license revenue increased 19.1 percentage points from 41.9% for the three months ended June 30, 2023 to 61.0% for the three months ended June 30, 2024.

Current wording

License revenue for the three months ended December 31, 2024 was $22.7 million, an increase of $1.9 million, or 9.1%, from $20.8 million for the three months ended December 31, 2023. The increase in license revenue was driven by a $1.6 million increase in variable license revenue due to higher volume of licensing royalties. As a percentage of total revenues, license revenue increased 29.5 percentage points from 15.1% for the three months ended December 31, 2023 to 44.6% for the three months ended December 31, 2024.

Previous wording

Connected services revenue for the three months ended June 30, 2024 was $10.9 million, a decrease of $7.7 million, or 41.1%, from $18.6 million for the three months ended June 30, 2023. This decrease was driven by a $8.4 million decrease related to the early termination of a legacy contract acquired by Nuance through a 2013 acquisition. The decrease was partially offset by a $0.7 million increase in demand for our connected services solutions from new connected business. As a percentage of total revenues, connected services revenue decreased by 14.6 percentage points from 30.1% for the three months ended June 30, 2023 to 15.5% for the three months ended June 30, 2024.

Current wording

Connected services revenue for the three months ended December 31, 2024 was $13.7 million, a decrease of $83.1 million, or 85.8%, from $96.8 million for the three months ended December 31, 2023. This decrease was primarily driven by the early termination of a legacy contract acquired by Nuance through a 2013 acquisition and the termination of services provided to a separate customer, who in turn provided services to our legacy customer. These terminations resulted in a decrease of $86.6 million in revenue compared to the first quarter of fiscal 2024. The decrease was offset by a $3.5 million increase in demand for our connected services solutions. As a percentage of total revenues, connected services revenue decreased by 43.1 percentage points from 70.0% for the three months ended December 31, 2023 to 26.9% for the three months ended December 31, 2024.

Previous wording

Professional service revenue for the three months ended June 30, 2024 was $16.5 million, a decrease of $0.7 million, or 4.0%, from $17.2 million for the three months ended June 30, 2023. This decrease was driven by the composition of our arrangements and the related timing of fulfilling performance obligations under the contracts. As a percentage of total revenues, professional services revenue decreased by 4.5 percentage points from 28.0% for the three months ended June 30, 2023 to 23.5% for the three months ended June 30, 2024.

Current wording

Professional service revenue for the three months ended December 31, 2024 was $14.5 million, a decrease of $6.2 million, or 30.1%, from $20.7 million for the three months ended December 31, 2023. This decrease was driven by the composition of our arrangements and the related timing of fulfilling performance obligations under the contracts. As a percentage of total revenues, professional services revenue increased by 13.6 percentage points from 14.9% for the three months ended December 31, 2023 to 28.5% for the three months ended December 31, 2024.

Previous wording

We experienced an increase in total gross profit of $67.8 million, or 47.9%, from $141.6 million for the nine months ended June 30, 2023 to $209.4 million for the nine months ended June 30, 2024. The increase was primarily driven by the increase in connected service revenue due to the early termination of a legacy contract acquired by Nuance through a 2013 acquisition and the termination of services provided to a separate customer, who in turn provided services to our legacy customer.

Current wording

We experienced a decrease in total gross profit of $78.9 million, or 70.5%, from $112.0 million for the three months ended December 31, 2023 to $33.1 million for the three months ended December 31, 2024. The decrease was primarily driven by the decrease in connected service revenue due to the early termination of a legacy contract acquired by Nuance through a 2013 acquisition and the termination of services provided to a separate customer, who in turn provided services to our legacy customer.

Previous wording

Cost of license revenue for the three months ended June 30, 2024 was $1.8 million, a decrease of $0.5 million, or 23.4%, from $2.3 million for the three months ended June 30, 2023. Cost of license revenues decreased primarily due to costs associated with our Cerence Link product. As a percentage of total cost of revenues, cost of license revenue decreased by 2.3 percentage points from 11.2% for the three months ended June 30, 2023 to 8.9% for the three months ended June 30, 2024.

Current wording

Cost of license revenue for the three months ended December 31, 2024 was $1.8 million, an increase of $0.2 million, or 11.1%, from $1.6 million for the three months ended December 31, 2023. Cost of license revenues increased primarily due to costs associated with our Cerence Link product. As a percentage of total cost of revenues, cost of license revenue increased by 3.9 percentage points from 6.1% for the three months ended December 31, 2023 to 10.0% for the three months ended December 31, 2024.

Previous wording

License gross profit increased by $17.8 million, or 75.6%, for the three months ended June 30, 2024 when compared to the three months ended June 30, 2023, primarily due to increases in license revenues.

Current wording

License gross profit increased by $1.7 million, or 9.0%, for the three months ended December 31, 2024 when compared to the three months ended December 31, 2023, primarily due to increases in license revenues.

Previous wording

Connected services gross profit decreased $7.8 million, or 59.9%, from $13.0 million for the three months ended June 30, 2023 to $5.2 million for the three months ended June 30, 2024, primarily due to declines in connected services revenues.

Current wording

Connected services gross profit decreased $82.1 million, or 91.7%, from $89.5 million for the three months ended December 31, 2023 to $7.4 million for the three months ended December 31, 2024, primarily due to declines in connected services revenues.

Previous wording

Cost of professional services revenue for the nine months ended June 30, 2024 was $44.0 million, a decrease of $3.4 million, or 7.2%, from $47.4 million for the nine months ended June 30, 2023. Cost of professional services revenue decreased primarily due to a $3.1 million decrease in salary-related expenditures, a $0.8 million decrease in amortization of costs previously deferred, a $0.6 million decrease in stock-based compensation costs, and a $0.2 million decrease in hardware costs. The decrease was partially offset by a $1.6 million increase in third-party contractor costs. As a percentage of total cost of revenues, cost of professional services revenue decreased by 0.4 percentage points from 65.8% for the nine months ended June 30, 2023 to 65.4% for the nine months ended June 30, 2024.

Current wording

Cost of professional services revenue for the three months ended December 31, 2024 was $9.7 million, a decrease of $7.6 million, or 43.8%, from $17.3 million for the three months ended December 31, 2023. Cost of professional services revenue decreased primarily due to a $5.1 million decrease in third-party contractor costs, a $1.2 million decrease in internal allocated labor, a $0.6 million decrease in salary-related expenditures, and a $0.2 million decrease in amortization of costs previously deferred. As a percentage of total cost of revenues, cost of professional services revenue decreased by 11.2 percentage points from 65.8% for the three months ended December 31, 2023 to 54.6% for the three months ended December 31, 2024.

Previous wording

Professional services gross profit decreased $0.3 million, or 8.3%, from $4.3 million for the three months ended June 30, 2023 to $4.0 million for the three months ended June 30, 2024, which was primarily due to the composition of our professional service arrangements.

Current wording

Professional services gross profit increased $1.3 million, or 40.6%, from $3.4 million for the three months ended December 31, 2023 to $4.7 million for the three months ended December 31, 2024, which was primarily due to the composition of our professional service arrangements.

Previous wording

The tables below show each component of operating expense. Total other expense, net and (benefit from) provision for income taxes are non-operating expenses and presented in a similar format (dollars in thousands).

Current wording

The tables below show each component of operating expense. Total other expense, net and provision for income taxes are non-operating expenses and presented in a similar format (dollars in thousands).

Previous wording

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, 2024 were $96.3 million, an increase of $8.1 million, or 9.2%, from $88.2 million for the nine months ended June 30, 2023. The increase was primarily attributable to a $6.0 million increase in salary-related expenditures, a $4.4 million increase in third-party contractor costs, a $1.4 million decrease in internally allocated labor, and a $1.3 million decrease in capitalized costs associated with internally developed software. The increase was partially offset by a $2.3 million decrease in stock-based compensation expense. As a percentage of total operating expenses, R&D expenses decreased by 38.6 percentage points from 51.1% for the nine months ended June 30, 2023 to 12.5% for the nine months ended June 30, 2024.

Current wording

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 December 31, 2024 were $20.9 million, a decrease of $12.4 million, or 37.3%, from $33.3 million for the three months ended December 31, 2023. The decrease was primarily attributable to a $4.2 million decrease in salary-related expenditures, a $2.9 million decrease in third-party contractor costs, a $2.5 million R&D international tax credit refund, a $2.0 million decrease in stock-based compensation costs, and a $1.1 increase in capitalized costs associated with internally developed software. The decrease was partially offset by a $1.3 million increase in internally allocated labor. As a percentage of total operating expenses, R&D expenses decreased by 20.6 percentage points from 62.3% for the three months ended December 31, 2023 to 41.7% for the three months ended December 31, 2024.

Previous wording

Sales and marketing expenses for the three months ended June 30, 2024 were $5.2 million, an increase of $0.9 million, or 21.8%, from $4.3 million for the three months ended June 30, 2023. The increase in sales and marketing expenses was primarily attributable to a $1.0 million increase in stock-based compensation costs, $0.4 million increase in salary-related expenditures, and a $0.2 million increase in commissions expenditures. The increase was partially offset by a $0.3 million decrease in professional services. As a percentage of total operating expenses, sales and marketing expenses decreased by 7.4 percentage points from 8.7% for the three months ended June 30, 2023 to 1.3% for the three months ended June 30, 2024.

Current wording

Sales and marketing expenses for the three months ended December 31, 2024 were $4.8 million, a decrease of $1.3 million, or 21.5%, from $6.1 million for the three months ended December 31, 2023. The decrease in sales and marketing expenses was primarily attributable to a $0.7 million decrease in salary-related expenditures, a $0.6 million decrease in travel-related expenditures, and a $0.2 million decrease in stock-based compensation costs. The decrease was partially offset by a $0.3 million increase in commissions expenditures. As a percentage of total operating expenses, sales and marketing expenses decreased by 1.9 percentage points from 11.4% for the three months ended December 31, 2023 to 9.5% for the three months ended December 31, 2024.

Previous wording

Intangible asset amortization for the three months ended June 30, 2024 was $0.6 million, a decrease of $0.1 million, or 16.2%, from $0.7 million for the three months ended June 30, 2023. The decrease in amortization relates to certain intangible assets having been fully amortized during fiscal year 2024 and 2023. 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.

Current wording

Intangible asset amortization for the three months ended December 31, 2024 and 2023 remained flat at $0.6 million. 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.

Previous wording

As a percentage of total cost of revenues, intangible asset amortization within cost of revenues decreased by 0.5 percentage points from 0.5% for the three months ended June 30, 2023 to 0.0% for the three months ended June 30, 2024. As a percentage of total operating expenses, intangible asset amortization expenses within operating expenses decreased by 1.0 percentage point from 1.1% for the nine months ended June 30, 2023 as compared to 0.1% for the nine months ended June 30, 2024.

Current wording

As a percentage of total cost of revenues, intangible asset amortization within cost of revenues decreased by 0.4 percentage points from 0.4% for the three months ended December 31, 2023 to 0.0% for the three months ended December 31, 2024. As a percentage of total operating expenses, intangible asset amortization expenses within operating expenses increased by 0.1 percentage point from 1.0% for the three months ended December 31, 2023 as compared to 1.1% for the three months ended December 31, 2024.

Previous wording

For the nine months ended June 30, 2023, we recorded restructuring and other costs, net of $11.1 million, which included a $7.4 million severance charge related to the elimination of personnel, $3.5 million of third-party fees relating to the modification of the 2025 Notes, a $0.3 million charge resulting from the closure of facilities that will no longer be utilized, offset by a $3.3 million other one-time gain.

Current wording

For the three months ended December 31, 2023, we recorded restructuring and other costs, net of $0.7 million, which included a $0.1 million severance charge related to the elimination of personnel, a $0.1 million charge resulting from the closure of facilities that will no longer be utilized, and $0.4 million related to other one-time charges.

Previous wording

As a percentage of total operating expenses, restructuring and other costs, net decreased by 2.0 percentage points from 2.4% for the three months ended June 30, 2023 to 0.4% for the three months ended June 30, 2024.

Current wording

As a percentage of total operating expenses, restructuring and other costs, net increased by 20.8 percentage points from 1.3% for the three months ended December 31, 2023 to 22.1% for the three months ended December 31, 2024.

Previous wording

Total other expense, net for the three months ended June 30, 2024 was expense of $1.2 million, a change of $3.7 million from $4.9 million of expense for the three months ended June 30, 2023. The decrease in interest expense was primarily attributable to a lower applicable interest rate on our Notes. The change in Other income (expense), net was primarily driven by foreign exchange gains. For further information, see “Liquidity and Capital Resources” below.

Current wording

Total other expense, net for the three months ended December 31, 2024 was expense of $1.7 million, a change of $1.3 million from $0.4 million of expense for the three months ended December 31, 2023. The change in Other income, net was primarily driven by a reduction in gains from foreign exchange offset by a $0.3 million gain on the extinguishment of debt related to our repurchase of $27.4 million principal value of the 2025 Notes. For further information, see “Liquidity and Capital Resources” below.

Previous wording

Our effective income tax rate for the nine months ended June 30, 2024 was negative 0.6%, compared to negative 21.7% for the nine months ended June 30, 2023. Our provision for income taxes for the nine months ended June 30, 2024 was $3.4 million, a net change of $4.6 million from a provision for income taxes of $8.0 million for the nine months ended June 30, 2023. This difference was attributable to the impairment of book goodwill and the change in income tax expense related to foreign valuation allowance.

Current wording

Our effective income tax rate for the three months ended December 31, 2024 was negative 30.5%, compared to 59.0% for the three months ended December 31, 2023. Our provision for income taxes for the three months ended December 31, 2024 was $5.7 million, a net change of $28.6 million from a provision for income taxes of $34.3 million for the three months ended December 31, 2023. This difference was attributable to the one-time acceleration of legacy deferred revenue in the three months ended December 31, 2023.

Previous wording

As of June 30, 2024, we had $126.3 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 government securities. As of June 30, 2024, our net working capital, excluding deferred revenue and deferred costs, was $94.5 million. This balance is representative of the short-term net cash inflows based on the working capital at that date.

Current wording

As of December 31, 2024, we had $110.5 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 corporate bonds and government securities. As of December 31, 2024, our net working capital, excluding deferred revenue and deferred costs, was $91.0 million. This balance is representative of the short-term net cash inflows based on the working capital at that date.

Previous wording

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 and debt markets as needed. Based on our expectations to generate positive cash flows and the $126.3 million of cash, cash equivalents, and marketable securities as of June 30, 2024, we believe that we will be able to meet our liquidity needs over the next 12 months. Our assessment included the repayment of the $87.5 million of the 2025 Modified Notes due in the third quarter of fiscal 2025; cash will be placed in a restricted account 91 days prior to the repayment date of the $87.5 million.

Current wording

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 and debt markets as needed. Based on our expectations to generate positive cash flows and the $110.5 million of cash, cash equivalents, and marketable securities as of December 31, 2024, we believe that we will be able to meet our liquidity needs over the next 12 months. Our assessment included the repayment of the $60.1 million of the 2025 Modified Notes due in the third quarter of fiscal 2025.

Previous wording

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 or that, if such financing is obtained, that it will be on acceptable terms. Our ability to issue debt or enter into other financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for our products or in the solvency of our customers or suppliers or if there are other significantly unfavorable changes in economic conditions. For instance, inflation and rising interest rates, and disruptions and instability in the banking industry have negatively impacted the global economy and created significant volatility and disruption of financial markets. An extended period of economic disruption or market volatility, could materially affect our business, results of operations, ability to meet debt covenants, access to sources of liquidity and financial condition.

Current wording

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 or that, if such financing is obtained, that it will be on acceptable terms. Our ability to issue debt or enter into other financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for our products or in the solvency of our customers or suppliers or if there are other significantly unfavorable changes in economic conditions. For instance, inflation and persistently high interest rates, and disruptions and instability in the banking industry have negatively impacted the global economy and created significant volatility and disruption of financial markets. An extended period of economic disruption or market volatility, could materially affect our business, results of operations, access to sources of liquidity and financial condition.

Previous wording

As a result, $87.5 million of the 2028 Notes are considered a modification of the 2025 Notes and are included in the balances of the 2025 Notes along with the remaining $87.5 million of the 2025 Notes (together the "2025 Modified Notes") that were not repurchased as part of the transaction. We recorded $14.3 million of fees paid directly to the lenders as deferred debt issuance costs, and $3.8 million of fees paid to third-parties were expensed in the period. As of June 30, 2024, the carrying amount of the 2025 Modified Notes was $159.8 million, net of unamortized costs of $15.2 million.

Current wording

As a result, $87.5 million of the 2028 Notes are considered a modification of the 2025 Notes and are included in the balances of the 2025 Notes along with the remaining $87.5 million of the 2025 Notes (together the "2025 Modified Notes") that were not repurchased as part of the transaction. We recorded $14.3 million of fees paid directly to the lenders as deferred debt issuance costs, and $3.8 million of fees paid to third-parties were expensed in the period. As of December 31, 2024, the carrying amount of the 2025 Modified Notes was $135.4 million, net of unamortized costs of $12.3 million.

Previous wording

We accounted for $122.5 million of the 2028 Notes, that were not negotiated with the investors of the 2025 Notes, as a single liability. We incurred transaction costs of $2.4 million relating to the issuance of the 2028 Notes, which were recorded as a direct deduction from the face amount of the 2028 Notes and are being amortized as interest expense over the term of the 2028 Notes using the interest method. As of June 30, 2024, the carrying amount of the 2028 Notes was $120.6 million and unamortized issuance costs of $1.9 million. As of June 30, 2024, the 2028 Notes were not convertible.

Current wording

We accounted for $122.5 million of the 2028 Notes, that were not negotiated with the investors of the 2025 Notes, as a single liability. We incurred transaction costs of $2.4 million relating to the issuance of the 2028 Notes, which were recorded as a direct deduction from the face amount of the 2028 Notes and are being amortized as interest expense over the term of the 2028 Notes using the interest method. As of December 31, 2024, the carrying amount of the 2028 Notes was $120.8 million and unamortized issuance costs of $1.7 million. As of December 31, 2024, the 2028 Notes were not convertible.

Previous wording

The interest expense recognized related to the Notes for the three and nine months ended June 30, 2024 and 2023 was as follows (dollars in thousands):

Current wording

The interest expense recognized related to the Notes for the three months ended December 31, 2024 and 2023 was as follows (dollars in thousands):

Previous wording

The conditional conversion feature of the Notes was not triggered during the three and nine months ended June 30, 2024. As of June 30, 2024, 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 shares), 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.

Current wording

The conditional conversion feature of the Notes was not triggered during the three months ended December 31, 2024. As of December 31, 2024, 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 shares), 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.

Previous wording

On June 12, 2020, we entered into the 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. In connection with the issuance of the 2028 Notes, in the third quarter of fiscal year 2023, we borrowed $24.7 million under our Revolving Facility and paid $106.3 million towards our Term Loan Facility. As a result, we recorded $104.9 million extinguishment of debt and $1.3 million loss on the extinguishment of debt. All principal and interest on the Term Loan Facility have been paid in full. As of June 30, 2024 and September 30, 2023, there were no amounts outstanding under the Revolver Facility.

Current wording

On June 12, 2020, we entered into the 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. In connection with the issuance of the 2028 Notes, in the third quarter of fiscal year 2023, we borrowed $24.7 million under our Revolving Facility and paid $106.3 million towards our Term Loan Facility. As a result, we recorded $104.9 million extinguishment of debt and $1.3 million loss on the extinguishment of debt. All principal and interest on the Term Loan Facility have been paid in full.

Previous wording

Total interest expense relating to the Senior Credit Facilities for the three months ended June 30, 2024 and 2023 was $0.1 million and $2.4 million, respectively, and $0.3 million and $6.6 million for the nine months ended June 30, 2024 and 2023, respectively. Amounts reflect the coupon and accretion of the discount.

Current wording

Total interest expense relating to the Senior Credit Facilities for the three months ended December 31, 2024 and 2023 was $0.4 million and $0.1 million, respectively. Amounts reflect the coupon and accretion of the discount.

Previous wording

Cash flows from operating, investing and financing activities for the nine months ended June 30, 2024 and 2023, 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):

Current wording

Cash flows from operating, investing and financing activities for the three months ended December 31, 2024 and 2023, 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):

Previous wording

Net cash provided by operating activities for the nine months ended June 30, 2024 was $11.1 million, a net change of $14.9 million, or 394.7%, from net cash used in operating activities of $3.8 million for the nine months ended June 30, 2023. The change in cash flows were primarily due to:

Current wording

Net cash provided by operating activities for the three months ended December 31, 2024 was $9.3 million, a net change of $12.1 million, or 428.7%, from net cash used in operating activities of $2.8 million for the three months ended December 31, 2023. The change in cash flows were primarily due to:

Previous wording

An increase of $75.8 million from income before non-cash charges;

Current wording

A decrease of $70.5 million from income before non-cash charges;

Previous wording

A decrease of $8.8 million due to unfavorable changes in working capital primarily related to accounts payable and accrued expenses and other liabilities; and

Current wording

A decrease of $6.2 million due to unfavorable changes in working capital primarily related to accrued expenses and other liabilities; and