Cerence Inc.
02/05/2026 | Press release | Distributed by Public on 02/05/2026 05:03
Quarterly Report for Quarter Ending December 31, 2025 (Form 10-Q)
Management's Discussion and Analysis of Financial Condition and Results of Operations.
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, 2025, filed with the Securities and Exchange Commission ("SEC") on November 20, 2025. Some of the information contained in this discussion and analysis or elsewhere in this Quarterly Report, including, but not limited to, 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, macroeconomic conditions, volatility in the political, legal and regulatory environment in which we operate including trade, tariffs and other policies implemented by the United States or actions taken by other countries in response, trends in the global auto industry and adjacent markets, including shipping and production issues, new products, process optimization efforts and cost management, litigation, 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, 2025 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, 2025 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.
Overview
Cerence builds conversational and agentic AI solutions 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 as well as the Internet of Things industry as a whole, including televisions, smart watches, voice-powered kiosks, and more. Our solutions power natural conversational and intuitive interactions between automobiles, drivers and passengers, and the broader digital world. We possess one of the leading software platforms for building automotive virtual assistants. Our automotive customers include nearly all major automobile 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.
Our principal offering is our software platform, which our customers use to build virtual assistants that can communicate, find information and take action across an expanding variety of categories. Our software platform has a hybrid architecture combining edge software components with cloud-connected components. Edge software components are installed on a vehicle's head unit and can operate without access to external networks and information. Cloud-connected components are comprised of certain speech and natural language understanding related technologies, AI-enabled personalization and context-based response frameworks, and content integration platform.
We generate revenue primarily by selling software or intellectual property ("IP") 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 automotive OEMs or their tier 1 suppliers, and while our customer contracts vary, they generally represent multi-year engagements, giving us some visibility into future revenue; however, such revenue may not materialize as expected due to delays in automobile production, volatility in the political, legal and regulatory environment in which we operate including trade, tariffs and other policies implemented by the administration in the United States or actions taken by other countries in response, automotive production curtailment or delays related thereto, changing customer forecasts, macroeconomic conditions or other factors discussed elsewhere in this Quarterly Report.
Basis of Presentation
The financial information presented in the accompanying unaudited condensed consolidated financial statements has been prepared in accordance with U.S. GAAP and in accordance with rules and regulations of the SEC
regarding interim financial reporting. Accordingly, the financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
The condensed consolidated balance sheet data as of September 30, 2025 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, 2025 are not necessarily indicative of the results expected for the full fiscal year ending September 30, 2026.
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company, as well as those of its wholly owned subsidiaries. All significant intercompany transactions and balances are eliminated in consolidation.
Key Financial Metrics
In evaluating our financial condition and operating performance, we focus on revenue, operating margins, and cash flow from operations.
For the three months ended December 31, 2025 as compared to the three months ended December 31, 2024:
•Total revenue increased by $64.2 million, or 126.1%, to $115.1 million from $50.9 million.
•Operating margin increased 58.7 percentage points to positive 25.5% from negative 33.3%.
•Cash provided by operating activities was $37.9 million, an increase of $28.6 million, or 309.5%, from cash provided by operating activities of $9.3 million.
Operating Results
The following table shows the Condensed Consolidated Statements of Operations for the three months ended December 31, 2025 and 2024 (dollars in thousands):
| Three Months Ended December 31, | |||||||||||||||||
| 2025 | 2024 | ||||||||||||||||
| Revenues: | |||||||||||||||||
| License | $ | 87,758 | $ | 22,725 | |||||||||||||
| Connected services | 14,532 | 13,707 | |||||||||||||||
| Professional services | 12,786 | 14,464 | |||||||||||||||
| Total revenues | 115,076 | 50,896 | |||||||||||||||
| Cost of revenues: | |||||||||||||||||
| License | 1,323 | 1,782 | |||||||||||||||
| Connected services | 4,911 | 6,311 | |||||||||||||||
| Professional services | 9,492 | 9,731 | |||||||||||||||
| Total cost of revenues | 15,726 | 17,824 | |||||||||||||||
| Gross profit | 99,350 | 33,072 | |||||||||||||||
| Operating expenses: | |||||||||||||||||
| Research and development | 24,701 | 20,869 | |||||||||||||||
| Sales and marketing | 5,557 | 4,766 | |||||||||||||||
| General and administrative | 31,987 | 12,754 | |||||||||||||||
| Amortization of intangible assets | - | 554 | |||||||||||||||
| Restructuring and other costs, net | 7,794 | 11,062 | |||||||||||||||
| Total operating expenses | 70,039 | 50,005 | |||||||||||||||
| Income (loss) from operations | 29,311 | (16,933) | |||||||||||||||
| Interest income | 865 | 1,437 | |||||||||||||||
| Interest expense | (1,665) | (3,393) | |||||||||||||||
| Other income, net | 1,550 | 272 | |||||||||||||||
| Income (loss) before income taxes | 30,061 | (18,617) | |||||||||||||||
| Provision for income taxes | 35,300 | 5,671 | |||||||||||||||
| Net loss | $ | (5,239) | $ | (24,288) | |||||||||||||
Our revenue consists primarily of license revenue, connected services revenue and revenue from professional services. License revenue primarily consists of license royalties associated with our edge software components and revenue associated with the licensing of our Intellectual Property or "IP". Our edge software components are typically sold under a traditional per unit perpetual software license model, in which a per unit fee is charged for each software instance installed on an automotive head unit. Our contracts contain variable, fixed prepaid or fixed minimum purchase commitment components. Revenue is recognized and cash is collected for variable contracts over the license distribution period. The fixed contracts typically provide the customer with a price discount and can include the conversion of a variable contract that is already in our variable backlog. Revenue for fixed contracts is recognized when the software is made available to the customer, which has typically occurred at the time the contract is signed. Cash is typically expected to be collected for a fixed prepaid deal at the inception of the contract. Cash is expected to be collected for a fixed minimum commitment deal over the license distribution period. Going forward, we will continue to assess the levels of fixed license contracts and make adjustments, as necessary. The timing and amount of revenue recognized from IP or patent licensing depends upon a variety of factors, including the specific terms of each agreement and the nature of the deliverables and obligations. These agreements could include, without limitation, performance obligations related to consideration for past patent royalties, patent licensing royalties on covered products sold by licensees, access to a portfolio of technology as it exists at a point in time, and access to a portfolio of technology at a point in time along with promises to provide any technology updates to the portfolio during the term on a when-and-if basis. Such licenses could be fixed and non-refundable in nature and/or variable over time. Certain components of revenue recognized with respect to IP license agreements may require the use of estimates, which may be significant. Related revenue is recognized at the point in time
when the software and technology is made available to the customer and control is transferred and, if applicable, according to usage. 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. Costs of license revenue primarily consists of third-party royalty expenses for certain external technologies we leverage and costs associated with our Cerence Link product.
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.
Professional services revenue is primarily comprised of porting, integrating, and customizing our embedded solutions, with costs primarily consisting of compensation for services personnel, contractors and overhead.
Our operating expenses include R&D, sales and marketing and general and administrative expenses. R&D expenses primarily consist of salaries, benefits, and overhead relating to research and engineering staff. Sales and marketing expenses includes salaries, benefits, and commissions related to our sales, product marketing, product management, and business unit management teams. General and administrative expenses primarily consist of personnel costs for administration, legal, finance, human resources, general management, fees for external professional advisers including accountants and attorneys, and provisions for credit losses.
Amortization of acquired patents and core technology are included within cost of revenues whereas the amortization of other intangible assets, such as acquired customer relationships, trade names and trademarks, are included within operating expenses. Customer relationships are amortized over their estimated economic lives based on the pattern of economic benefits expected to be generated from the use of the asset. Other identifiable intangible assets are amortized on a straight-line basis over their estimated useful lives.
Restructuring and other costs, net include restructuring expenses as well as other charges that are unusual in nature, are the result of unplanned events, and arise outside the ordinary course of our business.
Total other expense, net consists primarily of foreign exchange gains (losses), interest income and interest expense related to the Notes.
We expect our revenue to continue to be impacted by the changing dynamics in the global automotive industry which has experienced production delays and slowdowns. Volatility in the political, legal and regulatory environment in which we operate, including trade, tariffs and related policies also has resulted in increased pricing pressure from customers and delays in program timelines. 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 make efforts to streamline our operations, and we continue to focus on our cost management and have taken, and expect to continue to take, cost reduction actions, which may result in additional restructuring costs. In particular, in September 2025, we announced the 2025 Plan intended to streamline certain foreign operations. In August 2024, we announced the 2024 Plan intended to reduce operating expenses and position us for profitable growth. The implementation of the 2024 Plan was substantially complete by the end of the first quarter of fiscal year 2025 and is formally concluded as of December 31, 2025. The implementation of the 2025 Plan was substantially completed during the three months ended December 31, 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 2026 in certain cases. The charges that we expect to incur from the implementation of the 2025 Plan 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 factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended September 30, 2025.
Three Months Ended December 31, 2025 Compared with Three Months Ended December 31, 2024
Total Revenues
The following table shows total revenues by product type, including the corresponding percentage change, for the three months ended December 31, 2025 and 2024 (dollars in thousands):
| Three Months Ended December 31, | % Change | |||||||||||||||||||||||||||||||
| 2025 | % of Total | 2024 | % of Total | 2025 vs. 2024 | ||||||||||||||||||||||||||||
| License | $ | 87,758 | 76.3% | $ | 22,725 | 44.6% | 286.2 | % | ||||||||||||||||||||||||
| Connected services | 14,532 | 12.6% | 13,707 | 26.9% | 6.0 | % | ||||||||||||||||||||||||||
| Professional services | 12,786 | 11.1% | 14,464 | 28.4% | (11.6) | % | ||||||||||||||||||||||||||
| Total revenues | $ | 115,076 | $ | 50,896 | 126.1 | % | ||||||||||||||||||||||||||
Total revenues for the three months ended December 31, 2025 were $115.1 million, an increase of $64.2 million, or 126.1%, from $50.9 million for the three months ended December 31, 2024. The increase in revenue was primarily driven by our IP license agreement with Samsung, resulting in $49.5 million of one-time revenue. Additional increases in revenue were attributable to higher volume of both license volumes and connected services, and an increase of $7.8 million of fixed contracts.
License Revenue
License revenue for the three months ended December 31, 2025 was $87.8 million, an increase of $65.0 million, or 286.2%, from $22.7 million for the three months ended December 31, 2024. The increase in revenue was primarily driven by our IP license agreement with Samsung, resulting in $49.5 million of one-time revenue, recognized in accordance with ASC 606. The additional increase in license revenue was primarily driven by a $7.8 million increase in fixed contracts and a $7.8 million increase in variable license revenue due to higher volume of licensing royalties. As a percentage of total revenues, license revenue increased 31.6 percentage points from 44.6% for the three months ended December 31, 2024 to 76.3% for the three months ended December 31, 2025.
Connected Services Revenue
Connected services revenue for the three months ended December 31, 2025 was $14.5 million, an increase of $0.8 million, or 6.0%, from $13.7 million for the three months ended December 31, 2024. This increase was primarily driven by higher reported volumes. As a percentage of total revenues, connected services revenue decreased by 14.3 percentage points from 26.9% for the three months ended December 31, 2024 to 12.6% for the three months ended December 31, 2025.
Professional Services Revenue
Professional services revenue for the three months ended December 31, 2025 was $12.8 million, a decrease of $1.7 million, or 11.6%, from $14.5 million for the three months ended December 31, 2024. This decrease was primarily driven by the increased standardization of our software product offerings, which requires less professional services effort to implement, other efficiencies in our professional services processes and, in some cases, customers opting to perform these activities internally. As a percentage of total revenues, professional services revenue decreased by 17.3 percentage points from 28.4% for the three months ended December 31, 2024 to 11.1% for the three months ended December 31, 2025.
Three Months Ended December 31, 2025 Compared with Three Months Ended December 31, 2024
Total Cost of Revenues and Gross Profits
The following table shows total cost of revenues by product type and the corresponding percentage change (dollars in thousands):
| Three Months Ended December 31, | % Change | |||||||||||||||||||
| 2025 | 2024 | 2025 vs. 2024 | ||||||||||||||||||
| License | $ | 1,323 | $ | 1,782 | (25.8 | %) | ||||||||||||||
| Connected services | 4,911 | 6,311 | (22.2) | % | ||||||||||||||||
| Professional services | 9,492 | 9,731 | (2.5) | % | ||||||||||||||||
| Total cost of revenues | $ | 15,726 | $ | 17,824 | (11.8) | % | ||||||||||||||
The following table shows total gross profit by product type and the corresponding percentage change (dollars in thousands):
| Three Months Ended December 31, | % Change | |||||||||||||||||||
| 2025 | 2024 | 2025 vs. 2024 | ||||||||||||||||||
| License | $ | 86,435 | $ | 20,943 | 312.7 | % | ||||||||||||||
| Connected services | 9,621 | 7,396 | 30.1 | % | ||||||||||||||||
| Professional services | 3,294 | 4,733 | (30.4) | % | ||||||||||||||||
| Total gross profit | $ | 99,350 | $ | 33,072 | 200.4 | % | ||||||||||||||
Total cost of revenues for the three months ended December 31, 2025 were $15.7 million, a decrease of $2.1 million, or 11.8%, from $17.8 million for the three months ended December 31, 2024.
We experienced an increase in total gross profit of $66.3 million, or 200.4%, from $33.1 million for the three months ended December 31, 2024 to $99.4 million for the three months ended December 31, 2025. The increase was primarily driven by the Samsung patent license revenue.
Cost of License Revenue
Cost of license revenue for the three months ended December 31, 2025 was $1.3 million, a decrease of $0.5 million, or 25.8%, from $1.8 million for the three months ended December 31, 2024. Cost of license revenues decreased due to lower hardware costs attributable to decreased volume of our Cerence Link product revenue. As a percentage of total cost of revenues, cost of license revenue decreased by 1.6 percentage points from 10.0% for the three months ended December 31, 2024 to 8.4% for the three months ended December 31, 2025.
License gross profit increased by $65.5 million, or 312.7%, for the three months ended December 31, 2025 when compared to the three months ended December 31, 2024, primarily driven by the Samsung patent license revenue.
Cost of Connected Services Revenue
Cost of connected services revenue for the three months ended December 31, 2025 was $4.9 million, a decrease of $1.4 million, or 22.2%, from $6.3 million for the three months ended December 31, 2024. Cost of connected services revenue decreased primarily due to a $1.0 million decrease associated with lower amortization expense of capitalized project costs and lower overall in-period deferrals of project delivery costs, a $0.3 million reduction in internal allocated labor, and a $0.1 million decrease in our cloud infrastructure costs. As a percentage of total cost of revenues, cost of connected services revenue decreased by 4.2 percentage points from 35.4% for the three months ended December 31, 2024 to 31.2% for the three months ended December 31, 2025.
Connected services gross profit increased $2.2 million, or 30.1%, from $7.4 million for the three months ended December 31, 2024 to $9.6 million for the three months ended December 31, 2025, primarily due to higher reported volumes resulting in increased revenue, and lower overall costs associated with the delivery of connected services.
Cost of Professional Services Revenue
Cost of professional services revenue for the three months ended December 31, 2025 was $9.5 million, a decrease of $0.2 million, or 2.5%, from $9.7 million for the three months ended December 31, 2024. Cost of professional services revenue decreased primarily due a $0.3 million decrease in third-party contractor costs. As a percentage of total cost of revenues, cost of professional services revenue increased by 5.8 percentage points from 54.6% for the three months ended December 31, 2024 to 60.4% for the three months ended December 31, 2025.
Professional services gross profit decreased $1.4 million, or 30.4%, from $4.7 million for the three months ended December 31, 2024 to $3.3 million for the three months ended December 31, 2025, which was primarily due to a decrease in related revenues.
R&D Expenses
Three Months Ended December 31, 2025 Compared with Three Months Ended December 31, 2024
| Three Months Ended December 31, | % Change | |||||||||||||||||||
| 2025 | 2024 | 2025 vs. 2024 | ||||||||||||||||||
| Research and development | $ | 24,701 | $ | 20,869 | 18.4 | % | ||||||||||||||
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, 2025 were $24.7 million, an increase of $3.8 million, or 18.4%, from $20.9 million for the three months ended December 31, 2024. The increase was primarily attributable to $2.1 million of international tax credit catch-ups recorded in three months ended December 31, 2024 which did not recur in three months ended December 31, 2025, a $0.9 million increase in employee compensation costs, a $0.4 million increase in third-party contractor costs, and a $0.4 million increase in depreciation and amortization related to facilities and equipment required to support our AI infrastructure. As a percentage of total operating expenses, R&D expenses decreased by 6.5 percentage points from 41.7% for the three months ended December 31, 2024 to 35.3% for the three months ended December 31, 2025.
Sales & Marketing Expenses
Three Months Ended December 31, 2025 Compared with Three Months Ended December 31, 2024
| Three Months Ended December 31, | % Change | |||||||||||||||||||
| 2025 | 2024 | 2025 vs. 2024 | ||||||||||||||||||
| Sales and marketing | $ | 5,557 | $ | 4,766 | 16.6 | % | ||||||||||||||
Sales and marketing expenses for the three months ended December 31, 2025 were $5.6 million, an increase of $0.8 million, or 16.6%, from $4.8 million for the three months ended December 31, 2024. This increase was primarily driven by stock-based compensation expense of $0.3 million and other employee compensation costs of $0.3 million. As a percentage of total operating expenses, sales and marketing expenses decreased by 1.6 percentage points from 9.5% for the three months ended December 31, 2024 to 7.9% for the three months ended December 31, 2025.
General & Administrative Expenses
Three Months Ended December 31, 2025 Compared with Three Months Ended December 31, 2024
| Three Months Ended December 31, | % Change | |||||||||||||||||||
| 2025 | 2024 | 2025 vs. 2024 | ||||||||||||||||||
| General and administrative | $ | 31,987 | $ | 12,754 | 150.8 | % | ||||||||||||||
General and administrative expenses for the three months ended December 31, 2025 were $32.0 million, an increase of $19.2 million, or 150.8%, from $12.8 million for the three months ended December 31, 2024. The increase in general and administrative expenses was primarily attributable to a $20.8 million increase in legal professional services driven by costs related to the Samsung IP license agreement. As a percentage of total operating expenses, general
and administrative expenses increased by 20.2 percentage points from 25.5% for the three months ended December 31, 2024 to 45.7% for the three months ended December 31, 2025.
Amortization of Intangible Assets
Three Months Ended December 31, 2025 Compared with Three Months Ended December 31, 2024
| Three Months Ended December 31, | % Change | |||||||||||||||||||
| 2025 | 2024 | 2025 vs. 2024 | ||||||||||||||||||
| Operating expense | - | 554 | (100.0) | % | ||||||||||||||||
| Total amortization | $ | - | $ | 554 | (100.0) | % | ||||||||||||||
Amortization expense for acquired technology and patents is included in the cost of revenues in the accompanying Condensed Consolidated Statements of Operations. Acquired technology and patents were fully amortized as of December 31, 2024. Amortization expense for customer relationships is included in operating expenses in the accompanying Condensed Consolidated Statements of Operations. Customer relationships were fully amortized as of June 30, 2025.
As a percentage of total operating expenses, intangible asset amortization expenses within operating expenses decreased by 1.1 percentage points from 1.1% for the three months ended December 31, 2024 as compared to zero percent for the three months ended December 31, 2025.
Other Components of Operating Expense
Three Months Ended December 31, 2025 Compared with Three Months Ended December 31, 2024
| Three Months Ended December 31, | % Change | |||||||||||||||||||
| 2025 | 2024 | 2025 vs. 2024 | ||||||||||||||||||
| Restructuring and other costs, net | $ | 7,794 | $ | 11,062 | (29.5) | % | ||||||||||||||
Fiscal Year 2026
For the three months ended December 31, 2025, we recorded restructuring and other costs, net of $7.8 million, which included a $7.5 million charge related to the elimination of personnel, a $0.3 million charge resulting from the closure of facilities that will no longer be utilized, and $0.1 million relating to our transformation initiatives and other one-time charges.
Fiscal Year 2025
For the three months ended December 31, 2024, we recorded restructuring and other costs, net of $11.1 million, which included a $10.2 million charge related to the elimination of personnel, of which $3.0 million related to the stock-based compensation expense related to the termination of our former senior management employees, and a $0.9 million charge relating to our transformation initiatives.
As a percentage of total operating expenses, restructuring and other costs, net decreased by 11.0 percentage points from 22.1% for the three months ended December 31, 2024 to 11.1% for the three months ended December 31, 2025.
Total Other Income (Expense), Net
Three Months Ended December 31, 2025 Compared with Three Months Ended December 31, 2024
| Three Months Ended December 31, | % Change | |||||||||||||||||||
| 2025 | 2024 | 2025 vs. 2024 | ||||||||||||||||||
| Interest income | $ | 865 | $ | 1,437 | (39.8) | % | ||||||||||||||
| Interest expense | (1,665) | (3,393) | (50.9) | % | ||||||||||||||||
| Other income, net | 1,550 | 272 | 469.9 | % | ||||||||||||||||
| Total other income (expense), net | $ | 750 | $ | (1,684) | (144.5) | % | ||||||||||||||
Total other income (expense), net for the three months ended December 31, 2025 was income of $0.8 million, a change of $2.4 million from $1.7 million of expense for the three months ended December 31, 2024. The decrease in interest income was primarily attributable to lower balances of marketable securities and a generally lower interest rate environment when compared to the three months ended December 31, 2024. The decrease in interest expense was primarily attributable to a lower applicable interest rate on our Notes and a lower overall principal balance outstanding. The change in Other income, net was driven primarily by the gain on debt repurchase of the Notes. For further information, see "Liquidity and Capital Resources" below.
Provision For Income Taxes
Three Months Ended December 31, 2025 Compared with Three Months Ended December 31, 2024
| Three Months Ended December 31, | % Change | |||||||||||||||||||
| 2025 | 2024 | 2025 vs. 2024 | ||||||||||||||||||
| Provision for income taxes | $ | 35,300 | $ | 5,671 | 522.5 | % | ||||||||||||||
| Effective income tax rate % | 117.4 | % | (30.5) | % | ||||||||||||||||
Our effective income tax rate for the three months ended December 31, 2025 was positive 117.4%, compared to negative 30.5% for the three months ended December 31, 2024. Our provision for income taxes for the three months ended December 31, 2025 was $35.3 million, a net change of $29.6 million from a provision for income taxes of $5.7 million for the three months ended December 31, 2024. This difference was attributable to the tax impacts of foreign valuation allowances, stock-based compensation, research credits, and our composition of jurisdictional earnings.
Liquidity and Capital Resources
Financial Condition
As of December 31, 2025, we had $94.7 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.
Sources and Material Cash Requirements
Our principal sources of liquidity are our cash, cash equivalents, and marketable securities, as well as the cash flows we generate from our operations. The primary uses of cash include costs of revenues, funding of R&D activities, capital expenditures and debt obligations.
Our ability to fund future operating needs will depend on our ability to generate positive cash flows from operations and access additional funding in the capital and debt markets as needed. Based on our expectations to generate positive cash flows and the $94.7 million of cash, cash equivalents, and marketable securities as of December 31, 2025, we believe that we will be able to meet our liquidity needs over the next 12 months.
The following table presents our material cash requirements for future periods (dollars in thousands):
| Material Cash Requirements Due by Period | ||||||||||||||||||||||||||||||||
| 2026 | 2027-2028 | 2029-2030 | Thereafter | Total | ||||||||||||||||||||||||||||
| 2028 Notes | $ | - | $ | 105,000 | $ | - | $ | - | $ | 105,000 | ||||||||||||||||||||||
|
Cash interest payable on the 2028 Notes (a)
|
788 | 3,150 | - | - | 3,938 | |||||||||||||||||||||||||||
| 2025 Modified Notes | - | 75,000 | - | - | 75,000 | |||||||||||||||||||||||||||
|
Cash interest payable on the 2025 Modified Notes (a)
|
563 | 2,250 | - | - | 2,813 | |||||||||||||||||||||||||||
| Operating leases | 4,467 | 10,044 | 4,159 | 110 | 18,780 | |||||||||||||||||||||||||||
| Financing leases | 54 | - | - | - | 54 | |||||||||||||||||||||||||||
| Total material cash requirements | $ | 5,871 | $ | 195,444 | $ | 4,159 | $ | 110 | $ | 205,584 | ||||||||||||||||||||||
(a)Interest per annum is due and payable semiannually and is determined based on the outstanding principal as of December 31, 2025.
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, changes in the political, legal and regulatory environment, including trade policies and tariffs, and disruptions 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.
1.50% Senior Convertible Notes due 2028
On June 26, 2023, we issued $190.0 million in aggregate principal amount of 1.50% Convertible Senior Notes due 2028 (the "2028 Notes"), which are governed by an indenture (the "2028 Indenture"), between us and U.S. Bank Trust Company, National Association, as trustee (the "Trustee"), in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"). On July 3, 2023, we issued an additional $20.0 million in aggregate principal amount of 2028 Notes. The initial net proceeds from the issuance of the 2028 Notes were $193.2 million after deducting transaction costs.
The 2028 Notes are senior, unsecured obligations and accrue interest payable semiannually in arrears on January 1 and July 1 of each year at a rate of 1.50% per year. The 2028 Notes will mature on July 1, 2028, unless earlier converted, redeemed, or repurchased. The 2028 Notes are convertible into cash, shares of our common stock or a combination of cash and shares of our common stock, at our election.
The conversion rate is 24.5586 shares of our common stock per $1,000 principal amount of 2028 Notes (equivalent to an initial conversion price of approximately $40.72 per share of our common stock). The conversion rate is subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date or if we deliver a notice of redemption, we will, in certain circumstances, increase the conversion rate for a holder who elects to convert its 2028 Notes in connection with such a corporate event or convert its 2028 Notes called for redemption in connection with such notice of redemption, as the case may be.
During the three months ended December 31, 2025, we repurchased $30.0 million aggregate principal amount of our 2028 Notes for $28.0 million in cash, including accrued interest and fees, via privately negotiated transactions with certain holders. The repurchased notes were subsequently cancelled and retired, resulting in a gain on extinguishment of debt of $1.1 million.
In connection with the offering of the 2028 Notes, we repurchased $87.5 million in aggregate principal amount of the 2025 Notes in a privately negotiated transaction. We specifically negotiated the repurchase of the 2025 Notes with investors who concurrently purchased the 2028 Notes. We evaluated the transaction to determine whether the exchange should be accounted for as a modification or extinguishment under the provisions of ASC 470-50, which allows for an exchange of debt instruments between the same debtor and creditor to be accounted for as a modification so long as
the instruments do not have substantially different terms. Because the concurrent redemption of the 2025 Notes and a portion of issuance of the 2028 Notes were executed with the same investors, we evaluated the transaction as a debt modification, on a creditor by creditor basis. The repurchase of the 2025 Notes and issuance of the 2028 Notes were deemed to not have substantially different terms on the basis that (1) the present value of the cash flows under the terms of the new debt instrument were less than 10% different from the present value of the remaining cash flows under the terms of the original instrument and (2) the fair value of the conversion feature did not change by more than 10% of the carrying value of the 2025 Notes, and therefore, the repurchase of the 2025 Notes was accounted for as a debt modification.
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 (the "2025 Modified Notes" and together with the 2028 Notes, the "Notes"). 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, 2025, the carrying amount of the 2025 Modified Notes was $68.0 million, net of unamortized costs of $7.0 million.
If a convertible debt instrument is modified or exchanged in a transaction that is not accounted for as an extinguishment, an increase in the fair value of the embedded conversion option shall reduce the carrying amount of the debt instrument with a corresponding increase in Additional paid-in capital. We recognized the increase in the fair value of the embedded conversion feature of $4.1 million as Additional paid-in capital and an equivalent discount that reduced the carrying value of the 2025 Modified Notes.
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, 2025, the carrying amount of the 2028 Notes was $104.0 million and had unamortized issuance costs of $1.0 million. As of December 31, 2025, the 2028 Notes were not convertible. As of December 31, 2025 and September 30, 2025, the if-converted value of the 2028 Notes was $77.4 million and $85.0 million, respectively, less than its principal amount.
3.00% Senior Convertible Notes due 2025
On June 2, 2020, we issued $175.0 million in aggregate principal amount of 3.00% Convertible Senior Notes due June 1, 2025 (the "2025 Notes"), including the initial purchasers' exercise in full of their option to purchase $25.0 million principal amount of the 2025 Notes, which were governed by an indenture (the "2025 Indenture"), between us and the Trustee, in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The net proceeds from the issuance of the 2025 Notes were $169.8 million after deducting transaction costs.
The 2025 Notes were senior, unsecured obligations and accrued interest payable semiannually in arrears on June 1 and December 1 of each year at a rate of 3.00% per year. For a complete description of the 2025 Notes, please refer to Footnote 17, Long-Term Debtas disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2025.
During the year ended September 30, 2025, we repurchased $27.4 million aggregate principal amount of our 2025 Notes for $27.0 million in cash, including accrued interest and fees, via privately negotiated transactions with certain holders. The repurchased 2025 Notes were subsequently cancelled and retired, resulting in a gain on extinguishment of debt of $0.3 million. The remaining outstanding principal balance on the 2025 Notes and accrued interest of $61.0 million was repaid in its entirety at maturity during the three months ended June 30, 2025.
The interest expense recognized related to the Notes for the three months ended December 31, 2025 and 2024 was as follows (dollars in thousands):
| Three Months Ended December 31, | |||||||||||||||||
| 2025 | 2024 | ||||||||||||||||
| Contractual interest expense | $ | 784 | $ | 1,425 | |||||||||||||
| Amortization of debt discount | 158 | 265 | |||||||||||||||
| Amortization of issuance costs | 721 | 1,281 | |||||||||||||||
| Total interest expense related to the Notes | $ | 1,663 | $ | 2,971 | |||||||||||||
Senior Credit Facilities
On June 12, 2020 (the "Financing Closing Date"), we entered into a Credit Agreement, by and among the Borrower, the lenders and issuing banks party thereto and Wells Fargo Bank, N.A., as administrative agent (the "Credit
Agreement"), consisting of a four-year senior secured term loan facility in the aggregate principal amount of $125.0 million (the "Term Loan Facility"). The net proceeds from the issuance of the Term Loan Facility were $123.0 million. We also entered into a senior secured first-lien revolving credit facility in an aggregate principal amount of $50.0 million (the "Revolving Facility" and, together with the Term Loan Facility, the "Senior Credit Facilities"), which could have been drawn on in the event that our working capital and other cash needs were 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 December 31, 2025 and September 30, 2025, there were no amounts outstanding under the Revolver Facility.
On December 31, 2024, we terminated the Credit Agreement. On the date of termination, there were no revolving loans outstanding under the Credit Agreement. As a result of the Credit Agreement termination, we will not have access to the Revolving Facility and we will not be subject to the applicable Credit Agreement covenants.
Total interest expense relating to the Senior Credit Facilities for the three months ended December 31, 2025 and 2024 was none and $0.4 million, respectively. Amounts reflect the coupon and accretion of the discount.
Cash Flows
Cash flows from operating, investing and financing activities for the three months ended December 31, 2025 and 2025, 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):
| Three Months Ended December 31, | % Change | |||||||||||||||||||
| 2025 | 2024 | 2025 vs. 2024 | ||||||||||||||||||
| Net cash provided by operating activities | $ | 37,894 | $ | 9,254 | 309.5 | % | ||||||||||||||
| Net cash (used in) provided by investing activities | (1,789) | 759 | (335.7 | %) | ||||||||||||||||
| Net cash used in financing activities | (27,654) | (27,084) | 2.1 | % | ||||||||||||||||
| Effects of exchange rate changes on cash and cash equivalents | (338) | (311) | 8.7 | % | ||||||||||||||||
| Net changes in cash and cash equivalents | $ | 8,113 | $ | (17,382) | (146.7) | % | ||||||||||||||
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the three months ended December 31, 2025 was $37.9 million, a net change of $28.6 million, or 309.5%, from net cash provided by operating activities of $9.3 million for the three months ended December 31, 2024. The change in cash flows were primarily due to:
•An increase of $30.2 million from income before non-cash charges primarily driven by the net impact of the lump sum payment, net of taxes, received from Samsung and related legal expenses;
•A increase of $1.9 million due to favorable changes in working capital primarily related to accrued expenses and other liabilities, accounts receivable, prepaid expenses and other assets; and
•A decrease of $3.5 million from changes in deferred revenue.
Deferred revenue represents a significant portion of our net cash used in or provided by operating activities and, depending on the nature of our contracts with customers and foreign currency exchange rates, this balance can fluctuate significantly from period to period. Fluctuations in deferred revenue are not a reliable indicator of future performance and the related revenue associated with these contractual commitments. We do not expect any changes in deferred revenue to affect our ability to meet our obligations.
Net Cash (Used in) Provided by Investing Activities
Net cash used in investing activities for the three months ended December 31, 2025 was $1.8 million, a net change of $2.5 million, or 335.7%, from $0.8 million of cash provided by investing activities for the three months ended December 31, 2024. The change in cash flows were primarily due to a decrease of $1.6 million related to marketable securities and $0.9 million related to additional capital expenditures.
Net Cash Used in Financing Activities
Net cash used in financing activities for the three months ended December 31, 2025 was $27.7 million, a net change of $0.6 million, from cash used in financing activities of $27.1 million for the three months ended December 31, 2024. The change in cash flows were primarily due to:
•An increase of $27.6 million in principal payments for long-term debt;
•A decrease of $27.0 million in principal payments for short-term debt;
•An increase of $6.1 million in proceeds from the issuance of our common stock; and
•An increase of $6.2 million in payments of tax related withholdings due to the net settlement of equity awards.
Critical Accounting Estimates
Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that have a material impact on the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and various other factors we believe to be reasonable under the circumstances, the results of which form the basis for judgments about the carrying values of assets and liabilities and the amounts of revenues and expenses. Actual results may differ from these estimates.
We believe that our critical accounting estimates are those related to revenue recognition; allowance for credit losses; accounting for deferred costs; accounting for internally developed software; the valuation of goodwill and intangible assets; accounting for stock-based compensation; accounting for income taxes; accounting for convertible debt; and loss contingencies. We believe these estimates are critical because they most significantly affect the portrayal of our financial condition and results of operations and involve our most complex and subjective estimates and judgments. A discussion of our critical accounting estimates may be found in our Annual Report on Form 10-K for the fiscal year ended September 30, 2025 in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the heading "Critical Accounting Estimates" and below.
Recently Adopted Accounting Pronouncements and Recent Accounting Pronouncements To Be Adopted
Refer to Note 2 to the accompanying unaudited condensed consolidated financial statements for a description of certain issued accounting standards that have been recently adopted and are expected to be adopted by us and may impact our results of operations in future reporting periods.
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