What happened
Shares of automotive-technology company Cerence (NASDAQ: CRNC) crashed on Thursday after the company announced a convertible debt offering of $150 million. The stock was down by a single-digit percentage for most of the day before falling further in late trading. It finished 16% lower.
Even after today's pullback, Cerence stock has beaten the market since it was spun off from Nuance Communications in October 2019.
So what
Cerence reported earnings earlier in May. Revenue, according to generally accepted accounting principles (GAAP), was up 23% year over year. And its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), a non-GAAP profitability number, increased 55% to $29 million. Besides these always reported top and bottom line figures, the company said it had plans to refinance its $267 million debt but was waiting for more favorable market conditions.
That statement suggested Cerence wouldn't refinance its debt anytime soon. But apparently, right now is a more favorable time than a mere three weeks ago.
To handle its debt, Cerence is offering convertible notes worth $150 million. By restructuring its debt with convertible notes, it opens the door for future dilution of shareholder value. Final terms of the offering, such as the conversion rate, have yet to be decided, so we don't know how many new shares could be issued. But investors aren't keen on the idea at all, which is why the stock fell today.
Image source: Getty Images.
Now what
Cerence's debt restructuring is in the best interest of the company's long-term health -- something investors should be concerned with, as well. Going forward, it will be important for Cerence to land new partnerships and continue to grow profits. If it can do that, this automotive artificial intelligence stock likely won't need to tap additional financing in the future.
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