Quarterly Report (10-q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________________________

Form 10-Q

_____________________________________________

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended March 31, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-27038

_____________________________________________

NUANCE COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)

_____________________________________________



DE		94-3156479
(State or Other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1 Wayside Road
Burlington,	MA	01803
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code:

(781) 565-5000

_____________________________________________

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, par value $0.001	NUAN	Nasdaq Stock Market LLC

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer," “accelerated filer," “smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):



Large Accelerated Filer	☒	Accelerated Filer	☐
Non-accelerated Filer	☐	Smaller Reporting Company	☐
		Emerging Growth Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the Registrant’s Common Stock, outstanding as of April 30, 2020 was 281,271,002.

NUANCE COMMUNICATIONS, INC.

TABLE OF CONTENTS



		Page
PART I: FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements:
	Consolidated Statements of Operations for the three and six months ended March 31, 2020 and 2019	3
	Consolidated Statements of Comprehensive Income for the three and six months ended March 31, 2020 and 2019	4
	Consolidated Balance Sheets at March 31, 2020 and September 30, 2019	5
	Consolidated Statements of Stockholders’ Equity for the three and six months ended March 31, 2020 and 2019	6
	Consolidated Statements of Cash Flows for the six months ended March 31, 2020 and 2019	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	50
Item 4.	Controls and Procedures	51

PART II: OTHER INFORMATION
Item 1.	Legal Proceedings	52
Item 1A.	Risk Factors	52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3.	Defaults Upon Senior Securities	53
Item 4.	Mine Safety Disclosures	53
Item 5.	Other Information	53
Item 6.	Exhibits	53
Exhibit Index		54
Signatures		55
Certifications

NUANCE COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS



	Three Months Ended March 31,						Six Months Ended March 31,
	2020			2019			2020			2019
	(Unaudited) (In thousands, except per share amounts)
Revenues:
Hosting and professional services	$	235,514		$	217,527		$	465,991		$	445,244
Product and licensing	69,599			58,226			194,779			174,115
Maintenance and support	64,224			60,831			126,800			136,900
Total revenues	369,337			336,584			787,570			756,259
Cost of revenues:
Hosting and professional services	133,196			134,294			268,986			270,892
Product and licensing	9,316			9,373			43,494			41,778
Maintenance and support	7,965			8,911			15,759			16,672
Amortization of intangible assets	6,616			6,681			13,243			14,037
Total cost of revenues	157,093			159,259			341,482			343,379
Gross profit	212,244			177,325			446,088			412,880
Operating expenses:
Research and development	57,909			45,758			114,462			92,624
Sales and marketing	71,024			67,683			137,496			135,053
General and administrative	38,376			39,857			76,690			83,323
Amortization of intangible assets	11,821			13,824			24,370			27,666
Acquisition-related costs, net	1,680			2,051			2,847			4,652
Restructuring and other charges, net	6,329			9,858			13,012			24,499
Total operating expenses	187,139			179,031			368,877			367,817
Income (loss) from operations	25,105			(1,706		)	77,211			45,063
Other (expense) income:
Interest income	1,512			3,671			3,698			6,225
Interest expense	(23,629		)	(31,152		)	(47,444		)	(63,418		)
Other (expense) income, net	(1,688		)	199			(13,728		)	(977		)
Income (loss) before income taxes	1,300			(28,988		)	19,737			(13,107		)
Provision (benefit) for income taxes	14,810			(591		)	(21,630		)	1,409
Net (loss) income from continuing operations	(13,510		)	(28,397		)	41,367			(14,516		)
Net income (loss) from discontinued operations	—			105,729			(6,192		)	110,938
Net (loss) income	$	(13,510	)	$	77,332		$	35,175		$	96,422

Net (loss) income per common share - basic:
Continuing operations	$	(0.05	)	$	(0.10	)	$	0.15		$	(0.05	)
Discontinued operations	—			0.37			(0.03		)	0.39
Total net (loss) income per basic common share	$	(0.05	)	$	0.27		$	0.12		$	0.34

Net (loss) income per common share - diluted:
Continuing operations	$	(0.05	)	$	(0.10	)	$	0.14		$	(0.05	)
Discontinued operations	—			0.37			(0.02		)	0.39
Total net (loss) income per diluted common share	$	(0.05	)	$	0.27		$	0.12		$	0.34

Weighted average common shares outstanding:
Basic	282,576			285,866			283,366			286,849
Diluted	282,576			285,866			288,214			286,849

See accompanying notes.

Table of Contents

NUANCE COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	Three Months Ended March 31,					Six Months Ended March 31,
	2020			2019		2020			2019
	(Unaudited)
	(In thousands)
Net (loss) income	$	(13,510	)	$	77,332	$	35,175		$	96,422
Other comprehensive (loss) income:
Foreign currency translation adjustment	(15,538		)	5,255		(11,114		)	(3,047		)
Cerence Spin-off	—			—		12,331			—
Pension adjustments	—			46		2,007			(314		)
Unrealized (loss) gain on marketable securities	(496		)	158		(528		)	156
Total other comprehensive (loss) income, net	(16,034		)	5,459		2,696			(3,205		)
Comprehensive (loss) income	$	(29,544	)	$	82,791	$	37,871		$	93,217

See accompanying notes.

Table of Contents

NUANCE COMMUNICATIONS, INC.

CONSOLIDATED BALANCE SHEETS



	March 31, 2020			September 30, 2019
	(Unaudited)
	(In thousands, except per share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	397,907		$	560,961
Marketable securities	123,373			186,555
Accounts receivable, less allowances for doubtful accounts of $9,977 and $9,797	222,474			240,673
Prepaid expenses and other current assets	148,494			175,166
Current assets of discontinued operations	—			91,858
Total current assets	892,248			1,255,213
Marketable securities	4,897			17,287
Land, building and equipment, net	127,721			121,203
Goodwill	2,125,053			2,127,896
Intangible assets, net	253,414			291,371
Right-of-use assets	110,838			—
Other assets	242,579			316,215
Long-term assets of discontinued operations	—			1,236,608
Total assets	$	3,756,750		$	5,365,793
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	230,000		$	1,142,870
Contingent and deferred acquisition payments	14,676			17,470
Accounts payable	75,638			90,826
Accrued expenses and other current liabilities	187,401			249,570
Deferred revenue	259,639			214,223
Current liabilities of discontinued operations	—			130,117
Total current liabilities	767,354			1,845,076
Long-term debt	1,512,859			793,536
Deferred revenue, net of current portion	113,705			133,783
Deferred tax liabilities	63,942			54,216
Operating lease liabilities	108,420			—
Other liabilities	74,753			79,378
Long-term liabilities of discontinued operations	—			286,654
Total liabilities	2,641,033			3,192,643
Commitments and contingencies (Note 15)

Stockholders’ equity:
Common stock, $0.001 par value per share; 560,000 shares authorized; 284,832 and 289,680 shares issued and 281,081 and 285,930 shares outstanding, respectively	285			290
Additional paid-in capital	1,520,734			2,597,889
Treasury stock, at cost (3,751 shares)	(16,788		)	(16,788		)
Accumulated other comprehensive loss	(130,077		)	(132,773		)
Accumulated deficit	(258,437		)	(293,612		)
Total Nuance Communications, Inc. stockholders’ equity	1,115,717			2,155,006
Noncontrolling interests	—			18,144
Total stockholders’ equity	1,115,717			2,173,150
Total liabilities and stockholders’ equity	$	3,756,750		$	5,365,793

See accompanying notes.

Table of Contents

NUANCE COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the three months ended March 31, 2020



													Accumulated
	Common Stock					Additional Paid-In Capital			Treasury Stock				Other Comprehensive Loss			Accumulated Deficit			Noncontrolling Interests		Total Stockholders' Equity
	Shares		Amount			Additional Paid-In Capital			Shares	Amount			Other Comprehensive Loss			Accumulated Deficit			Noncontrolling Interests		Total Stockholders' Equity

Balance at December 31, 2019	287,626		$	288		$	1,615,989		3,751	$	(16,788	)	$	(114,043	)	$	(244,927	)	$	—	$	1,240,519
Issuance of common stock under employee stock plans	1,138		1			7,203			—	—			—			—			—		7,204
Cancellation of restricted stock, and repurchase of common stock at cost for employee tax withholding	(169	)	—			(3,478		)	—	—			—			—			—		(3,478		)
Stock-based compensation	—		—			23,911			—	—			—			—			—		23,911
Repurchase and retirement of common stock	(3,763	)	(4		)	(76,770		)	—	—			—			—			—		(76,774		)
Repurchases of convertible notes ^(a)	—		—			(46,121		)	—	—			—			—			—		(46,121		)
Net loss	—		—			—			—	—			—			(13,510		)	—		(13,510		)
Other comprehensive loss	—		—			—			—	—			(16,034		)	—			—		(16,034		)
Balance at March 31, 2020	284,832		$	285		$	1,520,734		3,751	$	(16,788	)	$	(130,077	)	$	(258,437	)	$	—	$	1,115,717

For the six months ended March 31, 2020



																Accumulated
	Common Stock					Additional Paid-In Capital				Treasury Stock						Other Comprehensive Loss				Accumulated Deficit				Noncontrolling Interests			Total Stockholders' Equity
	Shares		Amount			Additional Paid-In Capital				Shares		Amount				Other Comprehensive Loss				Accumulated Deficit				Noncontrolling Interests			Total Stockholders' Equity
	(In thousands)
Balance at September 30, 2019	289,680		$	290		$	2,597,889			3,751		$	(16,788	)		$	(132,773	)		$	(293,612	)		$	18,144		$	2,173,150
Cerence Spin-off	—		—			(922,567	)		—		—				12,331				—				(18,144		)	(928,380		)
Issuance of common stock under employee stock plans	6,720		7			7,253				—		—				—				—				—			7,260
Cancellation of restricted stock, and repurchase of common stock at cost for employee tax withholding	(2,111	)	(2		)	(36,605		)		—		—				—				—				—			(36,607		)
Stock-based compensation						90,093				—		—				—				—				—			90,093
Repurchases and retirement of common stock	(9,457	)	(10		)	(169,208		)		—		—				—				—				—			(169,218		)
Repurchases of convertible notes ^(a)	—		—			(46,121		)		—		—				—				—				—			(46,121		)
Net income	—		—			—				—		—				—				35,175				—			35,175
Other comprehensive loss	—		—			—				—		—				(9,635		)		—				—			(9,635		)
Balance at March 31, 2020	284,832		$	285		$	1,520,734			3,751		$	(16,788	)		$	(130,077	)		$	(258,437	)		$	—		$	1,115,717

^(a) According to ASC 470-20, cash consideration paid to repurchase and retire our convertible notes was first allocated to debt component based on the actual fair value on the trading date, and the remaining consideration was allocated to additional paid-in capital.

Table of Contents

NUANCE COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)

For the three months ended March 31, 2019



	Common Stock					Additional Paid-In Capital			Treasury Stock				Accumulated Other			Accumulated Deficit			Total Stockholders' Equity
	Shares		Amount			Additional Paid-In Capital			Shares	Amount			Comprehensive Loss			Accumulated Deficit			Total Stockholders' Equity

Balance at December 31, 2018	290,035		$	290		$	2,578,496		3,751	$	(16,788	)	$	(131,527	)	$	(488,332	)	$	1,942,139
Issuance of common stock under employee stock plans	1,426		1			8,642			—	—			—			—			8,643
Cancellation of restricted stock, and repurchase of common stock at cost for employee tax withholding	(252	)	—			(4,040		)	—	—			—			—			(4,040		)
Stock-based compensation	—		—			25,774			—	—			—			—			25,774
Repurchase and retirement of common stock	(1,171	)	(1		)	(16,164		)	—	—			—			—			(16,165		)
Reclassification of currency translation differences into earnings as a result of the disposition of our Imaging business	—		—			—			—	—			5,605			—			5,605
Net income	—		—			—			—	—			—			77,332			77,332
Other comprehensive income	—		—			—			—	—			5,459			—			5,459
Balance at March 31, 2019	290,038		$	290		$	2,592,708		3,751	$	(16,788	)	$	(120,463	)	$	(411,000	)	$	2,044,747

For the six months ended March 31, 2019



	Common Stock					Additional Paid-In Capital			Treasury Stock				Accumulated Other			Accumulated Deficit			Total Stockholders' Equity
	Shares		Amount			Additional Paid-In Capital			Shares	Amount			Comprehensive Loss			Accumulated Deficit			Total Stockholders' Equity
	(In thousands)
Balance at September 30, 2018	291,504		$	291		$	2,597,693		3,751	$	(16,788	)	$	(122,863	)	$	(740,837	)	$	1,717,496
Adoption of ASC 606	—		—			—			—	—			—			233,415			233,415
Issuance of common stock under employee stock plans	6,579		7			8,636			—	—			—			—			8,643
Cancellation of restricted stock, and repurchase of common stock at cost for employee tax withholding	(1,982	)	(2		)	(31,558		)	—	—			—			—			(31,560		)
Stock-based compensation	—		—			109,252			—	—			—			—			109,252
Repurchase and retirement of common stock	(6,063	)	(6		)	(91,315		)	—	—			—			—			(91,321		)
Reclassification of currency translation differences into earnings as a result of the disposition of our Imaging business	—		—			—			—	—			5,605			—			5,605
Net income	—		—			—			—	—			—			96,422			96,422
Other comprehensive loss	—		—			—			—	—			(3,205		)	—			(3,205		)
Balance at March 31, 2019	290,038		$	290		$	2,592,708		3,751	$	(16,788	)	$	(120,463	)	$	(411,000	)	$	2,044,747

See accompanying notes.

Table of Contents

NUANCE COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS



	Six Months Ended March 31,
	2020			2019
	(Unaudited) (In thousands)
Cash flows from operating activities:
Net income (loss) from continuing operations	$	41,367		$	(14,516	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	19,150			26,368
Amortization	37,613			41,703
Stock-based compensation	64,895			54,295
Non-cash interest expense	25,318			24,686
Deferred tax benefit	(39,255		)	(11,642		)
Loss on extinguishment of debt	18,656			910
Other	1,576			805
Changes in operating assets and liabilities, excluding effects of acquisitions:
Accounts receivable	19,934			19,773
Prepaid expenses and other assets	6,358			(14,698		)
Accounts payable	(6,219		)	2,584
Accrued expenses and other liabilities	(61,686		)	(7,081		)
Deferred revenue	27,031			28,951
Net cash provided by operating activities - continuing operations	154,738			152,138
Net cash (used in) provided by operating activities - discontinued operations	(13,307		)	51,418
Net cash provided by operating activities	141,431			203,556
Cash flows from investing activities:
Capital expenditures	(31,187		)	(23,434		)
Proceeds from disposition of businesses, net of transaction fees	—			404,045
Purchases of marketable securities and other investments	(148,880		)	(119,165		)
Proceeds from sales and maturities of marketable securities and other investments	224,987			117,661
Other	1,332			(2,553		)
Net cash provided by investing activities	46,252			376,554
Cash flows from financing activities:
Repurchase and redemption of debt	(513,642		)	(300,000		)
Net distribution from Cerence upon the spin-off	139,090			—
Payments for repurchase of common stock	(169,218		)	(91,321		)
Proceeds from issuance of common stock from employee stock plans	7,204			8,643
Proceeds from the revolving credit facility	230,000			—
Payments for taxes related to net share settlement of equity awards	(36,488		)	(38,191		)
Other financing activities	(2,834		)	(1,210		)
Net cash used in financing activities	(345,888		)	(422,079		)
Effects of exchange rate changes on cash and cash equivalents	(4,849		)	782
Net (decrease) increase in cash and cash equivalents	(163,054		)	158,813
Cash and cash equivalents at beginning of period	560,961			315,963
Cash and cash equivalents at end of period	$	397,907		$	474,776

See accompanying notes.

Table of Contents

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Presentation

Nuance Communications, Inc. ("We", "Nuance", "our", "us", or the "Company") is a pioneer and leader in conversational and cognitive artificial intelligence ("AI") innovations that bring intelligence to everyday work and life. Our solutions and technologies can understand, analyze and respond to human language to increase productivity and amplify human intelligence. Our solutions are used by businesses in the healthcare, financial services, telecommunications and travel industries, among others. We had three reportable segments: Healthcare, Enterprise, and Other as of March 31, 2020. See Note 17 for a description of each of these segments.

As more fully described in Note 4, on October 1, 2019, we completed the spin-off of our Automotive business as an independent public company, Cerence Inc. ("Cerence"). The historical results of our Automotive business are included within discontinued operations for all the historical periods presented.

Although we believe the disclosures included herein are adequate to ensure that the condensed consolidated financial statements are fairly presented, certain information and footnote disclosures to the financial statements have been condensed or omitted in accordance with the rules and regulations of the SEC. Accordingly, the condensed consolidated financial statements and the footnotes included herein should be read in conjunction with the audited financial statements and the footnotes included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire fiscal year or any future period.

2. Summary of Significant Accounting Policies

Recently Adopted Accounting Standards

Leases

In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, "Leases" ("ASC 842"), which became effective for fiscal years beginning after December 15, 2018 and interim periods therein, with early adoption permitted. ASC 842 requires lessees to recognize on the balance sheet a right-of-use asset, representing its right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. The standard initially required the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply. We adopted ASC 842 in the first quarter of fiscal year 2020.

In July 2018, the FASB issued ASU 2018-10, "Codification Improvements to Topic 842, Leases" and ASU 2018-11, "Leases Topic 842 Targeted Improvements", which provide an additional (and optional) transition method whereby the new lease standard is applied at the adoption date and recognized as an adjustment to retained earnings. Additionally, in March 2019, the FASB issued ASU 2019-01, "Codification Improvements to Topic 842", which provides guidance in the following areas: (1) determining the fair value of the underlying asset by lessors that are not manufacturers or dealers and (2) clarification of interim disclosure requirements during transition. We adopted ASC 842, as amended, as of October 1, 2019 under the optional transition method and elected the package of practical expedients under the transition guidance.

As a result of the adoption, we recognized $120 million of operating lease right-of-use assets, and approximately $140 million of operating lease obligations. Approximately $20 million of deferred rent balances were reclassified against the costs of the right-of-use assets. The cumulative-effect adjustment to retained earnings as of October 1, 2019 was immaterial. The adoption of the guidance did not have a material impact on our condensed consolidated statement of operations or consolidated statement of cash flows.

Income Taxes

In January 2018, the FASB issued ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("AOCI"), which became effective for fiscal years beginning after December 15, 2018 and interim periods therein. The guidance gives entities the option to reclassify to retained earnings the tax effects resulting from the Tax Cuts and Jobs Act ("TCJA") related to items in AOCI. The guidance may be applied retrospectively to each period in which the effect of the TCJA is recognized in the period of adoption. The adoption of the guidance did not have a material impact on our condensed consolidated financial statements.

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Issued Accounting Standards Not Yet Adopted

Internal-Use Software

In August 2018, the FASB issued ASU 2018-15, "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract", which is effective for fiscal year beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The guidance requires that implementation costs related to a hosting arrangement that is a service contract be capitalized and amortized over the term of the hosting arrangement, starting when the module or component of the hosting arrangement is ready for its intended use. The guidance will be applied retrospectively to each period presented. We do not expect the implementation to have a material impact on our condensed consolidated financial statements.

3. Revenue Recognition

We derive revenue from the following sources: (1) hosting services, (2) software licenses, including royalties, (3) maintenance and support ("M&S"), (4) professional services, and (5) sale of hardware. Revenue is reported net of applicable sales and use tax, value-added tax and other transaction taxes imposed on the related transaction including mandatory government charges that are passed through to our customers. We account for a contract when both parties have approved and committed to the contract, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and the collectibility of the consideration is probable.

The majority of our arrangements with customers typically contain multiple products and services. We account for individual products and services separately if they are distinct--that is, if a product or service is separately identifiable from other items in the contract and if a customer can benefit from it on its own or with other resources that are readily available to the customer.

We recognize revenue after applying the following five steps:


•	identification of the contract, or contracts, with a customer;


•	identification of the performance obligations in the contract, including whether they are distinct within the context of the contract;


•	determination of the transaction price, including the constraint on variable consideration;


•	allocation of the transaction price to the performance obligations in the contract; and


•	recognition of revenue when, or as, performance obligations are satisfied.

We allocate the transaction price of the arrangement based on the relative estimated standalone selling price ("SSP") of each distinct performance obligation. In determining SSP, we maximize observable inputs and consider a number of data points, including:


•	the pricing of standalone sales (in the instances where available);


•	the pricing established by management when setting prices for deliverables that are intended to be sold on a standalone basis;


•	contractually stated prices for deliverables that are intended to be sold on a standalone basis; and


•	other pricing factors, such as the geographical region in which the products are sold and expected discounts based on the customer size and type.

We only include estimated amounts of variable consideration in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. We reduce transaction prices for estimated returns and other allowances that represent variable consideration under ASU No. 2014-09, "Revenue from Contracts with Customers: Topic 606" ("ASC 606"), which we estimate based on historical return experience and other relevant factors and record a reduction to revenue and accounts receivable. Other forms of contingent revenue or variable consideration are infrequent.

Revenue is recognized when control of these products and services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services.

We assess the timing of the transfer of products or services to the customer as compared to the timing of payments to determine whether a significant financing component exists. In accordance with the practical expedient in ASC 606-10-32-18, we do not assess the existence of a significant financing component when the difference between payment and transfer of deliverables is a

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

year or less. If the difference in timing arises for reasons other than the provision of financing to either the customer or us, no financing component is deemed to exist. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our services, not to receive or provide financing from or to customers. We do not consider set-up fees nor other upfront fees paid by our customers to represent a financing component.

Certain products are sold through distributors or resellers. Certain distributors and resellers have been granted right of return and selling incentives which are accounted for as variable consideration when estimating the amount of revenue to be recognized. Returns and credits are estimated at the contract inception and updated at the end of each reporting period as additional information becomes available. In accordance with the practical expedient in ASC 606-10-10-4, we apply a portfolio approach to estimate the variable consideration associated with this group of customers.

Reimbursements for out-of-pocket costs generally include, but are not limited to, costs related to transportation, lodging and meals. Revenue from reimbursed out-of-pocket costs is accounted for as variable consideration.

Shipping and handling activities are not considered a contract performance obligation. We record shipping and handling costs billed to customers as revenue with offsetting costs recorded as cost of revenue.

Performance Obligations

Hosting

Hosting services, which allow our customers to use the hosted software over the contract period without taking possession of the software, are provided on a usage basis as consumed or on a fixed fee subscription basis. Our hosting contract terms generally range from one to five years.

As each day of providing services is substantially the same and the customer simultaneously receives and consumes the benefits as access is provided, we have determined that our hosting services arrangements are a single performance obligation comprised of a series of distinct services. These services include variable consideration, which is typically a function of usage. We recognize revenue as each distinct service period is performed (i.e., recognized as incurred).

Subscription basis revenue represents a single promise to stand-ready to provide access to our hosting services. Revenue is recognized over time on a ratable basis over the hosting contract term, which generally ranges from one to five years.

Software Licenses

On-premise software licenses sold with non-distinct professional services to customize and/or integrate the underlying software are accounted for as a combined performance obligation. Revenue from the combined performance obligation is recognized over time based upon the progress towards completion of the project, which is measured based on the labor hours already incurred to date as compared to the total estimated labor hours.

Revenue from distinct on-premise software licenses, which do not require professional services to customize and/or integrate the software license, is recognized at the point in time when the software is made available to the customer and control is transferred.

Revenue from software licenses sold on a royalty basis, where the license of intellectual property is the predominant item to which the royalty relates, is recognized in the period the usage occurs in accordance with the practical expedient in ASC 606-10-55-65(A).

Maintenance and Support

Our M&S contracts generally include telephone support and the right to receive unspecified upgrades and updates on a when-and-if available basis. M&S revenue is recognized over time on a ratable basis over the contract period because we transfer control evenly by providing a stand-ready service.

Professional Services

Revenue from distinct professional services, including training, is recognized over time based upon the progress towards completion of the project, which is measured based on the labor hours already incurred to date as compared to the total estimated labor hours.

Hardware

Hardware revenue is recognized at the point in time when control is transferred to the customer, which is typically upon delivery.

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Significant Judgments

Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Our license contracts often include professional services to customize and/or integrate the licenses into the customer’s environment. Judgment is required to determine whether the license is considered distinct and accounted for separately, or not distinct and accounted for together with professional services.

Judgments are required to determine the SSP for each distinct performance obligation. When SSP is directly observable, we estimate SSP based upon the historical transaction prices, adjusted for geographic considerations, customer classes, and customer relationship profiles. In instances where SSP is not directly observable, we determine SSP using information that may include market conditions and other observable inputs. We may have more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we may use information such as the size of the customer and geographic region in determining SSP. Determining SSP for performance obligations which we never sell separately also requires significant judgment. In estimating the SSP for such performance obligations, we consider the likely price that would have resulted from established pricing practices had the deliverable been offered separately and the prices a customer would likely be willing to pay.

From time to time, we may enter into arrangements with third party suppliers to resell products or services. In such cases, we evaluate whether we are the principal (i.e. report revenues on a gross basis) or agent (i.e. report revenues on a net basis). In doing so, we first evaluate whether we control the good or service before it is transferred to the customer. If we control the good or service before it is transferred to the customer, we are the principal; if not, we are the agent. Generally, we control a promised good or service before transferring that good or service to the customer and act as the principal to the transaction. Determining whether we control the good or service before it is transferred to the customer may require judgment.

Disaggregated Revenue

We disaggregate revenue from contracts with customers by reportable segment and products and services as this presentation depicts the timing, risks and uncertainty of our revenue streams, which is also in line with how we manage our businesses, assess performance, and determine management compensation. Our disaggregated revenue from continuing operations is as follows (dollars in thousands):



	Three Months Ended March 31,
	2020								2019
	Hosting and professional services		Product and licensing		Maintenance and support		Total		Hosting and professional services		Product and licensing		Maintenance and support		Total
Healthcare	$	147,012	$	43,303	$	34,080	$	224,395	$	125,867	$	41,708	$	36,829	$	204,404
Enterprise	80,839		26,260		30,135		137,234		76,674		14,774		23,994		115,442
Other	7,663		36		9		7,708		14,986		1,744		8		16,738
Total revenues	$	235,514	$	69,599	$	64,224	$	369,337	$	217,527	$	58,226	$	60,831	$	336,584



	Six Months Ended March 31,
	2020									2019
	Hosting and professional services		Product and licensing		Maintenance and support			Total		Hosting and professional services		Product and licensing		Maintenance and support		Total
Healthcare	$	291,996	$	135,259	$	67,675		$	494,930	$	259,382	$	134,737	$	82,150	$	476,269
Enterprise	158,476		57,995		59,145			275,616		155,216		35,053		54,625		244,894
Other	15,519		1,525		(20		)	17,024		30,646		4,325		125		35,096
Total revenues	$	465,991	$	194,779	$	126,800		$	787,570	$	445,244	$	174,115	$	136,900	$	756,259

Hardware revenue comprised approximately $8.5 million of total product and license revenue for the three months ended March 31, 2020 and $14.8 million for the six months ended March 31, 2020.

Contract Acquisition Costs

We are required to capitalize certain contract acquisition costs under ASC 606. The capitalized costs primarily relate to paid commissions and other direct, incremental costs to acquire customer contracts. In accordance with the practical expedient in ASC 606-10-10-4, we apply a portfolio approach to estimate contract acquisition costs for groups of customer contracts. We elect to

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

apply the practical expedient in ASC 340-40-25-4 and will expense contract acquisition costs as incurred where the expected period of benefit is one year or less. Sales commissions paid on renewal maintenance and support are not commensurate with sales commissions paid on the initial maintenance and support contract. Contract acquisition costs are deferred and amortized on a straight-line basis over the period of benefit, which we have estimated to be between one and five years. The period of benefit was determined based on an average customer contract term, expected contract renewals, changes in technology and our ability to retain customers including canceled contracts. Contract acquisition costs are classified as current or noncurrent assets based on when the expense will be recognized. The current and noncurrent portions of contract acquisition costs are included in Prepaid expenses and other current assets, and Other assets, respectively. As of March 31, 2020, we had $19.0 million of current contract acquisition costs and $38.2 million of noncurrent contract acquisition costs. Commission expense is primarily included in Sales and marketing expense on the consolidated statements of operations. We had amortization expense of $4.5 million related to contract acquisition costs for the three months ended March 31, 2020 and $8.6 million for the six months ended March 31, 2020. There was no impairment related to commission costs capitalized.

Capitalized Contract Costs

We capitalize incremental costs incurred to fulfill our contracts that (1) relate directly to the contract, (2) are expected to generate resources that will be used to satisfy our performance obligation under the contract, and (3) are expected to be recovered through revenue generated under the contract. Our capitalized costs consist primarily of setup costs, such as costs to standup, customize, and develop applications for each customer. These costs are incurred to satisfy our stand-ready obligation to provide access to our connected offerings. The contract costs are expensed to cost of revenue as we satisfy our stand-ready obligation over the contract term, which we estimate to be between one and five years. The contract term estimation was determined based on an average customer contract term, expected contract renewals, changes in technology, and our ability to retain customers including canceled contracts. We classify capitalized contract costs as current or noncurrent based on the timing of when we expect to recognize the expense. The current and noncurrent portions of capitalized contract fulfillment costs are included in Prepaid expenses and other current assets, and Other assets, respectively. At March 31, 2020, we had $16.2 million of short-term contract costs included with Prepaid expenses and other current assets and $34.9 million of long-term costs included within Other assets.

Trade Accounts Receivable and Contract Balances

We classify our right to consideration in exchange for deliverables as either a receivable or a contract asset. A receivable is a right to consideration that is unconditional (i.e. only the passage of time is required before payment is due). We present such receivables in Accounts receivable, net in our consolidated balance sheets at their net estimated realizable value. We maintain an allowance for doubtful accounts to provide for the estimated amount of receivables that may not be collected. The allowance is based upon an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivables and other applicable factors.

Our contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period.

Contract assets include unbilled amounts from long-term contracts when revenue recognized exceeds the amount billed to the customer, and right to payment is not solely subject to the passage of time. The current and noncurrent portions of contract assets are included in Prepaid expenses and other current assets, and Other assets. As of March 31, 2020, we had $53.5 million of current contract assets and $123.9 million of noncurrent contract assets. The table below shows significant changes in contract assets of continuing operations (dollars in thousands):



	Contract assets
Balance as of September 30, 2019	$	167,324
Revenues recognized but not billed	148,687
Amounts reclassified to accounts receivable	(138,601		)
Balance at March 31, 2020	$	177,410

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Our contract liabilities, or Deferred revenue, consist of advance payments and billings in excess of revenues recognized. We classify Deferred revenue as current or noncurrent based on when we expect to recognize the revenues. At March 31, 2020, we had $373.3 million of Deferred revenue. The table below shows significant changes in Deferred revenue of continuing operations (dollars in thousands):



	Deferred revenue
Balance as of September 30, 2019	$	348,006
Amounts bill but not recognized	448,927
Revenue recognized	(423,589		)
Balance at March 31, 2020	$	373,344

Remaining Performance Obligations

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied at March 31, 2020 (dollars in thousands):



	Within One Year		Two to Four Years		Greater than Four Years		Total
Total revenue	$	760,538	$	868,658	$	103,394	$	1,732,590

The table above includes fixed backlogs and does not include variable backlog derived from contingent usage-based activities, such as royalties and usage-based hosting revenue.

4. Disposition of Businesses

Spin-off of Automotive

On October 1, 2019, we completed the spin-off of our Automotive business as an independent public company, Cerence, and a pro rata and tax-free distribution to our stockholders of all of the outstanding shares of Cerence owned by Nuance on October 1, 2019. The distribution was made in the amount of one share of Cerence common stock for every eight shares of Nuance common stock owned by Nuance’s stockholders of record as of 5:00 p.m. Eastern Time on September 17, 2019.

In connection with the spin-off, on September 30, 2019, we sold 1.8% of our equity interest in Cerence to a non-affiliated third party for a total cash consideration of $9.8 million. The difference between the consideration received and the carrying amount of the non-controlling interest was recognized in additional paid-in capital, which was subsequently derecognized as part of the spin-off transaction. Effective as of October 1, 2019, for all periods presented, the results of operations of our former Automotive business have been included within discontinued operations.

For the six months ended March 31, 2020, we incurred cash payments of $13.3 million related to the separation and spin-off of our Automotive business, which have been presented as operating cash flows from discontinued operations.

Sale of Imaging

On February 1, 2019, we completed the sale of our Imaging business and received approximately $404.0 million in cash, after estimated transaction expenses. As a result, we recorded a gain of approximately $102.4 million, which has been included within Net income from discontinued operations.

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The historical results of operations for Imaging and Automotive have been included within discontinued operations in our condensed consolidated financial statements. The following table summarizes the results of the discontinued operations (dollars in thousands):



	Three Months Ended March 31,
	2020		2019
	Automotive		Imaging			Automotive			Total
Major line items constituting net income of discontinued operations:
Revenue	$	—	$	15,435		$	72,999		$	88,434
Cost of revenue	—		4,942			22,332			27,274
Research and development	—		2,041			20,090			22,131
Sales and marketing	—		10,243			8,072			18,315
General and administrative	—		766			565			1,331
Amortization of intangible assets	—		1,305			3,132			4,437
Acquisition-related costs, net	—		—			182			182
Restructuring and other charges, net	—		4,791			11,611			16,402
Other	—		—			(266		)	(266		)
(Loss) income from discontinued operations before income taxes	—		(8,653		)	7,281			(1,372		)
(Benefit) for income taxes	—		(4,363		)	(367		)	(4,730		)
Gain on disposition	—		102,371			—			102,371
Net income from discontinued operations	$	—	$	98,081		$	7,648		$	105,729

Supplemental information:
Depreciation	$	—	$	97		$	2,065		$	2,162
Amortization	$	—	$	1,643		$	5,499		$	7,142
Stock compensation	$	—	$	5,001		$	5,073		$	10,074
Capital expenditures	$	—	$	—		$	(1,091	)	$	(1,091	)



	Six Months Ended March 31,
	2020			2019
	Automotive			Imaging			Automotive			Total
Major line items constituting net income of discontinued operations:
Revenue	$	—		$	67,430		$	146,978		$	214,408
Cost of revenue	—			16,946			51,650			68,596
Research and development	—			7,557			41,552			49,109
Sales and marketing	—			28,433			16,061			44,494
General and administrative	—			1,997			1,148			3,145
Amortization of intangible assets	—			5,219			6,264			11,483
Acquisition-related costs, net	—			(386		)	417			31
Restructuring and other charges, net	7,386			13,251			20,051			33,302
Other	—			—			(250		)	(250		)
(Loss) income from discontinued operations before income taxes	(7,386		)	(5,587		)	10,085			4,498
Provision (benefit) for income taxes	1,194			(2,688		)	(1,381		)	(4,069		)
Gain on disposition	—			102,371			—			102,371
Net (loss) income from discontinued operations	$	(6,192	)	$	99,472		$	11,466		$	110,938

Supplemental information:
Depreciation	$	—		$	391		$	4,201		$	4,592
Amortization	$	—		$	6,569		$	11,033		$	17,602
Stock compensation	$	—		$	7,103		$	9,916		$	17,019
Capital expenditures	$	—		$	—		$	(1,871	)	$	(1,871	)

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes the assets and liabilities included within discontinued operations (dollars in thousands):



	September 30, 2019
Major classes of assets of discontinued operations:
Accounts receivable, net	$	67,928
Prepaid expenses and other current assets	23,930
Land, building and equipment, net	20,113
Goodwill	1,115,568
Intangible assets, net	65,561
Other assets	35,366
Total assets	$	1,328,466

Major classes of liabilities of discontinued operations:
Accounts payable	$	14,039
Accrued expenses and other current liabilities	27,429
Deferred revenue	353,700
Other liabilities	21,603
Total liabilities	$	416,771

5. Goodwill and Intangible Assets

The changes in the carrying amount of goodwill by reportable segment for the six months ended March 31, 2020 are as follows (dollars in thousands):

Goodwill



	Healthcare			Enterprise			Other			Total
Balance as of September 30, 2019	$	1,435,144		$	679,903		$	12,849		$	2,127,896
Purchase accounting adjustments	(30		)	—			—			(30		)
Effect of foreign currency translation	(1,464		)	(1,259		)	(90		)	(2,813		)
Balance at March 31, 2020	$	1,433,650		$	678,644		$	12,759		$	2,125,053

Other Intangible Assets

The changes in the carrying amount of intangible assets for the six months ended March 31, 2020 are as follows (dollars in thousands):



	Intangible Assets
Balance at September 30, 2019	$	291,371
Amortization	(37,613		)
Effect of foreign currency translation	(344		)
Balance at March 31, 2020	$	253,414

6. Financial Instruments and Hedging Activities

Derivatives Not Designated as Hedges

Forward Currency Contracts

We have operations in a number of international locations where currency exchange rates can be volatile. We utilize foreign currency forward contracts to mitigate the risks associated with changes in foreign currency exchange rates so that our exposure to foreign currencies will be mitigated or offset by the gains or losses on the foreign currency forward contracts. Generally, we enter into such contracts for less than 90 days and have no cash requirements until maturity. As of March 31, 2020 and September 30, 2019, we had outstanding contracts with a total notional value of $54.5 million and $189.6 million, respectively.

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

We did not designate any forward contracts as hedging instruments for the six months ended March 31, 2020 or 2019. Therefore, changes in fair value of foreign currency forward contracts were recognized within Other (expense) income, net in our consolidated statements of operations. The cash flows related to the settlement of forward contracts not designated as hedging instruments are included in cash flows from investing activities within our condensed consolidated statement of cash flows.

A summary of the derivative instruments is as follows (dollars in thousands):



Derivatives Not Designated as Hedges	Balance Sheet Classification	Fair Value
Derivatives Not Designated as Hedges	Balance Sheet Classification	March 31, 2020			September 30, 2019
Foreign currency forward contracts	Prepaid expenses and other current assets	$	—		$	597
Foreign currency forward contracts	Accrued expenses and other current liabilities	$	(297	)	$	(327	)

A summary of income (loss) related to foreign currency forward contracts for the three and six months ended March 31, 2020 and 2019 is as follows (dollars in thousands):



	Income Statement Classification	Three Months Ended March 31,					Six Months Ended March 31,
Derivatives Not Designated as Hedges	Income (Loss) Recognized	2020			2019		2020		2019
Foreign currency forward contracts	Other income (expense), net	$	(143	)	$	2,170	$	442	$	440

7. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. Valuation techniques must maximize the use of observable inputs and minimize the use of unobservable inputs. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.

The determination of the applicable level within the hierarchy of a particular financial asset or liability depends on the lowest level of inputs that are significant to the fair value measurement as of the measurement date as follows:


•	Level 1: Quoted prices for identical assets or liabilities in active markets.


•	Level 2: Observable inputs other than those described as Level 1.


•	Level 3: Unobservable inputs that are supportable by little or no market activities and are based on significant assumptions and estimates.

Assets and liabilities measured at fair value on a recurring basis at March 31, 2020 and September 30, 2019 consisted of the following (dollars in thousands):



	March 31, 2020
	Level 1		Level 2			Level 3			Total
Assets:
Money market funds ^(a)	$	260,701	$	—		$	—		$	260,701
Time deposits^(b)	—		146,864			—			146,864
Commercial paper, $33,207 at cost ^(b)	—		33,380			—			33,380
Corporate notes and bonds, $23,605 at cost ^(b)	—		23,403			—			23,403
Foreign currency exchange contracts ^(b)	—		—			—			—
Total assets at fair value	$	260,701	$	203,647		$	—		$	464,348
Liabilities:
Foreign currency exchange contracts ^(b)	$	—	(297		)	$	—		$	(297	)
Contingent acquisition payments ^(c)	—		—			(2,493		)	(2,493		)
Total liabilities at fair value	$	—	$	(297	)	$	(2,493	)	$	(2,790	)

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



	September 30, 2019
	Level 1		Level 2			Level 3			Total
Assets:
Money market funds ^(a)	$	217,861	$	—		$	—		$	217,861
Time deposits ^(b)	—		115,913			—			115,913
Commercial paper, $77,089 at cost ^(b)	—		77,494			—			77,494
Corporate notes and bonds, $37,504 at cost ^(b)	—		37,566			—			37,566
Foreign currency exchange contracts ^(b)	—		597			—			597
Total assets at fair value	$	217,861	$	231,570		$	—		$	449,431
Liabilities:
Foreign currency exchange contracts ^(b)	$	—	$	(327	)	$	—		$	(327	)
Contingent acquisition payments ^(c)	—		—			(2,925		)	(2,925		)
Total liabilities at fair value	$	—	$	(327	)	$	(2,925	)	$	(3,252	)


^(a)	Money market funds and time deposits with original maturity of 90 days or less are included within cash and cash equivalents in the consolidated balance sheets and are valued at quoted market prices in active markets.

^(b)

Time deposits, commercial paper, corporate notes and bonds, and foreign currency exchange contracts are recorded at fair market values, which are determined based on the most recent observable inputs for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or are directly or indirectly observable. Time deposits are generally for terms of one year or less. Commercial paper and corporate notes and bonds generally mature within three years and had a weighted average maturity of 0.50 years as of March 31, 2020 and 0.53 years as of September 30, 2019.


^(c)	The fair values of our contingent consideration arrangements were determined using either the option pricing model with Monte Carlo simulation or the probability-weighted discounted cash flow method.

The estimated fair value of our long-term debt was approximately $1,904.6 million (face value $1,896.5 million) as of March 31, 2020 and $2,143.4 million (face value $2,137.0 million) as of September 30, 2019 based on Level 2 measurements. The fair value of each borrowing was estimated using the average of the bid and ask trading quotes at each respective reporting date. There was no balance outstanding under our revolving credit agreement as of September 30, 2019. As of March 31, 2020, the carrying value of our borrowings under the revolving credit agreement approximated its fair value.

Additionally, contingent acquisition payments are recorded at fair values upon the acquisition and are remeasured in subsequent reporting periods with the changes in fair values recorded within acquisition-related costs, net. Such payments are contingent upon the achievement of specified performance targets and are valued using the option pricing model with Monte Carlo simulation or the probability-weighted discounted cash flow model (Level 3 measurement).

The following table provides a summary of changes in the aggregate fair value of the contingent acquisition payments for all periods presented (dollars in thousands):



	Three Months Ended March 31,					Six Months Ended March 31,
	2020		2019			2020			2019
Balance at beginning of period	$	2,493	$	3,979		$	2,550		$	4,000
Earn-out liabilities established at time of acquisition	—		—			—			—
Payments and foreign currency translation	—		(2,529		)	(57		)	(2,550		)
Adjustments to fair value included in acquisition-related costs, net	—		—			—			—
Balance at end of period	$	2,493	$	1,450		$	2,493		$	1,450

Contingent acquisition payments are to be made in periods through fiscal year 2021. As of March 31, 2020, the maximum amount payable based on the agreements was $4.8 million if the specified performance targets are achieved.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

8. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (dollars in thousands):



	March 31, 2020		September 30, 2019
Compensation	$	84,900	$	119,412
Cost of revenue related liabilities	34,606		58,012
Accrued interest payable	13,599		19,302
Consulting and professional fees	12,644		20,401
Sales and marketing incentives	1,357		2,692
Sales and other taxes payable	6,378		8,089
Facility-related liabilities	—		2,503
Operating lease obligations	28,010		—
Other	5,907		19,159
Total	$	187,401	$	249,570

9. Restructuring and Other Charges, net

Restructuring and other charges, net include restructuring expenses together with other charges that are unusual in nature, are the result of unplanned events, and arise outside of the ordinary course of our business.

The following table represents the roll forward of restructuring liabilities for the six months ended March 31, 2020 (dollars in thousands):



	Personnel			Facilities			Total
Balance at September 30, 2019	$	3,587		$	3,622		$	7,209
ASC 842 implementation ^(a)	—			11,674			11,674
Restructuring charges, net	4,335			2,533			6,868
Non-cash adjustment	—			1,263			1,263
Cash payments	(6,172		)	(3,148		)	(9,320		)
Balance at March 31, 2020	$	1,750		$	15,944		$	17,694

(a) The amount represents a reclassification of estimated sublease income from restructuring accrual to reduce the costs of right-of-use assets upon the adoption of ASC 842 on October 1, 2019.

The table below presents the Restructuring and other charges, net associated with each segment, but excluded from calculation of each segment's profit (dollars in thousands):



	Three Months Ended March 31,
	2020										2019
	Personnel		Facilities		Total Restructuring		Other Charges		Total		Personnel			Facilities		Total Restructuring			Other Charges		Total
Healthcare	$	506	$	248	$	754	$	—	$	754	$	2,971		$	14	$	2,985		$	—	$	2,985
Enterprise	233		213		446		—		446		2,700			—		2,700			—		2,700
Other	—		54		54		—		54		(116		)	—		(116		)	561		445
Corporate	683		883		1,566		3,509		5,075		797			612		1,409			2,319		3,728
Total	$	1,422	$	1,398	$	2,820	$	3,509	$	6,329	$	6,352		$	626	$	6,978		$	2,880	$	9,858

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



	Six Months Ended March 31,
	2020													2019
	Personnel		Facilities			Total Restructuring			Other Charges		Total			Personnel		Facilities		Total Restructuring		Other Charges		Total
Healthcare	$	1,782	$	1,775		$	3,557		$	—	$	3,557		$	4,450	$	141	$	4,591	$	—	$	4,591
Enterprise	1,537		718			2,255			—		2,255			5,251		13		5,264		—		5,264
Other	—		(311		)	(311		)	—		(311		)	914		—		914		3,067		3,981
Corporate	1,016		351			1,367			6,144		7,511			1,950		322		2,272		8,391		10,663
Total	$	4,335	$	2,533		$	6,868		$	6,144	$	13,012		$	12,565	$	476	$	13,041	$	11,458	$	24,499

Fiscal Year 2020

For the six months ended March 31, 2020, we recorded restructuring charges of $6.9 million, which included $4.3 million related to the termination of approximately 75 employees and $2.5 million related to certain restructuring facilities. Of these amounts, $2.8 million was recorded for the three months ended March 31, 2020, which included $1.4 million related to the termination of approximately 38 employees and $1.4 million related to certain restructuring facilities. These actions were part of our strategic initiatives focused on investment rationalization, process optimization and cost reduction. We expect the remaining outstanding severance of $1.8 million to be substantially paid during fiscal year 2020, and the remaining balance of $15.9 million related to excess facilities to be paid through fiscal year 2027, in accordance with the terms of the applicable leases.

Additionally, for the six months ended March 31, 2020, we recorded $4.2 million costs related to the separation of our Automotive business and $2.0 million related to the impairment of a right-of-use asset of a restructuring facility, offset in part by a $0.1 million cash receipt from insurance claims related to a malware incident that occurred in the third quarter of fiscal year 2017 (the "2017 Malware Incident"). Of these amounts, we recorded $1.5 million costs related to the separation of our Automotive business and $2.0 million related to the impairment of a right-of-use asset of a restructuring facility for the three months ended March 31, 2020. The $2.0 million impairment charge for the three and six months ended March 31, 2020 was related to a restructuring facility as we re-assessed the timing and fees of the assumed sublease as a result of the COVID-19 pandemic.

Fiscal Year 2019

For the six months ended March 31, 2019, we recorded restructuring charges of $13.0 million, which included $12.6 million related to the termination of approximately 274 employees and $0.5 million related to certain excess facilities. Of these amounts, $7.0 million was recorded for the three months ended March 31, 2019, which included $6.4 million related to the termination of approximately 178 employees and $0.6 million non-cash adjustments related to certain restructuring facilities. These actions were part of our strategic initiatives focused on investment rationalization, process optimization and cost reduction.

Additionally, for the six months ended March 31, 2019, we recorded $8.7 million of professional services fees related to our corporate transformational efforts and $3.1 million of accelerated depreciation related to our Mobile Operator Services business, offset in part by a $0.3 million cash receipt from insurance claims related to the 2017 Malware Incident. Of these amounts, we recorded $1.5 million of professional services fees related to the execution of our corporate transformational efforts, $0.6 million of accelerated depreciation related to our Mobile Operator Services business, and $0.8 million related to the 2017 Malware Incident for the three months ended March 31, 2019.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

10. Debt

As of March 31, 2020 and September 30, 2019, we had the following borrowing obligations (dollars in thousands):



	March 31, 2020			September 30, 2019
5.625% Senior Notes due 2026, net of deferred issuance costs of $4.2 million and $4.5 million, respectively. Effective interest rate 5.625%.	$	495,839		$	495,518
6.000% Senior Notes due 2024, net of deferred issuance costs of $1.5 million. Effective interest rate 6.000%.	—			298,529
1.000% Convertible Debentures due 2035, net of unamortized discount of $78.4 million and $91.6 million, respectively, and deferred issuance costs of $3.6 million and $4.3 million, respectively. Effective interest rate 5.622%.	594,515			580,639
2.750% Convertible Debentures due 2031. Effective interest rate 7.432%.	—			46,568
1.250% Convertible Debentures due 2025, net of unamortized discount of $49.5 million and $71.6 million, respectively, and deferred issuance costs of $2.1 million and $3.1 million, respectively. Effective interest rate 5.578%.	211,014			275,257
1.500% Convertible Debentures due 2035, net of unamortized discount of $15.1 million and $22.7 million, respectively, and deferred issuance costs of $0.5 million and $0.8 million, respectively. Effective interest rate 5.394%.	211,836			240,406
Revolving Credit Facility, net of unamortized issuance costs of $0.3 million and $0.5 million, respectively.	229,655			(511		)
Total debt	1,742,859			1,936,406
Less: current portion ^(a)	(230,000		)	(1,142,870		)
Total long-term debt	$	1,512,859		$	793,536

^(a) As of September 30, 2019, in connection with the anticipated Cerence spin-off, the holders had the right to convert all or any portion of their debentures until the close of business on October 1, 2019. As a result, the net carrying amounts of our convertible notes were included in current liabilities as of September 30, 2019. Upon the conclusion of the conversion period on October 1, 2019, none of the holders exercised their right to convert. As a result, the net carrying amounts of the convertible notes were reclassified back to long-term debt in the first quarter of fiscal year 2020.

The following table summarizes the maturities of our borrowing obligations as of March 31, 2020 (dollars in thousands):



Fiscal Year	Convertible Debentures⁽¹⁾			Senior Notes and Revolving Credit Facility			Total
2020	$	—		$	230,000		$	230,000
2021	—			—			—
2022	227,395			—			227,395
2023	676,488			—			676,488
2024	—			—			—
Thereafter	262,656			500,000			762,656
Total before unamortized discount	1,166,539			730,000			1,896,539
Less: unamortized discount and issuance costs	(149,174		)	(4,506		)	(153,680		)
Total long-term debt	$	1,017,365		$	725,494		$	1,742,859


⁽¹⁾	Pursuant to the terms of each convertible instrument, holders have the right to redeem the debt on specific dates prior to maturity. The repayment schedule above assumes that payment is due on the next redemption date after March 31, 2020.

5.625% Senior Notes due 2026

In December 2016, we issued $500.0 million aggregate principal amount of 5.625% Senior Notes due on December 15, 2026 (the "2026 Senior Notes") in a private placement. The proceeds from the 2026 Senior Notes were approximately $495.0 million, net of issuance costs, and we used the proceeds to repurchase a portion of our then outstanding 5.375% Senior Notes due 2020. The

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2026 Senior Notes bear interest at 5.625% per year, payable in cash semi-annually in arrears.

The 2026 Senior Notes are unsecured senior obligations and are guaranteed on an unsecured senior basis by certain of our domestic subsidiaries ("Subsidiary Guarantors"). The 2026 Senior Notes and the guarantees rank equally in right of payment with all of our and the Subsidiary Guarantors’ existing and future unsecured senior debt and rank senior in right of payment to all of our and the Subsidiary Guarantors’ future unsecured subordinated debt. The 2026 Senior Notes and guarantees effectively rank junior to all our secured debt and that of the Subsidiary Guarantors to the extent of the value of the collateral securing such debt and to all liabilities, including trade payables, of our subsidiaries that have not guaranteed the 2026 Senior Notes.

At any time before December 15, 2021, we may redeem all or a portion of the 2026 Senior Notes at a redemption price equal to 100% of the aggregate principal amount of the 2026 Senior Notes to be redeemed, plus a "make-whole" premium and accrued and unpaid interest to, but excluding, the redemption date. At any time on or after December 15, 2021, we may redeem all or a portion of the 2026 Senior Notes at certain redemption prices expressed as percentages of the principal amount, plus accrued and unpaid interest to, but excluding, the redemption date. At any time and from time to time before December 15, 2021, we may redeem up to 35% of the aggregate outstanding principal amount of the 2026 Senior Notes with the net cash proceeds received by us from certain equity offerings at a price equal to 105.625% of the aggregate principal amount, plus accrued and unpaid interest to, but excluding, the redemption date, provided that the redemption occurs no later than 120 days after the closing of the related equity offering, and at least 50% of the original aggregate principal amount of the 2026 Senior Notes remains outstanding immediately thereafter.

Upon the occurrence of a change in control or sale of substantially all assets, we must offer to repurchase the 2026 Senior Notes at a price equal to 100% in the case of an asset sale, or 101% in the case of a change of control, of the principal amount plus accrued and unpaid interest to, but excluding, the repurchase date.

6.0% Senior Notes due 2024

In June 2016, we issued $300.0 million aggregate principal amount of 6.0% Senior Notes due on July 1, 2024 (the "2024 Senior Notes") in a private placement. The proceeds from the 2024 Senior Notes were approximately $297.5 million, net of issuance costs. The 2024 Senior Notes bear interest at 6.0% per year, payable in cash semi-annually in arrears.

On October 1, 2019, we redeemed all the $300.0 million outstanding principal amount of the 2024 Senior Notes for $313.5 million, plus accrued and unpaid interest of $4.5 million. As a result of the redemption, we recorded a $15.0 million loss on extinguishment of debt for the first quarter of fiscal year 2020, including a $13.5 million redemption premium and a $1.5 million write-off of unamortized debt issuance costs.

1.0% Convertible Debentures due 2035

In December 2015, we issued $676.5 million in aggregate principal amount of 1.0% Senior Convertible Debentures due in 2035 (the "1.0% 2035 Debentures") in a private placement. Total proceeds were $663.8 million, net of issuance costs, and we used a portion to repurchase $38.3 million in aggregate principal on our 2.75% Senior Convertible Debentures due in 2031 (the “2.75% 2031 Debentures”) and to repay the aggregate principal balance of $472.5 million on our term loan under the amended and restated credit agreement. The 1.0% 2035 Debentures bear interest at 1.0% per year, payable in cash semi-annually in arrears. In addition to ordinary interest and default additional interest, beginning with the semi-annual interest period commencing on December 15, 2022, contingent interest will accrue during any regular semi-annual interest period where the average trading price of our 1.0% 2035 Debentures for the ten trading day period immediately preceding the first day of such semi-annual period is greater than or equal to $1,200 per $1,000 principal amount of our 1.0% 2035 Debentures, in which case, contingent interest will accrue at a rate of 0.50% per annum of such average trading price. The 1.0% 2035 Debentures mature on December 15, 2035, subject to the right of the holders to require us to redeem the 1.0% 2035 Debentures on December 15, 2022, 2027, or 2032. The 1.0% 2035 Debentures are general senior unsecured obligations and rank equally in right of payment with all of our existing and future unsecured, unsubordinated indebtedness and senior in right of payment to any indebtedness that is contractually subordinated to the 1.0% 2035 Debentures. The 1.0% 2035 Debentures will be effectively subordinated to indebtedness and other liabilities of our subsidiaries.

We account separately for the liability and equity components of the 1.0% 2035 Debentures in accordance with authoritative guidance for convertible debt instruments that may be settled in cash upon conversion. The guidance requires the carrying amount of the liability component to be estimated by measuring the fair value of a similar liability that does not have an associated conversion feature and record the remainder in stockholders’ equity. At issuance, we allocated $495.4 million to long-term debt, and $181.1 million has been recorded as additional paid-in capital, which is being amortized to interest expense using the effective interest rate method through December 2022.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

If converted, the principal amount of the 1.0% 2035 Debentures is payable in cash and any amounts payable in excess of the principal amount will (based on an initial conversion rate, which represents a conversion price of approximately $24.12 per share, subject to adjustment) be paid in cash or shares of our common stock, at our election. Conversion is only allowed in the following circumstances and to the following extent: (i) prior to June 15, 2035, on any date during any fiscal quarter (and only during such fiscal quarter) if the closing sale price of our common stock was more than 130% of the then current conversion price for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of the previous fiscal quarter; (ii) during the five consecutive business-day period following any five consecutive trading-day period in which the trading price for $1,000 principal amount of the 1.0% 2035 Debentures for each day during such five trading-day period was less than 98% of the closing sale price of our common stock multiplied by the then current conversion rate; (iii) upon the occurrence of specified corporate transactions, as described in the indenture for the 1.0% 2035 Debentures; or (iv) at the option of the holder at any time on or after June 15, 2035. Additionally, we may redeem the 1.0% 2035 Debentures, in whole or in part, on or after December 20, 2022 for cash at a price equal to 100% of the principal amount of the 1.0% 2035 Debentures to be purchased plus any accrued and unpaid interest, including any additional interest to, but excluding, the repurchase date. Each holder shall have the right, at such holder’s option, to require us to repurchase all or any portion of the 1.0% 2035 Debentures held by such holder on December 15, 2022, December 15, 2027, or December 15, 2032 at par plus accrued and unpaid interest. If we undergo a fundamental change or non-stock change of control (as described in the indenture for the 1.0% 2035 Debentures) prior to maturity, holders will have the option to require us to repurchase all or any portion of their debentures for cash at a price equal to 100% of the principal amount of the 1.0% 2035 Debentures to be purchased plus any accrued and unpaid interest.

In accordance with the terms of the indentures governing the debentures and due to the completion of the spin-off of our Automotive business, the conversion ratio of the 1.0% 2035 Debentures has been adjusted from 36.7360 to 41.4576 shares per $1,000 principal amount.

As of March 31, 2020, none of the conversion criteria were met for the 1.0% 2035 Debentures. If the conversion criteria were met, we could be required to repay all or some of the aggregate principal amount in cash prior to the maturity date.

2.75% Convertible Debentures due 2031

On October 24, 2011, we sold $690.0 million of our 2.75% 2031 Debentures in a private placement. Total proceeds, net of issuance costs, were $676.1 million. The 2.75% 2031 Debentures bear interest at 2.75% per year, payable in cash semi-annually in arrears. The 2.75% 2031 Debentures mature on November 1, 2031, subject to the right of the holders to require us to redeem the 2.75% 2031 Debentures on November 1, 2021 and 2026. The 2.75% 2031 Debentures are general senior unsecured obligations and rank equally in right of payment with all of our existing and future unsecured, unsubordinated indebtedness and senior in right of payment to any indebtedness that is contractually subordinated to the 2.75% 2031 Debentures. The 2.75% 2031 Debentures will be effectively subordinated to indebtedness and other liabilities of our subsidiaries. At issuance, we allocated $533.6 million to long-term debt, and $156.4 million has been recorded as additional paid-in capital, which was amortized to interest expense using the effective interest rate method through November 2017.

In June 2015, we entered into separate privately negotiated agreements with certain holders of our 2.75% 2031 Debentures to exchange, in a private placement, $256.2 million in aggregate principal amount of our 2031 Debentures for approximately $263.9 million in aggregate principal amount of our 1.5% Senior Convertible Debentures due in 2035 (the"1.5% 2035 Debenture"). In December 2015, we entered into separate privately negotiated agreements with certain holders of our 2.75% 2031 Debentures to repurchase $38.3 million in aggregate principal with proceeds received from the issuance of our 1.0% 2035 Debentures. Following this activity, $395.5 million in aggregate principal amount of our 2.75% 2031 Debentures remained outstanding. The aggregate debt discount was amortized to interest expense using the effective interest rate method through November 2017.

In November 2017, holders of approximately $331.2 million in aggregate principal amount of the outstanding 2.75% 2031 Debentures exercised their right to require us to repurchase such debentures. Following the repurchase, $46.6 million in aggregate principal amount of the 2.75% 2031 Debentures remained outstanding and we had the right to call for redemption of some or all of the remaining outstanding 2.75% 2031 Debentures.

In March 2020, we redeemed the remaining $46.6 million outstanding amount of the 2.75% Convertible Debentures at par. The issuance costs and discount had been fully amortized. No gain or loss was recognized for the redemption.

1.25% Convertible Debentures due 2025

In March 2017, we issued $350.0 million in aggregate principal amount of 1.25% Senior Convertible Debentures due in 2025 (the "1.25% 2025 Debentures") in a private placement. The proceeds were approximately $343.6 million, net of issuance costs. We used a portion of the proceeds to repurchase 5.8 million shares of our common stock for $99.1 million and $17.8 million in aggregate

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

principal on our 2.75% 2031 Debentures. The 1.25% 2025 Debentures bear interest at 1.25% per year, payable in cash semi-annually in arrears, beginning on October 1, 2017. The 1.25% 2025 Debentures mature on April 1, 2025. The 1.25% 2025 Debentures are general senior unsecured obligations and rank equally in right of payment with all of our existing and future unsecured, unsubordinated indebtedness and senior in right of payment to any indebtedness that is contractually subordinated to the 1.25% 2025 Debentures. The 1.25% 2025 Debentures will be effectively subordinated to indebtedness and other liabilities of our subsidiaries.

We account separately for the liability and equity components of the 1.25% 2025 Debentures in accordance with authoritative guidance for convertible debt instruments that may be settled in cash upon conversion. The guidance requires the carrying amount of the liability component to be estimated by measuring the fair value of a similar liability that does not have an associated conversion feature and record the remainder in stockholders’ equity. At issuance, we allocated $252.1 million to long-term debt, and $97.9 million has been recorded as additional paid-in capital, which is being amortized to interest expense using the effective interest rate method through April 1, 2025.

If converted, the principal amount of the 1.25% 2025 Debentures is payable in cash and any amounts payable in excess of the principal amount will (based on an initial conversion rate, which represents a conversion price of approximately $19.69 per share subject to adjustment under certain circumstances) be paid in cash or shares of our common stock, at our election. Conversion is only allowed in the following circumstances and to the following extent: (i) prior to October 1, 2024, on any date during any fiscal quarter (and only during such fiscal quarter) if the closing sale price of our common stock was more than 130% of the then current conversion price for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of the previous fiscal quarter; (ii) at any time on or after October 1, 2024; (iii) during the five consecutive business-day period immediately following any five consecutive trading-day period in which the trading price for $1,000 principal amount of the 1.25% 2025 Debentures for each day during such five trading-day period was less than 98% of the closing sale price of our common stock multiplied by the then current conversion rate; or (iv) upon the occurrence of specified corporate transactions, as described in the indenture for the 1.25% 2025 Debentures. We may not redeem the 1.25% 2025 Debentures prior to the maturity date. If we undergo a fundamental change or non-stock change of control (as described in the indenture for the 1.25% 2025 Debentures) prior to maturity, holders will have the option to require us to repurchase all or any portion of their debentures for cash at a price equal to 100% of the principal amount of the 1.25% 2025 Debentures to be purchased plus any accrued and unpaid interest.

In accordance with the terms of the indentures governing the debentures and due to the completion of the spin-off of our Automotive business, the conversion ratio of the 1.25% 2025 Debentures has been adjusted to from 45.0106 to 50.7957 shares per $1,000 principal amount.

During the second quarter of fiscal year 2020, we repurchased $87.3 million notional amount of our 1.25% 2025 Debentures for $112.3 million, of which we allocated $72.8 million to debt and $39.5 million to equity based upon ASC 470-20. Also, in connection with the repurchases, we wrote off $16.7 million unamortized discount and $0.7 million unamortized costs. As a result, we recorded a $2.8 million loss associated with the repurchases. Following the repurchases, $262.7 million in aggregate principal amount of the 1.25% 2025 Debentures remain outstanding.

As of March 31, 2020, none of the conversion criteria were met for the 1.25% 2025 Debentures. If the conversion criteria were met, we could be required to repay all or some of the aggregate principal amount in cash prior to the maturity date.

1.50% Convertible Debentures due 2035

In June 2015, we issued $263.9 million in aggregate principal amount of 1.5% Senior Convertible Debentures due in 2035 in exchange for $256.2 million in aggregate principal amount of our 2.75% 2031 Debentures. Total proceeds, net of issuance costs, were $253.2 million. The 1.5% 2035 Debentures were issued at 97.09% of the principal amount, which resulted in a discount of $7.7 million. The 1.5% 2035 Debentures bear interest at 1.5% per year, payable in cash semi-annually in arrears. In addition to ordinary interest and default additional interest, beginning with the semi-annual interest period commencing on November 1, 2021, contingent interest will accrue during any regular semi-annual interest period where the average trading price of our 1.5% 2035 Debentures for the ten trading day period immediately preceding the first day of such semi-annual period is greater than or equal to $1,200 per $1,000 principal amount of our 1.5% 2035 Debentures, in which case, contingent interest will accrue at a rate of 0.50% per annum of such average trading price. The 1.5% 2035 Debentures mature on November 1, 2035, subject to the right of the holders to require us to redeem the 1.5% 2035 Debentures on November 1, 2021, 2026, or 2031. The 1.5% 2035 Debentures are general senior unsecured obligations and rank equally in right of payment with all of our existing and future unsecured, unsubordinated indebtedness and senior in right of payment to any indebtedness that is contractually subordinated to the 1.5% 2035 Debentures. The 1.5% 2035 Debentures will be effectively subordinated to indebtedness and other liabilities of our subsidiaries.

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

We account separately for the liability and equity components of the 1.5% 2035 Debentures in accordance with authoritative guidance for convertible debt instruments that may be settled in cash upon conversion. At issuance, we allocated $208.6 million to long-term debt, and $55.3 million has been recorded as additional paid-in capital, which is being amortized to interest expense using the effective interest rate method through November 2021.

If converted, the principal amount of the 1.5% 2035 Debentures is payable in cash and any amounts payable in excess of the principal amount, will (based on an initial conversion rate, which represents an initial conversion price of approximately $20.61 per share subject to adjustment) be paid in cash or shares of our common stock, at our election. Conversion is only allowed in the following circumstances and to the following extent: (i) prior to May 1, 2035, on any date during any fiscal quarter beginning after September 30, 2015 (and only during such fiscal quarter) if the closing sale price of our common stock was more than 130% of the then current conversion price for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of the previous fiscal quarter; (ii) during the five consecutive business-day period following any five consecutive trading-day period in which the trading price for $1,000 principal amount of the 1.5% 2035 Debentures for each day during such five trading-day period was less than 98% of the closing sale price of our common stock multiplied by the then current conversion rate; (iii) upon the occurrence of specified corporate transactions, as described in the indenture for the 1.5% 2035 Debentures; or (iv) at the option of the holder at any time on or after May 1, 2035. Additionally, we may redeem the 1.5% 2035 Debentures, in whole or in part, on or after November 5, 2021 for cash at a price equal to 100% of the principal amount of the 1.5% 2035 Debentures to be purchased plus any accrued and unpaid interest, including any additional interest to, but excluding, the repurchase date. Each holder shall have the right, at such holder’s option, to require us to repurchase all or any portion of the 1.5% 2035 Debentures held by such holder on November 1, 2021, November 1, 2026, or November 1, 2031 at par plus accrued and unpaid interest. If we undergo a fundamental change (as described in the indenture for the 1.5% 2035 Debentures) prior to maturity, holders will have the option to require us to repurchase all or any portion of their debentures for cash at a price equal to 100% of the principal amount of the 1.5% 2035 Debentures to be purchased plus any accrued and unpaid interest.

In accordance with the terms of the indentures governing the debentures and due to the completion of the spin-off of our Automotive business, the conversion ratio of the 1.5% 2035 Debentures has been adjusted from 42.9978 to 48.5216 shares per $1,000 principal amount.

During the second quarter of fiscal year 2020, we repurchased $36.5 million notional amount of 1.5% 2035 Debentures for $41.3 million, of which we allocated $34.7 million to debt and $6.6 million to equity based upon ASC 470-20. Also, in connection with the repurchases, we wrote off $2.5 million unamortized discount and $0.1 million unamortized costs. As a result, we recorded a $0.8 million loss associated with the repurchases. Following the repurchases, $227.4 million in aggregate principal amount of the 1.5% 2035 Debentures remain outstanding.

As of March 31, 2020, none of the conversion criteria were met for the 1.5% 2035 Debentures. If the conversion criteria were met, we could be required to repay all or some of the aggregate principal amount in cash prior to the maturity date.

Revolving Credit Facility

Our revolving credit agreement (the “Revolving Credit Agreement"), which expires on April 15, 2021, provides for aggregate borrowing commitments of $242.5 million (the "Revolving Credit Facility"), including the revolving facility loans, the swingline loans and issuance of letters of credit. The borrowing outstanding under the Revolving Credit Facility bears interest at either (i) LIBOR plus an applicable margin of 1.50% or 1.75%, or (ii) the alternative base rate plus an applicable margin of 0.50% or 0.75%. The Revolving Credit Facility is secured by substantially all our assets. The Revolving Credit Agreement contains customary affirmative and negative covenants and conditions to borrowing, as well as customary events of default. At any time that there are any outstanding borrowings (excluding up to $25,000,000 of issued and undrawn Letters of Credit) under the Revolving Credit Facility, we are required to maintain a Consolidated Senior Secured Leverage Ratio (as defined in the Revolving Credit Agreement) not exceeding 4.00 to 1.00. We were in compliance with all the debt covenants as of March 31, 2020.

On March 24, 2020, we borrowed $230.0 million under our revolving credit facility at an effective interest rate of 2.68% per annum. The borrowing has a 30-day term and is renewable at our discretion until April 15, 2021. As of March 31, 2020, after taking into account the outstanding letters of credit of $2.8 million and the outstanding borrowing of $230.0 million, we had $9.7 million available for borrowing under the Revolving Credit Facility.

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

11. Stockholders' Equity

Share Repurchases

On April 29, 2013, our Board of Directors approved a share repurchase program for up to $500.0 million, which was increased by $500.0 million on April 29, 2015. On August 1, 2018, our Board of Directors approved an additional $500.0 million under our share repurchase program. Under the terms of the share repurchase program, we have the ability to repurchase shares from time to time through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades, accelerated stock repurchase transactions, or any combination of such methods. The share repurchase program does not require us to acquire any specific number of shares and may be modified, suspended, extended or terminated by us at any time without prior notice. The timing and the amount of any purchases will be determined by management based on an evaluation of market conditions, capital allocation alternatives, and other factors.

We repurchased 3.8 million shares of our common stock for $76.8 million for the three months ended March 31, 2020 and 9.5 million shares of our common stock for $169.2 million for the six months ended March 31, 2020. For the three months ended March 31, 2019, we repurchased 1.2 million shares of our common stock for $16.2 million and 6.1 million shares of our common stock for $91.3 million for the six months ended March 31, 2019 under the program. The amount paid in excess of par value is recognized in additional paid in capital and these shares were retired upon repurchase. Since the commencement of the program, we have repurchased an aggregate of 73.8 million shares for $1,238.8 million. As of March 31, 2020, approximately $261.2 million remained available for future repurchases under the program.

12. Net (Loss) Income Per Share

The following table sets forth the computation for basic and diluted net (loss) income per share (in thousands, except per share amounts):



	Three Months Ended March 31,						Six Months Ended March 31,
	2020			2019			2020			2019
Numerator:
Net (loss) income from continuing operations	$	(13,510	)	$	(28,397	)	$	41,367		$	(14,516	)
Net income (loss) from discontinued operations	—			105,729			(6,192		)	110,938
Net (loss) income	$	(13,510	)	$	77,332		$	35,175		$	96,422

Denominator:
Weighted average common shares outstanding — basic	282,576			285,866			283,366			286,849
Dilutive effect of employee stock compensation plans	—			—			4,848			—
Weighted average common shares outstanding — diluted	282,576			285,866			288,214			286,849

Net (loss) income per common share - basic:
Continuing operations	$	(0.05	)	$	(0.10	)	$	0.15		$	(0.05	)
Discontinued operations	—			0.37			(0.03		)	0.39
Total net (loss) income per basic common share	$	(0.05	)	$	0.27		$	0.12		$	0.34

Net (loss) income per common share - diluted:
Continuing operations	$	(0.05	)	$	(0.10	)	$	0.14		$	(0.05	)
Discontinued operations	—			0.37			(0.02		)	0.39
Total net (loss) income per diluted common share	$	(0.05	)	$	0.27		$	0.12		$	0.34

Anti-dilutive equity instruments excluded from the calculation	73			460			39			635
Contingently issuable awards excluded from the calculation	2,113			2,646			1,706			2,422

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

13. Stock-Based Compensation

On January 22, 2020, our shareholders adopted our 2020 Stock Plan (the "2020 Stock Plan"). The 2020 Stock Plan (i) grants the Company's compensation committee the discretionary authority over the plan; (ii) makes employees, directors, consultants, and advisors of the Company and its subsidiaries eligible to receive awards; (iii) sets the number of shares of common stock that may be issued in satisfaction of awards to be 9,000,000 shares, plus the number of shares available for issuance under the amended and restated 2000 Stock Plan (the "Amended and Restated 2000 Stock Plan"); and (iv) identifies the annual limits on shares granted to each individual and the types of awards permissible.

As of March 31, 2020, we had 13.9 million shares available for future grants under the 2020 Stock Plan. We recognize stock-based compensation expenses over the requisite service periods. Our share-based awards are classified within equity upon issuance.

The amounts included in the consolidated statements of operations related to stock-based compensation are as follows (dollars in thousands):



	Three Months Ended March 31,				Six Months Ended March 31,
	2020		2019		2020		2019
Cost of hosting and professional services	$	6,504	$	4,731	$	12,045	$	11,688
Cost of product and licensing	130		132		259		396
Cost of maintenance and support	453		381		846		147
Research and development	8,682		4,530		17,386		9,906
Sales and marketing	7,991		6,616		15,019		14,868
General and administrative	9,902		8,408		19,340		17,290
Total	$	33,662	$	24,798	$	64,895	$	54,295

Modifications of Equity Awards

In connection with the spin-off of our Automotive business (the "Distribution") on October 1, 2019, under the provisions of our Amended and Restated 2000 Stock Plan and our Amended and Restated Directors Stock Plan, we adjusted our then outstanding equity awards in accordance with the terms of the Employee Matters Agreement that Nuance entered into in connection with the Distribution. Effective upon the Distribution, Nuance stock options, Nuance restricted stock units ("RSUs"), and Nuance performance-based restricted stock units ("PSUs") held by employees and other service providers continuing with Nuance following the Distribution, were adjusted based on a conversion ratio of 1.16667 to 1, as outlined in the Employee Matters Agreement. Effective upon the Distribution, RSUs held by employees continuing with Cerence following the Distribution that were scheduled to vest on or before November 30, 2019 vested in full as of immediately prior to the Distribution, PSUs held by such employees that were eligible to vest based on Nuance's relative total shareholder return ("TSR") as of November 6, 2019 were cancelled in exchange for a cash payment based on the portion of the PSUs that were then earned, and all other RSUs and PSUs held by such employees were forfeited for no consideration upon their termination of employment with Nuance. As of the Distribution (or an applicable employee's later transfer date), all employees continuing with Cerence following the Distribution ceased to be eligible to participate in Nuance's Employee Stock Purchase Plan ("ESPP"). As of December 31, 2019, the employees participating in the Company's ESPP were all Nuance employees. There were no changes to the plan terms of any of the foregoing plans except as described above. The incremental expense as a result of these modification was immaterial to the condensed consolidated financial statements.

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Stock Options

The table below summarizes activities related to stock options for the six months ended March 31, 2020:



	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value ^(a)
Outstanding at September 30, 2019	11,302		$	20.04
Exercised	(3,207	)	$	17.18
Equitable Adjustment - Cerence Spin-off ^(b)	1,883
Outstanding at March 31, 2020	9,978		$	17.18	2.1 years	$	—
Exercisable at March 31, 2020	9,978		$	17.18	2.1 years	$	—
Exercisable at March 31, 2019	13,116		$	17.63	2.9 years	$	0.1	million


^(a)	The aggregate intrinsic value in this table represents any excess of the closing market price of our common stock as of March 31, 2020 ($16.78) over the exercise price of the underlying options.


^(b)	Effective with the spin-off of our Automotive business on October 1, 2019, outstanding equity awards were equitably adjusted by a conversion ratio of 1.16667 per one Nuance share then held.

The aggregate intrinsic values of stock options exercised during the six months ended March 31, 2020 and 2019 were de minimis.

Restricted Units

Restricted units are not included in issued and outstanding common stock until the units are vested and underlying shares are released. The purchase price for vested restricted units is $0.001 per share. The table below summarizes activities relating to restricted units for the six months ended March 31, 2020:



	Number of Shares Underlying Restricted Units — Performance-Based Awards		Number of Shares Underlying Restricted Units — Time-Based Awards
Outstanding at September 30, 2019	1,991,325		8,998,944
Granted	1,067,900		4,415,974
Earned/released	(303,198	)	(5,821,353	)
Forfeited	(418,834	)	(1,324,501	)
Equitable Adjustment - Cerence Spin-off ^(b)	303,074		1,316,006
Outstanding at March 31, 2020	2,640,267		7,585,070
Weighted average remaining recognition period of outstanding Restricted Units	1.9 years		1.7 years
Unrecognized stock-based compensation expense of outstanding Restricted Units	$25.0 million		$67.1 million
Aggregate intrinsic value of outstanding Restricted Units ^(a)	$44.3 million		$127.3 million


^(a)	The aggregate intrinsic value in this table represents any excess of the closing market price of our common stock as of March 31, 2020 ($16.78) over the purchase price of the underlying restricted units.


^(b)	Effective with the spin-off of our Automotive business on October 1, 2019, outstanding equity awards were equitably adjusted by a conversion ratio of 1.16667 per one Nuance share then held.

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A summary of the weighted-average grant-date fair value of restricted units granted, and the aggregate intrinsic value of restricted units vested during the periods noted is as follows:



	Six Months Ended March 31,
	2020		2019
Weighted-average grant-date fair value per share	$	17.52	$	16.35
Total intrinsic value of shares vested (in millions)	$	106.4	$	95.2

Performance-based restricted units outstanding as of March 31, 2020 and issued in fiscal year 2019 include performance goals based on total shareholder return relative to our peers during the performance period. The awards actually earned will be up to two hundred percent of the target number of the performance-based restricted units. Compensation expense is recorded ratably over the performance period of the award based on the grant date fair value determined using a Monte Carlo simulation model, which included the following assumptions:



	Six Months Ended March 31,
	2020		2019
Dividend yield	0.0	%	0.0	%
Expected volatility	27.73% - 28.24%		27.86% - 30.85%
Risk-free interest rate	1.40% - 1.62%		2.53% - 3.02%
Expected term (in years)	2.72 - 3		1 - 3

14. Income Taxes

The components of income (loss) from continuing operations before income taxes are as follows (dollars in thousands):



	Three Months Ended March 31,						Six Months Ended March 31,
	2020			2019			2020			2019
Domestic	$	(14,236	)	$	(28,639	)	$	(2,680	)	$	(10,185	)
Foreign	15,536			(349		)	22,417			(2,922		)
Income (loss) before income taxes	$	1,300		$	(28,988	)	$	19,737		$	(13,107	)

The components of provision (benefit) for income taxes from continuing operations are as follows (dollars in thousands):



	Three Months Ended March 31,						Six Months Ended March 31,
	2020			2019			2020			2019
Domestic	$	5,663		$	(2,417	)	$	(33,535	)	$	(2,128	)
Foreign	9,147			1,826			11,905			3,537
Provision (benefit) for income taxes	$	14,810		$	(591	)	$	(21,630	)	$	1,409
Effective tax rate	1,139.2		%	2.0		%	(109.6		)%	(10.7		)%

The effective income tax rate is based upon the income for the year, the composition of the income in different countries, changes relating to valuation allowances for certain countries if and as necessary, and adjustments, if any, for the potential tax consequences, benefits or resolutions of audits or other tax contingencies. Our effective income tax rate may be adversely affected by earnings being lower than anticipated in countries where we have lower statutory tax rates and higher than anticipated in countries where we have higher statutory tax rates.

Our effective income tax rate was 1,139.2% for the three months ended March 31, 2020, compared to 2.0% for the three months ended March 31, 2019. The effective tax rate for the three months ended March 31, 2020 differed from the U.S. federal statutory rate of 21.0% primarily due to the valuation allowance on deferred tax assets in the United States and a foreign uncertain tax position reserve. The effective tax rate for the three months ended March 31, 2019 differed from the U.S. federal statutory rate of 21.0% primarily due to the valuation allowance on deferred tax assets in the United States.

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Our effective income tax rate was (109.6)% for the six months ended March 31, 2020, compared to (10.7)% for the six months ended March 31, 2019. The effective tax rate for the six months ended March 31, 2020 differed from the U.S. federal statutory rate of 21.0% primarily due to a net $36.4 million deferred tax benefit from an adjustment to domestic valuation allowance due to the Cerence spin-off. The effective tax rate for the six months ended March 31, 2019 differed from the U.S. federal statutory rate of 21.0% primarily due to the valuation allowance on deferred tax assets in the United States.

Automotive Deferred Taxes

We have made a policy election to classify the deferred tax assets and liabilities associated with assets and liabilities held for sale or spun off within our consolidated balance sheets of continuing operations. As a result, approximately $92.6 million of deferred tax assets related to Cerence's intellectual property was included within Other assets as of September 30, 2019, which was spun off on October 1, 2019 and was recorded against equity.

15. Commitments and Contingencies

Litigation and Other Claims

Similar to many companies in the software industry, we are involved in a variety of claims, demands, suits, investigations and proceedings that arise from time to time relating to matters incidental to the ordinary course of our business, including actions with respect to contracts, intellectual property, employment, benefits and securities matters. At each balance sheet date, we evaluate contingent liabilities associated with these matters in accordance with ASC 450 "Contingencies". If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgments are required for the determination of probability and the range of the outcomes, and the estimates are based only on the information available at the time. Due to the inherent uncertainties involved in claims, legal proceedings, and in estimating the losses that may arise, actual outcomes may differ from our estimates. Contingencies deemed not probable or for which losses were not estimable in one period may become probable, or losses may become estimable in later periods which may have a material impact on our results of operations and financial position. As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates. As of March 31, 2020, accrued losses were not material to our condensed consolidated financial statements, and we do not expect any pending matter to have a material impact on our condensed consolidated financial statements.

Guarantees and Other

We include indemnification provisions in the contracts we enter into with customers and business partners. Generally, these provisions require us to defend claims arising out of our products’ infringement of third-party intellectual property rights, breach of contractual obligations and/or unlawful or otherwise culpable conduct. The indemnity obligations generally cover damages, costs and attorneys’ fees arising out of such claims. In most, but not all cases, our total liability under such provisions is limited to either the value of the contract or a specified, agreed upon amount. In some cases, our total liability under such provisions is unlimited. In many, but not all cases, the term of the indemnity provision is perpetual. While the maximum potential amount of future payments we could be required to make under all the indemnification provisions is unlimited, we believe the estimated fair value of these provisions is minimal due to the low frequency with which these provisions have been triggered.

We indemnify our directors and officers to the fullest extent permitted by Delaware law, which provides among other things, indemnification to directors and officers for expenses, judgments, fines, penalties and settlement amounts incurred by such persons in their capacity as a director or officer of the company, regardless of whether the individual is serving in any such capacity at the time the liability or expense is incurred. Additionally, in connection with certain acquisitions, we agreed to indemnify the former officers and members of the boards of directors of those companies, on similar terms as described above, for a period of six years from the acquisition date. In certain cases, we purchase director and officer insurance policies related to these obligations, which fully cover the six-year period. To the extent that we do not purchase a director and officer insurance policy for the full period of any contractual indemnification, and such directors and officers do not have coverage under separate insurance policies, we would be required to pay for costs incurred, if any, as described above.

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

16. Operating Leases

Operating Leases

We have various operating leases for office space, data centers, office equipment and automobiles around the world with lease terms expiring between 2021 and 2030.

We determine if an arrangement is a lease at inception. The current portion of our operating lease liabilities is included in accrued expenses and other current liabilities and the long-term portion is included in operating lease liabilities.

Operating lease assets and liabilities are recognized at the present value of the future lease payments at the lease commencement date. The interest rate used to determine the present value of the future lease payments is our incremental borrowing rate. Due to the interest rate implicit in most of our leases not being readily determinable, our incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments, and in economic environments where the leased asset is located. Operating lease assets also include any prepaid lease payments and lease incentives. Our lease terms include periods under options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Operating lease expense is recognized on a straight-line basis over the lease term.

Our lease agreements generally contain lease and non-lease components. Non-lease components primarily include payments for maintenance and utilities. We combine fixed payments for non-lease components with our lease payments and account for them together as a single lease component which increases the amount of our lease assets and liabilities. Payments under our lease arrangements are primarily fixed. Variable rents, if any, are expensed as incurred.

As of March 31, 2020, our operating leases had a weighted average remaining lease term of 4.5 years and a weighted average discount rate of 3.8%.

Future lease payments under operating leases as of March 31, 2020 were as follows (dollars in thousands):



Fiscal Year	Operating Leases		Operating leases under restructuring		Total
2020	$	14,140	$	3,071	$	17,211
2021	24,612		3,522		28,134
2022	20,182		3,122		23,304
2023	14,827		2,939		17,766
2024	13,111		1,629		14,740
Thereafter	50,618		3,189		53,807
Total	$	137,490	$	17,472	$	154,962

As of March 31, 2020, we have subleased certain office space that is included in the above table to third parties. As of March 31, 2020, the aggregate sublease income to be recognized during the remaining lease terms is $14.2 million, with approximately an average of $2.3 million annually for each of the next five fiscal years and approximately $2.9 million thereafter.

Our operating lease cost was approximately $8.0 million for the three months ended March 31, 2020 and $16.2 million for the six months ended March 31, 2020. Operating lease payments included within operating cash flows were $9.2 million for the three months ended March 31, 2020 and $17.9 million for the six months ended March 31, 2020.

17. Segment and Geographic Information

Our Chief Operating Decision Maker ("CODM") regularly reviews segment revenues and segment profits for performance evaluation and resources allocation. Segment revenues include certain acquisition-related adjustments for revenues that would otherwise have been recognized without the acquisition. Segment profits reflect controllable costs directly related to each segment and the allocation of certain corporate expenses such as corporate sales and marketing expenses and research and development project costs that benefit multiple segments. Certain items such as stock-based compensation, amortization of intangible assets, acquisition-related costs, net, restructuring and other charges, net, other expenses, net and certain unallocated corporate expenses are excluded from segment profits, which allow for more meaningful comparisons to the financial results of the historical operations for performance evaluation and resources allocation by our CODM.

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


•	The Healthcare segment is primarily engaged in providing clinical speech and clinical language understanding solutions that improve the clinical documentation process, from capturing the complete patient record to improving clinical documentation and quality measures for reimbursement.


•	The Enterprise segment is primarily engaged in using speech, natural language understanding, and artificial intelligence to provide automated customer solutions and services for voice, mobile, web and messaging channels.


•	The Other segment includes voicemail transcription services, Mobile Operator Services, and our Devices business. In May 2019, we completed the sale of our Mobile Operator Services business in Brazil, and in July 2019, we completed the sale of our Mobile Operator Services business in India.

As more fully described in Note 4, on October 1, 2019, we completed the spin-off of our Automotive business as an independent publicly traded company. Effective the first quarter of fiscal year 2020, our Automotive business's historical results of operations have been included within discontinued operations. For the three months ended March 31, 2019, $4.6 million of stranded costs previously allocated to our Automotive segment have been re-allocated to Healthcare, Enterprise, and Other; for the six months ended March 31, 2019, $8.8 million of stranded costs previously allocated to our Automotive segment have been re-allocated to Healthcare, Enterprise, and Other.

We do not track our assets by segment. Consequently, it is not practical to show assets or depreciation by segment. The following table presents segment results along with a reconciliation of segment profit to Income (loss) before income taxes (dollars in thousands):



	Three Months Ended March 31,						Six Months Ended March 31,
	2020			2019			2020			2019
Segment revenues:
Healthcare	$	224,395		$	204,549		$	494,929		$	476,527
Enterprise	137,445			115,637			275,918			245,329
Other	7,709			16,737			17,024			35,095
Total segment revenues	$	369,549		$	336,923		$	787,871		$	756,951
Less: acquisition-related revenues adjustments	(212		)	(339		)	(301		)	(692		)
Total revenues	$	369,337		$	336,584		$	787,570		$	756,259
Segment profit:
Healthcare	$	71,674		$	62,340		$	164,953		$	164,896
Enterprise	38,737			20,306			81,273			62,588
Other	3,847			5,036			8,975			10,371
Total segment profit	$	114,258		$	87,682		$	255,201		$	237,855
Corporate expenses and other, net	(28,833		)	(31,837		)	(59,322		)	(66,951		)
Acquisition-related revenues	(212		)	(339		)	(301		)	(692		)
Stock-based compensation	(33,662		)	(24,798		)	(64,895		)	(54,295		)
Amortization of intangible assets	(18,437		)	(20,505		)	(37,613		)	(41,703		)
Acquisition-related costs, net	(1,680		)	(2,051		)	(2,847		)	(4,652		)
Restructuring and other charges, net	(6,329		)	(9,858		)	(13,012		)	(24,499		)
Other expenses, net	(23,805		)	(27,282		)	(57,474		)	(58,170		)
Income (loss) before income taxes	$	1,300		$	(28,988	)	$	19,737		$	(13,107	)

No country outside of the United States provided greater than 10% of our total revenues. Revenues, classified by the major geographic areas in which our customers are located, were as follows (dollars in thousands):



	Three Months Ended March 31,				Six Months Ended March 31,
	2020		2019		2020		2019
United States	$	291,291	$	269,990	$	638,101	$	613,968
International	78,046		66,594		149,469		142,291
Total revenues	$	369,337	$	336,584	$	787,570	$	756,259

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

18. Supplemental Cash Flow Information

Cash paid for Interest and Income Taxes:



	Three Months Ended March 31,				Six Months Ended March 31,
	2020		2019		2020		2019
	(Dollars in thousands)
Interest paid	$	1,137	$	9,186	$	27,829	$	40,754
Income taxes paid	$	11,284	$	3,741	$	13,176	$	5,951

19. COVID-19 Impact

The novel coronavirus ("COVID-19") pandemic has disrupted economic markets and the future economic impact, duration and spread of the COVID-19 virus is uncertain at this time. Through March 31, 2020, our liquidity and operations had been modestly impacted by the pandemic. In particular, we saw reduced transaction volume in our medical transcription business and PowerScribe radiology solution, as well as a slowdown in payments from certain small healthcare providers towards the end of March. For the remainder of fiscal year 2020, we expect our revenue and cash flows to be adversely impacted due to the business and operational disruptions experienced by our customers. In particular, our Healthcare customers, primarily hospitals and clinics, have been significantly and adversely impacted as their cash flows continue to deteriorate due to the indefinite postponement of elective surgeries and the sharp decline in inpatient visits, which we expect to adversely affect our transaction- or volume-based revenue and cash collections for the remainder of fiscal year 2020.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was enacted. The CARES Act includes broad provisions to provide financial aid and economic relief to industries and enterprises impacted by the pandemic. Among other provisions, the CARES Act provides direct financial assistance to small businesses and funnels emergency funds to compensate hospitals and other health care providers for lost revenue and other costs associated with COVID-19. While the CARES Act may benefit our customers, we do not believe we are eligible to receive any direct relief payments. We are still assessing the full impact of the CARES Act.

While our liquidity and results of operations for the second quarter of fiscal year 2020 were not significantly impacted, we continue to take proactive measures to manage our cash spend and preserve liquidity. In connection with the contingency planning, on March 24, 2020, we borrowed $230.0 million under our revolving credit facility, which will be available for future working capital as needed. We are committed to increasing shareholders' return and managing our debt leverage ratio in the long term, but have paused our share repurchase activity for the near term and in any event until we have repaid our revolver.

The ultimate impact of the COVID-19 pandemic and the effects of the operational changes we have made in response cannot be accurately predicted at this time. While the COVID-19 pandemic did not significantly affect our results of operations or liquidity through March 31, 2020, it may adversely impact our business, results of operations, cash flows and financial condition.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis is intended to help the reader understand the results of operations and financial condition of our business. Management’s Discussion and Analysis is provided as a supplement to, and should be read in conjunction with, our condensed consolidated financial statements and the accompanying notes to the condensed consolidated financial statements.

CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks, uncertainties and assumptions that, if they never materialize or if they prove incorrect, could cause our consolidated results to differ materially from those expressed or implied by such forward-looking statements. These forward-looking statements include predictions regarding:


•	our future bookings, revenues, cost of revenues, research and development expenses, selling, general and administrative expenses, amortization of intangible assets and gross margin;


•	our strategy relating to our segments;


•	our programs to reduce costs and optimize processes;


•	market trends;


•	technological advancements;


•	the potential of future product releases;


•	our product development plans and the timing, amount and impact of investments in research and development;


•	future acquisitions, divestitures and other strategic transactions, and anticipated benefits from such transactions;


•	international operations and localized versions of our products;


•	the impact of the COVID-19 pandemic; and


•	the conduct, timing and outcome of legal proceedings and litigation matters.

You can identify these and other forward-looking statements by the use of words such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "intends," "potential," "continue" or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks described in Item 1A — "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q.

You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.

OVERVIEW

Business Overview

We are a pioneer and leader in conversational and cognitive AI innovations that bring intelligence to everyday work and life. Our solutions and technologies can understand, analyze and respond to human language to increase productivity and amplify human intelligence. Our solutions are used by businesses in the healthcare, financial services, telecommunications and travel industries, among others. We see several trends in our markets, including (i) the growing adoption of cloud-based, connected services and highly interactive mobile applications, (ii) deeper integration of virtual assistant capabilities and services, and (iii) the continued expansion of our core technology portfolio including automated speech recognition ("ASR"), natural language understanding ("NLU"), semantic processing, domain-specific reasoning, dialog management capabilities, AI, and voice biometric speaker authentication. We report our business in three segments, Healthcare, Enterprise, and Other.

•

Healthcare. Our healthcare segment provides intelligent systems that support a more natural and insightful approach to clinical documentation, freeing clinicians to spend more time caring for patients and helping technicians and health organizations drive meaningful financial and clinical outcomes. Our principal solutions include dragon medical cloud-based solutions ("Dragon Medical One"), computer assisted physician documentation ("CAPD"), clinical documentation improvement ("CDI") and coding, diagnostic solutions, and medical transcription services.


•	Enterprise. Our Enterprise segment is a leading provider of AI-powered intelligent customer engagement solutions and services, which enable enterprises and contact centers to enhance and automate customer service and sales engagement. Our principal solutions include interactive voice responses ("Voice IVR") solutions, intelligent engagement solutions and security & biometric solutions.

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•	Other. Our Other segment includes voicemail transcription services, Mobile Operator Services, and our Devices business. In May 2019, we completed the sale of our Mobile Operator Services business in Brazil, and in July 2019, we completed the sale of our Mobile Operator Services business in India.

•

Discontinued Operations. On February 1, 2019, we completed the sale of our Imaging business and received approximately $404.0 million in cash, after estimated transaction expenses. On October 1, 2019, we completed the previously announced spin-off of our Automotive business, Cerence, into an independent public company. As a result, the historical results of operations for Imaging and Automotive have been included within discontinued operations in our condensed consolidated financial statements.

COVID-19 Impact

While we continue to assess the full impact as the pandemic develops, we expect to lose approximately $50 million to $90 million of revenue for the remainder of fiscal year 2020 due to the general macroeconomic conditions and the recent disruptions experienced by our customers. However, we expect this impact to be partially mitigated by our proactive expense and liquidity management. As a result, we expect our fiscal year 2020 operating margin to be approximately 50 basis points lower due to the COVID-19 pandemic. While we expect our fiscal 2020 operating cash flows to be adversely affected due to lower operating income and delayed collections, the impact cannot be accurately estimated at this time. As the pandemic situation develops, we may revise our assessment, and the actual amounts may differ materially from our estimates.

Key Metrics

In evaluating the financial condition and operating performance of our business, management focuses on revenue, net income, gross margins, operating margins, cash flow from operations, and changes in deferred revenue. A summary of key financial metrics for the six months ended March 31, 2020, as compared to the six months ended March 31, 2019, is as follows:


•	Total revenues were $787.6 million for the six months ended March 31, 2020, as compared to $756.3 million for the six months ended March 31, 2019;


•	Net income from continuing operations for the six months ended March 31, 2020 was $41.4 million, compared to a net loss from continuing operations of $14.5 million for the six months ended March 31, 2019;


•	Gross margins for the six months ended March 31, 2020 were 56.6%, compared to 54.6% for the six months ended March 31, 2019;


•	Operating margins for the six months ended March 31, 2020 was 9.8%, compared to 6.0% for six months ended March 31, 2019; and

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•	Operating cash flows from continuing operations increased by $2.6 million to $154.7 million for the six months ended March 31, 2020, compared to $152.1 million for the six months ended March 31, 2019.

RESULTS OF OPERATIONS

Total Revenues

The following tables show total revenues by product type and by geographic location, based on the location of our customers, in dollars and percentage change (dollars in millions):



	Three Months Ended March 31,				Dollar Change		Percent Change
	2020		2019		Dollar Change		Percent Change
Hosting and professional services	$	235.5	$	217.5	$	18.0	8.3	%
Product and licensing	69.6		58.2		11.4		19.6	%
Maintenance and support	64.2		60.8		3.4		5.6	%
Total revenues	$	369.3	$	336.6	$	32.8	9.7	%

United States	$	291.3	$	270.0	$	21.3	7.9	%
International	78.0		66.6		11.5		17.2	%
Total revenues	$	369.3	$	336.6	$	32.8	9.7	%



	Six Months Ended March 31,				Dollar Change			Percent Change
	2020		2019		Dollar Change			Percent Change
Hosting and professional services	$	466.0	$	445.2	$	20.7		4.7	%
Product and licensing	194.8		174.1		20.7			11.9	%
Maintenance and support	126.8		136.9		(10.1		)	(7.4	)%
Total revenues	$	787.6	$	756.3	$	31.3		4.1	%

United States	$	638.1	$	614.0	$	24.1		3.9	%
International	149.5		142.3		7.2			5.1	%
Total revenues	$	787.6	$	756.3	$	31.3		4.1	%

The geographic split was 79% of total revenues in the United States and 21% internationally for the three months ended March 31, 2020, as compared to 80% of total revenues in the United States and 20% internationally for the three months ended March 31, 2019.

The geographic split was 81% of total revenues in the United States and 19% internationally for the six months ended March 31, 2020, as compared to 81% of total revenues in the United States and 19% internationally for the six months ended March 31, 2019.

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Hosting and Professional Services Revenue

Hosting revenue primarily relates to delivering on-demand hosted services, such as medical transcription and automated customer care applications, over a specified term. Professional services revenue primarily consists of consulting, implementation and training services for customers. The following table shows hosting and professional services revenue, in dollars and as a percentage of total revenues (dollars in millions):



	Three Months Ended March 31,						Dollar Change			Percent Change
	2020			2019			Dollar Change			Percent Change
Hosting revenue	$	197.9		$	179.3		$	18.5		10.3	%
Professional services revenue	37.7			38.2			(0.5		)	(1.4	)%
Hosting and professional services revenue	$	235.5		$	217.5		$	18.0		8.3	%
As a percentage of total revenue	63.8		%	64.6		%



	Six Months Ended March 31,						Dollar Change			Percent Change
	2020			2019			Dollar Change			Percent Change
Hosting revenue	$	392.8		$	366.0		$	26.8		7.3	%
Professional services revenue	73.2			79.2			(6.1		)	(7.7	)%
Hosting and professional services revenue	$	466.0		$	445.2		$	20.8		4.7	%
As a percentage of total revenue	59.2		%	58.9		%

Three Months Ended March 31, 2020 compared to Three Months Ended March 31, 2019

Hosting revenue for the three months ended March 31, 2020 increased by $18.5 million, or 10.3%, primarily due to a $24.1 million increase in Healthcare, offset in part by a $7.3 million decrease in our Other segment. Healthcare hosting revenue increased primarily due to the continued growth in our Dragon Medical cloud-based solutions, offset in part by a decline in our medical transcription services. Other hosting revenue decreased due to the wind-down of Devices and the sale of our Mobile Operator Services business in Brazil and India during fiscal year 2019. As a percentage of total revenue, hosting revenue increased from 53.3% to 53.6% for the three months ended March 31, 2020.

Professional services revenue for the three months ended March 31, 2020 decreased by $0.5 million, or 1.4%, primarily due to a $2.9 million decrease in Healthcare, mostly offset by a $2.5 million increase in Enterprise. Healthcare professional services revenue decreased primarily due to the timing of services performed. Enterprise professional services revenue increased primarily due to the increase in our digital engagement. As a percentage of total revenue, professional services revenue decreased from 11.3% to 10.2% for the three months ended March 31, 2020.

Six Months Ended March 31, 2020 compared to Six Months Ended March 31, 2019

Hosting revenue for the six months ended March 31, 2020 increased by $26.8 million, or 7.3%, primarily due to a $37.5 million increase in Healthcare, offset in part by a $12.9 million decrease in our Other segment. Healthcare hosting revenue increased primarily due to the continued growth in our Dragon Medical cloud-based solutions, offset in part by a decline in our medical transcription services. Other hosting revenue decreased due to the wind-down of Devices and the sale of our Mobile Operator Services business in Brazil and India during fiscal year 2019. As a percentage of total revenue, hosting revenue increased from 48.4% to 49.9% for the six months ended March 31, 2020.

Professional services revenue for the six months ended March 31, 2020 decreased by $6.1 million, or 7.7%, primarily due to a $4.9 million decrease in Healthcare. Healthcare professional services revenue decreased primarily due to the timing of the services performed. As a percentage of total revenue, professional services revenue decreased from 10.5% to 9.3% for the six months ended March 31, 2020.

Product and Licensing Revenue

Product and licensing revenue primarily consists of sales and licenses of our technology. The following table shows product and licensing revenue, in dollars and as a percentage of total revenues (dollars in millions):



	Three Months Ended March 31,						Dollar Change		Percent Change
	2020			2019			Dollar Change		Percent Change
Product and licensing revenue	$	69.6		$	58.2		$	11.4	19.5	%
As a percentage of total revenue	18.8		%	17.3		%

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	Six Months Ended March 31,						Dollar Change		Percent Change
	2020			2019			Dollar Change		Percent Change
Product and licensing revenue	$	194.8		$	174.1		$	20.7	11.9	%
As a percentage of total revenue	24.7		%	23.0		%

Three Months Ended March 31, 2020 compared to Three Months Ended March 31, 2019

Product and licensing revenue for the three months ended March 31, 2020 increased by $11.4 million, or 19.5%, primarily due to an $11.5 million increase in Enterprise. Enterprise product and licensing revenue increased primarily driven by the increase in digital engagement solutions. As a percentage of total revenue, product and licensing revenue increased from 17.3% to 18.8% for the three months ended March 31, 2020.

Six Months Ended March 31, 2020 compared to Six Months Ended March 31, 2019

Product and licensing revenue for the six months ended March 31, 2020 increased by $20.7 million, or 11.9%, primarily due to a $22.9 million increase in Enterprise, offset in part by a $2.8 million decrease in Other. Enterprise product and licensing revenue increased primarily driven by the timing of IVR license transactions and increases in digital engagement and security biometrics. Other product and licensing revenue decreased primarily due to the wind-down of Devices. As a percentage of total revenue, product and licensing revenue increased from 23.0% to 24.7% for the six months ended March 31, 2020.

Maintenance and Support Revenue

Maintenance and support revenue primarily consists of technical support and maintenance services. The following table shows maintenance and support revenue, in dollars and as a percentage of total revenues (dollars in millions):



	Three Months Ended March 31,						Dollar Change		Percent Change
	2020			2019			Dollar Change		Percent Change
Maintenance and support revenue	$	64.2		$	60.8		$	3.4	5.6	%
As a percentage of total revenue	17.4		%	18.1		%



	Six Months Ended March 31,						Dollar Change			Percent Change
	2020			2019			Dollar Change			Percent Change
Maintenance and support revenue	$	126.8		$	136.9		$	(10.1	)	(7.4	)%
As a percentage of total revenue	16.1		%	18.1		%

Three Months Ended March 31, 2020 compared to Three Months Ended March 31, 2019

Maintenance and support revenue for the three months ended March 31, 2020 increased by $3.4 million, or 5.6%, primarily due a $6.1 million increase in Enterprise, offset in part by a $2.7 million decrease in Healthcare. Enterprise maintenance and support revenue increased primarily driven by the increases in digital engagement license transactions. Healthcare maintenance and support revenue decreased primarily due to the continued transition from software sold with maintenance and support to cloud-based solutions in Healthcare. As a percentage of total revenue, maintenance and support revenue decreased from 18.1% to 17.4% for the three months ended March 31, 2020.

Six Months Ended March 31, 2020 compared to Six Months Ended March 31, 2019

Maintenance and support revenue for the six months ended March 31, 2020 decreased by $10.1 million, or 7.4%, primarily due a $14.5 million decrease in Healthcare, offset in part by a $4.5 million increase in Enterprise. Healthcare maintenance and support revenue decreased primarily due to the continued transition from software sold with maintenance and support to cloud-based solutions in Healthcare. Enterprise maintenance and support revenue increased primarily driven by the overall increase in license transactions. As a percentage of total revenue, maintenance and support revenue decreased from 18.1% to 16.1% for the six months ended March 31, 2020.

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COSTS AND EXPENSES

Cost of Hosting and Professional Services Revenue

Cost of hosting and professional services revenue primarily consists of compensation for services personnel, outside consultants and overhead, as well as the hardware, infrastructure and communications fees that support our hosting solutions. The following table shows the cost of hosting and professional services revenue, in dollars and as a percentage of professional services and hosting revenue (dollars in millions):



	Three Months Ended March 31,						Dollar Change			Percent Change
	2020			2019			Dollar Change			Percent Change
Cost of hosting and professional services revenue	$	133.2		$	134.3		$	(1.1	)	(0.8	)%
As a percentage of professional services and hosting revenue	56.6		%	61.7		%



	Six Months Ended March 31,						Dollar Change			Percent Change
	2020			2019			Dollar Change			Percent Change
Cost of hosting and professional services revenue	$	269.0		$	270.9		$	(1.9	)	(0.7	)%
As a percentage of professional services and hosting revenue	57.7		%	60.8		%

Three Months Ended March 31, 2020 compared to Three Months Ended March 31, 2019

Cost of hosting and professional services revenue for the three months ended March 31, 2020 decreased by $1.1 million, or 0.8%, primarily due to lower hosting and services labor costs. Gross margin increased by 5.1 percentage points primarily due to a favorable shift in revenue mix towards higher-margin Dragon Medical cloud-based solutions from lower-margin transcription services.

Six Months Ended March 31, 2020 compared to Six Months Ended March 31, 2019

Cost of hosting and professional services revenue for the six months ended March 31, 2020 decreased by $1.9 million, or 0.7%, primarily due to lower hosting and services labor costs. Gross margin increased by 3.1 percentage points primarily due to a favorable shift in revenue mix towards higher-margin Dragon Medical cloud-based solutions from lower-margin transcription services.

Cost of Product and Licensing Revenue

Cost of product and licensing revenue primarily consists of material and fulfillment costs, manufacturing and operations costs and third-party royalty expenses. The following table shows the cost of product and licensing revenue, in dollars and as a percentage of product and licensing revenue (dollars in millions):



	Three Months Ended March 31,						Dollar Change			Percent Change
	2020			2019			Dollar Change			Percent Change
Cost of product and licensing revenue	$	9.3		$	9.4		$	(0.1	)	(0.6	)%
As a percentage of product and licensing revenue	13.4		%	16.1		%



	Six Months Ended March 31,						Dollar Change		Percent Change
	2020			2019			Dollar Change		Percent Change
Cost of product and licensing revenue	$	43.5		$	41.8		$	1.7	4.1	%
As a percentage of product and licensing revenue	22.3		%	24.0		%

Three Months Ended March 31, 2020 compared to Three Months Ended March 31, 2019

Cost of product and licensing revenue for the three months ended March 31, 2020 decreased by $0.1 million, or 0.6%. Gross margin increased by 2.7 percentage points, primarily due to higher licensing revenue on relatively flat licensing costs in Enterprise.

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Six Months Ended March 31, 2020 compared to Six Months Ended March 31, 2019

Cost of product and licensing revenue for the six months ended March 31, 2020 increased by $1.7 million, or 4.1%, primarily due to higher product royalty costs in Healthcare. Gross margin increased by 1.7 percentage points, primarily due to higher licensing revenue on relatively flat licensing costs in Enterprise.

Cost of Maintenance and Support Revenue

Cost of maintenance and support revenue primarily consists of compensation for product support personnel and overhead. The following table shows the cost of maintenance and support revenue, in dollars and as a percentage of maintenance and support revenue (dollars in millions):



	Three Months Ended March 31,						Dollar Change			Percent Change
	2020			2019			Dollar Change			Percent Change
Cost of maintenance and support revenue	$	8.0		$	8.9		$	(0.9	)	(10.6	)%
As a percentage of maintenance and support revenue	12.4		%	14.6		%



	Six Months Ended March 31,						Dollar Change			Percent Change
	2020			2019			Dollar Change			Percent Change
Cost of maintenance and support revenue	$	15.8		$	16.7		$	(0.9	)	(5.5	)%
As a percentage of maintenance and support revenue	12.4		%	12.2		%

Three Months Ended March 31, 2020 compared to Three Months Ended March 31, 2019

Cost of maintenance and support revenue for the three months ended March 31, 2020 decreased by $0.9 million, or 10.6%. Gross margins increased by 2.2 percentage points primarily due to higher margins in security biometrics and Voice IVR in Enterprise, offset in part by lower margin in Healthcare as we continued to transition from licenses to cloud-based solutions.

Six Months Ended March 31, 2020 compared to Six Months Ended March 31, 2019

Cost of maintenance and support revenue for the six months ended March 31, 2020 decreased by $0.9 million, or 5.5%. Gross margins decreased by 0.2 percentage primarily due to lower margin in Healthcare as we continued to transition from licenses to cloud-based solutions, mostly offset by higher gross margins in security biometrics and Voice IVR in Enterprise.

Research and Development Expense

Research and development ("R&D") expense primarily consists of salaries, benefits, and overhead relating to engineering staff as well as third party engineering costs. The following table shows R&D expense, in dollars and as a percentage of total revenues (dollars in millions):



	Three Months Ended March 31,						Dollar Change		Percent Change
	2020			2019			Dollar Change		Percent Change
Research and development expense	$	57.9		$	45.8		$	12.2	26.6	%
As a percentage of total revenue	15.7		%	13.6		%



	Six Months Ended March 31,						Dollar Change		Percent Change
	2020			2019			Dollar Change		Percent Change
Research and development expense	$	114.5		$	92.6		$	21.8	23.6	%
As a percentage of total revenue	14.5		%	12.2		%

Three Months Ended March 31, 2020 compared to Three Months Ended March 31, 2019

R&D expense increased by $12.2 million, or 26.6%, primarily due to higher compensation costs as we continued to invest in our technologies to power new products and solutions.

Six Months Ended March 31, 2020 compared to Six Months Ended March 31, 2019

R&D expense increased by $21.8 million, or 23.6%, primarily due to higher compensation costs as we continued to invest in our technologies to power new products and solutions.

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Sales and Marketing Expense

Sales and marketing expense includes salaries and benefits, commissions, advertising, direct mail, public relations, tradeshow costs and other costs of marketing programs, travel expenses associated with our sales organization and overhead. The following table shows sales and marketing expense, in dollars and as a percentage of total revenues (dollars in millions):



	Three Months Ended March 31,						Dollar Change		Percent Change
	2020			2019			Dollar Change		Percent Change
Sales and marketing expense	$	71.0		$	67.7		$	3.3	4.9	%
As a percentage of total revenue	19.2		%	20.1		%



	Six Months Ended March 31,						Dollar Change		Percent Change
	2020			2019			Dollar Change		Percent Change
Sales and marketing expense	$	137.5		$	135.1		$	2.4	1.8	%
As a percentage of total revenue	17.5		%	17.9		%

Three Months Ended March 31, 2020 compared to Three Months Ended March 31, 2019

Sales and marketing expense for the three months ended March 31, 2020 increased by $3.3 million, or 4.9%, primarily due to higher compensation costs, which was mostly offset by lower traveling and entertainment expenses.

Six Months Ended March 31, 2020 compared to Six Months Ended March 31, 2019

Sales and marketing expense for the six months ended March 31, 2020 increased by $2.4 million, or 1.8%, primarily due to higher compensation costs, which was mostly offset by lower traveling and entertainment expenses.

General and Administrative Expense

General and administrative ("G&A") expense primarily consists of personnel costs for administration, finance, human resources, general management, fees for external professional advisers including accountants and attorneys, and provisions for doubtful accounts. The following table shows G&A expense, in dollars and as a percentage of total revenues (dollars in millions):



	Three Months Ended March 31,						Dollar Change			Percent Change
	2020			2019			Dollar Change			Percent Change
General and administrative expense	$	38.4		$	39.9		$	(1.5	)	(3.7	)%
As a percentage of total revenue	10.4		%	11.8		%



	Six Months Ended March 31,						Dollar Change			Percent Change
	2020			2019			Dollar Change			Percent Change
General and administrative expense	$	76.7		$	83.3		$	(6.6	)	(8.0	)%
As a percentage of total revenue	9.7		%	11.0		%

Three Months Ended March 31, 2020 compared to Three Months Ended March 31, 2019

G&A expense decreased by $1.5 million, or 3.7%, primarily driven by lower professional services costs and compensation costs due to our cost saving initiatives.

Six Months Ended March 31, 2020 compared to Six Months Ended March 31, 2019

G&A expense decreased by $6.6 million, or 8.0%, primarily driven by lower professional services costs and compensation costs due to our cost saving initiatives.

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Amortization of Intangible Assets

Amortization of acquired patents and technologies are included within cost of revenue and the amortization of acquired customer and contractual relationships, non-compete agreements, acquired trade names and trademarks, and other intangibles are included within Operating expenses. Customer relationships are amortized based upon the pattern in which the economic benefits of the customer relationships are expected to be realized. Other identifiable intangible assets are amortized on a straight-line basis over their estimated useful lives. Amortization expense was recorded as follows (dollars in millions):



	Three Months Ended March 31,				Dollar Change			Percent Change
	2020		2019		Dollar Change			Percent Change
Cost of revenue	$	6.6	$	6.7	$	(0.1	)	(1.0	)%
Operating expenses	11.8		13.8		(2.0		)	(14.5	)%
Total amortization expense	$	18.4	$	20.5	$	(2.1	)	(10.2	)%



	Six Months Ended March 31,				Dollar Change			Percent Change
	2020		2019		Dollar Change			Percent Change
Cost of revenue	$	13.2	$	14.0	$	(0.8	)	(5.7	)%
Operating expenses	24.4		27.7		(3.3		)	(11.9	)%
Total amortization expense	$	37.6	$	41.7	$	(4.1	)	(9.8	)%

The decreases in total amortization of intangible assets for the three and six months ended March 31, 2020, as compared to the prior year period, were primarily due to certain intangible assets having been fully amortized or written off during fiscal year 2019.

Acquisition-Related Costs, Net

Acquisition-related costs include costs related to business and asset acquisitions. These costs consist of (i) transition and integration costs, including retention payments, transitional employee costs, earn-out payments, and other costs related to integration activities; (ii) professional service fees, including financial advisory, legal, accounting, and other outside services incurred in connection with acquisition activities, and disputes and regulatory matters related to acquired entities; and (iii) fair value adjustments to acquisition-related contingencies. A summary of the Acquisition-related cost, net is as follows (dollars in millions):



	Three Months Ended March 31,					Dollar Change			Percent Change
	2020		2019			Dollar Change			Percent Change
Transition and integration costs	$	1.4	$	2.2		$	(0.8	)	(36.4	)%
Professional service fees	0.3		0.3			—			14.7	%
Acquisition-related adjustments	—		(0.4		)	0.4			(100.0	)%
Total Acquisition-related costs, net	$	1.7	$	2.1		$	(0.4	)	(19.0	)%



	Six Months Ended March 31,					Dollar Change			Percent Change
	2020		2019			Dollar Change			Percent Change
Transition and integration costs	$	2.8	$	4.8		$	(2.0	)	(41.3	)%
Professional service fees	—		0.3			(0.3		)	(91.6	)%
Acquisition-related adjustments	—		(0.5		)	0.5			(99.6	)%
Total Acquisition-related costs, net	$	2.8	$	4.7		$	(1.9	)	(39.8	)%

The decreases in Acquisition-related cost, net for the three and six months ended March 31, 2020, as compared to the prior year periods, were primarily due to overall reduced acquisition and integration activities.

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Restructuring and Other Charges, Net

Restructuring and other charges, net include restructuring expenses together with other charges that are unusual in nature, are the result of unplanned events, or arise outside of the ordinary course of our business. While restructuring and other charges, net are excluded from segment profits, the table below presents the restructuring and other charges, net associated with each segment (dollars in thousands):



	Three Months Ended March 31,
	2020										2019
	Personnel		Facilities		Total Restructuring		Other Charges		Total		Personnel			Facilities		Total Restructuring			Other Charges		Total
Healthcare	$	506	$	248	$	754	$	—	$	754	$	2,971		$	14	$	2,985		$	—	$	2,985
Enterprise	233		213		446		—		446		2,700			—		2,700			—		2,700
Other	—		54		54		—		54		(116		)	—		(116		)	561		445
Corporate	683		883		1,566		3,509		5,075		797			612		1,409			2,319		3,728
Total	$	1,422	$	1,398	$	2,820	$	3,509	$	6,329	$	6,352		$	626	$	6,978		$	2,880	$	9,858



	Six Months Ended March 31,
	2020													2019
	Personnel		Facilities			Total Restructuring			Other Charges		Total			Personnel		Facilities		Total Restructuring		Other Charges		Total
Healthcare	$	1,782	$	1,775		$	3,557		$	—	$	3,557		$	4,450	$	141	$	4,591	$	—	$	4,591
Enterprise	1,537		718			2,255			—		2,255			5,251		13		5,264		—		5,264
Other	—		(311		)	(311		)	—		(311		)	914		—		914		3,067		3,981
Corporate	1,016		351			1,367			6,144		7,511			1,950		322		2,272		8,391		10,663
Total	$	4,335	$	2,533		$	6,868		$	6,144	$	13,012		$	12,565	$	476	$	13,041	$	11,458	$	24,499

Fiscal Year 2020

Fiscal Year 2019

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Other (Expense) Income, Net

A summary is as follows (dollars in millions):



	Three Months Ended March 31,						Dollar Change			Percent Change
	2020			2019			Dollar Change			Percent Change
Interest income	$	1.5		$	3.7		$	(2.2	)	(58.8	)%
Interest expense	(23.6		)	(31.2		)	7.5			(24.1	)%
Other (expense) income, net	(1.7		)	0.2			(1.9		)	(948.2	)%
Total other expense, net	$	(23.8	)	$	(27.3	)	$	3.5		(12.8	)%



	Six Months Ended March 31,						Dollar Change			Percent Change
	2020			2019			Dollar Change			Percent Change
Interest income	$	3.7		$	6.2		$	(2.5	)	(40.6	)%
Interest expense	(47.4		)	(63.4		)	16.0			(25.2	)%
Other expense, net	(13.7		)	(1.0		)	(12.8		)	1,305.1	%
Total other expense, net	$	(57.5	)	$	(58.2	)	$	0.7		(1.2	)%

The decrease in interest income for the three and six months ended March 31, 2020 was primarily due to lower yields on marketable securities during fiscal year 2020.

The decrease in interest expense for the three and six months ended March 31, 2020 was primarily due to the repayment of $300.0 million of the 2024 Senior Notes in October 2019 and the repurchases of an aggregate of $123.8 million notional amounts of the 1.25% and 1.5% Convertible Debentures during the second quarter of fiscal year 2020.

The increase in other expense, net for the three and six months ended March 31, 2020 was primarily due to losses on redemption and repurchases of debt in fiscal year 2020, offset in part by higher gains on foreign currency transactions.

Provision (Benefit) for Income Taxes

The following table shows the provision (benefit) for income taxes on continuing operations and the effective income tax rate (dollars in millions):



	Three Months Ended March 31,						Dollar Change		Percent Change
	2020			2019			Dollar Change		Percent Change
Provision (benefit) for income taxes	$	14.8		$	(0.6	)	$	15.4	(2,605.9	)%
Effective income tax rate	1,139.2		%	2.0		%



	Six Months Ended March 31,						Dollar Change			Percent Change
	2020			2019			Dollar Change			Percent Change
(Benefit) provision for income taxes	$	(21.6	)	$	1.4		$	(23.0	)	(1,635.1	)%
Effective income tax rate	(109.6		)%	(10.7		)%

Net Income (Loss) from Discontinued Operations

As more fully described in Note 4 to the accompanying condensed consolidated financial statements, on February 1, 2019, we completed the sale of our Imaging business and received approximately $404.0 million in cash, after estimated transaction expenses.

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On October 1, 2019, we completed the spin-off of our Automotive business into an independent public company, Cerence. As a result, the historical results of operations for Imaging and Automotive have been included within discontinued operations in our condensed consolidated financial statements.

SEGMENT ANALYSIS

The following table presents certain financial information about our operating segments (dollars in millions):



	Three Months Ended March 31,						Change			Percent Change
	2020			2019			Change			Percent Change
Segment Revenues ^(a):
Healthcare	$	224.4		$	204.5		$	19.8		9.7	%
Enterprise	137.4			115.6			21.8			18.9	%
Other	7.7			16.7			(9.0		)	(53.9	)%
Total segment revenues	$	369.5		$	336.9		$	32.6		9.7	%
Less: acquisition related revenues adjustments	(0.2		)	(0.3		)	0.1			(37.5	)%
Total revenues	$	369.3		$	336.6		$	32.8		9.7	%
Segment Profit:
Healthcare	$	71.7		$	62.3		$	9.3		15.0	%
Enterprise	38.7			20.3			18.4			90.8	%
Other	3.8			5.0			(1.2		)	(23.6	)%
Total segment profit	$	114.3		$	87.7		$	26.6		30.3	%
Segment Profit Margin:
Healthcare	31.9		%	30.5		%	1.5
Enterprise	28.2		%	17.6		%	10.6
Other	49.9		%	30.1		%	19.8
Total segment profit margin	30.9		%	26.0		%	4.9



	Six Months Ended March 31,						Change			Percent Change
	2020			2019			Change			Percent Change
Segment Revenues ^(a):
Healthcare	$	494.9		$	476.5		$	18.4		3.9	%
Enterprise	275.9			245.3			30.6			12.5	%
Other	17.0			35.1			(18.1		)	(51.5	)%
Total segment revenues	$	787.9		$	757.0		$	30.9		4.1	%
Less: acquisition related revenues adjustments	(0.3		)	(0.7		)	0.4			(56.5	)%
Total revenues	$	787.6		$	756.3		$	31.3		4.1	%
Segment Profit:
Healthcare	$	165.0		$	164.9		$	0.1		—	%
Enterprise	81.3			62.6			18.7			29.9	%
Other	9.0			10.4			(1.4		)	(13.5	)%
Total segment profit	$	255.2		$	237.9		$	17.3		7.3	%
Segment Profit Margin:
Healthcare	33.3		%	34.6		%	(1.3		)
Enterprise	29.5		%	25.5		%	3.9
Other	52.7		%	29.6		%	23.2
Total segment profit margin	32.4		%	31.4		%	1.0


^(a)	Segment revenues differ from reported revenues due to certain revenue adjustments related to acquisitions that would otherwise have been recognized but for the purchase accounting treatment of the business combinations. These revenues are included to allow for more complete comparisons to the financial results of historical operations and in evaluating management performance.

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Segment Revenues

Three Months Ended March 31, 2020 compared to Three Months Ended March 31, 2019


•	Healthcare segment revenue, for the three months ended March 31, 2020, increased by $19.8 million, or 9.7%, primarily driven by:


◦	Revenue from Dragon Medical cloud-based solutions increased by $21.2 million, or 45.8%, to $67.6 million for the three months ended March 31, 2020 from $46.4 million for the three months ended March 31, 2019, primarily due to the continued market penetration and customer transition to our cloud-based solutions.


◦	Revenue from radiology and other increased by $10.9 million, or 29.2%, to $48.1 million for the three months ended March 31, 2020 from $37.2 million for the three months ended March 31, 2019, primarily due to the timing of multi-year term license renewal.


◦	Revenue from transcription services decreased by $8.1 million, or 14.9%, to $46.2 million for the three months ended March 31, 2020 from $54.3 million for the three months ended March 31, 2019, primarily due to customers' transition to our cloud-based solutions.


◦	Revenue from Dragon Medical licensing and maintenance and support decreased by $2.4 million, or 10.2%, to $21.2 million for the three months ended March 31, 2020 from $23.6 million for the three months ended March 31, 2019, primarily driven by the continued transition from software sold with maintenance and support to cloud-based solutions.


◦	Professional services revenue decreased by $2.2 million or 12.5%, to $15.2 million for the three months ended March 31, 2020 from $17.3 million for the three months ended March 31, 2019, primarily due to timing of services performed.


•	Enterprise segment revenue, for the three months ended March 31, 2020, increased by $21.8 million, or 18.9%, primarily due to the increases in our digital engagement and security and biometrics solutions.


•	Other segment revenue, for the three months ended March 31, 2020, decreased by $9.0 million, or 53.9%, primarily due to the wind-down of Devices and the sale of Mobile Operator Services business in Brazil in fiscal year 2019.

Six Months Ended March 31, 2020 compared to Six Months Ended March 31, 2019


•	Healthcare segment revenue, for the six months ended March 31, 2020, increased by $18.4 million, or 3.9%, primarily driven by:


◦	Revenue from Dragon Medical cloud-based solutions increased by $43.5 million, or 48.4%, to $133.4 million for the six months ended March 31, 2020 from $89.9 million for the six months ended March 31, 2019, primarily due to the continued market penetration and customer transition to our cloud-based solutions.


◦	Revenue from radiology and other increased by $13.3 million, or 10.3%, to $141.9 million for the six months ended March 31, 2020 from $128.7 million for the six months ended March 31, 2019, primarily due to the timing of multi-year term license renewal.


◦	Revenue from transcription services decreased by $16.5 million, or 14.8%, to $94.9 million for the six months ended March 31, 2020 from $111.4 million for the six months ended March 31, 2019, primarily due to customers' transition to our cloud-based solutions.


◦	Revenue from Dragon Medical licensing and maintenance and support decreased by $15.6 million, or 27.5%, to $41.0 million for the six months ended March 31, 2020 from $56.6 million for the six months ended March 31, 2019, primarily driven by the continued transition from software sold with maintenance and support to cloud-based solutions.


◦	Professional services revenue decreased by $3.0 million or 8.9%, to $30.8 million for the six months ended March 31, 2020 from $33.8 million for the six months ended March 31, 2019, primarily due to timing of services performed.


•	Enterprise segment revenue, for the six months ended March 31, 2020, increased by $30.6 million, or 12.5%, primarily due to the increases in digital engagement, Voice IVR and security and biometrics solutions.


•	Other segment revenue, for the six months ended March 31, 2020, decreased by $18.1 million, or 51.5%, primarily due to the wind-down of Devices and the sale of Mobile Operator Services business in Brazil in fiscal year 2019.

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Segment Profit

Three Months Ended March 31, 2020 compared to Three Months Ended March 31, 2019

•

Healthcare segment profit increased by $9.3 million, or 15.0%, primarily due to increases in revenue and gross margin, offset in part by higher R&D and sales and marketing expenses. Gross margin increased primarily due to a favorable shift in mix to higher margin Dragon Medical cloud-based solution from lower margin medical transcription services. The increases in R&D and sales and marketing expenses were primarily due to higher spend to support the development and launch of new products and solutions. As a result, segment profit margin increased by 1.5 percentage points to 31.9%.

•

Enterprise segment profit increased by $18.4 million, or 90.8%, primarily due to higher segment revenue and gross margin, offset in part by higher R&D and sales and marketing expenses. Gross margin improvement was primarily driven by a favorable shift in revenue mix towards higher margin licensing revenue. The increase in R&D expense was primarily due to higher spend on core technologies to support future growth. The increase in sales and marketing expense was primarily driven by higher commission costs due to higher bookings. As a result, segment profit margin increased by 10.6 percentage points to 28.2%.


•	Other segment profit decreased by $1.2 million, or 23.6%, primarily driven by lower revenue, offset by lower expense profile of the remaining business. Lower revenue was primarily due to the wind-down of Devices and the sale of Mobile Operator Services business in Brazil in fiscal year 2019. Segment profit margin increased by 19.8 percentage points to 49.9%.

Six Months Ended March 31, 2020 compared to Six Months Ended March 31, 2019

•

Healthcare segment profit increased by $0.1 million, or relatively flat, as increases in revenue and gross margin were offset by higher R&D and sales and marketing expenses. Gross margin increased primarily due to a favorable shift in mix to higher margin Dragon Medical cloud-based solution from lower margin medical transcription services. The increases in R&D and sales and marketing expenses were primarily due to higher spend to support the development and launch of new products and solutions. Segment profit margin decreased by 1.3 percentage points to 33.3%.

•

Enterprise segment profit increased by $18.7 million, or 29.9%, primarily due to higher segment revenue and gross margin, offset in part by higher R&D and sales and marketing expenses. Gross margin improvement was primarily driven by a favorable shift in revenue mix towards higher margin licensing revenue. The increase in R&D expense was primarily due to higher spend on core technologies to support future growth. The increase in sales and marketing expense was primarily driven by higher commission costs due to higher bookings. As a result, segment profit margin increased by 3.9 percentage points to 29.5%.


•	Other segment profit decreased by $1.4 million, or 13.5%, primarily driven by lower revenue, offset in part by lower expense profile of the remaining business. Lower revenue was primarily due to the wind-down of Devices and the sale of Mobile Operator Services business in Brazil in fiscal year 2019. Segment profit margin increased by 23.2 percentage points to 52.7%.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

We had cash and cash equivalents and marketable securities of $526.2 million as of March 31, 2020, a decrease of $238.6 million from $764.8 million as of September 30, 2019. Our working capital, defined as total current assets less total current liabilities from continuing operations, was $354.9 million as of March 31, 2020, compared to $591.3 million as of September 30, 2019. As of March 31, 2020, we had $9.7 million available for borrowing under our revolving credit facility. We believe that our existing sources of liquidity are sufficient to support our operating needs, capital requirements and any debt service requirements for the next twelve months.

Cash and cash equivalents and marketable securities held by our international operations totaled $89.9 million as of March 31, 2020 and $135.9 million as of September 30, 2019. We utilize a variety of financing strategies to ensure that our worldwide cash is available to meet our liquidity needs. We expect the cash held overseas to be permanently invested in our international operations, and our U.S. operation to be funded through its own operating cash flows, cash and marketable securities within the U.S., and if necessary, borrowing under our revolving credit facility.

As more fully described in "COVID-19 Impact" in the "Overview", while we expect our fiscal 2020 operating cash flows to be adversely affected due to lower operating income and delayed collections, the impact cannot be accurately estimated at this time. We continue to take proactive measures to manage our cash spend and preserve our liquidity. In connection with the contingency planning, on March 24, 2020, we borrowed $230.0 million under our revolving credit facility, which will be available for future working capital as needed. While we are committed to increasing shareholders' return and managing our debt leverage ratio in the

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long term, we have paused our share repurchase activity for the near term and in any event until we have repaid our revolver. We believe our existing cash and investments, and future cash flows from operations to be sufficient for future liquidity needs.

Spin-Off of Automotive

On October 1, 2019, we completed the previously announced spin-off of our Automotive business as an independent public company, Cerence, and a pro rata and tax-free distribution to our stockholders of all of the outstanding shares of Cerence owned by Nuance on October 1, 2019. The distribution was made in the amount of one share of Cerence common stock for every eight shares of Nuance common stock owned by Nuance’s stockholders of record as of 5:00 p.m. Eastern Time on September 17, 2019.

Upon the spin-off on October 1, 2019, we received an approximately $139.1 million distribution from Cerence. We used the proceeds from the distribution and existing cash to redeem all the $300.0 million outstanding principal amount of the 2024 Senior Notes for $313.5 million, plus accrued and unpaid interest of $4.5 million.

Net Cash Provided by Operating Activities

Cash provided by operating activities for the six months ended March 31, 2020 was $141.4 million, a decrease of $62.1 million from $203.6 million cash provided for the six months ended March 31, 2019. The decrease was primarily due to:


•	A decrease of $42.2 million in cash provided due to unfavorable changes in working capital, primarily due to the timing of cash collections and cash payments;


•	A decrease of $1.9 million in cash provided from changes in deferred revenue. Deferred revenue had a positive effect of $27.0 million on operating cash flows for the six months ended March 31, 2020, as compared to $29.0 million for the six months ended March 31, 2019;


•	A decrease of $64.7 million in cash flows from discontinued operations; offset in part by,


•	An increase of $46.7 million in cash provided due to higher income before non-cash charges.

Net Cash Provided by Investing Activities

Cash provided by investing activities for the six months ended March 31, 2020 was $46.3 million, a decrease of $330.3 million from $376.6 million cash provided for the six months ended March 31, 2019. The decrease was primarily due to:


•	Net proceeds of $404.0 million in net proceeds from the sale of our Imaging business during the second quarter of fiscal year 2019;


•	An increase of $7.8 million in cash used for capital expenditures; offset in part by,


•	An increase of $77.6 million in net proceeds from the sale and purchase of marketable securities and other investments; and


•	An increase of $3.9 million in cash used in other investing activities.

Net Cash Used in Financing Activities

Cash used in financing activities for the six months ended March 31, 2020 was $345.9 million, a decrease of $76.2 million from $422.1 million cash used for the six months ended March 31, 2019. The decrease was primarily due to:


•	A net contribution of $139.1 million from Cerence in connection with the spin-off of our Automobile business during the first quarter of fiscal year 2020;


•	An increase of $230.0 million in proceeds from the revolving credit facility; offset in part by,


•	An increase of $213.6 million in cash used for the repayment and redemption of debt; and


•	An increase of $77.9 million in cash used for share repurchases.

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Debt

For a detailed description of the terms and restrictions of the debt and revolving credit facility, see Note 10 to the accompanying condensed consolidated financial statements. For the six months ended March 31, 2020, we spent approximately $513.6 million on repurchase and redemption of debt:


•	Upon the spin-off on October 1, 2019, we received an approximately $139.1 million distribution from Cerence. We used the proceeds from the distribution and existing cash to redeem all the $300.0 million outstanding principal amount of the 2024 Senior Notes for $313.5 million, plus accrued and unpaid interest of $4.5 million.


•	During the second quarter of fiscal year 2020, we repurchased $87.3 million notional amount of our 1.25% 2025 Debentures for $112.3 million and $36.5 million notional amount of 1.5% 2035 Debentures for $41.3 million.


•	In March 2020, we redeemed the remaining outstanding $46.6 million of our 2.75% 2031 Debentures at par.

We may from time to time, depending on market and business conditions, repurchase outstanding debt in the open market or by private negotiation. We expect to incur a cash interest payment of approximately $52 million in fiscal year 2020, based on the outstanding balance as of March 31, 2020. We expect to fund our debt service requirements through existing sources of liquidity and our operating cash flows.

Share Repurchase Program

Off-Balance Sheet Arrangements, Contractual Obligations

Contractual Obligations

The following table outlines our contractual payment obligations (dollars in millions):



	Contractual Payments Due in Fiscal Year
Contractual Obligations	Total		2020		2021 and 2022		2023 and 2024		Thereafter
Convertible debentures ⁽¹⁾	$	1,166.6	$	—	$	227.4	$	676.5	$	262.7
Senior notes ⁽²⁾	500.0		—		—		—		500.0
Interest payable on long-term debt ⁽³⁾	227.9		20.8		80.0		64.5		62.6
Revolving credit facility	230.0		230.0		—		—		—
Letters of credit ⁽⁴⁾	2.8		2.8		—		—		—
Lease obligations and other liabilities:
Operating leases ⁽⁵⁾	137.4		14.1		44.8		27.9		50.6
Operating leases under restructuring	17.5		3.1		6.6		4.6		3.2
Purchase commitments for inventory, property and equipment ⁽⁶⁾	173.8		32.0		99.4		42.4		—
Total contractual cash obligations	$	2,456.0	$	302.8	$	458.2	$	815.9	$	879.1

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⁽¹⁾	Pursuant to the terms of each convertible instrument, holders have the right to redeem the debt on specific dates prior to maturity. The repayment schedule above assumes that payment is due on the next redemption date after March 31, 2020.


⁽²⁾	The repayment schedule reflects all the senior notes outstanding as of March 31, 2020.


⁽³⁾	Interest per annum is due and payable semi-annually and is determined based on the outstanding principal as of March 31, 2020, the stated interest rate of each debt instrument and the assumed redemption dates discussed above.


⁽⁴⁾	Letters of credit are in place primarily to secure future operating lease payments.


⁽⁵⁾	Obligations include contractual lease commitments related to facilities that have subsequently been subleased. As of March 31, 2020, we have subleased certain facilities with total sublease income of $14.2 million through fiscal year 2027.


⁽⁶⁾	These amounts include non-cancelable purchase commitments for property and equipment as well as inventory in the normal course of business to fulfill customer backlog.

Total unrecognized tax benefits as of March 31, 2020 were $29.2 million. We do not expect any significant change in the amount of unrecognized tax benefits within the next twelve months.

Contingent Liabilities and Commitments

Certain acquisition payments to selling shareholders were contingent upon the achievement of pre-determined performance target over a period of time after the acquisition. Such contingent payments were recorded at estimated fair values upon the acquisition and re-measured in subsequent reporting periods. As of March 31, 2020, we may be required to pay the selling stockholders up to $4.8 million upon achieving specified performance goals, including the achievement of future bookings and sales targets related to the products of the acquired entities. In addition, certain deferred compensation payments to selling shareholders contingent upon their continued employment after the acquisition was recorded as compensation expense over the requisite service period. Additionally, as of March 31, 2020, the remaining deferred payment obligations of $12.4 million to certain former stockholders, which are contingent upon their continued employment, will be recognized ratably as compensation expense over the remaining requisite service periods.

Off-Balance Sheet Arrangements

Through March 31, 2020, we have not entered into any off-balance sheet arrangements or material transactions with unconsolidated entities or other persons.

CRITICAL ACCOUNTING POLICIES

Our critical accounting policies are included in the "Critical Accounting Policies" section of "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included in the Form 10-K for the fiscal year ended September 30, 2019. There has been no material change to our critical accounting policies since September 30, 2019.

RECENTLY ADOPTED ACCOUNTING STANDARDS AND ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED

See Note 2 to the accompanying condensed consolidated financial statements for a discussion of the recently adopted and issued accounting standards.


Item 3.	Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk from changes in foreign currency exchange rates, interest rates and equity prices which could affect operating results, financial position and cash flows. We manage our exposure to these market risks through our regular operating and financing activities and, when appropriate, through the use of derivative financial instruments.

Exchange Rate Sensitivity

We are exposed to changes in foreign currency exchange rates. Any foreign currency transaction, defined as a transaction denominated in a currency other than the local functional currency, will be reported in the functional currency at the applicable exchange rate in effect at the time of the transaction. A change in the value of the functional currency compared to the foreign currency of the transaction will have either a positive or negative impact on our financial position and results of operations.

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Assets and liabilities of our foreign entities are translated into U.S. dollars at exchange rates in effect at the balance sheet date and income and expense items are translated at average rates for the applicable period. Therefore, the change in the value of the U.S. dollar compared to foreign currencies will have either a positive or negative effect on our financial position and results of operations. Historically, our primary exposure has related to transactions denominated in the euro, British pound, Brazilian real, Canadian dollar, Japanese yen, and Indian rupee.

Periodically, we enter into forward exchange contracts to hedge against foreign exchange rate fluctuations. As of March 31, 2020, we had not designated any contracts as fair value or cash flow hedges. The contracts generally have a maturity of less than 90 days. As of March 31, 2020, the notional contract amount of outstanding foreign currency exchange contracts was $54.5 million.

Interest Rate Sensitivity

We are exposed to interest rate risk as a result of our cash and cash equivalents and marketable securities.

At March 31, 2020, we held approximately $526.2 million of cash and cash equivalents and marketable securities consisting of cash, money-market funds, bank deposits and a separately managed investment portfolio. Assuming a one percentage point increase in interest rates, our interest income on our investments classified as cash and cash equivalents and marketable securities would increase by approximately $5.3 million per annum, based on the March 31, 2020 reported balances of our investment accounts.

At March 31, 2020, we had $230.0 million outstanding under our revolving credit agreement, which was subject to variable interest rates. Assuming a one percentage point increase in interest rates, our interest expense would increase by $2.3 million per annum.

Convertible Debentures

The fair values of our convertible debentures are dependent on the price and volatility of our common stock as well as movements in interest rates. The fair market values of these debentures will generally increase as the market price of our common stock increases and will decrease as the market price of our common stock decreases. The fair market values of these debentures will generally increase as interest rates fall and decrease as interest rates rise. The market value and interest rate changes affect the fair market values of these debentures, but do not impact our financial position, results of operations or cash flows due to the fixed nature of the debt obligations. However, increases in the value of our common stock above the stated trigger price for each issuance for a specified period of time may provide the holders of these debentures the right to convert each bond using a conversion ratio and payment method as defined in the debenture agreement.

The following table summarizes the fair value and conversion value of our convertible debentures, and the estimated increase in fair value and conversion value with a hypothetical 10% increase in the stock price of $16.78 as of March 31, 2020 (dollars in millions):



	March 31, 2020
	Fair value		Conversion value		Increase to fair value		Increase to conversion value
1.5% 2035 Debentures	$	237.8	$	185.1	$	8.6	$	18.5
1.0% 2035 Debentures	$	663.0	$	470.6	$	21.9	$	47.1
1.25% 2025 Debentures	$	339.2	$	266.1	$	18.7	$	26.6


Item 4.	Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

We have evaluated the effectiveness of the design and operation of our disclosure controls and procedures under the supervision of, and with the participation of, management, including our Chief Executive Officer and Chief Financial Officer, as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have

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concluded that our disclosure controls and procedures are effective to meet the requirements of Rules 13a-15(f) and 15d-15(f) under the Exchange Act.

Changes in Internal Control Over Financial Reporting

There have been no material changes in our internal controls over financial reporting during the second quarter of fiscal 2020 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Part II. Other Information

Item 1.Legal Proceedings

This information is included in Note 15, Commitments and Contingencies, in the accompanying notes to the unaudited condensed consolidated financial statements and is incorporated herein by reference from Item 1 of Part I.

Item 1A.Risk Factors

Item 1A of our Annual Report on Form 10-K for the year ended September 30, 2019 sets forth information relating to important risks and uncertainties that could materially affect our business, financial condition or operating results. Those risk factors, in addition to the other information set forth in this report, continue to be relevant to an understanding of our business, financial condition and operating results for the three and six months ended March 31, 2020. Other than as set forth below, there have been no material changes in our risk factors from those disclosed in our Annual Report. The following risk factor should be read in conjunction with the risk factors included in our Annual Report.

Our liquidity and operations have been adversely impacted, and our business, financial condition, results of operations and cash flows may be adversely impacted, by the outbreak of the novel coronavirus (COVID-19).

On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 to be a pandemic, which continues to spread throughout the U.S. and the world. The global spread of COVID-19 has created significant market volatility, uncertainty and economic disruption. National, state and local governments have responded in a variety of ways, including by declaring states of emergency, restricting people from gathering in groups and traveling, ordering people to stay at home, and ordering businesses to close or limit operations. The extent to which the coronavirus pandemic will impact our business, operations, and financial results in the future will depend on numerous evolving factors that we may not be able to accurately predict, including:


•	the duration and scope of the pandemic;


•	governmental, business and individual actions taken in response to the pandemic and the impact of those actions on global economic activity;


•	the actions taken in response to economic disruption;


•	the impact of business disruptions on our customers and partners and the resulting impact on their demand for our products and services;


•	our customers’ and partners’ ability to pay for our products and services; and


•	our ability to provide our products and services, including as a result of our employees working remotely and/or closures of offices and facilities.

We are closely monitoring the impact of the COVID-19 pandemic and continually assessing its potential effects on our business. While we have not experienced significant disruptions to our ability to conduct business thus far as a result of the pandemic, we are currently conducting business with substantial modifications to employee travel, employee work locations, virtualization or cancellation of customer and employee events, and remote sales, implementation, and support activities, among other modifications. In addition, many of our customers are hospitals and other healthcare providers that are facing capital shortages and other changes to their businesses as they focus primarily on fighting the pandemic. As a result, in particular with respect to our healthcare customers, our net new sales may be lower than expected; our ability to recognize revenue may be negatively impacted due to implementation delays, decreased utilization of certain products such as our HIM, PowerScribe and DAX solutions, decrease in volumes where we have transaction-based revenue, or other factors; our collections may be delayed, which will negatively affect our cash flows; some customers may go out of business, and we will be unsecured creditors and may not be able to collect what we are owed; our ability to provide 24x7 worldwide support to our customers may be affected; and our employees’ productivity may be negatively impacted as a result of almost all of our workforce working from home. The pandemic and accompanying market volatility, uncertainty and economic disruption may also have the effect of heightening many of the other risks described in the “Risk Factors” set forth in Item 1A of our Annual Report on Form 10-K. The ultimate impact of the COVID-19 pandemic and the effects of the operational changes we have made in response cannot be accurately predicted at this time. While the COVID-19 pandemic only modestly affected our results of operations and liquidity as of March 31, 2020, it may adversely impact our business, results of operations, cash flows and financial condition.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

The following is a summary of our share repurchases for the three months ended March 31, 2020:



Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Program ⁽¹⁾	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program⁽¹⁾
January 1, 2020 - January 31, 2020	1,109,187	18.93	1,109,187	$316.9 million
February 1, 2020 - February 29, 2020	1,656,120	22.08	1,656,120	$280.4 million
March 1, 2020 - March 31, 2020	998,000	19.25	998,000	$261.2 million
Total	3,763,307		3,763,307

⁽¹⁾ On April 29, 2013, our Board of Directors approved a share repurchase program for up to $500.0 million, which was increased by $500.0 million on April 29, 2015. On August 1, 2018, our Board of Directors approved additional $500.0 million under our share repurchase program. As of March 31, 2020, approximately $261.2 million remained available for future repurchases under the program.

For the majority of restricted stock units granted to employees, the number of shares issued on the date the restricted stock units vest is net of the minimum statutory income withholding tax requirements that we pay in cash to the applicable taxing authorities on behalf of our employees. We do not consider these transactions to be common stock repurchases.


Item 3.	Defaults Upon Senior Securities

None.


Item 4.	Mine Safety Disclosures

Not applicable.


Item 5.	Other Information

None.


Item 6.	Exhibits

The exhibits listed on the Exhibit Index are filed or incorporated by reference (as stated therein) as part of this Quarterly Report on Form 10-Q.

EXHIBIT INDEX

Incorporated by Reference

Exhibit

Number

Exhibit Description

Form

File No.

Exhibit

Filing

Date

Filed

Herewith

3.1

Amended and Restated Certificate of Incorporation of the Registrant.

10-Q

0-27038

3.2

5/11/2001

3.2

Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Registrant.

10-Q

0-27038

3.1

8/9/2004

3.3

Certificate of Ownership and Merger.

8-K

0-27038

3.1

10/19/2005

3.4

Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Registrant, as amended.

S-3

333-142182

3.3

4/18/2007

3.5

Amended and Restated Bylaws of the Registrant.

10-K

1-36056

3.4

11/7/2019

31.1

Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a).

31.2

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a).

32.1

Certification Pursuant to 18 U.S.C. Section 1350.

101

The following materials from Nuance Communications, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Consolidated Statements of Operations, (ii) the Consolidated Statements of Comprehensive Loss, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements.

104

The cover page of the Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 formatted in Inline XBRL (included in Exhibit 101)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Burlington, Commonwealth of Massachusetts, on May 8, 2020.




	Nuance Communications, Inc.

	By:		/s/ Daniel D. Tempesta
			Daniel D. Tempesta
			Executive Vice President and Chief Financial Officer

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