Nuance Communications, Inc. - Annual Report: 2019 (Form 10-K)

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Transitioning to cloud-based solutions in Healthcare. We are transitioning our Healthcare solutions to the cloud, enabling us to shift our revenue mix to a more subscription-based, higher-value recurring model. We’ve established Nuance as a cloud platform in all our solution areas within Healthcare. During the year, we made significant progress migrating incremental Dragon Medical on-premise customers to the cloud with Dragon Medical One (DMO). We launched the new cloud solutions, including PowerScribe One for our radiology base, and CDE One for clinical documentation improvement programs. We have created a go-to-market approach that aligns sales compensation to our cloud models, and have enabled our channel to sell Dragon Medical cloud. We also launched new Dragon Medical cloud offerings in certain international markets, including Canada, United Kingdom and Australia.

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Expanding our Intelligent Engagement portfolio in Enterprise, with a focus on cloud. While we maintain leadership in Voice IVR offerings, we are increasing our focus on Intelligent Engagement growth opportunies, which includes live and virtual engagement offerings, as well as Security and Biometrics. We recently launched Nuance Gatekeeper, a new cloud-native voice biometrics and authentication solution. We expanded the cloud-native stack with the roll-out of Intelligent Engagement Services for Conversational AI, Messaging, and Agent AI. These solutions offer customers more flexible integration with third-party systems and the ability to deploy across hosted, public, or private cloud. It gives large enterprises more options for deployment while making Nuance technology available to smaller organizations via the cloud model.

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Expanding our go-to-market presence. We are increasing sales coverage in new markets and developing new solutions to increase our customer lifetime value. In Healthcare, we are pursuing under-served markets, including community hospitals, ambulatory clinics, and surgery centers. We also are launching new solutions for specialty areas such as pediatrics, the emergency department, and surgical, as well as increasing our federal and other government customer offerings. In Enterprise, we are expanding our Intelligent Engagement solutions into our existing IVR customer base and delivering new rapid AI development tools that will allow us to increase our penetration into mid-market accounts.

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Expanding internationally. In Healthcare, we continue to expand our international presence in the UK, France, DACH region, Nordics, Australia, and Canada with a growing direct sales force and new offerings. In Enterprise, we continue to expand our international presence in the UK, France, Spain, Germany, Italy, Japan, Australia, New Zealand, Mexico, Brazil, Argentina, and Canada with expanded Intelligent Engagement offerings and sales focus.

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Accelerating our innovation activities. We are accelerating investment in research and development, with a focus on new AI products, including our development of ambient clinical intelligence (“ACI”), sub-specialty solutions, and the AI Marketplace for Diagnostic Imaging in Healthcare. In Enterprise, we launched Nuance Gatekeeper, a new cloud-native voice biometrics solution for authentication and fraud prevention across voice and digital channels and rapid AI development tools for large and mid-market enterprises. In addition, we launched Nuance Lightning Engine, within our Security Suite, which combines NLU with voice biometrics to personalize responses and validate individuals faster than before.

•	Growing through targeted acquisitions and strategic investments. While organic growth is our priority, we also expect to selectively pursue acquisitions and investments in businesses and technologies that advance the strategies described above.

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Dragon Medical One: Our cloud-based speech solution provides a consistent and personalized clinical documentation experience across solutions, platforms, and devices, regardless of physical location. Dragon Medical One allows clinicians to use their voice to securely capture the patient story and control applications more naturally and efficiently - anywhere, anytime. Dragon Medical One is HITRUST CSF-certified and uses a secure desktop app to keep data private and protected. It helps increase productivity and offers more flexibility and personalization while establishing a firm foundation for organizations to take advantage of new and future innovations, including virtual assistants and ambient clinical intelligence (“ACI”).

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Computer-Assisted Physician Documentation (“CAPD”): Backed by AI, our solutions give physicians in-workflow guidance to drive better data outcomes across the continuum of care. Our CAPD solutions apply workflow and knowledge automation, proven clinical strategies and point-of-care advice to capture complete and accurate documentation while improving productivity and satisfaction. We make it easier to add specificity to existing diagnoses, discover evidence of undocumented diagnoses and support various specialties and care settings. Details are extracted from patient narratives for fast and accurate translation into discrete data, while coding assistance helps capture professional charges, improve quality and reduce retrospective queries.

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Clinical Documentation Improvement (“CDI”) and Coding: Our comprehensive portfolio of cloud-based technologies is designed to help increase the productivity and effectiveness of CDI teams. Our clinically focused program and services deliver documentation guidance, AI-powered encounter prioritization, workflow management, denials support and analytics to drive better documentation across the care continuum. Designed with scale and reliability in mind, these solutions require lower installation, deployment and maintenance costs and are hosted on Microsoft Azure, a HITRUST CSF-certified infrastructure to support privacy, security and compliance. We provide real-time insights that promote a performance-driven program, allow peer comparisons and identify opportunities for improvement. Our Coding solutions offer cloud-based, enterprise-wide products and services that are designed to improve coder productivity and maintain the highest levels of accuracy and compliance. These solutions effectively manage and monitor the types of compliance coding challenges that can put a health system at risk for delayed and reduced reimbursement. We help manage the workflow by bringing together the tools needed to provide better visibility into key coding performance indicators. Coder productivity can be enhanced by enabling a more complete and accurate review of both inpatient and outpatient encounters that are associated with facility and professional service fees.

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Diagnostic Solutions: Our solutions continuously improve the efficiency and effectiveness of the radiologists’ work to improve clinical and financial outcomes across the continuum of care. Driving both speed and precision in how radiology is applied to patient care to maximize reimbursement, we reduce duplications and errors and alleviate burnout. Using AI, we help automate time-consuming, non-value-added tasks, freeing radiologists to perform more important tasks. By focusing more on integrating patients’ clinical and imaging information and collaborating better with peers, we help radiologists uplift their role within the care team.

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Transcriptions Solutions: These solutions offer cloud-based transcription capabilities for clinical documentation that use background speech recognition to increase Medical Language Specialists’ productivity and reduce costs. Helping organizations simplify the documentation process by offering users an automated and flexible workflow with options designed to meet a facility’s specific needs, our solutions and services offer fast, accurate, and usable documentation with more seamless and fully automated processes that can identify discrete information and securely upload data directly into the electronic health record (“EHR”). Clinicians using EHRs can accurately document entire patient encounters using a mobile device or their standard dictation methods.

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IVR Voice Solutions:  These solutions add automated customer service to phone calls into a contact center. They are integrated with interactive voice response ("IVR") systems provided to the customer by us or by a wide range of third-party IVR and contact center vendors, who often resell our IVR Voice Solutions. Our solutions in this category include ASR, TTS, NLU and dialog engines, which are sold as perpetual licenses with maintenance and support ("M&S"), or volume-based transactional pricing. We also offer a cloud hosted IVR and voice automation platform which is largely sold direct through multi-year agreements with volume-based transactional pricing and associated professional services.

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Intelligent Engagement Solutions:  We have an open, modular cloud platform that provides enterprises with the ability to implement virtual- and live-engagement across nearly all digital voice and text channels. The platform supports virtual assistant, live engagement and proactive outbound services, using our conversational AI and engagement AI capabilities. Our intelligent engagement cloud is sold both direct and through partners, and are largely multi-year agreements with volume-based transactional pricing and associated professional services.

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Security & Biometrics Solutions: These solutions enable organizations to automate the identification & verification (ID&V) of their customers using voice, face or behavioral biometrics, replacing time consuming security questions with either a simple phase - “At Big Bank my voice is my password” or simply by having the system listen to the conversation between the customer and agent. The system also can detect potential fraud using voice biometrics in real time or in batch, providing enterprises with an effective way of preventing fraud. We license this solution via perpetual M&S, on-premise transactional and cloud transactional models.

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Specialized Professional Services.  Our superior technology, when coupled with the high quality and domain knowledge of our professional services organization, allows our customers and partners to place a high degree of confidence and trust in our ability to deliver results. We support our customers in designing and building powerful innovative solutions that specifically address their needs and requirements.

•	International Coverage.  The international reach of our solutions and technologies is due to the broad language coverage of our offerings, including our ASR and NLU solutions, which provide recognition for approximately 90 languages and dialects and natural-sounding synthesized speech in over 160 voices, and support a broad range of hardware platforms and operating systems.

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Technological Superiority.  We have deep domain expertise and our conversational AI technologies, applications and solutions are often recognized as the most innovative and proficient in their respective categories. Our ASR and NLU solutions have industry-leading recognition accuracy and provide a natural, voice-enabled interaction with systems, devices and applications. Technology publications, analyst research and independent benchmarks have consistently indicated that our solutions and technologies rank at or above performance levels of alternative solutions.

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Broad Distribution Channels.  Our ability to address the needs of specific markets, such as financial, law, healthcare and government, and to introduce new solutions and technologies quickly and effectively is provided by our direct sales force, our extensive global network of resellers, comprising system integrators, independent software vendors, value-added resellers, hardware vendors, telecommunications carriers and distributors, and our e-commerce website.

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•	volume, timing and fulfillment of customer orders and receipt of royalty reports;

•	fluctuating sales by our channel partners to their customers;

•	customers delaying their purchasing decisions in anticipation of new versions of our products;

•	contractual counterparties failing to meet their contractual commitments to us;

•	introduction of new products by us or our competitors;

•	cybersecurity or data breaches;

•	seasonality in purchasing patterns of our customers;

•	reduction in the prices of our products in response to competition, market conditions or contractual obligations;

•	returns and allowance charges in excess of accrued amounts;

•	timing of significant marketing and sales promotions;

•	impairment of goodwill or intangible assets;

•	the pace of the transition to an on-demand and transactional revenue model;

•	delayed realization of synergies resulting from our acquisitions;

•	accounts receivable that are not collectible and write-offs of excess or obsolete inventory;

•	increased expenditures incurred pursuing new product or market opportunities;

•	higher than anticipated costs related to fixed-price contracts with our customers;

•	change in costs due to regulatory or trade restrictions;

•	expenses incurred in litigation matters, whether initiated by us or brought by third parties against us, and settlements or judgments we are required to pay in connection with disputes; and

•	general economic trends as they affect the customer bases into which we sell.

•	adverse political and economic conditions, or changes to such conditions, in a specific region or country;

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•	trade protection measures, including tariffs and import/export controls, imposed by the United States and/or by other countries or regional authorities such as Canada or the European Union;

•	the impact on local and global economies of the United Kingdom leaving the European Union;

•	changes in foreign currency exchange rates or the lack of ability to hedge certain foreign currencies;

•	compliance with laws and regulations in many countries and any subsequent changes in such laws and regulations;

•	geopolitical turmoil, including terrorism and war;

•	changing data privacy regulations and customer requirements to locate data centers in certain jurisdictions;

•	evolving restrictions on cross-border investment, including recent enhancements to the oversight by the Committee on Foreign Investment in the United States pursuant to the Foreign Investment Risk Preview Modernization Act;

•	changes in applicable tax laws;

•	difficulties in staffing and managing operations in multiple locations in many countries;

•	longer payment cycles of foreign customers and timing of collections in foreign jurisdictions; and

•	less effective protection of intellectual property outside the United States.

•	loss of revenue resulting from the operational disruption;

•	loss of revenue or increased bad debt expense due to the inability to invoice properly or to customer dissatisfaction resulting in collection issues;

•	loss of revenue due to loss of customers;

•	material remediation costs to restore systems;

•	material investments in new or enhanced systems in order to enhance our information security posture;

•	cost of incentives offered to customers to restore confidence and maintain business relationships;

•	reputational damage resulting in the failure to retain or attract customers;

•	costs associated with potential litigation or governmental investigations;

•	costs associated with any required notices of a data breach;

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•	costs associated with the potential loss of critical business data; and

•	other consequences of which we are not currently aware but will discover through the remediation process.

•	cause our customers to lose confidence in our solutions;

•	harm our reputation;

•	expose us to litigation, regulatory investigations and to resulting liabilities including reimbursement of customer costs, damages penalties or fines imposed by regulatory agencies; and

•	require us to incur significant expenses for remediation.

•	difficulty in transitioning and integrating the operations and personnel of the acquired businesses;

•	difficulty in separating the operations, personnel and systems of divested businesses:

•	potential negative impact on our profitability as a result of losses that may result from a divestiture, including the loss of sales and operating income or decrease in cash flows;

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•	retained exposure on financial guarantee leases, real estate and other contractual, employment, pension and severance obligations of divested business, and potential liabilities that may arise under law as a result of the disposition or the subsequent failure of an acquirer;

•	potential disruption of our ongoing business and distraction of management;

•	difficulty in incorporating acquired products and technologies into our products and technologies;

•	potential difficulties in completing projects associated with in-process research and development;

•	unanticipated expenses and delays in completing acquired development projects and technology integration and upgrades;

•	challenges associated with managing additional, geographically remote businesses;

•	impairment of relationships with partners and customers;

•	assumption of unknown material liabilities of acquired companies;

•	the accuracy of revenue and bookings projections of acquired companies;

•	customers delaying purchases of our products pending resolution of product integration between our existing and our newly acquired products;

•	entering markets or types of businesses in which we have limited experience; and

•	potential loss of key employees of the acquired business or loss of key employees of a divested business.

•	costs incurred to integrate the operations of businesses we acquire, such as transitional employee expenses and employee retention, redeployment or relocation expenses;

•	impairment of goodwill or intangible assets;

•	amortization of intangible assets acquired;

•	a reduction in the useful lives of intangible assets acquired;

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•	identification of or changes to assumed contingent liabilities, both income tax and non-income tax related, after our final determination of the amounts for these contingencies or the conclusion of the measurement period (generally up to one year from the acquisition date), whichever comes first;

•	charges to our operating results to eliminate certain duplicative pre-merger activities, to restructure our operations or to reduce our cost structure;

•	charges to our operating results arising from expenses incurred to effect the acquisition; and

•	charges to our operating results due to the expensing of stock awards assumed in acquisitions.

•	significant adjustments to our multi-year operating plans, in connection with our ongoing portfolio review;

•	changes in our organization or management reporting structure that could result in additional reporting units, which may require alternative methods of estimating fair values or greater disaggregation or aggregation in our analysis by reporting unit;

•	significant under performance relative to historical or projected future operating results;

•	significant changes in the manner of or use of the acquired assets or the strategy for our overall business;

•	significant negative industry or economic trends;

•	significant decline in our stock price for a sustained period; and

•	our market capitalization declining to below net book value.

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•	projected levels of taxable income;

•	pre-tax income being lower than anticipated in countries with lower statutory rates or higher than anticipated in countries with higher statutory rates;

•	increases or decreases to valuation allowances recorded against deferred tax assets;

•	tax audits conducted and settled by various tax authorities;

•	adjustments to income taxes upon finalization of income tax returns;

•	the ability to claim foreign tax credits;

•	the repatriation of non-U.S. earnings for which we have not previously provided for income taxes; and

•	changes in tax laws and their interpretations in countries in which we are subject to taxation.

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•	incur additional debt or issue guarantees;

•	create liens;

•	make certain investments;

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•	enter into transactions with our affiliates;

•	sell certain assets;

•	repurchase capital stock or make other restricted payments;

•	declare or pay dividends or make other distributions to stockholders; and

•	merge or consolidate with any entity.

•	require us to use a large portion of our cash flow to pay principal and interest on debt, including the convertible debentures and the credit facility, which will reduce the availability of our cash flow to fund working capital, capital expenditures, acquisitions, research and development, exploit business opportunities, and undertake other business activities;

•	place us at a competitive disadvantage compared to our competitors that have less debt; and

•	limit, along with the financial and other restrictive covenants related to our debt, our ability to borrow additional funds, dispose of assets or pay cash dividends.

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Item 1B.	Unresolved Staff Comments

Item 2.	Properties

Item 3.	Legal Proceedings

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Item 4.	Mine Safety Disclosures

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Item 5.	Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

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Healthcare. Customers in our healthcare segment are broadly implementing EHR systems and are working to improve clinical documentation, improve quality of care, minimize physician burnout, integrate quality measures and aid reimbursement. These trends are driving a shift towards more integrated solutions that combine both Dragon Medical cloud-based solutions and transcription services. Recently, higher demand for more integrated solutions have offset declines in legacy, hosted transcription services. Additionally, we have been able to capitalize on healthcare providers’ shift towards hosted, or cloud-based solutions, and away from perpetual licenses, by adding new innovations to our Dragon Medical cloud solutions including new clinical language understanding and AI capabilities designed to increase productivity and improve clinical documentation at the point of care and within existing electronic medical work flow.

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Enterprise. Consumer demand for 24/7, multi-channel access to customer service from the businesses they interact with is driving demand for our AI-powered omni-channel engagement solutions. We continue to enhance our technology capabilities with intelligent self-service and AI for customer service, and to extend the market for our on-demand omni-channel enterprise solutions into international markets, expand our sales and solutions for biometrics, and expand our core products and services portfolio.

•	Automotive. Demand for our embedded and cloud-based automotive solutions is being driven by the growth in personalized, automotive virtual assistants and connected services for cars and by auto manufacturers' desire to create a branded and personalized experience, capable of intelligently integrating users' smart phone and home device preferences and technologies.

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Other. Our Other segment includes our SRS and Devices businesses. Our SRS business provides value-added services to mobile operators in India and Brazil (“Mobile Operator Services”) and voicemail transcription services to mobile operators in the rest of the world (“Voicemail-to-Text”). Our Devices business provides speech recognition solutions and predictive text technologies for handset devices. Our Mobile Operator Services has experienced dramatic market disruptions during fiscal year 2018. Our Devices revenue has been declining due to the ongoing consolidation of our handset manufacturer customer base and continued erosion of our penetration of the remaining market. During the fourth quarter of fiscal 2018, in connection with our comprehensive portfolio and business review efforts, we commenced a wind-down of our Devices and Mobile Operator Services businesses.  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. The sale prices and any gains or losses were immaterial.

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Discontinued Operations - Imaging. On November 11, 2018, we entered into a definitive stock purchase agreement, pursuant to which we agreed to sell our Imaging business and associated assets. On February 1, we completed the sale of the business and we received proceeds approximately $400.0 million, net of related fees and expenses, and subject to certain customary post-closing adjustments. As a result, for fiscal years 2019, 2018, and 2017, Imaging's results of operations have been included within discontinued operations for all the historical periods presented and its assets and liabilities within held for sale in our consolidated financial statements as of September 30, 2018.

•	Total revenues under ASC 606 was $1,823.1 million for the year ended September 30, 2019, as compared to $1,842.3 million under ASC 605 for the year ended September 30, 2018;

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•	Net income from continuing operations under ASC 606 for the year ended September 30, 2019 was $114.3 million, compared to a net loss from continuing operations of $184.9 million under ASC 605 the year ended September 30, 2018;

•	Gross margins under ASC 606 for the year ended September 30, 2019 was 57.2%, compared to 55.2% under ASC 605 for the year ended September 30, 2018;

•	Operating margins under ASC 606 for the year ended September 30, 2019 was 7.3%, compared to (6.4)% under ASC 605 for year ended September 30, 2018; and

•	Operating cash flows from continuing operations increased by $4.7 million to $397.0 million for the year ended September 30, 2019, compared to $392.3 million for the year ended September 30, 2018.

•	Total deferred revenue decreased by 8% to $701.7 million, primarily as a result of the ASC 606 implementation, offset in part by the continued growth of our Automotive connected solutions and Healthcare bundled offerings.

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(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.

•	Healthcare segment revenue for the year ended September 30, 2019 reflected the up-front recognition of term license revenue from Clintegrity, Dragon Medical, and Diagnostic solutions under ASC 606. Under ASC 605, Healthcare segment revenue decreased by $0.4 million or 0.0%, primarily driven by:

•	Revenue from Dragon Medical cloud offerings increased by $74.6 million, or 54.0%, to $212.7 million for fiscal year 2019 from $138.1 million for fiscal year 2018, primarily due to the continued market penetration and customer transition to our cloud-based offering.

•	Revenue from transcription services decreased by $43.0 million, or 16.3%, to $220.5 million for fiscal year 2019 from $263.5 million for fiscal year 2018, primarily due to the continued erosion of our medical transcription services revenue and customer's transition to Dragon Medical cloud-based software.

•	Professional services revenue decreased by $59.1 million or 40.8%, to $85.8 million for fiscal year 2019 from $144.9 million for fiscal year 2018, primarily driven by lower revenue from EHR implementation and optimization services.

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Enterprise segment revenue for the year ended September 30, 2019 reflected the allocation of contract consideration to multiple performance obligations based on standalone selling prices, and the up-front recognition of term license revenue and related costs under ASC 606. Under ASC 605, Enterprise segment revenue increased by $24.2 million, or 5.0%, primarily due to the growth in our omni-channel hosting solutions.

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Automotive segment revenue for the year ended September 30, 2019 reflected the allocation of contract consideration to multiple performance obligations based on standalone selling prices under ASC 606. Under ASC 605, Automotive segment revenue increased by $33.3 million, or 11.9%, primarily due to higher royalties and hosting revenue driven by the continued growth in our speech recognition and infotainment platform services.

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Other segment revenue for the year ended September 30, 2019 reflected the allocation of contract consideration to multiple performance obligations based on standalone selling prices under ASC 606. Under ASC 605, Other segment revenue decreased by $47.3 million, or 43.3%, primarily due to the wind-down of Devices and the sale of Mobile Operator Services business in Brazil and India in fiscal year 2019.

•	Healthcare segment revenues increased by $85.5 million, or 9.5%, primarily driven by:

•	Revenue from Dragon Medical cloud offerings increased by $74.0 million, or 115.5%, to $138.1 million for fiscal year 2018 from $64.1 million for fiscal year 2017, primarily due to the continued market penetration and customer transition to our cloud-based offering, as well as the revenue loss in fiscal year 2017 due to the Malware Incident.

•	Revenue from transcription services decreased by $50.6 million, or 16.1%, to $263.5 million for fiscal year 2018 from $314.1 million for fiscal year 2017, primarily due to the continued erosion of our medical transcription services revenue and customer's transition to Dragon Medical cloud-based software.

•	Professional services revenue increased by $49.0 million or 51.0%, to $144.9 million for fiscal year 2018 from $96.0 million for fiscal year 2017, primarily driven by higher revenue from EHR implementation and optimization services.

•	Enterprise segment revenues increased by $8.9 million, or 1.9%, during fiscal year 2018 primarily due to higher contact center license and services revenue, offset in part by lower revenue from our inbound and outbound on-demand solutions.

•	Automotive segment revenues increased by $27.2 million, or 10.8%, during fiscal year 2018 primarily due to higher royalties and revenues from our hosting solutions driven by continued growth in our ASR and infotainment platform services.

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Other segment revenue decreased by $24.7 million, or 18.5%, primarily due to the accelerated declines in both SRS and Devices businesses during fiscal year 2018. The decline in SRS was primarily due to the recent market disruptions in India and Brazil. These markets have experienced a dramatic recent disruption as a result of accelerated change in competition and business models for our SRS mobile operator customers, which has reduced demand for our services. The decline in our Devices business was primarily due to the ongoing consolidation of our handset manufacturer customer base, as well as continued erosion of our penetration of the remaining market.

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Healthcare segment profit for the year ended September 30, 2019 reflected the upfront recognition of term license revenue and related costs for Clintegrity, Dragon Medical, and Diagnostic solutions under ASC 606. Under ASC 605, Healthcare segment profit increased by $37.8 million, or 11.6%, primarily due to higher gross margin. The gross margin improvement was primarily due to a favorable shift in mix to higher margin Dragon Medical cloud-based solution from lower margin medical transcription services, and lower revenue from EHR implementation and optimization services which carried lower margins. As a result, segment profit margin under ASC 605 increased by 3.9 percentage points to 37.0%.

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Enterprise segment profit for the year ended September 30, 2019 reflected the allocation of contract consideration to multiple performance obligations based on standalone selling prices and the up-front recognition of term license revenue and related costs under ASC 606. Under ASC 605, Enterprise segment profit increased by $1.4 million, or 1.0%, primarily due to higher segment revenue and lower sales and marketing expense, offset in part by lower gross margin. Gross margin decline was primarily due to lower licensing revenue, which carries higher margins. The decrease in sales and marketing expenses was primarily due to lower compensation expenses. As a result, segment profit margin under ASC 605 decreased by 1.1 percentage points to 28.0%.

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Automotive segment profit for the year ended September 30, 2019 reflected the allocation of contract consideration to multiple performance obligations based on standalone selling prices and the upfront recognition of term license costs under ASC 606. Under ASC 605, Automotive segment profit increased by $7.2 million, or 6.6%, primarily due to higher revenue, offset in part by lower gross margin, and higher operating expenses. Lower gross margin was primarily driven by the continued pricing

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Other segment profit for the year ended September 30, 2019 reflected the allocation of contract consideration to multiple performance obligations based on standalone selling prices and the upfront recognition of term license costs under ASC 606. Under ASC 605, Other segment profit decreased by $4.1 million, or 14.7%, primarily driven by our costs saving initiatives related to the wind-down of our Devices and Mobile Operator Services businesses, offset in part by lower segment revenue.

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Healthcare segment profit increased by $68.8 million, or 26.7%, primarily due to higher segment revenue and higher gross margin. Healthcare operating results for fiscal year 2017 was negatively impacted by the 2017 Malware Incident. The gross margin for fiscal year 2018 reflected a favorable shift in revenue mix towards higher margin Dragon Medical cloud-based offerings, offset in part by the increase in EHR implementation and optimization services which carried lower margins. As a result, segment profit margin increased by 4.5 percentage points, to 33.2% for fiscal year 2018.

•	Enterprise segment profit increased by $6.6 million, or 4.9%, primarily due to higher segment revenue, offset in part by lower gross margin. The lower gross margin was primarily due to higher infrastructure costs and increased headcount to support future growth. As a result, segment profit margin increased by 0.9 percentage points to 29.1% for fiscal year 2018 from 28.2% for fiscal year 2017.

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Automotive segment profit decreased by $9.1 million, or 7.7%, primarily due to lower gross margin and higher R&D expenses, offset in part by higher revenue. The lower gross margin was primarily driven by increased professional services headcount to support implementation of our connected solutions across existing and new customer base. The higher R&D expense was primarily driven by our increased investment in new technologies. As a result, segment profit margin decreased by 7.8 percentage points to 39.1% for fiscal year 2018 from 46.9% for fiscal year 2017.

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Other segment profit decreased by $13.2 million, or 32.0%, primarily due to lower revenue and the margin compression in SRS and Devices. Segment profit margin declined primarily due to lower revenues and relatively fixed costs and expenses structure. As more fully described in Note 4 to the accompanying consolidated financial statements, during the fourth quarter of fiscal 2018, in connection with our comprehensive portfolio and business review efforts, we commenced a wind-down of our Devices and Mobile Operator Services businesses.

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•	A decrease of $74.7 million from changes in deferred revenue. Deferred revenue had a positive effect of $22.3 million on operating cash flows for the year ended September 30, 2019, as compared to $97.0 million for the year ended September 30, 2018, primarily due to the ASC 606 implementation using the modified retrospective approach in the current period;

•	A decrease of $47.8 million from operating cash flows from discontinued operations; offset in part by,

•	An increase of $56.6 million due to higher income before non-cash charges;

•	An increase of $22.8 million due to favorable changes in working capital, primarily due to the timing of cash payments.

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•	An increase of $33.0 million driven by favorable changes in working capital excluding deferred revenue, primarily due to the timing of billing and collections; and

•	An increase of cash inflows of $45.9 million from deferred revenue. Deferred revenue contributed cash inflow of $97.0 million in fiscal year 2018, as compared to $51.0 million in fiscal year 2017, primarily driven by continued growth of our Automotive connected solutions and bundled offerings within our Healthcare segment.

•	Net proceeds of $407.0 million from the dispositions of businesses, net of transaction fees;

•	A decrease of $89.3 million in payments for business and asset acquisitions;

•	A decrease of $4.7 million in capital expenditures; offset in part by,

•	A decrease of $167.7 million in net proceeds from the sale and purchase of marketable securities and other investments.

•	An increase of $280.3 million in net proceeds from the sale and purchase of marketable securities and other investments; and

•	A decrease of $13.0 million in capital expenditures.

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A decrease of $181.2 million in repayment and redemption of debt. During fiscal year 2019, we redeemed $300.0 million in aggregate principal of our 5.375% Senior Notes due 2020 with the net proceeds from the sale of Imaging. During fiscal year 2018, we redeemed approximately $331.2 million in aggregate principal of the 2.75% 2031 Debentures, and repurchased $150.0 million in aggregate principal amount of our 2020 Senior Notes.

•	A decrease of $24.8 million related to acquisition payments with extended payment terms;

•	A decrease of $6.0 million related to payments for taxes related to net share settlement of equity awards;

•	A decrease of $9.2 million for share repurchases; offset in part by,

•	An increase of $9.9 million due to the proceeds from sale of noncontrolling interests in a subsidiary.

•	A decrease in cash inflows of $837.5 million from debt issuance. During fiscal year 2017, the cash inflows from debt activities includes $495.0 million net proceeds from the issuance of 5.625% Senior Notes due 2026; and $343.6 million net proceeds from the issuance of our 1.25% 2025 Convertible Debentures;

•	An increase in cash outflows of $37.0 million related to share repurchases; and

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•	An increase in cash outflows of $24.8 million related to acquisition payments with extended payment terms, offset in part by,

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A decrease in cash outflows of $152.9 million from the redemption and repayment of debt. During fiscal year 2018, we redeemed approximately $331.2 million in aggregate principal of the 2.75% 2031 Debentures, and repurchased $150.0 million in aggregate principal of our 2020 Senior Notes. During fiscal year 2017, we repurchased $600.0 million in aggregate principal of our 2020 Senior Notes and $17.8 million in aggregate principal of our 2031 Convertible Debentures.

(1)

The repayment schedule above assumes that payment is due on the first mandatory redemption date after September 30, 2019. As more fully described below, as of September 30, 2019, 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.

(2)	The repayment schedule reflects all the senior notes outstanding as of September 30, 2019. As more fully described below, on October 1, 2019, we redeemed all of the $300 million outstanding principal of the 2024 Senior Notes.

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(3)	Interest per annum is due and payable semi-annually and is determined based on the outstanding principal as of September 30, 2019, 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 September 30, 2019, we have subleased certain facilities with total sublease income of $15.2 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.

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•	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.

•	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.

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Item 8.	Financial Statements and Supplementary Data

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Evaluating the design and testing operating effectiveness of controls relating to management’s adoption of ASC 606 including controls over: (i) evaluating the impact of the new accounting standard, (ii) evaluating the completeness and accuracy of relevant historical data for open contracts at the date of adoption, (iii) assessing the results and recording the impact of the adoption, and (iv) evaluating the design and testing the operating effectiveness of certain IT general controls relating to management’s implementation of the new revenue management system.

•	Evaluating management’s accounting policies and practices, including the reasonableness of management’s judgments and assumptions related to: (i) evaluation of performance obligations and whether they are distinct or non-distinct, (ii) consideration of income tax implications, and (iii) capitalization of contract costs including commissions.

•	Utilizing BDO technical specialists to assist in evaluating the technical merits of management’s accounting policies used as a basis of management’s ASC 606 adoption.

•	Testing of a sample of revenue contracts and underlying order documents recorded by management to evaluate proper processing within the new revenue management system.

•	Testing the completeness and accuracy of relevant inputs and outputs used in the adoption of ASC 606, identification of performance obligations and determination of standalone selling prices.

•	Evaluating the design and testing operating effectiveness of certain controls relating to management’s identification and assessment of distinct performance obligations in customer revenue contracts.

•	Evaluating management’s accounting policies and practices including the reasonableness of management’s judgments and assumptions relating to the evaluation of performance obligations and whether they are distinct or non-distinct.

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•	Testing a sample of revenue contracts and underlying order documents to evaluate management’s identification of distinct performance obligations in revenue contracts.

•	Evaluating the design and testing the operating effectiveness of controls relating to management’s assessment of: (i) completeness and accuracy of the identified uncertain tax positions, (ii) evaluation of the technical merits of positions, and (iii) reasonableness of assumptions used in the determinations.

•	Evaluating management’s judgments and assessing the reasonableness of assumptions used in determining the units of account, recognition, measurement, and technical merits of UTPs.

•	Assessing management’s application of new and updated regulatory and legislative guidance in various jurisdictions and evaluating implications on the Company’s UTPs due to changes in legal structure of certain subsidiaries.

•	Utilizing BDO Tax and valuation specialists to assist in evaluating technical merits, reasonableness of management’s judgments and assumptions used in UTPs calculations and the overall reasonableness of conclusions reached.

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1.	Organization and Presentation

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•	estimated fair values of intangible assets;

•	estimated fair values of legal performance commitments to customers, assumed from the acquiree under existing contractual obligations (classified as deferred revenue);

•	estimated fair values of stock awards assumed from the acquiree that are included in the purchase price;

•	estimated fair value of required payments under contingent consideration provisions;

•	estimated income tax assets and liabilities assumed from the acquiree; and

•	estimated fair value of pre-acquisition contingencies assumed from the acquiree.

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•	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.

•	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.

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(1)

The repayment schedule above assumes that payment is due on the first contractual redemption date after September 30, 2019. As more fully described below, as of September 30, 2019, 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.

(2)	The repayment schedule reflects all the senior notes outstanding as of September 30, 2019. As more fully described below, on October 1, 2019, we redeemed all of the $300 million outstanding principal of the 2024 Senior Notes.

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•	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.

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(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.

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(a)	The aggregate intrinsic value represents any excess of the closing price of our common stock of $16.31 on September 30, 2019 over the exercise price of the underlying options.

(b)	We repurchased 1.0 million shares owned directly or indirectly by our former Chief Executive Officer, including 649,649 outstanding shares and 800,000 vested stock options with a net share equivalent of 350,351 shares, for an aggregate purchase price of $21.4 million.

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•	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.

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The Automotive segment is primarily engaged in providing automotive manufacturers and their suppliers branded and personalized virtual assistants and connected car services built on our voice recognition and natural language understanding technologies. As more fully disclosed in Note 4, on November 19, 2018, we announced our intent to spin off our Automotive business into an independent publicly traded company through a pro rata distribution to our common stockholders. On August 5, 2019, we further announced our plans to brand the Automotive spin-off as Cerence and the spin-off was completed on October 1, 2019.

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The Other segment includes our SRS and Devices businesses. Our SRS business provides value-added services to mobile operators in India and Brazil (“Mobile Operator Services”) and voicemail transcription services to mobile operators in the rest of the world (“Voicemail-to-Text”). Our Devices business provides speech recognition solutions and predictive text technologies for handset devices. Our Devices revenue has been declining due to the ongoing consolidation of our handset manufacturer customer base and continued erosion of our penetration of the remaining market. During the fourth quarter of fiscal 2018, in connection with our comprehensive portfolio and business review efforts, we commenced a wind-down of our Devices and Mobile Operator Services businesses. 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. The sale prices and any gain or loss were immaterial to our consolidated financial statement.

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(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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Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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•	pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

•	provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and,

•	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Item 9B.	Other Information

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Item 10.	Directors, Executive Officers and Corporate Governance

Item 11.	Executive Compensation

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters

Item 13.	Certain Relationships and Related Transactions, and Director Independence

Item 14.	Principal Accountant Fees and Services

Item 15.	Exhibits and Financial Statement Schedules

(a)	The following documents are filed as a part of this Report:

(1)	Financial Statements — See Index to Financial Statements in Item 8 of this Report.

(2)	Financial Statement Schedules — All schedules have been omitted as the requested information is inapplicable or the information is presented in the financial statements or related notes included as part of this Report.

(3)	Exhibits — See Item 15(b) of this Report below.

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(b)	Exhibits.

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Item 16.	Form 10-K Summary

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