Nuance Communications, Inc. - Quarter Report: 2020 December (Form 10-Q)

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 December 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)

_____________________________________________

94-3156479

(State or Other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

1 Wayside Road

Burlington,

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 January 31, 2021 was 285,060,048.

NUANCE COMMUNICATIONS, INC.

TABLE OF CONTENTS

Page

PART I: FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements:

Consolidated Statements of Operations for the three months ended December 31, 2020 and 2019

Consolidated Statements of Comprehensive Income for the three months ended December 31, 2020 and 2019

Consolidated Balance Sheets at December 31, 2020 and September 30, 2020

Consolidated Statements of Stockholders’ Equity for the three months ended December 31, 2020 and 2019

Consolidated Statements of Cash Flows for the three months ended December 31, 2020 and 2019

Notes to Condensed Consolidated Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Item 4.

Controls and Procedures

PART II: OTHER INFORMATION

Item 1.

Legal Proceedings

Item 1A.

Risk Factors

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.

Defaults Upon Senior Securities

Item 4.

Mine Safety Disclosures

Item 5.

Item 6.

Certifications

NUANCE COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended December 31,
	2020		2019
	(In thousands, except per share amounts)
Revenues:
Hosting and professional services	$	195,832	$	173,921
Product and licensing	86,037		125,015
Maintenance and support	63,884		62,573
Total revenues	345,753		361,509
Cost of revenues:
Hosting and professional services	105,615		101,330
Product and licensing	14,415		33,944
Maintenance and support	7,486		7,863
Amortization of intangible assets	4,262		6,569
Total cost of revenues	131,778		149,706
Gross profit	213,975		211,803
Operating expenses:
Research and development	56,457		54,605
Sales and marketing	65,405		65,776
General and administrative	41,145		38,334
Amortization of intangible assets	10,531		9,189
Acquisition-related costs, net	325		1,220
Restructuring and other charges, net	8,566		6,683
Total operating expenses	182,429		175,807
Income from operations	31,546		35,996
Other income (expense):
Interest income	228		2,186
Interest expense	(23,014)		(23,815)
Other income (expense), net	497		(12,040)
Income before income taxes	9,257		2,327
Provision (benefit) for income taxes	2,303		(41,297)
Net income from continuing operations	6,954		43,624
Net income from discontinued operations	7,941		5,061
Net income	$	14,895	$	48,685

Net income per common share - basic:
Continuing operations	$	0.02	$	0.15
Discontinued operations	0.03		0.02
Total net income per basic common share	$	0.05	$	0.17

Net income per common share - diluted:
Continuing operations	$	0.02	$	0.15
Discontinued operations	0.03		0.02
Total net income per diluted common share	$	0.05	$	0.17

Weighted average common shares outstanding:
Basic	283,818		284,130
Diluted	314,210		289,453

See accompanying notes.

Table of Contents

NUANCE COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


	Three Months Ended December 31,
	2020		2019
	(In thousands)
Net income	$	14,895	$	48,685
Other comprehensive income (loss):
Foreign currency translation adjustment	15,814		4,424
Cerence Spin-off	—		12,331
Pension adjustments	14		2,007
Unrealized loss on marketable securities	(29)		(32)
Total other comprehensive income, net	15,799		18,730
Comprehensive income	$	30,694	$	67,415

See accompanying notes.

Table of Contents

NUANCE COMMUNICATIONS, INC.

CONSOLIDATED BALANCE SHEETS


	December 31, 2020		September 30, 2020
	(In thousands, except per share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	299,446	$	301,233
Marketable securities	74,862		71,114
Accounts receivable, less allowances for doubtful accounts of $9,305 and $8,649	216,447		175,583
Prepaid expenses and other current assets	157,482		152,563
Current assets, discontinued operations	35,965		35,492
Total current assets	784,202		735,985

Land, building and equipment, net	138,639		137,299
Goodwill	2,131,095		2,120,495
Intangible assets, net	153,424		167,270
Right-of-use assets	101,172		104,839
Other assets	262,464		248,414
Long-term assets, discontinued operations	76,689		79,030
Total assets	$	3,647,685	$	3,593,332
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	1,053,011	$	432,209
Contingent and deferred acquisition payments	4,524		4,224
Accounts payable	81,461		71,833
Accrued expenses and other current liabilities	157,779		199,254
Deferred revenue	273,145		249,484
Current liabilities, discontinued operations	26,160		29,138
Total current liabilities	1,596,080		986,142
Long-term debt	495,977		1,104,464
Deferred revenue, net of current portion	101,632		98,696
Deferred tax liabilities	64,094		70,116
Operating lease liabilities	100,339		103,996
Other liabilities	65,085		64,597
Long-term liabilities, discontinued operations	18,099		21,388
Total liabilities	2,441,306		2,449,399

Commitments and contingencies (Note 15)

Mezzanine Equity	53,343		—

Stockholders’ equity:
Common stock, $0.001 par value per share; 560,000 shares authorized; 288,669 and 286,703 shares issued and 284,918 and 282,952 shares outstanding, respectively	289		287
Additional paid-in capital	1,528,975		1,550,568
Treasury stock, at cost (3,751 shares)	(16,788)		(16,788)
Accumulated other comprehensive loss	(102,119)		(117,918)
Accumulated deficit	(257,321)		(272,216)
Total stockholders’ equity	1,153,036		1,143,933
Total liabilities and stockholders’ equity	$	3,647,685	$	3,593,332

See accompanying notes.

Table of Contents

NUANCE COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the three months ended December 31, 2020


	Common Stock			Additional Paid-In Capital		Treasury Stock			Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders' Equity
	Shares	Amount				Shares	Amount
	(In thousands)
Balance at September 30, 2020	286,703	$	287	$	1,550,568	(3,751)	$	(16,788)	$	(117,918)	$	(272,216)	$	1,143,933
Issuance of common stock under employee stock plans	3,117	3		(3)		—	—		—		—		—
Cancellation of restricted stock, and repurchase of common stock at cost for employee tax withholding	(1,151)	(1)		(43,702)		—	—		—		—		(43,703)
Stock-based compensation	—	—		75,455		—	—		—		—		75,455
Equity portion of convertible debt puttable	—	—		(53,343)		—	—		—		—		(53,343)
Net income	—	—		—		—	—		—		14,895		14,895
Other comprehensive income	—	—		—		—	—		15,799		—		15,799
Balance at December 31, 2020	288,669	$	289	$	1,528,975	(3,751)	$	(16,788)	$	(102,119)	$	(257,321)	$	1,153,036

For the three months ended December 31, 2019


	Common Stock			Additional Paid-In Capital		Treasury Stock			Accumulated Other Comprehensive Loss		Accumulated Deficit		Noncontrolling Interests		Total Stockholders' Equity
	Shares	Amount				Shares	Amount
	(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	5,582	6		50		—	—		—		—		—		56
Cancellation of restricted stock, and repurchase of common stock at cost for employee tax withholding	(1,942)	(2)		(33,127)		—	—		—		—		—		(33,129)
Stock-based compensation	—	—		66,182		—	—		—		—		—		66,182
Repurchase and retirement of common stock	(5,694)	(6)		(92,438)		—	—		—		—		—		(92,444)
Net income	—	—		—		—	—		—		48,685		—		48,685
Other comprehensive income	—	—		—		—	—		6,399		—		—		6,399
Balance at December 31, 2019	287,626	$	288	$	1,615,989	(3,751)	$	(16,788)	$	(114,043)	$	(244,927)	$	—	$	1,240,519

See accompanying notes.

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NUANCE COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Three Months Ended December 31,
	2020		2019
	(In thousands)
Cash flows from operating activities:
Net income from continuing operations	$	6,954	$	43,624
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	7,993		7,793
Amortization	14,793		15,758
Stock-based compensation	34,906		30,402
Non-cash interest expense	12,324		12,744
Deferred tax benefit	(5,435)		(42,900)
Loss on extinguishment of debt	—		15,000
Other	3,028		41
Changes in operating assets and liabilities, excluding effects of acquisitions:
Accounts receivable	(40,023)		(21,164)
Prepaid expenses and other assets	(5,892)		27,414
Accounts payable	11,636		(1,703)
Accrued expenses and other liabilities	(9,480)		(70,017)
Deferred revenue	23,814		27,686
Net cash provided by operating activities - continuing operations	54,618		44,678
Net cash provided by operating activities - discontinued operations	6,570		8,875
Net cash provided by operating activities	61,188		53,553
Cash flows from investing activities:
Capital expenditures	(17,400)		(14,204)

Purchases of marketable securities and other investments	(41,366)		(86,699)
Proceeds from sales and maturities of marketable securities and other investments	37,582		82,588
Payments for business and asset acquisitions, net of cash acquired	(250)		—
Other	(545)		1,272
Net cash used in investing activities	(21,979)		(17,043)
Cash flows from financing activities:
Repurchase and redemption of debt	—		(313,500)
Net distribution from Cerence upon the spin-off	—		139,090
Payments for repurchase of common stock	—		(92,444)



Payments for taxes related to net share settlement of equity awards	(43,729)		(29,958)
Other financing activities	(6)		(725)
Net cash used in financing activities	(43,735)		(297,537)
Effects of exchange rate changes on cash and cash equivalents	2,739		1,524
Net decrease in cash and cash equivalents	(1,787)		(259,503)
Cash and cash equivalents at beginning of period	301,233		560,961
Cash and cash equivalents at end of period	$	299,446	$	301,458

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 as of December 31, 2020: Healthcare, Enterprise, and Other. See Note 17 for a description of each of these segments.

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, 2020. 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.

As more fully described in Note 10, during the first quarter of fiscal year 2021, our common stock price exceeded 130% of the applicable conversion price for each of our convertible debentures for at least 20 trading days during the 30 consecutive trading days ending December 31, 2020. As a result, the holders of our 1.25% 2025 Debentures, 1.5% 2035 Debentures, and 1.0% 2035 Debentures have the right to convert all or any portion of their debentures between January 1, 2021 and March 31, 2021. Additionally, the holders of the 1.5% 2035 Debentures will have the right to redeem the notes in November 2021. All three convertible notes with a total net book value of $1.05 billion were included within current liabilities as of December 31, 2020.

Should any holders elect to convert, the principal amount of the convertible debentures would be payable in cash, and any amount payable in excess of the principal amount would be paid in cash or shares of our common stock at our election. Although the holders of our 1.25% 2025 and 1.5% 2035 Debentures previously had the right to convert their debentures between October 1, 2020 and December 31, 2020 as our common stock price exceeded 130% of the applicable conversion price for these debentures for at least 20 trading days during the 30 consecutive trading days ending September 30, 2020, only one holder of $0.02 million notional amount exercised their conversion right during the fiscal quarter ended December 31, 2020.

Our convertible debentures are actively traded in the open market at a trading price consistently in excess of their conversion values. Therefore, we believe that it is uneconomic, and thus unlikely, for the holders to early exercise their conversion rights. In the event that the holders presented an amount for settlement that exceeded our then available sources of liquidity, we may need to obtain additional financing, which we believe would be available to us based upon our assessment of the prevailing market and business conditions and our experience of successful capital raising activities.

2. Summary of Significant Accounting Policies

Recently Adopted Accounting Standards

Internal-Use Software

In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 became effective for us during the first quarter of fiscal year 2021. 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 is applied retrospectively to each period presented. The implementation did not have a material impact on our condensed consolidated financial statements.

Current Expected Credit Losses

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" which became effective for us during the first quarter of fiscal year 2021. The guidance requires entities to estimate an expected lifetime credit loss on financial assets ranging from short-term trade accounts receivable to long-term financial assets using a forward-looking approach, taking into consideration historical experience, current conditions, and supportable forecasts that impact collectibility. The implementation 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

From time to time, new accounting pronouncements are issued by the FASB and are adopted by us as of the specified effective dates. Unless otherwise discussed, such pronouncements did not have or will not have a significant impact on our consolidated financial position, results of operations or cash flows, or do not apply to our operations.

Convertible Notes

In August 2020, the FASB issued ASU 2020-06, "Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity," which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The new guidance eliminates two of the three models in Accounting Standards Codification ("ASC") 470-202 that require separating embedded conversion features from convertible instruments. As a result, only conversion features accounted for under the substantial premium model in ASC 470-20 and those that require bifurcation in accordance with ASC 815-153 will be accounted for separately. For contracts in an entity’s own equity, the new guidance eliminates some of the requirements in ASC 815-404 for equity classification. The guidance also addresses how convertible instruments are accounted for in the diluted earnings per share calculation and requires enhanced disclosures about the terms of convertible instruments and contracts in an entity’s own equity. The guidance will be effective for annual periods beginning after December 15, 2021, and interim periods therein. Early adoption is permitted for all entities for fiscal periods beginning after December 15, 2020, including interim periods within the same fiscal year. Entities are allowed to adopt the guidance using either the modified or full retrospective approach. We are currently assessing the provisions of the guidance and the impact on our 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.

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 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-based 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).

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

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 December 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	$	110,803	$	54,783	$	33,746	$	199,332	$	88,427	$	91,792	$	33,591	$	213,810
Enterprise	78,741		30,286		30,125		139,152		77,637		31,736		29,011		138,384
Other	6,288		968		13		7,269		7,857		1,487		(29)		9,315
Total revenues	$	195,832	$	86,037	$	63,884	$	345,753	$	173,921	$	125,015	$	62,573	$	361,509

Hardware revenue comprised approximately $6.6 million of total product and license revenue for the three months ended December 31, 2020, and $6.4 million of total product and license revenue for the three months ended December 31, 2019.

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 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 December 31, 2020, we had $27.1 million of current contract acquisition costs from continuing operations and $63.0 million of noncurrent contract acquisition costs from continuing operations. As of September 30, 2020, we had $20.9 million of current contract acquisition costs from continuing operations and $51.6 million of noncurrent contract acquisition costs from continuing operations. Commission expense is primarily included in sales and marketing expense on the consolidated statements of operations. We had amortization expense related to contract acquisition costs from continuing operations of $4.7 million for the three months ended December 31, 2020, and $3.6 million for the three months ended December 31, 2019. 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 stand-up, 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 December 31, 2020, we had $19.0 million of short-term contract costs from continuing operations included with Prepaid expenses and other current assets and $31.9 million of long-term costs from continuing operations included within Other assets. As of September 30, 2020, we had $18.0 million of short-term contract costs from continuing operations included with Prepaid expenses and other current assets and $30.7 million of long-term costs from continuing operations 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 December 31, 2020, we had $48.3 million of current contract assets from continuing operations and $106.1 million of noncurrent contract assets from continuing operations. As of September 30, 2020, we had $48.7 million of current contract assets from continuing operations and $107.4 million of noncurrent contract assets from continuing operations. The table below shows significant changes in contract assets of continuing operations (dollars in thousands):

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	Contract assets
Balance as of September 30, 2020	$	156,142
Revenues recognized but not billed	99,618
Amounts reclassified to accounts receivable	(101,358)
Balance at December 31, 2020	$	154,402

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 December 31, 2020, we had $374.8 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, 2020	$	348,180
Amounts bill but not recognized	213,232
Revenue recognized	(186,635)
Balance at December 31, 2020	$	374,777

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 December 31, 2020 (dollars in thousands):


	Within One Year		Two to Four Years		Greater than Four Years		Total
Total revenue	$	714,055	$	952,108	$	38,966	$	1,705,129

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

Disposition of Our Medical Transcription and EHR Go-live businesses

On November 17, 2020, we entered into a definitive agreement (the “Agreement”) to sell our medical transcription and electronic healthcare record ("EHR") go-live businesses (the "Business") to Assured Healthcare Partners and Aeries Technology Group (together, the “Buyer”). Pursuant to the Agreement, we will sell and transfer, and the Buyer will purchase and acquire, (a) the shares of certain subsidiaries through which we operate a portion of the Business and (b) certain assets used in or related to the Business; and the Buyer will assume certain liabilities related to such assets or the Business, subject to certain exclusions and indemnities as set forth in the Agreement. We expect the sale to close during the second quarter of fiscal year 2021.

The Business met the held-for-sale criteria as of December 31, 2020. As a result, effective the first quarter of fiscal year 2021, the results of operations of the Business have been included within discontinued operations and its assets and liabilities within held for sale on our condensed consolidated financial statements for all periods presented.

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.

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the three months ended December 31, 2019, 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.

The historical results of operations of 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 December 31,
	2020		2019
	Medical Transcription and EHR go-live		Medical Transcription and EHR go-live		Automotive		Total
Major line items constituting net income (loss) of discontinued operations:
Revenue	$	47,650	$	56,724	$	—	$	56,724
Cost of revenue	29,152		34,683		—		34,683
Research and development	1,298		1,948		—		1,948
Sales and marketing	908		696		—		696
General and administrative	12		(20)		—		(20)
Amortization of intangible assets	2,444		3,360		—		3,360
Acquisition-related costs, net	—		(53)		—		(53)
Restructuring and other charges, net	4,438		—		7,386		7,386

Income (loss) from discontinued operations before income taxes	9,398		16,110		(7,386)		8,724
Provision (benefit) for income taxes	1,457		4,857		(1,194)		3,663

Net income (loss) from discontinued operations	$	7,941	$	11,253	$	(6,192)	$	5,061

Supplemental information:
Depreciation	$	1,063	$	1,601	$	—	$	1,601
Amortization	$	2,444	$	3,418	$	—	$	3,418
Stock compensation	$	287	$	831	$	—	$	831
Capital expenditures	$	57	$	21	$	—	$	21

The following table summarizes the assets and liabilities of our Medical Transcription and EHR Implementation Businesses included within discontinued operations. (dollars in thousands):


	December 31, 2020		September 30, 2020
Major classes of assets of discontinued operations:
Accounts receivable, net	$	25,328	$	24,993
Prepaid expenses and other current assets	10,637		10,499
Land, building and equipment, net	6,295		6,129
Goodwill	13,722		13,217
Intangible assets, net	43,770		46,214
Right-of-use assets	5,189		5,437
Other noncurrent assets	7,713		8,033
Total assets	$	112,654	$	114,522

Major classes of liabilities of discontinued operations:
Accounts payable	$	3,247	$	3,289
Accrued expenses and other current liabilities	12,286		14,010
Deferred revenue	14,433		17,452
Operating lease liabilities	3,231		3,625
Other noncurrent liabilities	11,062		12,150
Total liabilities	$	44,259	$	50,526

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

We made an accounting policy election to exclude deferred taxes from the held-for-sale balance sheet. As of December 31, 2020, the Business held for sale had a net deferred tax liability of approximately $50.0 million.

5. Goodwill and Intangible Assets

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

Goodwill


	Healthcare		Enterprise		Other		Total
Balance as of September 30, 2020	$	1,424,959	$	682,600	$	12,936	$	2,120,495
Purchase accounting adjustments	—		—		—		—
Effect of foreign currency translation	3,902		6,369		329		10,600
Balance at December 31, 2020	$	1,428,861	$	688,969	$	13,265	$	2,131,095

Other Intangible Assets

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


	Intangible Assets
Balance at September 30, 2020	$	167,270

Amortization	(14,793)
Effect of foreign currency translation	947
Balance at December 31, 2020	$	153,424

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 December 31, 2020 and September 30, 2020, we had outstanding contracts with a total notional value of $24.3 million and $40.7 million, respectively.

We did not designate any forward contracts as hedging instruments for the three months ended December 31, 2020 or 2019. Therefore, changes in fair value of foreign currency forward contracts were recognized within Other income (expense), net in our condensed 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
		December 31, 2020		September 30, 2020
Foreign currency forward contracts	Prepaid expenses and other current assets	$	139	$	109
Foreign currency forward contracts	Accrued expenses and other current liabilities	$	(124)	$	(92)

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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


	Income Statement Classification	Three Months Ended December 31,
Derivatives Not Designated as Hedges	(Loss) Income Recognized	2020		2019
Foreign currency forward contracts	Other (expense) income, net	$	(548)	$	585

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 December 31, 2020 and September 30, 2020 consisted of the following (dollars in thousands):


	December 31, 2020
	Level 1		Level 2		Level 3		Total
Assets:
Money market funds (a)	$	161,056	$	—	$	—	$	161,056
Time deposits (b)	—		57,425		—		57,425
Commercial paper, $54,502 at cost (b)	—		54,545		—		54,545
Corporate notes and bonds, $10,742 at cost (b)	—		10,743		—		10,743
Foreign currency exchange contracts (b)	—		139		—		139
Total assets at fair value	$	161,056	$	122,852	$	—	$	283,908
Liabilities:
Foreign currency exchange contracts (b)	$	—	(124)		$	—	$	(124)
Contingent acquisition payments (c)	—		—		(1,847)		(1,847)
Total liabilities at fair value	$	—	$	(124)	$	(1,847)	$	(1,971)


	September 30, 2020
	Level 1		Level 2		Level 3		Total
Assets:
Money market funds (a)	$	182,645	$	—	$	—	$	182,645
Time deposits (b)	—		95,180		—		95,180
Commercial paper, $33,265 at cost (b)	—		33,290		—		33,290
Corporate notes and bonds, $15,460 at cost (b)	—		15,480		—		15,480
Foreign currency exchange contracts (b)	—		109		—		109
Total assets at fair value	$	182,645	$	144,059	$	—	$	326,704
Liabilities:
Foreign currency exchange contracts (b)	$	—	$	(92)	$	—	$	(92)
Contingent acquisition payments (c)	—		—		(1,796)		(1,796)
Total liabilities at fair value	$	—	$	(92)	$	(1,796)	$	(1,888)

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(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 0.41 years as of December 31, 2020 and 0.31 years as of September 30, 2020.

(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 $2,875.4 million (face value $1,666.5 million) as of December 31, 2020 and $2,355.5 million (face value $1,666.5 million) as of September 30, 2020 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 December 31, 2020 or September 30, 2020.

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 December 31,
	2020		2019
Balance at beginning of period	$	1,796	$	2,550
Payments and foreign currency translation	51		(57)

Balance at end of period	$	1,847	$	2,493

Contingent acquisition payments are to be made in periods through fiscal year 2021. As of December 31, 2020, the maximum amount payable based on the agreements was $3.0 million if the specified performance targets are achieved.

8. Accrued Expenses and Other Current Liabilities

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


	December 31, 2020		September 30, 2020
Compensation	$	74,403	$	110,827
Cost of revenue related liabilities	22,145		25,434
Accrued interest payable	3,087		13,484
Consulting and professional fees	11,305		10,589
Sales and marketing incentives	1,537		2,021
Sales and other taxes payable	6,685		6,339
Operating lease obligations	26,108		26,284
Other	12,509		4,276
Total	$	157,779	$	199,254

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 three months ended December 31, 2020 (dollars in thousands):

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	Personnel		Facilities		Total
Balance at September 30, 2020	$	1,243	$	15,614	$	16,857
Restructuring charges, net	4,789		3,071		7,860
Non-cash adjustment	(839)		(1,374)		(2,213)
Cash payments	(3,126)		(1,242)		(4,368)
Balance at December 31, 2020	$	2,067	$	16,069	$	18,136

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 December 31,
	2020										2019
	Personnel		Facilities		Total Restructuring		Other Charges		Total		Personnel		Facilities		Total Restructuring		Other Charges		Total
Healthcare	$	2,632	$	567	$	3,199	$	—	$	3,199	$	1,276	$	1,527	$	2,803	$	—	$	2,803
Enterprise	1,182		2,472		3,654		—		3,654		1,304		505		1,809		—		1,809
Other	—		29		29		—		29		—		(365)		(365)		—		(365)
Corporate	975		3		978		706		1,684		333		(532)		(199)		2,635		2,436
Total	$	4,789	$	3,071	$	7,860	$	706	$	8,566	$	2,913	$	1,135	$	4,048	$	2,635	$	6,683

Fiscal Year 2021

For the three months ended December 31, 2020, we recorded restructuring charges of $7.9 million, which included $4.8 million related to the termination of approximately 57 employees and a $3.1 million charge related to closing certain idle facilities. These actions were part of our strategic initiatives focused on investment rationalization, process optimization and cost reduction as we continue to evaluate the geographic footprint of our offices and facilities. We expect the remaining outstanding severance of $2.1 million to be substantially paid during fiscal year 2021, and the remaining $16.1 million of lease payments to be made through fiscal year 2027, in accordance with the terms of the applicable leases. Additionally, for the three months ended December 31, 2020, we recorded $0.7 million professional services expenses related to other corporate initiatives.

Fiscal Year 2020

For the three months ended December 31, 2019, we recorded restructuring charges of $4.0 million, which included $2.9 million related to the termination of approximately 37 employees and $1.1 million related to closing certain restructuring facilities. These actions were part of our strategic initiatives focused on investment rationalization, process optimization and cost reduction. Additionally, for the three months ended December 31, 2019, we recorded $2.8 million costs related to the separation of our Automotive business, which was offset in part by a $0.2 million cash receipt from insurance claims.

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

10. Debt

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


	December 31, 2020		September 30, 2020
5.625% Senior Notes due 2026, net of deferred issuance costs of $3.7 million and $3.9 million, respectively. Effective interest rate 5.625%.	$	496,302	$	496,148
1.000% Convertible Debentures due 2035, net of unamortized discount of $57.9 million and $64.8 million, respectively, and deferred issuance costs of $2.6 million and $2.9 million, respectively. Effective interest rate 5.622%.	616,037		608,767
1.250% Convertible Debentures due 2025, net of unamortized discount of $42.9 million and $45.2 million, respectively, and deferred issuance costs of $1.8 million and $1.9 million, respectively. Effective interest rate 5.578%.	217,910		215,582
1.500% Convertible Debentures due 2035, net of unamortized discount of $8.1 million and $10.4 million, respectively, and deferred issuance costs of $0.3 million and $0.3 million, respectively. Effective interest rate 5.394%.	219,064		216,627
Deferred issuance costs related to our Revolving Credit Facility	(325)		(451)
Total debt	1,548,988		1,536,673
Less: current portion (a)	(1,053,011)		(432,209)
Total long-term debt	$	495,977	$	1,104,464

(a) As of December 31, 2020, the holders have the right to convert all or any portion of the 1.25% 2025 Debentures, 1.5% 2035 Debentures, and 1.0% 2035 Debentures between January 1, 2021 and March 31, 2021. Additionally, the holders of the 1.5% 2035 Debentures will have the right to redeem the notes in November 2021. As a result, the net carrying amounts of the convertible debentures were included in current liabilities as of December 31, 2020.

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


Fiscal Year	Convertible Debentures (a)		Senior Notes		Total
2021	$	1,166,539	$	—	$	1,166,539
2022	—		—		—
2023	—		—		—
2024	—		—		—
2025	—		—		—
Thereafter	—		500,000		500,000
Total before unamortized discount	1,166,539		500,000		1,666,539
Less: unamortized discount and issuance costs	(113,528)		(4,023)		(117,551)
Total debt	$	1,053,011	$	495,977	$	1,548,988

(a) As more fully described below, as of December 31, 2020, the holders have the right to convert all or any portion of the 1.25% 2025 Debentures, 1.5% 2035 Debentures, and 1.0% 2035 Debentures between January 1, 2021 and March 31, 2021. Additionally, the holders of the 1.5% 2035 Debentures will have the right to redeem the notes in November 2021. As a result, these convertible debentures were treated as if they were due in fiscal year 2021.

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 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

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

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.

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 be paid in cash or shares of our common stock, at our election. The conversion of the 1.0% 2035 Debentures will be based upon a conversion ratio of 41.4576 common shares per $1,000 principal amount, subject to adjustments. 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

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

The 1.0% 2035 Debentures were convertible as of December 31, 2020, as our common stock price exceeded the conversion threshold price of 130% of the applicable conversion price per share for at least 20 trading days during the 30 consecutive trading days ending December 31, 2020. As a result, the holders of our 1.0% 2035 Debentures have the right to convert all or any portion of their debentures between January 1, 2021 and March 31, 2021. As of December 31, 2020, the net carrying amount of the 1.0% 2035 Debentures was included within the current portion of long-term debt. As of December 31, 2020, the if-converted value of the 1.0% 2035 Debentures exceeded its principal amount by $560.0 million.

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 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 be paid in cash or shares of our common stock, at our election. The conversion of the 1.25% 2025 Debentures will be based upon a conversion ratio of 50.7957 common shares per $1,000 principal amount, subject to adjustments. 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.

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 of unamortized discount and $0.7 million of 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 remains outstanding.

The 1.25% 2025 Debentures were convertible as of December 31, 2020, as our common stock price exceeded the conversion threshold price of 130% of the applicable conversion price per share for at least 20 trading days during the 30 consecutive trading days ending December 31, 2020. As a result, the holders of our 1.25% 2025 Debentures have the right to convert all or any portion of their debentures between January 1, 2021 and March 31, 2021. The holders previously had the right to convert

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

all or any portion of their debentures at the aforementioned conversion ratio beginning October 1, 2020 through December 31, 2020. As of December 31, 2020, the net carrying amount of the 1.25% 2025 Debentures was included within the current portion of long-term debt, and $44.7 million has been reclassified from permanent equity to mezzanine equity. As of December 31, 2020, the if-converted value of the 1.25% 2025 Debentures exceeded its principal amount by $325.6 million.

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.

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 be paid in cash or shares of our common stock, at our election. The conversion of the 1.5% 2035 Debentures will be based upon a conversion ratio of 48.5216 common shares per $1,000 principal amount, subject to adjustments. 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.

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 of unamortized discount and $0.1 million of 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 remains outstanding.

The 1.5% 2035 Debentures were convertible as of December 31, 2020, as our common stock price exceeded the conversion threshold price of 130% of the applicable conversion price per share for at least 20 trading days during the 30 consecutive trading days ending December 31, 2020. As a result, the holders of our 1.5% 2035 Debentures have the right to convert all or any portion of their debentures between January 1, 2021 and March 31, 2021. The holders previously had the right to convert all or any portion of their debentures at the aforementioned conversion ratio beginning October 1, 2020 through December 31,

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2020. As of December 31, 2020, the net carrying amount of the 1.5% 2035 Debentures was included within the current portion of long-term debt, and $8.6 million has been reclassified from permanent equity to mezzanine equity. As of December 31, 2020, the if-converted value of the 1.5% 2035 Debentures exceeded its principal amount by $259.1 million.

Revolving Credit Facility

On July 31, 2020, we amended our revolving credit agreement (the "Amended Revolving Credit Agreement") to, among other things, extend the expiration from April 15, 2021 to April 15, 2022. The Amended Revolving Credit Agreement 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 December 31, 2020.

As of December 31, 2020, after taking into account the outstanding letters of credit of $2.2 million, we had $240.3 million available for borrowing under the Revolving Credit Facility.

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 are subject to our assessment of the prevailing market conditions, general economic conditions, capital allocation alternatives, and other factors.

We did not repurchase any shares of our common stock for the three months ended December 31, 2020, and we repurchased 5.7 million shares of our common stock for $92.4 million for the three months ended December 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 73.8 million shares for $1,238.8 million. As of December 31, 2020, approximately $261.2 million remained available for future repurchases under the program.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

12. Net Income Per Share

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


	Three Months Ended December 31,
	2020		2019
Numerator:
Net income from continuing operations	$	6,954	$	43,624
Net income from discontinued operations	7,941		5,061
Net income	$	14,895	$	48,685

Denominator:
Weighted average common shares outstanding — basic	283,818		284,130
Dilutive effect of convertible instruments	21,636		—
Dilutive effect of employee stock compensation plans(a)	8,756		5,323
Weighted average common shares outstanding — diluted	314,210		289,453

Net income per common share - basic:
Continuing operations	$	0.02	$	0.15
Discontinued operations	0.03		0.02
Total net income per basic common share	$	0.05	$	0.17

Net income per common share - diluted:
Continuing operations	$	0.02	$	0.15
Discontinued operations	0.03		0.02
Total net income per diluted common share	$	0.05	$	0.17

Anti-dilutive equity instruments excluded from the calculation	580		1,336
Contingently issuable awards excluded from the calculation	—		2,932

(a)Certain performance-based awards were excluded from the determination of dilutive net income per share as the conditions were not met at the end of the reporting period.

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 December 31, 2020, we had 11.3 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.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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


	Three Months Ended December 31,
	2020		2019
Cost of hosting and professional services	$	6,563	$	4,977
Cost of product and licensing	75		129
Cost of maintenance and support	426		393
Research and development	8,440		8,440
Sales and marketing	8,943		7,025
General and administrative	10,459		9,438
Total	$	34,906	$	30,402

Stock Options

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


	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value (a)
Outstanding at September 30, 2020	9,355	$	17.18
Outstanding at December 31, 2020	9,355	$	17.18	1.3 years	$	0.3	million
Exercisable at December 31, 2020	9,355	$	17.18	1.3 years	$	0.3	million
Exercisable at December 31, 2019	9,978	$	17.18	2.3 years	$	—	million

(a)The aggregate intrinsic value in this table represents any excess of the closing market price of our common stock as of December 31, 2020 ($44.09) over the exercise price of the underlying options.

The aggregate intrinsic values of stock options exercised during the three months ended December 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 three months ended December 31, 2020:


	Number of Shares Underlying Restricted Units — Performance-Based Awards	Number of Shares Underlying Restricted Units — Time-Based Awards
Outstanding at September 30, 2020	2,620,120	7,157,649
Granted	665,977	1,905,186
Earned/released	(301,870)	(2,814,891)
Forfeited	(97,668)	(175,998)
Outstanding at December 31, 2020	2,886,559	6,071,946
Weighted average remaining recognition period of outstanding Restricted Units	1.5 years	1.8 years
Unrecognized stock-based compensation expense of outstanding Restricted Units	$30.3 million	$81.9 million
Aggregate intrinsic value of outstanding Restricted Units (a)	$127.3 million	$267.7 million

(a)The aggregate intrinsic value in this table represents any excess of the closing market price of our common stock as of December 31, 2020 ($44.09) over the purchase price of the underlying restricted units.

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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:


	Three Months Ended December 31,
	2020		2019
Weighted-average grant-date fair value per share	$	37.26	$	17.08
Total intrinsic value of shares vested (in millions)	$	119.4	$	95.4

Performance-based restricted units outstanding as of December 31, 2020 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 as determined using a Monte Carlo simulation model. Below is a summary of key assumptions of the valuation:


	Three Months Ended December 31,
	2021		2020
Dividend yield	0.0	%	0.0	%
Expected volatility	34.95	%	27.73	%
Risk-free interest rate	0.21	%	1.62	%
Expected term (in years)	3		3

14. Income Taxes

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


	Three Months Ended December 31,
	2020		2019
Domestic	$	(4,995)	$	(3,422)
Foreign	14,252		5,749
Income before income taxes	$	9,257	$	2,327

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


	Three Months Ended December 31,
	2020			2019
Domestic	$	(2,892)		$	(43,145)
Foreign	5,195			1,848
Provision (benefit) for income taxes	$	2,303		$	(41,297)
Effective tax rate	24.9		%	(1,774.7)		%

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 and as necessary, and adjustments, if any, for the potential tax consequences of resolving audits or other tax contingencies. Our effective income tax rate may vary based on the geographic mix of our income.

Our effective income tax rate was 24.9% for the three months ended December 31, 2020, compared to (1,774.7)% for the three months ended December 31, 2019. The effective tax rate for the three months ended December 31, 2020 differed from the U.S. federal statutory rate of 21.0% primarily due to the base erosion anti-abuse tax offset by a change in the valuation allowance in the United States. The effective tax rate for the three months ended December 31, 2019 differed from the U.S. federal statutory rate of 21.0% primarily due to a net tax benefit related an adjustment to domestic valuation allowance in connection with the Cerence spin-off.

We have made a policy election to classify the deferred tax assets and liabilities associated with assets and liabilities held for sale (including those of our medical transcription and EHR go-live businesses) with other deferred tax assets and liabilities. As a result, the deferred tax assets included in Other Assets as of December 31, 2020 include deferred tax liabilities of approximately $50.0 million associated with our medical transcription business.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Valuation Allowances

As of December 31, 2020 and September 30, 2020, we had a full valuation allowance against net domestic deferred tax assets and certain foreign deferred tax assets. We intend to maintain valuation allowances on these deferred tax assets until there is sufficient evidence to support the release of all or some portion of these allowances. A significant portion of our domestic deferred tax assets relate to U.S. net operating losses. Cumulative pretax losses have historically represented significant negative evidence of our ability to realize our domestic deferred tax assets. We continue to evaluate all sources of domestic taxable income including both the reversal of existing deferred tax liabilities and the likelihood that we could sustain pretax profitability in the future. As of December 31, 2020, we believe that there is a reasonable possibility that within the next twelve months these sources of taxable income may become sufficient positive evidence to support a conclusion that a substantial portion of the domestic valuation allowance, excluding capital losses, could be released.

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 December 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.

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.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 December 31, 2020, our operating leases had a weighted average remaining lease term of 4.8 years and a weighted average discount rate of 3.8%.

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


Fiscal Year	Operating Leases		Operating leases under restructuring		Total
2021	$	18,945	$	3,171	$	22,116
2022	21,671		3,828		25,499
2023	16,494		3,440		19,934
2024	14,110		1,996		16,106
2025	12,360		1,346		13,706
Thereafter	41,524		1,843		43,367
Total	$	125,104	$	15,624	$	140,728

As of December 31, 2020, we have subleased certain office space that is included in the above table to third parties. As of December 31, 2020, the aggregate sublease income to be recognized during the remaining lease terms is $11.1 million, with approximately an average of $1.8 million annually for each of the next five fiscal years and approximately $2.1 million thereafter.

Our operating lease cost was approximately $7.2 million for the three months ended December 31, 2020 and $7.8 million for the three months ended December 31, 2019. Operating lease payments included within operating cash flows were $7.7 million for the three months ended December 31, 2020 and $7.6 million for the three months ended December 31, 2019.

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 income (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.

•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 consists primarily of voicemail transcription services.

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As more fully described in Note 4, on November 17, 2020, we entered into a definitive agreement to sell our medical transcription and EHR go-live businesses. Effective the first quarter of fiscal year 2021, the results of operations of our medical transcription and EHR go-live businesses are included within discontinued operations for all periods presented. Our Healthcare segment revenue and segment profit for the historical periods have been recast to reflect the forementioned change.

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 before income taxes (dollars in thousands):


	Three Months Ended December 31,
	2020		2019
Segment revenues:
Healthcare	$	199,332	$	213,810
Enterprise	139,152		138,473
Other	7,269		9,315
Total segment revenues	$	345,753	$	361,598
Less: acquisition-related revenues adjustments	—		(89)
Total revenues	$	345,753	$	361,509
Segment profit:
Healthcare	$	74,812	$	73,714
Enterprise	41,468		41,767
Other	4,971		5,115
Total segment profit	$	121,251	$	120,596
Corporate expenses and other, net	(31,115)		(30,448)
Acquisition-related revenues	—		(89)
Stock-based compensation	(34,906)		(30,402)
Amortization of intangible assets	(14,793)		(15,758)
Acquisition-related costs, net	(325)		(1,220)
Restructuring and other charges, net	(8,566)		(6,683)
Other expenses, net	(22,289)		(33,669)
Income before income taxes	$	9,257	$	2,327

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 December 31,
	2020		2019
United States	$	272,598	$	297,375
International	73,155		64,134
Total revenues	$	345,753	$	361,509

18. Supplemental Cash Flow Information

Cash paid for Interest and Income Taxes:


	Three Months Ended December 31,
	2020		2019
	(Dollars in thousands)
Interest paid	$	21,087	$	26,692
Income taxes paid	$	2,738	$	1,615

19. Subsequent Events

On January 28, 2021, we completed an acquisition within our Healthcare segment of Saykara, Inc., a developer of a mobile AI assistant technology focused on automation of clinical documentation for physicians. We are in the process of allocating the

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

purchase consideration to the fair values of assets and liabilities acquired, and do not expect the acquisition to have a material impact on our condensed consolidated financial statements.

On February 4, 2021, we entered into a new revolving credit agreement (the "New Revolving Credit Agreement"), which replaced the existing Amended Revolving Credit Agreement. The New Revolving Credit Agreement extends the expiration to February 4, 2026, and increases the aggregate borrowing commitments from $242.5 million to $300.0 million, including revolving loans and letters of credit (the "New Revolving Credit Facility"). The New 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 New Revolving Credit Facility is secured by substantially all our assets and substantially all assets of certain of our domestic subsidiaries that guarantee our obligations under the New Revolving Credit Agreement. The New Revolving Credit Agreement contains customary affirmative and negative covenants and conditions to borrowing, as well as customary events of default. Among other things, we are required to maintain a Consolidated Senior Secured Leverage Ratio (as defined in the New Revolving Credit Agreement) not exceeding 4.00 to 1.00.

20. COVID-19 Pandemic

The novel coronavirus ("COVID-19") pandemic has disrupted economic markets, and the future economic impact, duration and spread of COVID-19 is still uncertain at this time. The COVID-19 pandemic adversely affected our results of operations and liquidity for fiscal year 2020, and may continue to adversely impact our business, results of operations, cash flows and financial condition. 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.

The full extent to which the coronavirus pandemic will impact our business, operations, and financial results in the future will depend on numerous evolving factors and may not be accurately predicted at this time.

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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, natural language understanding, 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 care teams and health organizations drive meaningful financial and clinical outcomes. Our principal solutions include dragon medical cloud-based

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solutions ("Dragon Medical One"), computer assisted physician documentation, diagnostic imaging solutions, Nuance® Dragon Ambient eXperience™ ("DAX"), clinical documentation improvement and coding.

•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 solutions, intelligent engagement solutions and security & biometric solutions.

•Other. Our Other segment currently consists primarily of voicemail transcription services.

•Discontinued Operations. In connection with our ongoing comprehensive portfolio and business review, during the first quarter of 2021, we announced our strategic plan to sell our medical transcription and EHR go-live businesses to Assured Healthcare Partners and Aeries Technology Group. Effective the first quarter of fiscal year 2021, the results of operations of our medical transcription and EHR go-live businesses are included within discontinued operations for all periods presented.

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 three months ended December 31, 2020, as compared to the three months ended December 31, 2019, is as follows:

•Total revenues were $345.8 million for the three months ended December 31, 2020, as compared to $361.5 million for the three months ended December 31, 2019;

•Net income from continuing operations for the three months ended December 31, 2020 was $7.0 million, compared to net income from continuing operations of $43.6 million for the three months ended December 31, 2019;

•Gross margins for the three months ended December 31, 2020 were 61.9%, compared to 58.6% for the three months ended December 31, 2019;

•Operating margins for the three months ended December 31, 2020 were 9.1%, compared to 10.0% for three months ended December 31, 2019; and

•Operating cash flows from continuing operations increased by $9.9 million to $54.6 million for the three months ended December 31, 2020, compared to $44.7 million for the three months ended December 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 December 31,				Dollar Change		Percent Change
	2020		2019
Hosting and professional services	$	195.8	$	173.9	$	21.9	12.6	%
Product and licensing	86.0		125.0		(39.0)		(31.2)	%
Maintenance and support	63.9		62.6		1.3		2.1	%
Total revenues	$	345.8	$	361.5	$	(15.8)	(4.4)	%

United States	$	272.6	$	297.4	$	(24.8)	(8.3)	%
International	73.2		64.1		9.0		14.1	%
Total revenues	$	345.8	$	361.5	$	(15.8)	(4.4)	%

The geographic split was 79% of total revenues in the United States and 21% internationally for the three months ended December 31, 2020, as compared to 82% of total revenues in the United States and 18% internationally for the three months ended December 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 December 31,						Dollar Change		Percent Change
	2020			2019
Hosting revenue	$	167.3		$	146.4		$	21.0	14.3	%
Professional services revenue	28.5			27.6			0.9		3.4	%
Hosting and professional services revenue	$	195.8		$	173.9		$	21.9	12.6	%
As a percentage of total revenue	56.6		%	48.1		%

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

Hosting revenue for the three months ended December 31, 2020 increased by $21.0 million, or 14.3%, primarily due to a $22.6 million increase in Healthcare. Healthcare hosting revenue increased primarily due to the growth in our Dragon Medical Cloud solutions and our continued transition from a license model to a cloud based model. As a percentage of total revenue, hosting revenue increased from 40.5% to 48.4% for the three months ended December 31, 2020.

Professional services revenue for the three months ended December 31, 2020 increased by $0.9 million, or 3.4%, primarily due to the increase in professional services related to security and biometrics suite of products. As a percentage of total revenue, professional services revenue increased from 7.6% to 8.2% for the three months ended December 31, 2020.

Product and Licensing Revenue

Product and licensing revenue primarily consist 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 December 31,						Dollar Change		Percent Change
	2020			2019
Product and licensing revenue	$	86.0		$	125.0		$	(39.0)	(31.2)	%
As a percentage of total revenue	24.9		%	34.6		%

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

Product and licensing revenue for the three months ended December 31, 2020 decreased by $39.0 million, or 31.2%, primarily due to a $37.0 million decrease in Healthcare. Healthcare product and licensing revenue decreased primarily due to a decrease related to a non-strategic legacy term license contract. Also contributing to the decrease is the continued transition from a license model to a cloud based model within our Healthcare segment. As a percentage of total revenue, product and licensing revenue decreased from 34.6% to 24.9% for the three months ended December 31, 2020.

Maintenance and Support Revenue

Maintenance and support revenue primarily consist 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 December 31,						Dollar Change		Percent Change
	2020			2019
Maintenance and support revenue	$	63.9		$	62.6		$	1.3	2.1	%
As a percentage of total revenue	18.5		%	17.3		%

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

Maintenance and support revenue for the three months ended December 31, 2020 increased by $1.3 million, or 2.1%, primarily due to a $1.1 million increase in Enterprise. Enterprise maintenance and support revenue increased primarily driven by the

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volume growth in digital engagement and security biometrics license transactions. As a percentage of total revenue, maintenance and support revenue increased from 17.3% to 18.5% for the three months ended December 31, 2020.

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 December 31,						Dollar Change		Percent Change
	2020			2019
Cost of hosting and professional services revenue	$	105.6		$	101.3		$	4.3	4.2	%
As a percentage of professional services and hosting revenue	53.9		%	58.3		%

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

Cost of hosting and professional services revenue for the three months ended December 31, 2020 increased by $4.3 million, or 4.2%, primarily driven by increased employee headcount to support the continued growth and expansion of our cloud-based solutions. Gross margin increased by 4.3 percentage points primarily due to the growth in Dragon Medical cloud-based solution, which is margin accretive.

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 December 31,						Dollar Change		Percent Change
	2020			2019
Cost of product and licensing revenue	$	14.4		$	33.9		$	(19.5)	(57.5)	%
As a percentage of product and licensing revenue	16.8		%	27.2		%

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

Cost of product and licensing revenue for the three months ended December 31, 2020 decreased by $19.5 million, or 57.5%. Gross margin increased by 10.4 percentage points year-over-year. The decrease in cost and increase in gross margin were primarily due to higher royalty costs related to a legacy term license transaction in Healthcare for the first quarter of fiscal year 2020.

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 December 31,						Dollar Change		Percent Change
	2020			2019
Cost of maintenance and support revenue	$	7.5		$	7.9		$	(0.4)	(4.8)	%
As a percentage of maintenance and support revenue	11.7		%	12.6		%

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

Cost of maintenance and support revenue for the three months ended December 31, 2020 decreased by $0.4 million, or 4.8%, primarily due to the continued transition from license transactions with maintenance and support to cloud-based solutions in Healthcare. Gross margins increased by 0.8 percentage points primarily driven by higher margin on Dragon Medical maintenance and support services in Healthcare.

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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 December 31,						Dollar Change		Percent Change
	2020			2019
Research and development expense	$	56.5		$	54.6		$	1.9	3.4	%
As a percentage of total revenue	16.3		%	15.1		%

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

R&D expense increased by $1.9 million, or 3.4%, primarily due to a higher employee headcount as we continued to invest in our core technologies to power new products and solutions.

Sales and Marketing Expense

Sales and marketing expense include 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 December 31,						Dollar Change		Percent Change
	2020			2019
Sales and marketing expense	$	65.4		$	65.8		$	(0.4)	(0.6)	%
As a percentage of total revenue	18.9		%	18.2		%

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

Sales and marketing expense for the three months ended December 31, 2020 decreased by $0.4 million, or 0.6%, primarily due to lower traveling and entertainment expenses, mostly offset by our investment in sales force to support new products and solutions.

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 December 31,						Dollar Change		Percent Change
	2020			2019
General and administrative expense	$	41.1		$	38.3		$	2.8	7.3	%
As a percentage of total revenue	11.9		%	10.6		%

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

G&A expense increased by $2.8 million, or 7.3%, primarily driven by increases in compensation costs, offset in part by lower traveling and entertainment expenses.

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):

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	Three Months Ended December 31,				Dollar Change		Percent Change
	2020		2019
Cost of revenue	$	4.3	$	6.6	$	(2.3)	(35.1)	%
Operating expenses	10.5		9.2		1.3		14.6	%
Total amortization expense	$	14.8	$	15.8	$	(1.0)	(6.1)	%

The decreases in total amortization of intangible assets for the three months ended December 31, 2020, as compared to the prior year periods, as certain intangible assets became fully amortized or written off during fiscal year 2020.

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 December 31,				Dollar Change		Percent Change
	2020		2019
Transition and integration costs	$	0.1	$	1.5	$	(1.4)	(95.1)	%
Professional service fees	0.3		(0.2)		0.5		(208.6)	%

Total Acquisition-related costs, net	$	0.3	$	1.2	$	(0.9)	(73.4)	%

The decrease in acquisition-related cost, net for the three months ended December 31, 2020 was primarily due to overall reduced acquisition and integration activities as we focus on portfolio optimization and organizational simplification.

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 December 31,
	2020										2019
	Personnel		Facilities		Total Restructuring		Other Charges		Total		Personnel		Facilities		Total Restructuring		Other Charges		Total
Healthcare	$	2,632	$	567	$	3,199	$	—	$	3,199	$	1,276	$	1,527	$	2,803	$	—	$	2,803
Enterprise	1,182		2,472		3,654		—		3,654		1,304		505		1,809		—		1,809
Other	—		29		29		—		29		—		(365)		(365)		—		(365)
Corporate	975		3		978		706		1,684		333		(532)		(199)		2,635		2,436
Total	$	4,789	$	3,071	$	7,860	$	706	$	8,566	$	2,913	$	1,135	$	4,048	$	2,635	$	6,683

Fiscal Year 2021

For the three months ended December 31, 2020, we recorded restructuring charges of $7.9 million, which included $4.8 million related to the termination of approximately 57 employees and $3.1 million charge related to closing certain idle facilities. These actions were part of our strategic initiatives focused on investment rationalization, process optimization and cost reduction as we continue to evaluate the geographic footprint of our offices and facilities. We expect the remaining outstanding severance of $2.1 million to be substantially paid during fiscal year 2021, and the remaining $16.1 million lease payments to be made through fiscal year 2027, in accordance with the terms of the applicable leases. Additionally, for the three months ended December 31, 2020, we recorded $0.7 million professional services expenses related to other corporate initiatives.

Fiscal Year 2020

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Additionally, for the three months ended December 31, 2019, we recorded $2.8 million costs related to the separation of our Automotive business, which was offset in part by a $0.2 million cash receipt from insurance claims.

Other Income (Expense), Net

A summary is as follows (dollars in millions):


	Three Months Ended December 31,				Dollar Change		Percent Change
	2020		2019
Interest income	$	0.2	$	2.2	$	(2.0)	(89.6)	%
Interest expense	(23.0)		(23.8)		0.8		(3.4)	%
Other income, net	0.5		(12.0)		12.5		(104.1)	%
Total other expense, net	$	(22.3)	$	(33.7)	$	11.4	(33.8)	%

Interest income for the three months ended December 31, 2020 decreased primarily due to lower yields and decreases in cash and marketable securities for the current year period.

Interest expense for the three months ended December 31, 2020 decreased as we repaid $300.0 million of the 2024 Senior Notes in October 2019. We also repurchased $123.8 million notional amounts of the 1.25% and 1.5% Convertible Debentures during the second quarter of fiscal year 2020.

Other income, net for the three months ended December 31, 2020 decreased primarily due to losses on redemption and repurchases of debt in the first quarter of fiscal year 2020.

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 December 31,						Dollar Change		Percent Change
	2020			2019
Provision (benefit) for income taxes	$	2.3		$	(41.3)		$	43.6	(105.6)	%
Effective income tax rate	24.9		%	(1,774.7)		%

Valuation Allowances

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SEGMENT ANALYSIS

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


	Three Months Ended December 31,						Dollar Change		Percent Change
	2020			2019
Segment Revenues (a):
Healthcare	$	199.3		$	213.8		$	(14.5)	(6.8)	%
Enterprise	139.2			138.5			0.7		0.5	%
Other	7.3			9.3			(2.0)		(22.0)	%
Total segment revenues	$	345.8		$	361.6		$	(15.8)	(4.4)	%
Less: acquisition related revenues adjustments	—			(0.1)			0.1		(100.0)	%
Total revenues	$	345.8		$	361.5		$	(15.8)	(4.4)	%
Segment Profit:
Healthcare	$	74.8		$	73.7		$	1.1	1.5	%
Enterprise	41.5			41.8			(0.3)		(0.7)	%
Other	5.0			5.1			(0.1)		(2.8)	%
Total segment profit	$	121.3		$	120.6		$	0.7	0.5	%
Segment Profit Margin:
Healthcare	37.5		%	34.5		%	3.1
Enterprise	29.8		%	30.2		%	(0.4)
Other	68.4		%	54.9		%	13.5
Total segment profit margin	35.1		%	33.4		%	1.7

(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.

Segment Revenues

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

•Healthcare segment revenue decreased by $14.5 million, or 6.8%, as the growths in Dragon Medical and DAX cloud-based solutions were more than offset by a decrease related to a non-strategic legacy term license contract. Revenue from Dragon Medical and DAX cloud-based solutions increased by $14.8 million, or 22.5%, to $80.6 million for the three months ended December 31, 2020 from $65.8 million for the three months ended December 31, 2019, primarily due to the continued market penetration and customer transition.

•Enterprise segment revenue increased by $0.7 million, or 0.5%, primarily due to growth in security and biometrics, offset in part by a decrease in voice engagement, which was due to the timing of license transactions.

•Other segment revenue decreased by $2.0 million, or 22.0%, as we continue to wind down our Other segment.

Segment Profit

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

•Healthcare segment profit increased by $1.1 million, or 1.5%, primarily due to lower sales and marketing expenses, offset in part by lower segment revenue. Sales and marketing expenses decreased primarily as a result of lower travel and entertainment expenses in the first quarter of fiscal year 2021. Segment profit margin increased by 3.1 percentage points to 37.5%, primarily driven by the growth in our Dragon Medical cloud-based solution, which is margin accretive.

•Enterprise segment profit decreased by $0.3 million, or 0.7%, as higher segment revenue was more than offset by higher R&D expenses. The increase in R&D expense was primarily due to higher spend on core technologies to support future growth. Segment profit margin decreased by 0.4 percentage points to 29.8%, primarily due to higher R&D expense margin, offset in part by higher gross margin in security and biometrics.

•Other segment profit decreased by $0.1 million, or 2.8%, as we continue to wind down our Other segment. Segment profit margin increased by 13.5 percentage points to 68.4%.

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LIQUIDITY AND CAPITAL RESOURCES

Liquidity

We had cash and cash equivalents and marketable securities of $374.3 million as of December 31, 2020, an increase of $2.0 million from $372.3 million as of September 30, 2020. Our working capital, defined as total current assets less total current liabilities from continuing operations, was $(821.7) million as of December 31, 2020, compared to $(256.5) million as of September 30, 2020. Our working capitals include $1,053.0 million and $432.2 million convertible debts as of December 31, 2020 and September 30, 2020, respectively. As of December 31, 2020, we had $240.3 million available for borrowing under our revolving credit facility. On February 4, 2021, we entered into the New Revolving Credit Agreement, which replaced the existing Amended Revolving Credit Agreement. The New Revolving Credit Agreement extends the expiration to February 4, 2026, and increases the aggregate borrowing commitments to $300.0 million. 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 $75.3 million as of December 31, 2020 and $60.9 million as of September 30, 2020. 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.

Disposition of Our Medical Transcription and EHR Go-live Businesses

In connection with our ongoing comprehensive portfolio and business review, on November 17, 2020, we entered into a definitive agreement to sell our medical transcription and EHR go-live businesses. We expect the sale to be completed the sale of the businesses during the second quarter of fiscal year 2021.

Convertible Debentures

During the first quarter of fiscal year 2021, our common stock price exceeded the conversion threshold price of 130% of the applicable conversion price per share for each of our convertible debentures for at least 20 trading days during the 30 consecutive trading days ending December 31, 2020. As a result, the holders of our 1.25% 2025 Debentures, 1.5% 2035 Debentures, and 1.0% 2035 Debentures have the right to convert all or any portion of their debentures between January 1, 2021 and March 31, 2021. Additionally, the holders of the 1.5% 2035 Debentures will have the right to redeem the notes in November 2021. All three convertible notes with a total net book value of $1.05 billion was included within current liabilities as of December 31, 2020.

Should any holders elect to convert, the principal amount of the convertible debentures would be payable in cash, and any amount payable in excess of the principal amount would be paid in cash or shares of our common stock at our election. Although the holders of our 1.25% 2025 Debentures and 1.5% 2035 Debentures previously had the right to convert their debentures between October 1, 2020 and December 31, 2020 as our common stock price exceeded 130% of the applicable conversion price for these debentures for at least 20 trading days during the 30 consecutive trading days ending September 30, 2020, only one holder of $0.02 million notional amount exercised their conversion right during the fiscal quarter ended December 31, 2020.

Our convertible debentures are actively traded in the open market and consistently at a trading price in excess of their conversion values. Therefore, we believe that it is uneconomic, and thus unlikely for the holders to early exercise their conversion rights with Nuance. In the event that the holders presented an amount for settlement that exceeded our then available sources of liquidity, we may need to obtain additional financing, which we believe would be available to us based upon our assessment of the prevailing market and business conditions and our experience of successful capital raising activities.

Net Cash Provided by Operating Activities

Cash provided by operating activities for the three months ended December 31, 2020 was $61.2 million, an increase of $7.6 million from $53.6 million cash provided for the three months ended December 31, 2019. The increase was primarily due to:

•An increase of $21.7 million in cash provided due to favorable changes in working capital, primarily due to the timing of cash collections and cash payments; offset in part by,

•A decrease of $7.9 million in cash provided due to lower income before non-cash charges;

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•A decrease of $3.9 million in cash provided from changes in deferred revenue. Deferred revenue had a positive effect of $23.8 million on operating cash flows for the three months ended December 31, 2020, as compared to $27.7 million for the three months ended December 31, 2019; and

•A decrease of $2.3 million in cash flows from discontinued operations.

Net Cash Used in Investing Activities

Cash used in investing activities for the three months ended December 31, 2020 was $22.0 million, an increase of $4.9 million from $17.0 million cash used for the three months ended December 31, 2019. The increase was primarily due to:

•An increase of $3.2 million in cash used for capital expenditures; and

•An increase of $2.1 million in cash used in other investing activities; offset in part by,

•An increase of $0.3 million in net proceeds from the sale and purchase of marketable securities and other investments.

Net Cash Used in Financing Activities

Cash used in financing activities for the three months ended December 31, 2020 was $43.7 million, a decrease of $253.8 million from $297.5 million cash used for the three months ended December 31, 2019. The decrease was primarily due to:

•A decrease of $313.5 million in cash used for the repayment and redemption of debt; and

•A decrease of $92.4 million in cash used for share repurchases; offset in part by,

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

•An increase of $13.8 million in cash used for payments for taxes related to net share settlement of equity awards.

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.

As of December 31, 2020, we were in compliance with all the debt covenants. 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 cash interest payments of approximately $20.8 million for the remainder of fiscal year 2021, based on the stated yields and the outstanding debt principals as of December 31, 2020. We expect to fund our debt service requirements through existing sources of liquidity and our operating cash flows.

Share Repurchase Program

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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		Remainder of 2021		2022 and 2023		2024 and 2025		Thereafter
Convertible debentures (1)	$	1,166.5	$	1,166.5	$	—	$	—	$	—
Senior notes (2)	500.0		—		—		—		500.0
Interest payable on long-term debt (3)	186.4		20.8		71.6		61.2		32.8
Letters of credit (4)	2.2		2.2		—		—		—
Lease obligations and other liabilities:
Operating leases (5)	125.1		18.9		38.2		26.5		41.5
Operating leases under restructuring	15.6		3.2		7.3		3.3		1.8
Purchase commitments for inventory, property and equipment (6)	127.5		51.2		76.3		—		—
Total contractual cash obligations	$	2,123.3	$	1,262.8	$	193.4	$	91.0	$	576.1

(1)As of December 31, 2020, the holders have the right to convert all or any portion of the 1.25% 2025 Debentures, 1.5% 2035 Debentures, and 1.0% 2035 Debentures between January 1, 2021 and March 31, 2021. Additionally, the holders of the 1.5% 2035 Debentures will have the right to redeem the notes in November 2021. Additionally, the holders of the 1.5% 2035 Debentures will have the right to redeem the notes in November 2021. As a result, these convertible debentures were treated as if they were due in fiscal year 2021.

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

(3)Interest per annum is due and payable semi-annually and is determined based on the outstanding principal as of December 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 December 31, 2020, we have subleased certain facilities with total sublease income of $11.1 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 December 31, 2020 were $62.2 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 predetermined 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 December 31, 2020, we may be required to pay the selling stockholders up to $3.0 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 December 31, 2020, the remaining deferred payment obligations of $0.3 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 December 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, 2020. There has been no material change to our critical accounting policies since September 30, 2020.

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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.

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, and Indian rupee.

Periodically, we enter into forward exchange contracts to hedge against foreign exchange rate fluctuations. As of December 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 December 31, 2020, the notional contract amount of outstanding foreign currency exchange contracts was $24.3 million.

Interest Rate Sensitivity

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

At December 31, 2020, we held approximately $374.3 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 $3.7 million per annum, based on the balances of cash and cash equivalents and marketable securities as of December 31, 2020.

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 $44.09 as of December 31, 2020 (dollars in millions):


	December 31, 2020
	Fair value		Conversion value		Increase to fair value		Increase to conversion value
1.5% 2035 Debentures	$	488.0	$	486.5	$	39.7	$	48.6
1.0% 2035 Debentures	$	1,260.2	$	1,236.5	$	114.3	$	123.7
1.25% 2025 Debentures	$	599.6	$	588.2	$	54.9	$	58.8

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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 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 three months ended December 31, 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, 2020 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 months ended December 31, 2020. There have been no material changes in our risk factors from those disclosed in our Annual Report.

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 December 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)

October 1, 2020 - October 31, 2020

—

$261.2 Million

November 1, 2020 - November 30, 2020

—

$261.2 Million

December 1, 2020 - December 31, 2020

—

$261.2 Million

Total

—

(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 December 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

000-27038

3.2

5/11/2001

3.2

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

10-Q

000-27038

3.1

8/9/2004

3.3

Certificate of Ownership and Merger.

8-K

000-27038

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

001-36056

3.4

11/7/2019

10.1

Revolving Credit Agreement, dated February 4, 2021, among Nuance Communications, Inc., the lenders party thereto, Barclays Bank PLC, as Administrative Agent, and the other parties named therein.

8-K

001-36056

10.1

2/8/2021

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 December 31, 2020, formatted in XBRL (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 December 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 February 9, 2021.



			Nuance Communications, Inc.

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