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 ~~June 30,~~December 31, 2019

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

Commission file number 000-27038

_____________________________________________

NUANCE COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)

_____________________________________________



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

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

Registrant’s telephone number, including area code:

(781) 565-5000

_____________________________________________

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



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, par value $0.001	NUAN	~~NASDAQ~~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~~	☐	~~Emerging Growth Company~~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 ~~July 30, 2019~~January 31, 2020 was ~~285,642,813.~~282,887,582.

NUANCE COMMUNICATIONS, INC.

TABLE OF CONTENTS



		Page
PART I: FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements:
	Consolidated Statements of Operations for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2019 and 2018	13
	Consolidated Statements of Comprehensive Income (Loss) for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2019 and 2018	24
	Consolidated Balance Sheets at ~~June 30,~~December 31, 2019 and September 30, ~~2018~~2019	35
	Consolidated Statements of Stockholders’ Equity for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2019 and 2018	46
	Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~June 30,~~December 31, 2019 and 2018	67
	Notes to Condensed Consolidated Financial Statements	78
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	5143
Item 4.	Controls and Procedures	5244

PART II: OTHER INFORMATION
Item 1.	Legal Proceedings	5245
Item 1A.	Risk Factors	5245
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5345
Item 3.	Defaults Upon Senior Securities	5345
Item 4.	Mine Safety Disclosures	5345
Item 5.	Other Information	5345
Item 6.	Exhibits	5445
Exhibit Index		5446
Signatures		5547
Certifications

NUANCE COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended June 30,						Nine Months Ended June 30,
	2019			2018			2019			2018			Three Months Ended December 31,
	(ASC 606)			(ASC 605)			(ASC 606)			(ASC 605)			2019			2018
	(Unaudited) (In thousands, except per share amounts)												(Unaudited) (In thousands, except per share amounts)
Revenues:
Hosting and professional services	$	260,902		$	253,610		$	771,601		$	785,038		$	230,477		$	227,717
Product and licensing	121,809			132,762			377,349			387,956			125,180			115,889
Maintenance and support	66,486			63,077			203,484			189,872			62,576			76,069
Total revenues	449,197			449,449			1,352,434			1,362,866			418,233			419,675
Cost of revenues:
Hosting and professional services	154,397			165,578			471,204			517,362			135,790			136,598
Product and licensing	19,207			13,969			61,897			41,867			34,178			32,405
Maintenance and support	8,192			9,612			24,919			28,616			7,794			7,761
Amortization of intangible assets	8,895			12,172			27,700			38,744			6,627			7,356
Total cost of revenues	190,691			201,331			585,720			626,589			184,389			184,120
Gross profit	258,506			248,118			766,714			736,277			233,844			235,555
Operating expenses:
Research and development	67,598			69,427			201,774			202,211			56,553			46,866
Sales and marketing	72,229			77,820			223,343			233,237			66,472			67,370
General and administrative	46,421			49,666			130,892			174,622			38,314			43,466
Amortization of intangible assets	16,496			19,856			50,426			57,094			12,549			13,842
Acquisition-related costs, net	1,154			4,916			6,223			12,837			1,167			2,601
Restructuring and other charges, net	16,118			5,342			60,668			27,792			6,683			14,641
Impairment of goodwill	—			—			—			137,907
Total operating expenses	220,016			227,027			673,326			845,700			181,738			188,786
Income (loss) from operations	38,490			21,091			93,388			(109,423		)
Income from operations													52,106			46,769
Other (expense) income:
Interest income	3,762			2,482			9,987			6,910			2,186			2,554
Interest expense	(28,359		)	(33,849		)	(91,777		)	(103,785		)	(23,815		)	(32,266		)
Other income (expense), net	3,152			(885		)	2,425			(1,515		)
Income (loss) before income taxes	17,045			(11,161		)	14,023			(207,813		)
Provision (benefit) for income taxes	7,786			9,559			7,814			(67,417		)
Net income (loss) from continuing operations	9,259			(20,720		)	6,209			(140,396		)
Net income from discontinued operations	—			6,683			99,472			15,534
Net income (loss)	$	9,259		$	(14,037	)	$	105,681		$	(124,862	)
Other expense, net													(12,040		)	(1,176		)
Income before income taxes													18,437			15,881
(Benefit) provision for income taxes													(36,440		)	2,000
Net income from continuing operations													54,877			13,881
Net (loss) income from discontinued operations													(6,192		)	5,209
Net income													$	48,685		$	19,090

Net income (loss) per common share - basic:
Continuing operations	$	0.03		$	(0.07	)	$	0.02		$	(0.48	)	$	0.19		$	0.05
Discontinued operations	—			0.02			0.35			0.05			(0.02		)	0.02
Total net income (loss) per basic common share	$	0.03		$	(0.05	)	$	0.37		$	(0.43	)
Total net income per basic common share													$	0.17		$	0.07

Net income (loss) per common share - diluted:
Continuing operations	$	0.03		$	(0.07	)	$	0.02		$	(0.48	)	$	0.19		$	0.05
Discontinued operations	—			0.02			0.35			0.05			(0.02		)	0.02
Total net income (loss) per diluted common share	$	0.03		$	(0.05	)	$	0.37		$	(0.43	)
Total net income per diluted common share													$	0.17		$	0.07

Weighted average common shares outstanding:
Basic	285,942			292,663			285,064			292,703			284,130			287,796
Diluted	288,648			292,663			288,153			292,703			289,453			292,359

See accompanying notes.

NUANCE COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ~~(LOSS)~~

Three Months Ended June 30, Nine Months Ended June 30,
2019 2018 2019 2018
(Unaudited)
(In thousands)
Net income (loss) $ 9,259
$ (14,037 ) $ 105,681
$ (124,862 )
Other comprehensive income (loss):
Foreign currency translation adjustment 3,541
(25,985 ) 494
(20,374 )
Pension adjustments 32
432
(282 ) 548
Unrealized loss on marketable securities 78
126
234
(222 )
Total other comprehensive income (loss), net 3,651

(25,427 ) 446
(20,048 )
Comprehensive income (loss) $ 12,910
$ (39,464 ) $ 106,127
$ (144,910 )



	Three Months Ended December 31,
	2019			2018
	(Unaudited)
	(In thousands)
Net income	$	48,685		$	19,090
Other comprehensive income (loss):
Foreign currency translation adjustment	4,424			(8,302		)
Cerence Spin-off	12,331			—
Pension adjustments	2,007			(360		)
Unrealized loss on marketable securities	(32		)	(2		)
Total other comprehensive income (loss), net	18,730			(8,664		)
Comprehensive income	$	67,415		$	10,426

See accompanying notes.

NUANCE COMMUNICATIONS, INC.

CONSOLIDATED BALANCE SHEETS

June 30,
2019 September 30,
2018
(ASC 606) (ASC 605)
(Unaudited)

(In thousands, except per
share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 536,377
$ 315,963
Marketable securities 136,986
135,579
Accounts receivable, less allowances for doubtful accounts of $10,538 and $9,823 313,599
347,873
Prepaid expenses and other current assets 193,795
94,814
Current assets held for sale —
34,402
Total current assets 1,180,757
928,631
Marketable securities 12,796
21,932
Land, building and equipment, net 138,466
153,452
Goodwill 3,242,693
3,247,105
Intangible assets, net 372,934
450,001
Other assets 241,271
141,761
Long-term assets held for sale —
359,497
Total assets $ 5,188,917
$ 5,302,379

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Contingent and deferred acquisition payments $ 17,122
$ 14,211
Accounts payable 95,272
80,912
Accrued expenses and other current liabilities 245,012
269,339
Deferred revenue 310,586
330,689
Current liabilities held for sale —
69,013
Total current liabilities 667,992
764,164
Long-term debt 1,923,716
2,185,361
Deferred revenue, net of current portion 410,897
434,316
Deferred tax liabilities 45,456
49,931
Other liabilities 97,858
93,593
Long-term liabilities held for sale —
57,518
Total liabilities 3,145,919
3,584,883

Commitments and contingencies (Note 16)

Stockholders’ equity:
Common stock, $0.001 par value per share; 560,000 shares authorized; 288,730 and 291,504 shares issued and 284,979 and 287,753 shares outstanding, respectively 289
291
Additional paid-in capital 2,578,050
2,597,693
Treasury stock, at cost (3,751 shares) (16,788 ) (16,788 )
Accumulated other comprehensive loss (116,812 ) (122,863 )
Accumulated deficit (401,741 ) (740,837 )
Total stockholders’ equity 2,042,998
1,717,496
Total liabilities and stockholders’ equity $ 5,188,917
$ 5,302,379



	December 31, 2019			September 30, 2019
	(Unaudited)
	(In thousands, except per share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	301,458		$	560,961
Marketable securities	201,304			186,555
Accounts receivable, less allowances for doubtful accounts of $9,669 and $9,797	262,411			240,673
Prepaid expenses and other current assets	145,062			175,166
Current assets of discontinued operations	—			91,858
Total current assets	910,235			1,255,213
Marketable securities	7,272			17,287
Land, building and equipment, net	125,163			121,203
Goodwill	2,132,249			2,127,896
Intangible assets, net	272,859			291,371
Right-of-use assets	112,167			—
Other assets	225,792			316,215
Long-term assets of discontinued operations	—			1,236,608
Total assets	$	3,785,737		$	5,365,793
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	—		$	1,142,870
Contingent and deferred acquisition payments	18,719			17,470
Accounts payable	86,331			90,826
Accrued expenses and other current liabilities	186,328			249,570
Deferred revenue	242,877			214,223
Current liabilities of discontinued operations	—			130,117
Total current liabilities	534,255			1,845,076
Long-term debt	1,650,650			793,536
Deferred revenue, net of current portion	131,032			133,783
Deferred tax liabilities	62,885			54,216
Operating lease liabilities	97,973			—
Other liabilities	68,423			79,378
Long-term liabilities of discontinued operations	—			286,654
Total liabilities	2,545,218			3,192,643
Commitments and contingencies (Note 15)

Stockholders’ equity:
Common stock, $0.001 par value per share; 560,000 shares authorized; 287,626 and 289,680 shares issued and 283,875 and 285,930 shares outstanding, respectively	288			290
Additional paid-in capital	1,615,989			2,597,889
Treasury stock, at cost (3,751 shares)	(16,788		)	(16,788		)
Accumulated other comprehensive loss	(114,043		)	(132,773		)
Accumulated deficit	(244,927		)	(293,612		)
Total Nuance Communications, Inc. stockholders’ equity	1,240,519			2,155,006
Noncontrolling interests	—			18,144
Total stockholders’ equity	1,240,519			2,173,150
Total liabilities and stockholders’ equity	$	3,785,737		$	5,365,793

See accompanying notes.

NUANCE COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the three months ended ~~June 30,~~December 31, 2019

Accumulated
Common Stock Additional Paid-In Capital Treasury Stock Other Comprehensive Loss Accumulated Deficit Total Stockholders' Equity
Shares Amount Shares Amount
(In thousands)
Balance at March 31, 2019 290,038
$ 290
$ 2,592,708
3,751
$ (16,788 ) $ (120,463 ) $ (411,000 ) $ 2,044,747
Issuance of common stock under employee stock plans 646
1
(1 ) —
—
Cancellation of restricted stock, and repurchase of common stock at cost for employee tax withholding (247 ) —
(4,292 ) (4,292 )
Stock-based compensation —
—
19,247
19,247
Repurchase and retirement of common stock (1,707 ) (2 ) (29,612 ) (29,614 )
Net income 9,259
9,259
Other comprehensive income 3,651
3,651
Balance at June 30, 2019 288,730
$ 289
$ 2,578,050
3,751
$ (16,788 ) $ (116,812 ) $ (401,741 ) $ 2,042,998

~~For the nine months ended June 30, 2019~~



													Accumulated
	Common Stock					Additional Paid-In Capital			Treasury Stock				Other Comprehensive Loss			Accumulated Deficit			Noncontrolling Interests			Total Stockholders' Equity
	Shares		Amount			Additional Paid-In Capital			Shares	Amount			Other Comprehensive Loss			Accumulated Deficit			Noncontrolling Interests			Total Stockholders' Equity
	(In thousands)
Balance at September 30, 2019	289,680		$	290		$	2,597,889		3,751	$	(16,788	)	$	(132,773	)	$	(293,612	)	$	18,144		$	2,173,150
Cerence spin-off	—		—			(922,567		)	—	—			12,331			—			(18,144		)	(928,380		)
Issuance of common stock under employee stock plans	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

Accumulated
Common Stock Additional Paid-In Capital Treasury Stock Other Comprehensive Loss Accumulated Deficit Total Stockholders' Equity
Shares Amount Shares Amount
(In thousands)
Balance at September 30, 2018 291,504
$ 291
$ 2,597,693
3,751
$ (16,788 ) $ (122,863 ) $ (740,837 ) $ 1,717,496
Accumulated adjustment related to the adoption of ASC 606 233,415
233,415
Issuance of common stock under employee stock plans 7,225
8
8,635
8,643
Cancellation of restricted stock, and repurchase of common stock at cost for employee tax withholding (2,229 ) (2 ) (35,850 ) (35,852 )
Stock-based compensation

128,499
128,499
Repurchase and retirement of common stock (7,770 ) (8 ) (120,927 ) (120,935 )
Reclassification of currency translation differences into earnings as a result of the disposition of our Imaging business 5,605
—
5,605
Net income 105,681
105,681
Other comprehensive income 446
446
Balance at June 30, 2019 288,730
$ 289
$ 2,578,050
3,751
$ (16,788 ) $ (116,812 ) $ (401,741 ) $ 2,042,998

~~See accompanying notes.~~

~~NUANCE COMMUNICATIONS, INC.~~

~~CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY~~

For the three months ended ~~June 30,~~December 31, 2018

Accumulated
Common Stock Additional Paid-In Capital Treasury Stock Other Comprehensive Loss Accumulated Deficit Total Stockholders' Equity
Shares Amount Shares Amount
(In thousands)
Balance at March 31, 2018 298,330
$ 298
$ 2,697,869
3,751
$ (16,788 ) $ (95,963 ) $ (691,734 ) $ 1,893,682
Issuance of common stock under employee stock plans 1,452
2
(3 ) —
(1 )
Cancellation of restricted stock, and repurchase of common stock at cost for employee tax withholding (533 ) (1 ) (7,841 ) (7,842 )
Stock-based compensation —
—
23,519
23,519
Repurchase and retirement of common stock (8,107 ) (8 ) (111,971 ) (111,979 )
Net loss (14,037 ) (14,037 )
Other comprehensive loss (25,427 ) (25,427 )
Balance at June 30, 2018 291,142
$ 291
$ 2,601,573
3,751
$ (16,788 ) $ (121,390 ) $ (705,771 ) $ 1,757,915

~~For the nine months ended June 30, 2018~~



													Accumulated
	Common Stock					Additional Paid-In Capital			Treasury Stock				Other Comprehensive Loss			Accumulated Deficit			Noncontrolling Interests		Total Stockholders' Equity
	Shares		Amount			Additional Paid-In Capital			Shares	Amount			Other Comprehensive Loss			Accumulated Deficit			Noncontrolling Interests		Total Stockholders' Equity
	(In thousands)
Balance at September 30, 2018	291,504		$	291		$	2,597,693		3,751	$	(16,788	)	$	(122,863	)	$	(740,837	)	$	—	$	1,717,496
Adoption of ASC 606	—		—			—			—	—			—			233,415			—		233,415
Issuance of common stock under employee stock plans	5,153		6			(6		)	—	—			—			—			—		—
Cancellation of restricted stock, and repurchase of common stock at cost for employee tax withholding	(1,730	)	(2		)	(27,518		)	—	—			—			—			—		(27,520		)
Stock-based compensation	—		—			83,478			—	—			—			—			—		83,478
Repurchase and retirement of common stock	(4,892	)	(5		)	(75,151		)	—	—			—			—			—		(75,156		)
Net income	—		—			—			—	—			—			19,090			—		19,090
Other comprehensive loss	—		—			—			—	—			(8,664		)	—			—		(8,664		)
Balance at December 31, 2018	290,035		$	290		$	2,578,496		3,751	$	(16,788	)	$	(131,527	)	$	(488,332	)	$	—	$	1,942,139

Accumulated
Common Stock Additional Paid-In Capital Treasury Stock Other Comprehensive Loss Accumulated Deficit Total Stockholders' Equity
Shares Amount Shares Amount
(In thousands)
Balance at September 30, 2017 293,938
$ 294
$ 2,629,245
3,751
$ (16,788 ) $ (101,342 ) $ (580,027 ) $ 1,931,382
Prior period adjustment related to early adoption of ASU 2016-16 (882 ) (882 )
Issuance of common stock under employee stock plans 7,995
8
9,351
9,359
Cancellation of restricted stock, and repurchase of common stock at cost for employee tax withholding (2,684 ) (3 ) (42,346 ) (42,349 )
Stock-based compensation

117,294
117,294
Repurchase and retirement of common stock (8,107 ) (8 ) (111,971 ) (111,979 )
Net loss (124,862 ) (124,862 )
Other comprehensive loss (20,048 ) (20,048 )
Balance at June 30, 2018 291,142
$ 291
$ 2,601,573
3,751
$ (16,788 ) $ (121,390 ) $ (705,771 ) $ 1,757,915

See accompanying notes.

NUANCE COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine Months Ended June 30,
	2019			2018			Three Months Ended December 31,
	(ASC 606)			(ASC 605)			2019			2018
	(Unaudited) (In thousands)						(Unaudited) (In thousands)
Cash flows from operating activities:
Net income (loss) from continuing operations	$	6,209		$	(140,396	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	121,438			142,341
Net income from continuing operations							$	54,877		$	13,881
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation							10,183			13,679
Amortization							19,176			21,198
Stock-based compensation	100,143			101,466			31,233			29,497
Non-cash interest expense	37,011			37,091			12,744			12,298
Deferred tax benefit	(18,975		)	(90,836		)	(40,288		)	(2,089		)
Loss on extinguishment of debt	910			—			15,000			—
Impairment of goodwill	—			137,907
Impairment of fixed asset	—			1,780
Other	(651		)	894			(749		)	312
Changes in operating assets and liabilities, excluding effects of acquisitions:
Accounts receivable	5,011			(1,426		)	(19,242		)	(15,254		)
Prepaid expenses and other assets	(20,116		)	(18,933		)	30,118			(25,926		)
Accounts payable	15,260			(3,646		)	(1,346		)	12,503
Accrued expenses and other liabilities	8,329			(889		)	(71,741		)	(19,317		)
Deferred revenue	38,270			92,075			26,895			31,881
Net cash provided by operating activities - continuing operations	292,839			257,428			66,860			72,663
Net cash provided by operating activities - discontinued operations	4,355			37,595
Net cash (used in) provided by operating activities - discontinued operations							(13,307		)	27,228
Net cash provided by operating activities	297,194			295,023			53,553			99,891
Cash flows from investing activities:
Proceeds from dispositions of businesses, net of transaction fees	407,043			—
Capital expenditures	(32,243		)	(38,965		)	(14,204		)	(12,220		)
Payments for business and asset acquisitions, net of cash acquired	(3,102		)	(109,225		)
Purchases of marketable securities and other investments	(256,332		)	(158,645		)	(86,699		)	(47,502		)
Proceeds from sales and maturities of marketable securities and other investments	262,914			259,677			82,588			45,678
Net cash provided by (used in) investing activities	378,280			(47,158		)
Other							1,272			(1,447		)
Net cash used in investing activities							(17,043		)	(15,491		)
Cash flows from financing activities:
Repayment and redemption of debt	(300,000		)	(331,172		)	(313,500		)	—
Net distribution from Cerence upon the spin-off							139,090			—
Payments for repurchase of common stock	(120,935		)	(111,979		)	(92,444		)	(75,156		)
Acquisition payments with extended payment terms	—			(20,769		)
Proceeds from issuance of common stock from employee stock plans	8,643			9,359
Payments for taxes related to net share settlement of equity awards	(42,562		)	(51,852		)	(29,958		)	(31,651		)
Other financing activities	(1,442		)	(1,073		)	(725		)	(696		)
Net cash used in financing activities	(456,296		)	(507,486		)	(297,537		)	(107,503		)
Effects of exchange rate changes on cash and cash equivalents	1,236			(1,419		)	1,524			391
Net increase (decrease) in cash and cash equivalents	220,414			(261,040		)
Net decrease in cash and cash equivalents							(259,503		)	(22,712		)
Cash and cash equivalents at beginning of period	315,963			592,299			560,961			315,963
Cash and cash equivalents at end of period	$	536,377		$	331,259		$	301,458		$	293,251

See accompanying notes.

~~Table of Contents~~

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Presentation

~~The condensed consolidated financial statements include the accounts of~~ Nuance Communications, Inc. ("~~Nuance"~~We", ~~"we"~~"Nuance", "our", "us", or the "Company") is a pioneer and ~~our wholly-owned subsidiaries. We prepared the unaudited interim condensed consolidated financial statements~~leader in ~~accordance with accounting principles generally accepted~~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 ~~United States~~healthcare, financial services, telecommunications and travel industries, among others. We had three reportable segments: Healthcare, Enterprise, and Other as of ~~America (the "U.S." or~~December 31, 2019. See Note 17 for a description of each of these segments.

As more fully described in Note 4, on October 1, 2019, we completed the ~~"United States") and pursuant to the rules and regulations~~spin-off of ~~the Securities and Exchange Commission (the "SEC"~~our Automotive business as an independent public company, Cerence Inc. ("Cerence"). The ~~condensed consolidated financial statements reflect all normal and recurring adjustments that, in our opinion, are necessary to present fairly our financial position,~~historical results of our Automotive business are included within discontinued operations ~~and cash flows~~ for all the historical periods presented. The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts and classifications of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting period.

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, ~~2018.~~2019. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire fiscal year or any future period.

2. Summary of Significant Accounting Policies

Recently Adopted Accounting Standards

~~Revenue Recognition~~Leases

In ~~May 2014,~~February 2016, the Financial Accounting Standards Board ("FASB") issued ASU ~~No. 2014-09, "Revenue from Contracts with Customers: Topic 606"~~2016-02, "Leases" ("ASC 606"), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. We adopted ASC 606 on October 1, 2018 using the modified retrospective approach, with a cumulative adjustment to retained earnings as opposed to retrospectively adjusting prior periods.

Results for reporting periods beginning after October 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting policies under "Revenue Recognition: Topic 605" ("ASC 605"). For contracts that were modified before the effective date, the Company aggregated the effect of all contract modifications prior to identifying performance obligations and allocating transaction price in accordance with the practical expedient ASC 606-10-65-1-(f)-4.

Upon adoption of ASC 606 on October 1, 2018, we recorded a decrease to Accumulated deficit of approximately $233 million as a result of the transition. The impact of the adoption primarily relates to the cumulative effect of (1) approximately $70 million decrease in Deferred revenue from the upfront recognition of term licenses and the general requirement to allocate the transaction price on a relative stand-alone selling price, (2) approximately $180 million increase in contract assets, (3) approximately $30 million decrease in Accounts receivable, (4) approximately $30 million increase in Deferred costs, and (5) approximately $20 million increase in Deferred tax liabilities related to the above items.

~~NUANCE COMMUNICATIONS, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

The following tables summarize the impact of adopting ASC 606 on the Company’s condensed consolidated statement of operations for the three and nine months ended June 30, 2019 and the condensed consolidated balance sheet as of June 30, 2019 (dollars in thousands):

For the Three Months Ended June 30, 2019
As reported, ASC 606 Effect of Implementation As adjusted, ASC 605
Revenues:
Hosting and professional services $ 260,902
$ 7,943
$ 268,845
Product and licensing 121,809
5,579
127,388
Maintenance and support 66,486
(4,387 ) 62,099
Total revenues $ 449,197
$ 9,135
$ 458,332

Cost of revenues:
Hosting and professional services $ 154,397
$ 6,555
$ 160,952
Product and licensing 19,207
(1,496 ) 17,711
Maintenance and support 8,192
215
8,407
Amortization of intangible assets 8,895
—
8,895
Total cost of revenues $ 190,691
$ 5,274
$ 195,965

Sales and marketing $ 72,229
$ 1,603
$ 73,832

Provision for income taxes $ 7,786
$ (650 ) $ 7,136

For the Nine Months Ended June 30, 2019
As reported, ASC 606 Effect of Implementation As adjusted, ASC 605
Revenues:
Hosting and professional services $ 771,601
$ 29,179
$ 800,780
Product and licensing 377,349
9,502
386,851
Maintenance and support 203,484
(20,146 ) 183,338
Total revenues $ 1,352,434
$ 18,535
$ 1,370,969

Cost of revenues:
Hosting and professional services $ 471,204
$ 3,302
$ 474,506
Product and licensing 61,897
(12,941 ) 48,956
Maintenance and support 24,919
262
25,181
Amortization of intangible assets 27,700
—
27,700
Total cost of revenues $ 585,720
$ (9,377 ) $ 576,343

Sales and marketing $ 223,343
$ 1,023
$ 224,366

Provision for income taxes $ 7,814
$ 10,029
$ 17,843

~~NUANCE COMMUNICATIONS, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

As of June 30, 2019
As reported, ASC 606 Effect of Implementation As adjusted, ASC 605
Assets:
Accounts receivable $ 313,599
$ 26,611
$ 340,210
Prepaid expenses and other current assets $ 193,795
$ (65,621 ) $ 128,174
Other assets $ 241,271
$ (121,462 ) $ 119,809

Liabilities:
Deferred revenue, current $ 310,586
$ 36,191
$ 346,777
Deferred revenue, noncurrent $ 410,897
$ 19,882
$ 430,779
Deferred tax liabilities $ 45,456
$ (10,026 ) $ 35,430
Other long-term liabilities $ 97,858
$ (11,252 ) $ 86,606

Stockholders' Equity:
Accumulated deficit $ (401,741 ) $ (195,117 ) $ (596,858 )

~~Statements of Cash Flows~~

~~In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" ("ASU 2016-15"~~842"), which isbecame effective for fiscal years beginning after December 15, ~~2017~~2018 and ~~the~~ interim periods ~~therein. We adopted this guidance on October 1, 2018 and applied it retrospectively. The~~therein, with early adoption ~~did not have a material impact on our condensed consolidated statements of cash flows.~~

~~Financial Instruments~~

In January 2016, the FASB issued ASU No. 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01"). ASU 2016-01 amends the guidance on the classification and measurement of financial instruments. We adopted ASU 2016-01 as of January 1, 2018 using the modified retrospective method. The adoption did not have a material impact on our condensed consolidated financial statements.

~~Issued Accounting Standards Not Yet Adopted~~

~~Leases~~

~~In February 2016, the FASB issued ASU No. 2016-02, "Leases" ("ASC 842").~~permitted. ASC 842 requires lessees to recognize on the balance sheet a right-of-use asset, representing its right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. The standard ~~requires~~initially required the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply. We adopted ASC 842 ~~is effective for us~~ in the first quarter of fiscal year ~~2020, and early application is permitted.~~ 2020.

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

~~We are currently evaluating~~As a result of the ~~impact of ASC 842 and expect to recognize $110 million to $145~~adoption, we recognized $120 million of operating lease right-of-use assets, and ~~$130~~approximately $140 million ~~to $175 million~~of operating lease obligations. ~~We do not expect~~Approximately $20 million of deferred rent balances were reclassified against the costs of the right-of-use assets. The cumulative-effect adjustment to retained earnings as of October 1, 2019 was immaterial. The adoption of the guidance todid not have a material impact on our consolidated ~~statements~~statement of operations or consolidated ~~statements~~statement of cash flows.

Income Taxes

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

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Issued Accounting ~~Pronouncements~~Standards Not Yet Adopted

Internal-Use Software

In August 2018, the FASB issued ASU ~~No.~~ 2018-15, ~~"Intangibles-Goodwill~~"Intangibles—Goodwill and ~~Other-Internal-Use~~Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract" ~~("ASU 2018-15")~~, which is effective for fiscal year beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The guidance requires that implementation costs related to a hosting arrangement that is a service contract be capitalized and amortized over the term of the hosting arrangement, starting when the module or component of the

~~NUANCE COMMUNICATIONS, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

hosting arrangement is ready for its intended use. The guidance will be applied retrospectively to each period presented. We do not expect the implementation to have a material impact on our condensed consolidated financial statements.

In January 2018, the FASB issued ASU No. 2018-02, "Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("AOCI"), which is effective for fiscal years beginning after December 15, 2018 and interim periods therein, with early adoption permitted. The guidance gives entities the option to reclassify to retained earnings the tax effects resulting from the Tax Cuts and Jobs Act ("TCJA") related to items in AOCI. The new guidance may be applied retrospectively to each period in which the effect of TCJA is recognized in the period of adoption. We do not expect the implementation to have a material impact on our condensed consolidated financial statements.

3. Revenue Recognition

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

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

We recognize revenue after applying the following five steps:

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

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

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

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

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

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

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

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

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

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

We only include estimated amounts of variable consideration in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. We reduce transaction prices for estimated returns and other allowances that represent variable consideration under ASC 606, which we estimate based on historical return experience and other relevant factors, and record a ~~corresponding refund liability as a component of accrued expenses~~reduction to revenue and ~~other current liabilities.~~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 finance 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

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

~~NUANCE COMMUNICATIONS, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

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

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

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

Performance Obligations

Hosting

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

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

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

Software Licenses

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

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

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

Maintenance and Support

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

Professional Services

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

Hardware

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

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Significant Judgments

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

Judgments are required to determine the SSP for each distinct performance obligation. When SSP is directly observable, we estimate SSP based upon the historical transaction prices, adjusted for geographic considerations, customer classes, and customer relationship profiles. In instances where SSP is not directly observable, we determine SSP using information that may include market conditions

~~NUANCE COMMUNICATIONS, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

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):


	For the Three Months Ended June 30, 2019								For the Three Months Ended December 31, 2019
	Hosting and professional services		Product and licensing		Maintenance and support		Total		Hosting and professional services		Product and licensing		Maintenance and support			Total
Healthcare	$	142,502	$	48,302	$	37,062	$	227,866	$	144,983	$	91,957	$	33,594		$	270,534
Enterprise	80,346		28,232		29,204		137,782		77,637		31,736		29,011			138,384
Automotive	28,042		43,625		93		71,760
Other	10,012		1,650		127		11,789		7,857		1,487		(29		)	9,315
Total revenues	$	260,902	$	121,809	$	66,486	$	449,197	$	230,477	$	125,180	$	62,576		$	418,233


	For the Nine Months Ended June 30, 2019								For the Three Months Ended December 31, 2018
	Hosting and professional services		Product and licensing		Maintenance and support		Total		Hosting and professional services		Product and licensing		Maintenance and support		Total
Healthcare	$	401,884	$	183,039	$	119,212	$	704,135	$	133,515	$	93,029	$	45,321	$	271,865
Enterprise	235,562		63,285		83,829		382,676		78,542		20,279		30,631		129,452
Automotive	93,497		125,050		191		218,738
Other	40,658		5,975		252		46,885		15,660		2,581		117		18,358
Total revenues	$	771,601	$	377,349	$	203,484	$	1,352,434	$	227,717	$	115,889	$	76,069	$	419,675

Hardware revenue comprised of approximately $6.4 million of total product and license revenue for the three months ended ~~June 30, 2019 and $21.5 million for the nine months ended June 30,~~December 31, 2019.

Contract Acquisition Costs

~~In conjunction with the adoption of ASC 606, we~~We are required to capitalize certain contract acquisition ~~costs.~~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

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 ~~June 30,~~December 31, 2019, we had ~~$18.6~~$19.4 million of current contract acquisition costs and ~~$28.7~~$35.2 million of noncurrent contract acquisition costs. Commission expense is primarily included

~~NUANCE COMMUNICATIONS, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

in Sales and marketing expense on the ~~condensed~~ consolidated statements of operations. We had amortization expense of ~~$4.3~~$4.1 million ~~related~~related to contract acquisition costs for the three months ended ~~June 30, 2019 and $11.5 million for the nine months ended June 30,~~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 ~~(i)~~(1) relate directly to the contract, ~~(ii)~~(2) are expected to generate resources that will be used to satisfy our performance obligation under the contract, and ~~(iii)~~(3) are expected to be recovered through revenue generated under the contract. Our capitalized costs consist primarily of setup costs, such as costs to standup, customize, and develop applications for each ~~customer, which~~customer. These costs are incurred to satisfy our stand-ready obligation to provide access to our connected offerings. ~~These~~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 ~~June 30,~~December 31, 2019, we had ~~$7.0~~$18.7 million of short-term contract costs included with Prepaid expenses and other current assets and ~~$95.2~~$35.4 million of long-term costs included within Other assets.

Trade Accounts Receivable and Contract Balances

We classify our right to consideration in exchange for deliverables as either a receivable or a contract asset. A receivable is a right to consideration that is unconditional (i.e. only the passage of time is required before payment is due). We present such receivables in Accounts receivable, net in our ~~condensed~~ 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 ~~June 30,~~December 31, 2019, we had ~~$68.2~~$41.0 million of current contract assets and ~~$102.9~~$108.7 million of noncurrent contract assets. The table below shows significant changes in contract assets of continuing operations (dollars in thousands):


	Contract assets			Contract assets
Balance as of October 1, 2018	$	168,595
Balance as of October 1, 2019				$	167,324
Revenues recognized but not billed	249,707			56,797
Amounts reclassified to accounts receivable	(247,156		)	(74,501		)
Balance at June 30, 2019	$	171,146
Balance at December 31, 2019				$	149,620

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 ~~June 30,~~December 31, 2019, we had ~~$721.5~~$373.9 million of Deferred revenue. The table below shows significant changes in Deferred revenue of continuing operations (dollars in thousands):

Deferred revenue
Balance as of October 1, 2018 $ 693,272
Amounts bill but not recognized 712,594
Revenue recognized (684,383 )
Balance at June 30, 2019 $ 721,483

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



	Deferred revenue
Balance as of October 1, 2019	$	348,006
Amounts bill but not recognized	274,795
Revenue recognized	(248,892		)
Balance at December 31, 2019	$	373,909

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 ~~June 30,~~December 31, 2019 (dollars in thousands):

Within One Year Two to Five Years Greater than Five Years Total
Total revenue $ 754,280
$ 1,066,562
$ 185,857
$ 2,006,699



	Within One Year		Two to Four Years		Greater than Four Years		Total
Total revenue	$	721,808	$	912,306	$	90,206	$	1,724,320

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

4. Disposition of Businesses

~~Sale~~Spin-off of ~~Imaging~~Automotive

On ~~November 7, 2018, our Board of Directors approved~~October 1, 2019, we completed the ~~divestiture~~spin-off of our ~~Imaging business. On November 11, 2018,~~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 entered into a sale agreement (the “Agreement") with Project Leopard AcquireCo Limited, a private limited company incorporated under the laws of England and Wales (and an affiliate of Kofax, Inc.) (the “Buyer"), relating to the salesold 1.8% of our ~~Imaging business~~equity interest in Cerence to a non-affiliated third party for a total cash consideration of ~~approximately $400.0 million, subject to certain customary post-closing adjustments~~$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 ~~set forth in~~part of the ~~Agreement. Pursuant to~~spin-off transaction. Effective as of October 1, 2019, for all periods presented, the ~~Agreement, we sold and transferred, and Buyer purchased and acquired, (i) the shares~~results of ~~certain subsidiaries through which we operate a portion~~operations of our ~~Imaging~~former Automotive business ~~and (ii) certain assets used in or~~have been included within discontinued operations.

During the first quarter of fiscal year 2020, we incurred payments of $13.3 million related to the ~~business;~~separation and ~~the Buyer assumed certain liabilities related to such assets or the~~spin-off of our Automotive business, ~~subject to certain exclusions and indemnities~~which has been presented as ~~set forth in the Agreement.~~operating cash flows from discontinued operations.

Sale of Imaging

On February 1, 2019, we completed the sale of our Imaging business and received approximately $404.0 million in cash, after estimated transaction ~~expenses, and subject to post-closing finalization of the adjustments set forth in the Agreement.~~expenses. As a result, we recorded a gain of approximately $102.4 million, which ishas been included within Net income from discontinued operations. There are a number of working capital and other adjustments under the Agreement and related ancillary agreements. We do not believe that post-closing working capital adjustments under the Agreement, if any, will have a material impact on our results of operations.

For all periods presented, Imaging's results of operations have been included within discontinued operations and its assets and liabilities within held for sale in our condensed consolidated financial statements.

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

Three Months Ended June 30, Nine Months Ended June 30,
2019 2018 2019 2018
(ASC 606) (ASC 605) (ASC 606) (ASC 605)
Major line items constituting net income of Imaging:
Revenue ^(a)
$ —
$ 53,438
$ 67,430
$ 155,890
Cost of revenue —
12,107
16,946
37,031
Research and development —
6,299
7,557
21,066
Sales and marketing ^(a)
—
18,392
28,433
59,122
General and administrative —
987
1,997
3,211
Amortization of intangible assets —
4,261
5,219
12,757
Acquisition-related costs, net —
—
(386 ) —
Restructuring and other charges, net —
3,895
13,251
5,194
Other —
(200 ) —
(38 )
Income (loss) from discontinued operations before income taxes ^(a)
—
7,697
(5,587 ) 17,547
Provision (benefit) for income taxes —
1,014
(2,688 ) 2,013
Gain on disposition —
—
102,371
—
Net income from discontinued operations $ —
$ 6,683
$ 99,472
$ 15,534

Supplemental information:
Depreciation —
167
391
917
Amortization —
5,849
6,569
17,909
Stock compensation —
1,703
7,103
5,471

~~Capital expenditures for all periods presented were de minimis.~~

^(a)As more fully described in Note 2, as a result of the adoption of ASC 606 using the modified retrospective approach, Revenue for the six months ended March 31, 2019 reflected an increase of $2.4 million due to the upfront recognition of term licenses and the re-allocation of contract consideration to performance obligations based upon standalone selling prices; Sales and marketing expense for the six months ended March 31, 2019 reflected a decrease of $1.4 million due to the capitalization and amortization of commission expense; and the provision for income taxes for the three months ended March 31, 2019 reflected an increase in tax benefit of $1.6 million related to the tax effect of the ASC 606 adjustments.



	Three Months Ended December 31,
	2019			2018
	Automotive			Imaging			Automotive			Total
Major line items constituting net income of discontinued operations:
Revenue	$	—		$	51,995		$	73,979		$	125,974
Cost of revenue	—			12,004			29,318			41,322
Research and development	—			5,516			21,462			26,978
Sales and marketing	—			18,190			7,989			26,179
General and administrative	—			1,231			583			1,814
Amortization of intangible assets	—			3,914			3,132			7,046
Acquisition-related costs, net	—			(386		)	235			(151		)
Restructuring and other charges, net	7,386			8,460			8,440			16,900
Other	—			—			16			16
(Loss) income from discontinued operations before income taxes	(7,386		)	3,066			2,804			5,870
Provision (benefit) for income taxes	1,194			1,675			(1,014		)	661
Net (loss) income from discontinued operations	$	(6,192	)	$	1,391		$	3,818		$	5,209

Supplemental information:
Depreciation	$	—		$	294		$	2,136		$	2,430
Amortization	—			4,926			5,534			10,460
Stock compensation	—			2,102			4,843			6,945
Capital expenditures	—			—			780			780

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



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

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

September 30,
2018
(ASC 605)
Major classes of Imaging assets:
Accounts receivable, net $ 30,959
Prepaid expenses and other current assets 3,443
Land, building and equipment, net 2,442
Goodwill 257,352
Intangible assets, net 99,507
Other assets 196
Total assets classified as held for sale $ 393,899

Major classes of Imaging liabilities:
Accounts payable $ 3,604
Accrued expenses and other current liabilities 12,304
Deferred revenue 107,965
Other liabilities 2,658
Total liabilities classified as held for sale $ 126,531

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~Spin-off of Automotive~~

On November 19, 2018, we announced our intent to spin off our Automotive business into an independent publicly traded company through a pro rata distribution to our common stock holders. Completion of the proposed spin-off is subject to certain conditions, including final approval by our Board of Directors. We intend to complete the separation of the business by the beginning of fiscal year 2020.

~~Other Dispositions~~

In connection with our efforts to wind down a portion of our SRS business, which provides value-added services to mobile operators in India and Brazil ("Mobile Operator Services"), in May 2019, we completed the sale of our Mobile Operator Services business in Brazil, and in July 2019, we completed the sale of our Mobile Operator Services business in India. The sale prices and any gain or loss was immaterial.

5. ~~Business Acquisitions~~

~~We continue to expand our solutions and integrate our technologies in new offerings through acquisitions. A summary of our acquisition activities is as follows:~~

~~Fiscal Year 2018~~

For the nine months ended June 30, 2018, we completed several acquisitions in our Healthcare and Automotive segment for total cash consideration of $113.1 million and contingent payments with a fair value of $2.0 million and effective settlement of the preexisting relationship with the acquiree of $12.9 million. As a result, we recognized goodwill of $65.1 million and other intangible assets of $60.8 million, with a weighted average life of 6.0 years. Such acquisitions were not significant individually or in aggregate to our condensed consolidated financial statements for the periods presented.

~~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 and 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 acquisition-related costs, net is as follows (dollars in thousands):~~

Three Months Ended June 30, Nine Months Ended June 30,
2019 2018 2019 2018
Transition and integration costs $ 1,531
$ 5,370
$ 6,623
$ 12,799
Professional service fees 950
1,254
1,406
2,705
Acquisition-related adjustments (1,327 ) (1,708 ) (1,806 ) (2,667 )
Total $ 1,154
$ 4,916
$ 6,223
$ 12,837

6. Goodwill and Intangible Assets

The changes in the carrying amount of Goodwill by reportable segment for the ~~nine~~three months ended ~~June 30,~~December 31, 2019 are as follows (dollars in thousands):

Goodwill

Healthcare Enterprise Automotive Other Total
Balance as of September 30, 2018 $ 1,430,325
$ 683,347
$ 1,119,947
$ 13,486
$ 3,247,105
Purchase accounting adjustments 113
—
(172 ) —
(59 )
Effect of foreign currency translation (1,354 ) (1,240 ) (1,532 ) (227 ) (4,353 )
Balance at June 30, 2019 $ 1,429,084
$ 682,107
$ 1,118,243
$ 13,259
$ 3,242,693



	Healthcare		Enterprise		Other		Total
Balance as of September 30, 2019	$	1,435,144	$	679,903	$	12,849	$	2,127,896
Effect of foreign currency translation	1,961		2,283		109		4,353
Balance at December 31, 2019	$	1,437,105	$	682,186	$	12,958	$	2,132,249

~~NUANCE COMMUNICATIONS, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

Other Intangible Assets

The changes in the carrying amount of Intangible assets for the ~~nine~~three months ended ~~June 30,~~December 31, 2019 are as follows (dollars in thousands):



	Intangible Assets
Balance as of September 30, 2019	$	291,371
Amortization	(19,176		)
Effect of foreign currency translation	664
Balance at December 31, 2019	$	272,859

Intangible
Assets
Balance as of September 30, 2018 $ 450,001
Acquisitions 1,488
Amortization (78,126 )
Effect of foreign currency translation (429 )
Balance at June 30, 2019 $ 372,934

~~Fiscal Year 2018 Interim Impairment Analysis~~

Effective the second quarter of fiscal year 2018, our Automotive business, which was previously included within our Mobile segment, became a standalone operating segment. As a result of the reorganization, the original Mobile reporting unit was separated into three discrete lines of business comprised of Automotive, Dragon TV, and Devices. Dragon TV was merged within our Enterprise segment, and Devices was included within Other segment. We assigned $1,080.5 million, $12.0 million, and $36.0 million of Goodwill to Automotive, Dragon TV and Devices, respectively, based on their relative fair values as of March 31, 2018, and assessed the assigned Goodwill for impairment by comparing each component’s fair value to its carrying amount. As a result, we recorded a Goodwill impairment charge of $35.1 million related to Devices for the second quarter of fiscal 2018.

Also during the second quarter of fiscal year 2018, our Subscriber Revenue Services ("SRS") reporting unit, originally included within our Mobile operating segment, recorded significantly lower revenue and profitability due to recent market disruptions in certain markets that we serve. We concluded that these financial results coupled with the rapid market shifts being experienced in the industry were factors that represented impairment indicators, triggering a review of Goodwill and indefinite-lived intangible assets for impairment during the second quarter of fiscal year 2018. Based on the result of the impairment assessment, the carrying value of SRS exceeded its fair value by $94.3 million. In addition, we recorded an $8.5 million deferred tax benefit related to SRS’s Goodwill, which is amortized over time for tax purposes, and therefore increased the impairment charge by the same amount. As a result, we recorded a Goodwill impairment charge of $102.8 million related to SRS for the second quarter of fiscal year 2018. After the impairment charge, Goodwill assigned to SRS was $17.8 million as of March 31, 2018. The assessment did not result in any impairment charge of Other intangible assets.

~~Wind-down of Devices and Mobile Operator Services and Annual Goodwill Impairment Analysis~~

During the fourth quarter of fiscal year 2018, in connection with our strategic business review announced in our earnings release issued on May 9, 2018, we restructured our SRS business by separating the voicemail transcription services business ("Voice-to-Text"), which will continue to operate as part of the Other Segment, and commenced a wind-down of our SRS Mobile Operator Services in India and Brazil, and our Devices businesses. The SRS business provides value-added services to mobile operators in India and Brazil ("Mobile Operator Services"). As a result, we revised our multi-year operating plans of Mobile Operator Services and Devices businesses, as part of our fiscal year 2019 budgeting process, to reflect a significant decline in revenue and operating income. The wind-down decision has resulted in significantly lower estimated future cash flows over a considerably shorter time horizon, which triggered a review of Goodwill and long-lived asset groups for impairment.

As a result of the impairment review, we recorded an additional $15.0 million impairment charge for Devices for the fourth quarter of fiscal year 2018, including $7.6 million related to acquired trade names and customer relationships, $0.8 million related to acquired technology assets, $6.2 million related to fixed assets, and $0.4 million related to its remaining goodwill; we also recorded $25.1 million impairment charge for our Mobile Operator Services business for the fourth quarter of fiscal year 2018, including $12.9 million related to acquired trade names and customer relationships, $7.9 million related to acquired technology assets, $0.9 million related to fixed assets, and $3.4 million related to Goodwill.

~~NUANCE COMMUNICATIONS, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

7.6. 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.~~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. ~~At June 30,~~As of December 31, 2019 and September 30, ~~2018,~~2019, we had outstanding contracts with a total notional value of ~~$153.3~~$109.8 million and ~~$117.1~~$189.6 million, respectively.

We did not designate any forward contracts as hedging instruments for the ~~nine~~three months ended ~~June 30,~~December 31, 2019 or 2018. Therefore, changes in fair value of foreign currency forward contracts were recognized within Other ~~income (expense),~~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						Balance Sheet Classification	Fair Value
Derivatives Not Designated as Hedges	Balance Sheet Classification	June 30, 2019			September 30, 2018			Balance Sheet Classification	December 31, 2019			September 30, 2019
Foreign currency forward contracts	Prepaid expenses and other current assets	$	100		$	143		Prepaid expenses and other current assets	$	—		$	597
Foreign currency forward contracts	Accrued expenses and other current liabilities	(109		)	(1,192		)	Accrued expenses and other current liabilities	(90		)	(327		)

A summary of income (loss) from continued operations related to the derivative instruments for the three and ~~nine~~three months ended ~~June 30,~~December 31, 2019 and 2018 is as follows (dollars in thousands):


	Income Statement Classification	Three Months Ended June 30,						Nine Months Ended June 30,						Income Statement Classification	Three Months Ended December 31,
Derivatives Not Designated as Hedges	Income (Loss) Recognized	2019			2018			2019			2018			Income (Loss) Recognized	2019		2018
Foreign currency forward contracts	Other income (expense), net	$	(799	)	$	(1,597	)	$	(359	)	$	(2,381	)	Other income (expense), net	$	585	$	(1,730	)

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

~~NUANCE COMMUNICATIONS, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

Assets and liabilities measured at fair value on a recurring basis at ~~June 30,~~December 31, 2019 and September 30, ~~2018~~2019 consisted of the following (dollars in thousands):

June 30, 2019
Level 1 Level 2 Level 3 Total
Assets:
Money market funds^(a)
$ 386,071
$ —
$ —
$ 386,071
Time deposits^(b)
—
91,147
—
91,147
Commercial paper, $39,113 at cost^(b)
—
39,409
—
39,409
Corporate notes and bonds, $42,292 at cost^(b)
—
42,358
—
42,358
Foreign currency exchange contracts^(b)
—
100
—
100
Total assets at fair value $ 386,071
$ 173,014
$ —
$ 559,085
Liabilities:
Foreign currency exchange contracts^(b)
$ —
$ (109 ) $ —
$ (109 )
Contingent acquisition payments^(c)
—
—
(889 ) (889 )
Total liabilities at fair value $ —
$ (109 ) $ (889 ) $ (998 )



	December 31, 2019
	Level 1		Level 2			Level 3			Total
Assets:
Money market funds^(a)	$	174,658	$	—		$	—		$	174,658
Time deposits^(b)	—		115,286			—			115,286
Commercial paper, $79,063 at cost^(b)	—		79,584			—			79,584
Corporate notes and bonds, $31,175 at cost^(b)	—		31,213			—			31,213
Foreign currency exchange contracts^(b)	—		—			—			—
Total assets at fair value	$	174,658	$	226,083		$	—		$	400,741
Liabilities:
Foreign currency exchange contracts^(b)	$	—	$	(90	)	$	—		$	(90	)
Contingent acquisition payments^(c)	—		—			(2,493		)	(2,493		)
Total liabilities at fair value	$	—	$	(90	)	$	(2,493	)	$	(2,583	)


	September 30, 2018											September 30, 2019
	Level 1		Level 2			Level 3			Total			Level 1		Level 2			Level 3			Total
Assets:
Money market funds^(a)	$	200,004	$	—		$	—		$	200,004		$	217,861	$	—		$	—		$	217,861
Time deposits^(b)	—		88,158			—			88,158			—		115,913			—			115,913
Commercial paper, $27,194 at cost^(b)	—		27,363			—			27,363
Corporate notes and bonds, $57,563 at cost^(b)	—		57,417			—			57,417
Commercial paper, $77,089 at cost^(b)												—		77,494			—			77,494
Corporate notes and bonds, $37,504 at cost^(b)												—		37,566			—			37,566
Foreign currency exchange contracts^(b)	—		143			—			143			—		597			—			597
Total assets at fair value	$	200,004	$	173,081		$	—		$	373,085		$	217,861	$	231,570		$	—		$	449,431
Liabilities:
Foreign currency exchange contracts^(b)	$	—	$	(1,192	)	$	—		$	(1,192	)	$	—	$	(327	)	$	—		$	(327	)
Contingent acquisition payments^(c)	—		—			(4,000		)	(4,000		)	—		—			(2,925		)	(2,925		)
Total liabilities at fair value	$	—	$	(1,192	)	$	(4,000	)	$	(5,192	)	$	—	$	(327	)	$	(2,925	)	$	(3,252	)


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

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

^(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~~corporate notes and bonds generally mature within three years and had a weighted average maturity of ~~0.50~~0.43 years as of ~~June 30,~~December 31, 2019 and ~~0.61~~0.53 years as of September 30, ~~2018.~~2019.


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

The estimated fair value of our long-term debt was approximately ~~$2,112.7~~$1,926.2 million (face value $1,837.0 million) as of December 31, 2019 and $2,143.4 million (face value $2,137.0 million) as of ~~June~~September 30, 2019 ~~and $2,423.6 million (face value $2,437.0 million) as of September 30, 2018~~ 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 ~~June 30,~~December 31, 2019 or September 30, ~~2018.~~

~~NUANCE COMMUNICATIONS, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

2019.

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.~~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 June 30,						Nine Months Ended June 30,						Three Months Ended December 31,
	2019			2018			2019			2018			2019			2018
Balance at beginning of period	$	1,450		$	11,752		$	4,000		$	8,648		$	2,550		$	4,000
Earn-out liabilities established at time of acquisition	—			1,500			—			2,000			—			—
Payments and foreign currency translation	—			(4,557		)	(2,550		)	(4,652		)	(57		)	(21		)
Adjustments to fair value included in acquisition-related costs, net	(561		)	(660		)	(561		)	2,039			—			—
Balance at end of period	$	889		$	8,035		$	889		$	8,035		$	2,493		$	3,979

Contingent acquisition payments are to be made in periods through fiscal year 2021. As of ~~June 30,~~December 31, 2019, the maximum amount payable based on the agreements was ~~$1.7~~$4.8 million if the specified performance targets are achieved.

9.8. Accrued Expenses and Other Current Liabilities

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


	June 30, 2019		September 30, 2018		December 31, 2019		September 30, 2019
Compensation	$	116,289	$	174,984	$	67,808	$	119,412
Cost of revenue related liabilities	52,621		30,432		40,007		58,012
Accrued interest payable					3,681		19,302
Consulting and professional fees	27,355		21,220		14,504		20,401
Accrued interest payable	12,681		21,326
Sales and marketing incentives					1,316		2,692
Sales and other taxes payable	6,459		5,983		6,295		8,089
Facility-related liabilities	3,281		4,621		—		2,503
Sales and marketing incentives	2,508		1,889
Operating lease obligations					38,115		—
Other	23,818		8,884		14,602		19,159
Total	$	245,012	$	269,339	$	186,328	$	249,570

~~10.~~

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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, orand arise outside of the ordinary course of our business.

The following table ~~sets forth accrual activities relating to~~represents the roll forward of restructuring ~~reserves~~liabilities for the ~~nine~~three months ended ~~June 30,~~December 31, 2019 (dollars in thousands):


	Personnel			Facilities			Total			Personnel			Facilities			Total
Balance at September 30, 2018	$	9,690		$	6,503		$	16,193
Balance at September 30, 2019										$	3,587		$	3,622		$	7,209
ASC 842 implementation ^(a)										—			11,674			11,674
Restructuring charges, net	19,104			2,553			21,657			2,913			1,135			4,048
Non-cash adjustment	(307		)	(285		)	(592		)	—			1,263			1,263
Cash payments	(23,429		)	(6,280		)	(29,709		)	(5,026		)	(982		)	(6,008		)
Balance at June 30, 2019	$	5,058		$	2,491		$	7,549
Balance at December 31, 2019										$	1,474		$	16,712		$	18,186

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

~~NUANCE COMMUNICATIONS, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

~~While Restructuring and other charges, net are excluded from our calculation of segment profit, the~~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 June 30,
2019 2018
Personnel Facilities Total Restructuring Other Charges Total Personnel Facilities Total Restructuring Other Charges Total
Healthcare $ 222
$ 1
$ 223
$ —
$ 223
$ 377
$ —
$ 377
$ —
$ 377
Enterprise (165 ) —
(165 ) —
(165 ) 3,412
(197 ) 3,215
—
3,215
Automotive (639 ) 32
(607 ) 14,778
14,171
1,233
—
1,233
—
1,233
Other 529
15
544
239
783
154
54
208
—
208
Corporate 730
354
1,084
22
1,106
1,148
893
2,041
(1,732 ) 309
Total $ 677
$ 402
$ 1,079
$ 15,039
$ 16,118
$ 6,324
$ 750
$ 7,074
$ (1,732 ) $ 5,342



	Three Months Ended December 31,
	2019													2018
	Personnel		Facilities			Total Restructuring			Other Charges		Total			Personnel		Facilities			Total Restructuring		Other Charges		Total
Healthcare	$	1,276	$	1,527		$	2,803		$	—	$	2,803		$	1,479	$	127		$	1,606	$	—	$	1,606
Enterprise	1,304		505			1,809			—		1,809			2,551		13			2,564		—		2,564
Other	—		(365		)	(365		)	—		(365		)	1,030		—			1,030		2,507		3,537
Corporate	333		(532		)	(199		)	2,635		2,436			1,153		(290		)	863		6,071		6,934
Total	$	2,913	$	1,135		$	4,048		$	2,635	$	6,683		$	6,213	$	(150	)	$	6,063	$	8,578	$	14,641

Nine Months Ended June 30,
2019 2018
Personnel Facilities Total Restructuring Other Charges Total Personnel Facilities Total Restructuring Other Charges Total
Healthcare $ 4,672
$ 142
$ 4,814
$ —
$ 4,814
$ 3,678
$ 25
$ 3,703
$ —
$ 3,703
Enterprise 5,086
13
5,099
—
5,099
3,939
2,170
6,109
—
6,109
Automotive 5,224
1,707
6,931
27,291
34,222
2,233
—
2,233
—
2,233
Other 1,443
15
1,458
3,306
4,764
1,498
624
2,122
—
2,122
Corporate 2,679
676
3,355
8,414
11,769
2,339
951
3,290
10,335
13,625
Total $ 19,104
$ 2,553
$ 21,657
$ 39,011
$ 60,668
$ 13,687
$ 3,770
$ 17,457
$ 10,335
$ 27,792

Fiscal Year ~~2019~~2020

For the ~~nine~~three months ended ~~June 30,~~December 31, 2019, we recorded restructuring charges of ~~$21.7~~$4.0 million, which included ~~$19.1~~$2.9 million related to the termination of approximately ~~391~~37 employees and ~~$2.6~~$1.1 million related to certain excess facilities. Of these amounts, $1.1 million was recorded for the three months ended June 30, 2019, which included $0.7 million related to employee termination and $0.4 million related to certain excessrestructuring facilities. These actions were part of our strategic initiatives focused on investment rationalization, process optimization and cost reduction. We expect the remaining outstanding severance of ~~$5.1~~$1.5 million to be substantially paid during fiscal year ~~2019,~~2020, and the remaining balance of ~~$2.5~~$16.7 million related to excess facilities to be paid through fiscal year 2027, in accordance with the terms of the applicable leases.

Additionally, for the ~~nine~~three months ended ~~June 30,~~December 31, 2019, we recorded ~~$8.7 million of professional services fees related to our corporate transformational efforts, $27.7~~$2.8 million costs related to the separation of our ~~Imaging business and separation and stand-up of our~~ Automotive business, ~~and $3.3 million accelerated depreciation related to our Mobile Operator Services,~~which was offset in part by a ~~$0.7~~$0.2 million cash receipt from insurance claims related to the malware incident that occurred in the third quarter of fiscal year 2017 (the "2017 Malware Incident"). For the three months ended June 30, 2019, we recorded $15.2 million costs related to the separation of our Imaging business and separation and stand-up of our Automotive business, $0.2 million accelerated depreciation related to our Mobile Operator Services, offset in part by $0.4 million income from insurance claims related to the 2017 Malware Incident.claims.

Fiscal Year ~~2018~~2019

For the ~~nine~~three months ended ~~June 30,~~December 31, 2018, we recorded restructuring charges of ~~$17.5 million, which~~$6.1 million. This included ~~$13.7~~$6.2 million related to the termination of ~~approximately 280~~approximately 96 employees, ~~and $3.8~~which was offset in part by $0.2 million non-cash adjustments related to certain excess facilities. Of these amount, $7.1 million was recorded for the three months ended June 30, 2018, which included $6.3 million related to employee termination and $0.8 million related to certain excessrestructuring facilities. These actions were part of our strategic initiatives focused on investment rationalization, process optimization and cost reduction.

Additionally, for the ~~nine~~three months ended ~~June 30,~~December 31, 2018, we recorded ~~$5.6~~$7.2 million ~~expense~~of professional services fees related to the ~~transition agreement with~~execution of our ~~former CEO~~corporate transformational efforts, and ~~a $7.2~~$2.5 million ~~expense~~of accelerated depreciation related to our remediation and restoration efforts related to the 2017 Malware Incident, offset in part by a $2.5 million income from insurance claims related to the 2017 Malware Incident. For the three months ended June 30, 2018, we recorded a $2.8 million income from insurance claims related to the 2017 Malware Incident,Mobile Operator Services business, offset in part by a $1.1 million ~~expense~~cash receipt from insurance claims related to a malware incident that occurred in the ~~CEO transition.~~third quarter of fiscal year 2017.

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~11.~~10. Debt

As of ~~June 30,~~December 31, 2019 and September 30, ~~2018,~~2019, we had the following borrowing obligations (dollars in thousands):

June 30,
2019 September 30,
2018
5.625% Senior Notes due 2026, net of deferred issuance costs of $4.6 million and $5.1 million, respectively. Effective interest rate 5.625%. $ 495,364
$ 494,915
5.375% Senior Notes due 2020, net of deferred issuance costs of $1.2 million. Effective interest rate 5.375%. —
298,759
6.000% Senior Notes due 2024, net of deferred issuance costs of $1.6 million and $1.8 million, respectively. Effective interest rate 6.000%. 298,452
298,220
1.000% Convertible Debentures due 2035, net of unamortized discount of $98.1 million and $116.9 million, respectively, and deferred issuance costs of $4.6 million and $5.6 million, respectively. Effective interest rate 5.622%. 573,840
553,973
2.750% Convertible Debentures due 2031. Effective interest rate 7.432%. 46,568
46,568
1.250% Convertible Debentures due 2025, net of unamortized discount of $74.4 million and $82.4 million, respectively, and deferred issuance costs of $3.3 million and $3.7 million, respectively. Effective interest rate 5.578%. 272,350
263,863
1.500% Convertible Debentures due 2035, net of unamortized discount of $25.3 million and $32.8 million, respectively, and deferred issuance costs of $0.9 million and $1.1 million, respectively. Effective interest rate 5.394%. 237,736
229,906
Deferred issuance costs related to our Revolving Credit Facility (594 ) (843 )
Total debt 1,923,716
2,185,361
Less: current portion —
—
Total long-term debt $ 1,923,716
$ 2,185,361



	December 31, 2019			September 30, 2019
5.625% Senior Notes due 2026, net of deferred issuance costs of $4.3 million and $4.5 million, respectively. Effective interest rate 5.625%.	$	495,672		$	495,518
6.000% Senior Notes due 2024, net of deferred issuance costs of $1.5 million. Effective interest rate 6.000%.	—			298,529
1.000% Convertible Debentures due 2035, net of unamortized discount of $85.0 million and $91.6 million, respectively, and deferred issuance costs of $3.9 million and $4.3 million, respectively. Effective interest rate 5.622%.	587,531			580,639
2.750% Convertible Debentures due 2031. Effective interest rate 7.432%.	46,568			46,568
1.250% Convertible Debentures due 2025, net of unamortized discount of $68.8 million and $71.6 million, respectively, and deferred issuance costs of $3.0 million and $3.1 million, respectively. Effective interest rate 5.578%.	278,201			275,257
1.500% Convertible Debentures due 2035, net of unamortized discount of $20.1 million and $22.7 million, respectively, and deferred issuance costs of $0.7 million and $0.8 million, respectively. Effective interest rate 5.394%.	243,106			240,406
Deferred issuance costs related to our Revolving Credit Facility	(428		)	(511		)
Total debt	1,650,650			1,936,406
Less: current portion ^(a)	—			(1,142,870		)
Total long-term debt	$	1,650,650		$	793,536

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

The following table summarizes the maturities of our borrowing obligations as of ~~June 30,~~December 31, 2019 (dollars in thousands):


Fiscal Year	Convertible Debentures⁽¹⁾			Senior Notes			Total			Convertible Debentures⁽¹⁾			Senior Notes			Total
2019	$	—		$	—		$	—
2020	—			—			—			$	—		$	—		$	—
2021	—			—			—			—			—			—
2022	310,463			—			310,463			310,463			—			310,463
2023	676,488			—			676,488			676,488			—			676,488
2024										—			—			—
Thereafter	350,000			800,000			1,150,000			350,000			500,000			850,000
Total before unamortized discount	1,336,951			800,000			2,136,951			1,336,951			500,000			1,836,951
Less: unamortized discount and issuance costs	(206,457		)	(6,778		)	(213,235		)	(181,545		)	(4,756		)	(186,301		)
Total long-term debt	$	1,130,494		$	793,222		$	1,923,716		$	1,155,406		$	495,244		$	1,650,650


⁽¹⁾	Pursuant to the terms of each convertible instrument, holders have the right to redeem the debt on specific dates prior to maturity. The repayment schedule above assumes that payment is due on the next redemption date after ~~June 30,~~December 31, 2019.

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 ~~2020~~then outstanding 5.375% Senior ~~Notes.~~Notes due 2020. The 2026 Senior Notes bear interest at 5.625% per year, payable in cash semi-annually in ~~arrears, beginning on June 15, 2017.~~arrears.

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The 2026 Senior Notes are unsecured senior obligations and are guaranteed on an unsecured senior basis by certain of our domestic subsidiaries ("Subsidiary Guarantors"). The 2026 Senior Notes and the guarantees rank equally in right of payment with all of our and the Subsidiary Guarantors’ existing and future unsecured senior debt and rank senior in right of payment to all of our and the Subsidiary Guarantors’ future unsecured subordinated debt. The 2026 Senior Notes and guarantees effectively rank junior to all

~~NUANCE COMMUNICATIONS, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

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.

~~5.375%~~ 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 ~~due 2020~~

~~In August 2012, we issued $700.0 million~~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 ~~5.375% Senior Notes due on August 15, 2020 in a private placement. In October 2012, we issued an additional $350.0 million aggregate principal amount of our 5.375% Senior Notes (collectively~~ the "2020 Senior Notes"). The 2020 Senior Notes bear interest at 5.375% per year, payable in cash semi-annually in arrears. The 2020 Senior Notes are our unsecured senior obligations and are guaranteed on an unsecured senior basis by certain of our domestic subsidiaries, ("the Subsidiary Guarantors"). The 2020 Senior Notes and guarantees rank equally in right of payment with all of our and the Subsidiary Guarantors' existing and future unsecured senior debt and rank senior in right of payment to all of our and the Subsidiary Guarantors' future unsecured subordinated debt. The 2020 Senior Notes and guarantees effectively rank junior to all secured debt of our and 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 2020 Senior Notes.

~~In January 2017, we repurchased $600.0 million in aggregate principal amount of our 2020 Senior Notes using cash and cash equivalents and the net proceeds from our~~ 2026 Senior Notes ~~issued~~remains outstanding immediately thereafter.

Upon the occurrence of a change in ~~December 2016. In January 2017,~~control or sales of substantially all assets, we ~~recorded an extinguishment loss of $18.6 million. In accordance with~~must offer to repurchase the authoritative guidance for debt instruments, a loss on extinguishment is equal to the difference between the reacquisition price and the net carrying amount of the extinguished debt, including any unamortized debt discount or issuance costs. Following this activity, $450.0 million in aggregate principal amount of our 2020 Senior Notes remained outstanding.

~~In September 2018, we repurchased $150.0 million in aggregate principal amount of our 2020~~2026 Senior Notes at ~~par. As~~ a ~~result, we wrote off~~price equal to 100% in the ~~related unamortized deferred issuance costs related to~~case of an asset sale, or 101% in the ~~repayment and recorded an extinguishment loss~~case of ~~$0.3 million in fiscal year 2018. Following this activity, $300.0 million in aggregate~~a change of control, of the principal amount ~~of our 2020 Senior Notes remained outstanding.~~plus accrued and unpaid interest to, but excluding, the repurchase date.

In March 2019, we repurchased the remaining $300.0 million in aggregate principal amount of our 2020 Senior Notes at par using the proceeds from the sale of our Imaging business. As a result, we wrote off the remaining unamortized deferred issuance costs related to the repayment and recorded an extinguishment loss of $0.9 million for the three months ended March 31, 2019. Following this activity, we have fully repaid our 2020 Senior Notes and no amount remained outstanding.

~~6.000%~~6.0% Senior Notes due 2024

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

The 2024 Senior Notes are unsecured senior obligations and are guaranteed on an unsecured senior basis by our Subsidiary Guarantors. The 2024 Senior Notes and the guarantees rank equally in right of payment with all of our and the Subsidiary Guarantors’ existing and future unsecured senior debt, and rank senior in right of payment to all of our and the Subsidiary Guarantors’ future unsecured subordinated debt. The 2024 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 2024 Senior Notes.

~~At any time before July~~On October 1, 2019, we ~~may redeem~~redeemed all ~~or a portion of~~ the ~~2024 Senior Notes at a redemption price equal to 100% of the aggregate~~$300.0 million outstanding principal amount of the 2024 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 July 1, 2019, we may redeem all or a portion of the 2024 Senior Notes at certain redemption prices expressed as percentages of the principal amount,for $313.5 million, plus accrued and unpaid interest ~~to, but excluding,~~of $4.5 million. As a result of the redemption, ~~date.~~

~~NUANCE COMMUNICATIONS, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

we recorded a $15.0 million loss on extinguishment of debt for the first quarter of fiscal year 2020, including a $13.5 million redemption premium and a $1.5 million write-off of unamortized debt issuance costs.

1.0% Convertible Debentures due 2035

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

We account separately for the liability and equity components of the 1.0% 2035 Debentures in accordance with authoritative guidance for convertible debt instruments that may be settled in cash upon conversion. The ~~initial~~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 ~~price is approximately $27.22 per share.~~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.

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

If ~~we distribute~~converted, the principal amount of the 1.0% 2035 Debentures is payable in cash and any amounts payable in excess of the principal amount will (based on an initial conversion rate, which represents a conversion price of approximately $24.12 per share, subject to ~~all holders~~adjustment) be paid in cash or shares of our common stock, ~~a per share dividend exceeding 10%~~at our election. Conversion is only allowed in the following circumstances and to the following extent: (i) prior to June 15, 2035, on any date during any fiscal quarter (and only during such fiscal quarter) if the closing sale price of our common stock was more than 130% of the then current conversion price for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of the previous fiscal quarter; (ii) during the five consecutive business-day period following any five consecutive trading-day period in which the trading price for $1,000 principal amount of the 1.0% 2035 Debentures for each day during such five trading-day period was less than 98% of the closing sale price of our common stock multiplied by the then current conversion rate; (iii) upon the occurrence of specified corporate transactions, as described in the indenture for the 1.0% 2035 Debentures; or (iv) at the option of the holder at any time on or after June 15, 2035. Additionally, we may redeem the ~~trading day preceding~~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 ~~declaration date~~principal amount of the 1.0% 2035 Debentures to be purchased plus any accrued and unpaid interest, including any additional interest to, but excluding, the repurchase date. Each holder shall have the right, at such holder’s option, to require us to repurchase all or any portion of the 1.0% 2035 Debentures held by such holder on December 15, 2022, December 15, 2027, or December 15, 2032 at par plus accrued and unpaid interest. If we undergo a fundamental change or non-stock change of control (as described in the indenture for ~~such distribution (e.g. a spin-off),~~ the 1.0% 2035 Debentures) prior to maturity, holders will have the ~~right~~option to ~~convert~~require us to repurchase all or any portion of their debentures for cash at a price equal to 100% of the principal amount of the 1.0% 2035 Debentures to be purchased plus any accrued and unpaid interest.

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

As of ~~June 30,~~December 31, 2019, none of the conversion criteria were met for the 1.0% 2035 Debentures. If the conversion criteria were met, we could be required to repay all or some of the aggregate principal amount in cash prior to the maturity date.

2.75% Convertible Debentures due 2031

InOn October 24, 2011, we ~~issued~~sold $690.0 million ~~in aggregate principal amount~~ of 2.75% ~~Senior~~ Convertible Debentures due in 2031 ~~(the "2.75% 2031 Debentures")~~ in a private placement. Total proceeds, net of issuance costs, were $676.1 million. The 2.75% 2031 Debentures bear interest at 2.75% per year, payable in cash semi-annually in arrears. The 2.75% 2031 Debentures mature on November 1, 2031, subject to the right of the holders to require us to redeem the 2.75% 2031 Debentures on November 1, 2021 and 2026. The 2.75% 2031 Debentures are general senior unsecured obligations and rank equally in right of payment with all of our existing and future unsecured, unsubordinated indebtedness and senior in right of payment to any indebtedness that is contractually subordinated to the 2.75% 2031 Debentures. The 2.75% 2031 Debentures will be effectively subordinated to indebtedness and other liabilities of our subsidiaries. ~~The initial conversion price is approximately $32.30 per share.~~

We account separately for the liability and equity components of the 2.75% 2031 Debentures in accordance with authoritative guidance for convertible debt instruments that may be settled in cash upon conversion. At issuance, we allocated $533.6 million to ~~Long-term~~long-term debt, and $156.4 million has been recorded as ~~Additional~~additional paid-in capital, which ~~is being~~was amortized to ~~Interest~~interest expense using the effective interest rate method through November 2017.

In June 2015, we entered into separate privately negotiated agreements with certain holders of our 2.75% 2031 Debentures to exchange, in a private placement, $256.2 million in aggregate principal amount of our 2031 Debentures for approximately $263.9 million in aggregate principal amount of our 1.5% Senior Convertible Debentures due in 2035 ~~Debentures.~~(the"1.5% 2035 Debenture"). Upon repurchase we recorded an extinguishment loss of $17.7 million in other expense, net, in the accompanying consolidated statements of operations. In December 2015, we entered into separate privately negotiated agreements with certain holders of our 2.75% 2031 Debentures to repurchase $38.3 million in aggregate principal with proceeds received from the issuance of our 1.0% 2035 Debentures. Upon repurchase we recorded an extinguishment loss of $2.4 million in other expense, net, in the accompanying consolidated statements of operations. In ~~March 2017, we entered into separate privately negotiated agreements~~accordance with ~~certain holders~~the authoritative guidance for convertible debt instruments, a loss on extinguishment is equal to the difference between the reacquisition price and the net carrying amount of the extinguished debt for our 2.75%2031 Debentures, ~~to repurchase $17.8~~including any unamortized debt discount or issuance costs. Following this activity, $395.5 million in aggregate principal ~~with proceeds received from the issuance~~amount of our ~~1.25% Senior Convertible~~2.75% 2031 Debentures ~~issued~~remained outstanding. The aggregate debt discount was amortized to interest expense using the effective interest rate method through November 2017.

If converted, the principal amount of the 2.75% 2031 Debentures is payable in ~~March 2017.~~cash and any amounts payable in excess of the principal amount will (based on an initial conversion rate, which represents a conversion price of approximately $28.62 per share, subject to adjustment) be paid in cash or shares of our common stock, at our election. Conversion is only allowed in the following circumstances and to the following extent: (i) 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

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the period of the 30 consecutive trading days ending on the last trading day of the previous fiscal quarter; (ii) during the 5 consecutive business-day period following any 5 consecutive trading-day period in which the trading price for $1,000 principal amount of the 2.75% 2031 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 2.75% 2031 Debentures; or (iv) at the option of the holder at any time on or after May 1, 2031. Additionally, we may redeem the 2.75% 2031 Debentures, in whole or in part, at par plus accrued and unpaid interest. Each holder shall have the right, at such holder's option, to require us to repurchase all or any portion of the 2.75% 2031 Debentures held by such holder on November 1, 2021 and November 1, 2026 at par plus accrued and unpaid interest. If we undergo a fundamental change (as described in the indenture for the 2.75% 2031 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 debentures to be purchased plus any accrued and unpaid interest.

In November 2017, holders of approximately $331.2 million in aggregate principal amount of the outstanding 2.75% 2031 Debentures exercised their right to require us to repurchase such debentures. Following the repurchase, $46.6 million in aggregate principal amount of the 2.75% 2031 Debentures remains outstanding. ~~On or after November 6, 2017, we~~We have the right to call for redemption of some or all of the remaining outstanding 2.75% 2031 Debentures.

~~If we distribute~~In accordance with the terms of the indentures governing the 2.75% 2031 Debentures and due to ~~all holders~~the completion of the spin-off of our common stock a per share dividend exceeding 10% of the closing sale price of our common stock on the trading day preceding the declaration date for such distribution (e.g. a spin-off), the holders will have the right to convert all or any portion of their debentures atAutomotive business, the conversion ratio of the 2.75% 2031 Debentures has been adjusted to from 30.9610 to 34.9385 shares per $1,000 principal ~~amount, multiplied by the then current stock price.~~ amount.

As of ~~June 30,~~December 31, 2019, none of the conversion criteria were met for the 2.75% 2031 Debentures. If the conversion criteria were met, we could be required to repay all or some of the aggregate principal amount in cash prior to the maturity date.

On February 5, 2020, we announced our intent to redeem the remaining $46.6 million outstanding amount of the 2.75% Convertible Debentures due 2031, which is expected to be completed in March 2020.

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 ~~initial~~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 ~~price is approximately $22.22 per share.~~feature and record the remainder in stockholders’ equity. At issuance, we allocated $252.1 million to ~~Long-~~

~~NUANCE COMMUNICATIONS, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

~~term~~long-term debt, and $97.9 million has been recorded as ~~Additional~~additional paid-in capital, which is being amortized to ~~Interest~~interest expense using the effective interest rate method through April 1, 2025.

If ~~we distribute~~converted, the principal amount of the 1.25% 2025 Debentures is payable in cash and any amounts payable in excess of the principal amount will (based on an initial conversion rate, which represents a conversion price of approximately $19.69 per share subject to ~~all holders~~adjustment under certain circumstances) be paid in cash or shares of our common stock, ~~a per share dividend exceeding 10%~~at our election. Conversion is only allowed in the following circumstances and to the following extent: (i) prior to October 1, 2024, on any date during any fiscal quarter (and only during such fiscal quarter) if the closing sale price of our common stock was more than 130% of the then current conversion price for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of the previous fiscal quarter; (ii) at any time on or after October 1, 2024, (iii) during the five consecutive business-day period immediately following any five consecutive trading-day period in which the trading price for $1,000 principal amount of the 1.25% 2025 Debentures for each day during such five trading-day period was less than 98% of the closing sale price of our common stock onmultiplied by the ~~trading day preceding~~then current conversion rate; or (iv) upon the ~~declaration date~~occurrence of specified corporate transactions, as described in the indenture for ~~such distribution (e.g.~~the 1.25% 2025 Debentures. We may not redeem the 1.25% 2025 Debentures prior to the maturity date. If we undergo a ~~spin-off),~~fundamental change or non-stock change of control (as described in the indenture for the 1.25% 2025 Debentures) prior to

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

maturity, holders will have the ~~right~~option to ~~convert~~require us to repurchase all or any portion of their debentures for cash at a price equal to 100% of the principal amount of the 1.25% 2025 Debentures to be purchased plus any accrued and unpaid interest.

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

As of ~~June 30,~~December 31, 2019, none of the conversion criteria were met for the 1.25% 2025 Debentures. If the conversion criteria were met, we could be required to repay all or some of the aggregate principal amount in cash prior to the maturity date.

1.50% Convertible Debentures due 2035

In June 2015, we issued $263.9 million in aggregate principal amount of ~~1.50%~~1.5% Senior Convertible Debentures due in 2035 ~~(the "1.5% 2035 Debentures")~~ 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 ~~1.50%~~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. ~~The initial conversion price is approximately $23.26 per share.~~

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~~long-term debt, and $55.3 million has been recorded as ~~Additional~~additional paid-in capital, which is being amortized to ~~Interest~~interest expense using the effective interest rate method through November 2021.

If ~~we distribute~~converted, the principal amount of the 1.5% 2035 Debentures is payable in cash and any amounts payable in excess of the principal amount, will (based on an initial conversion rate, which represents an initial conversion price of approximately $20.61 per share subject to ~~all holders~~adjustment) be paid in cash or shares of our common stock, ~~a per share dividend exceeding 10%~~at our election. Conversion is only allowed in the following circumstances and to the following extent: (i) prior to May 1, 2035, on any date during any fiscal quarter beginning after September 30, 2015 (and only during such fiscal quarter) if the closing sale price of our common stock was more than 130% of the then current conversion price for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of the previous fiscal quarter; (ii) during the five consecutive business-day period following any five consecutive trading-day period in which the trading price for $1,000 principal amount of the 1.5% 2035 Debentures for each day during such five trading-day period was less than 98% of the closing sale price of our common stock multiplied by the then current conversion rate; (iii) upon the occurrence of specified corporate transactions, as described in the indenture for the 1.5% 2035 Debentures; or (iv) at the option of the holder at any time on or after May 1, 2035. Additionally, we may redeem the ~~trading day preceding~~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 ~~declaration date~~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 ~~such distribution (e.g. a spin-off),~~ the 1.5% 2035 Debentures) prior to maturity, holders will have the ~~right~~option to ~~convert~~require us to repurchase all or any portion of their debentures for cash at a price equal to 100% of the principal amount of the 1.5% 2035 Debentures to be purchased plus any accrued and unpaid interest.

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

As of ~~June 30,~~December 31, 2019, none of the conversion criteria were met for the 1.5% 2035 Debentures. If the conversion criteria were met, we could be required to repay all or some of the aggregate principal amount in cash prior to the maturity date.

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Revolving Credit Facility

Our revolving credit agreement (the “Revolving Credit Facility"), which expires on April 15, 2021, provides for aggregate borrowing commitments of $242.5 million, including the revolving facility loans, the swingline loans and issuance of letters of credit. As of ~~June 30,~~December 31, 2019, after taking into account the outstanding letters of credit of ~~$5.8~~$5.9 million, we had ~~$236.7~~$236.6 million available for borrowing under the Revolving Credit Facility. 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 Facility contains customary affirmative and negative covenants and conditions to borrowing, as well as customary events of default. As of ~~June 30,~~December 31, 2019, we ~~are~~were in compliance with all the debt covenants.

~~12.~~11. Stockholders' Equity

Share Repurchases

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

We repurchased ~~1.7~~5.7 million shares of our common stock for ~~$29.6~~$92.4 million for the three months ended ~~June 30,~~December 31, 2019, and ~~7.8~~we repurchased 4.9 million shares of our common stock for ~~$120.9 million for the nine months ended June 30, 2019. For the three and nine months ended June 30, 2018, we repurchased 8.1 million shares of our common stock for $112.0~~$75.2 million under the program for the three months ended December 31, 2018 under the program. The amount paid in excess of par value is recognized in additional paid in capital and these shares were retired upon repurchase. Since the commencement of the program, we have repurchased an aggregate of ~~63.9~~70.0 million shares for ~~$1,063.6~~$1,162.1 million. ~~The amount paid in excess of par value is recognized in Additional paid in capital. Shares were retired upon repurchase.~~ As of ~~June 30,~~December 31, 2019, approximately ~~$436.4~~$337.9 million remained available for future repurchases under the program.

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~13.~~12. Net Income (Loss) Per Share

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


	Three Months Ended June 30,					Nine Months Ended June 30,					Three Months Ended December 31,
	2019		2018			2019		2018			2019			2018
Numerator:
Net income (loss) from continuing operations	$	9,259	$	(20,720	)	$	6,209	$	(140,396	)
Net income from discontinued operations	—		6,683			99,472		15,534
Net income (loss)	$	9,259	$	(14,037	)	$	105,681	$	(124,862	)
Net income from continuing operations											$	54,877		$	13,881
Net (loss) income from discontinued operations											(6,192		)	5,209
Net income											$	48,685		$	19,090

Denominator:
Weighted average common shares outstanding — basic	285,942		292,663			285,064		292,703			284,130			287,796
Dilutive effect of employee stock compensation plans	2,706		—			3,089		—			5,323			4,563
Weighted average common shares outstanding — diluted	288,648		292,663			288,153		292,703			289,453			292,359

Net income (loss) per common share - basic:
Continuing operations	$	0.03	$	(0.07	)	$	0.02	$	(0.48	)	$	0.19		$	0.05
Discontinued operations	—		0.02			0.35		0.05			(0.02		)	0.02
Total net income (loss) per basic common share	$	0.03	$	(0.05	)	$	0.37	$	(0.43	)
Total net income per basic common share											$	0.17		$	0.07

Net income (loss) per common share - diluted:
Continuing operations	$	0.03	$	(0.07	)	$	0.02	$	(0.48	)	$	0.19		$	0.05
Discontinued operations	—		0.02			0.35		0.05			(0.02		)	0.02
Total net income (loss) per diluted common share	$	0.03	$	(0.05	)	$	0.37	$	(0.43	)
Total net income per diluted common share											$	0.17		$	0.07

Anti-dilutive equity instruments excluded from the calculation	527		4,408			673		3,838			1,336			1,962
Contingently issuable awards excluded from the calculation ^(a)	2,555		1,975			2,542		1,801			2,932			2,076

^(a) ~~Certain contingently issuable 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.~~

~~14.~~13. Stock-Based Compensation

On January ~~17, 2019,~~22, 2020, our shareholders ~~approved amendments~~adopted of the 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 ~~Company’s~~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")~~. The Amended~~; and ~~Restated 2000 Stock Plan (i) increases~~(iv) identifies the ~~number~~annual limits on shares granted to each individual and the types of ~~shares issuable from 82,250,000 to 83,500,000 shares; (ii) permits the Company’s Board of Directors (the "Board") to make proportional adjustments to outstanding~~ awards affected by a change in the Company’s capital structure, and in addition to or in lieu of such adjustments, to permit the Board to pay dividends, dividend equivalents, or similar rights in conjunction to any such changes in the Company’s capital structure; and (iii) contains certain updates to reflect changes in law relating to Section 162(m).permissible.

As of ~~June 30,~~December 31, 2019, we had ~~8.5~~6.0 million shares available for future grants under the Amended and Restated 2000 Stock Plan. We recognize stock-based compensation expenses over the requisite service periods. Our share-based awards are classified within ~~equity.~~ equity upon issuance.

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


	Three Months Ended June 30,				Nine Months Ended June 30,				Three Months Ended December 31,
	2019		2018		2019		2018		2019		2018
Cost of hosting and professional services	$	7,280	$	6,790	$	20,093	$	20,474	$	5,541	$	6,957
Cost of product and licensing	197		114		593		492		129		264
Cost of maintenance and support	583		551		730		1,770		393		(234		)
Research and development	10,262		8,034		26,912		24,798		8,704		5,376
Sales and marketing	7,593		8,461		24,488		25,997		7,028		8,252
General and administrative	10,017		9,549		27,327		27,935		9,438		8,882
Total	$	35,932	$	33,499	$	100,143	$	101,466	$	31,233	$	29,497

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Modifications of Equity Awards

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

Stock Options

The table below summarizes activities related to stock options for the ~~nine~~three months ended ~~June 30, 2019~~:December 31, 2019:

Number of
Shares

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Term

Aggregate
Intrinsic
Value ^(a)
Outstanding at September 30, 2018 19,144
$ 17.31

Exercised (1,500 ) $ 12.79

Expired (4,528 ) $ 17.89

Outstanding at June 30, 2019 13,116
$ 17.63
2.7 years $ 0.02 million
Exercisable at June 30, 2019 13,116
$ 17.63
2.7 years $ 0.02 million
Exercisable at June 30, 2018 20,504
$ 17.16
2.5 years $ 0.10 million



	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value ^(a)
Outstanding at September 30, 2019	11,302		$	20.04
Exercised	(3,207	)	$	17.18
Expired	—		$	—
Equitable Adjustment - Cerence Spin-off ^(b)	1,883
Outstanding at December 31, 2019	9,978		$	17.18	2.3 years	$	—
Exercisable at December 31, 2019	9,978		$	17.18	2.3 years	$	—
Exercisable at December 31, 2018	14,616		$	17.13	2.9 years	$	—


^(a)	The aggregate intrinsic value in this table represents any excess of the closing market price of our common stock as of ~~June 30,~~December 31, 2019 ($~~15.97)~~17.83) over the exercise price of the underlying options.


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

The aggregate intrinsic values of stock options exercised during the ~~nine~~three months ended ~~June 30,~~December 31, 2019 and 2018 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 ~~nine~~three months ended ~~June 30,~~December 31, 2019:

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Number of Shares Underlying Restricted Units — Contingent Awards Number of Shares Underlying Restricted Units — Time-Based Awards
Outstanding at September 30, 2018 3,039,568
6,872,087
Granted 1,342,836
6,214,882
Earned/released (1,386,735 ) (5,220,312 )
Modification ^(a)
(296,759 ) 296,759
Forfeited (688,835 ) (1,159,444 )
Outstanding at June 30, 2019 2,010,075
7,003,972
Weighted average remaining recognition period of outstanding restricted units 1.6 years
1.6 years
Unrecognized stock-based compensation expense of outstanding restricted units $27.0 million $62.2 million
Aggregate intrinsic value of outstanding restricted units ^(b)
$32.1 million $111.9 million



	Number of Shares Underlying Restricted Units — Performance-Based Awards		Number of Shares Underlying Restricted Units — Time-Based Awards
Outstanding at September 30, 2019	1,991,325		8,998,944
Granted	1,060,384		3,934,253
Earned/released	(303,198	)	(5,274,466	)
Forfeited	(418,834	)	(1,253,558	)
Equitable Adjustment - Cerence Spin-off ^(b)	303,074		1,316,006
Outstanding at December 31, 2019	2,632,751		7,721,179
Weighted average remaining recognition period of outstanding Restricted Units	2.1 years		1.9 years
Unrecognized stock-based compensation expense of outstanding Restricted Units	$27.2 million		$74.2 million
Aggregate intrinsic value of outstanding Restricted Units ^(a)	$46.9 million		$137.7 million


^(a)	~~296,759 shares of contingently issuable awards were modified to time-based awards with only service conditions in December 2018.~~


^(b)	The aggregate intrinsic value in this table represents any excess of the closing market price of our common stock as of ~~June 30,~~December 31, 2019 ($~~15.97)~~17.83) over the purchase price of the underlying restricted units.


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

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:

Nine Months Ended June 30,
2019 2018
Weighted-average grant-date fair value per share $ 17.30
$ 15.76
Total intrinsic value of shares vested (in millions) $ 106.1
$ 115.3



	Three Months Ended December 31,
	2019		2018
Weighted-average grant-date fair value per share	$	17.08	$	16.43
Total intrinsic value of shares vested (in millions)	$	95.4	$	82.4

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



	December 31, 2019		December 31, 2018
Dividend yield	0.0	%	0.0	%
Expected volatility	27.73	%	27.86% - 30.85%
Risk-free interest rate	1.62	%	2.72% - 3.02%
Expected term (in years)	3		1 - 3

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~15.~~14. Income Taxes

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


	Three Months Ended June 30,						Nine Months Ended June 30,						Three Months Ended December 31,
	2019			2018			2019			2018			2019		2018
Domestic	$	(4,912	)	$	(42,438	)	$	(20,475	)	$	(162,305	)	$	11,556	$	18,634
Foreign	21,957			31,277			34,498			(45,508		)	6,881		(2,753		)
Income (loss) before income taxes	$	17,045		$	(11,161	)	$	14,023		$	(207,813	)
Income before income taxes													$	18,437	$	15,881

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


	Three Months Ended June 30,						Nine Months Ended June 30,						Three Months Ended December 31,
	2019			2018			2019			2018			2019			2018
Domestic	$	(3,086	)	$	(339	)	$	(8,805	)	$	(76,130	)	$	(39,197	)	$	1,570
Foreign	10,872			9,898			16,619			8,713			2,757			430
Provision (benefit) for income taxes	$	7,786		$	9,559		$	7,814		$	(67,417	)
(Benefit) provision for income taxes													$	(36,440	)	$	2,000
Effective tax rate	45.7		%	(85.6		)%	55.7		%	32.4		%	(197.6		)%	12.6		%

The effective income tax ~~rates were estimated~~rate is based upon ~~estimated~~the income for the year, the composition of the income in different countries, changes relating to valuation allowances for certain countries if and as necessary, and adjustments, if any, for the potential tax consequences, benefits or resolutions of audits or other tax contingencies. Our ~~aggregate statutory~~effective income tax rate in foreign jurisdictions is lower than our statutory income tax rate in the United States; the majority of our income before provision for income taxes from foreign operations has been earned by subsidiaries in Ireland. Our effective tax rate may be adversely affected by earnings being lower than anticipated in countries where we have lower statutory tax rates and higher than anticipated in countries where we have higher statutory tax rates.

Our effective income tax rate was ~~45.7% for the three months ended June 30, 2019, compared to (85.6)~~(197.6)% for the three months ended ~~June 30, 2018. The effective tax rates~~December 31, 2019, compared to 12.6% for the three months ended ~~June 30,~~December 31, 2018. The effective tax rate for the three months ended December 31, 2019 ~~and June 30,~~differed from the U.S. federal statutory rate of 21.0% primarily due to a net $36.4 million deferred tax benefit from an adjustment to domestic valuation allowance due to the Cerence spin-off. The effective tax rate for the three months ended December 31, 2018 differed from the U.S. federal statutory ~~rates~~rate of 21.0% ~~and 24.53%, respectively,~~ primarily due to the valuation allowance ~~related to losses~~on deferred tax assets in the United States.

Automotive Deferred Taxes

~~Our effective income tax rate was 55.7% for~~We have made a policy election to classify the nine months ended June 30, 2019, compared to 32.4% for the nine months ended June 30, 2018. The effective tax rates for the nine months ended June 30, 2019 and June 30, 2018 differed from the U.S. federal statutory rates of 21.0% and 24.53%, respectively, primarily due to the valuation allowance related to losses in the United States. Additionally, for the nine months ended June 30, 2018, we recognized approximately $87.0 million of deferred tax benefit from the remeasurement of deferred tax assets and liabilities ~~offset by approximately $2.0 million estimated tax provision~~associated with assets and liabilities held for ~~deemed repatriated foreign earnings as~~sale or spun off within our consolidated balance sheets of continuing operations. As a result, approximately $92.6 million of ~~the Tax Cuts~~deferred tax assets related to Cerence's intellectual property was included within Other assets as of September 30, 2019, which was spun off on October 1, 2019 and ~~Jobs Act ("TCJA") enacted in December 2017.~~

In July 2019, we completed an intra-entity transfer from Bermuda to Europe of certain intangible property ("IP") rights associated with certain technology portfolios. This transfer is expected to result in a deferred income tax benefit for local tax purposes. We are still evaluating the analysis, which is expected to be completed in the fourth quarter of fiscal year 2019.

was recorded against equity.

~~16.~~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 ~~at times~~ 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."~~"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 ~~best~~ information available at the time. Due to the inherent uncertainties involved in claims, ~~and~~ 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

~~NUANCE COMMUNICATIONS, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

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 ~~June 30,~~December 31, 2019, 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.

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

~~17. Related Party Transaction~~16. Operating Leases

~~In January 2018, we entered into~~Operating Leases

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

We determine if an arrangement is a ~~software~~lease at inception. The current portion of our operating lease liabilities is included in accrued expenses and ~~license agreement (the "License Agreement") with Magnet Systems, Inc. ("Magnet"). A member~~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 ~~Magnet board of directors also served on our Board of Directors~~future lease payments at the ~~time~~lease commencement date. The interest rate used to determine the present value of the ~~transaction. Pursuant~~future lease payments is our incremental borrowing rate. Due to the ~~License Agreement, Magnet granted Nuance~~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 ~~perpetual software license~~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 ~~technology~~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 ~~one-time payment~~single lease component which increases the amount of ~~$5.0~~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, 2019, our operating leases had a weighted average remaining lease term of 4.6 years and a weighted average discount rate of 3.8%.

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Future lease payments under operating leases as of December 31, 2019 were as follows (dollars in thousands):



Fiscal Year	Operating Leases		Operating leases under restructuring		Total
2020	$	20,977	$	4,041	$	25,018
2021	23,918		3,147		27,065
2022	19,384		2,866		22,250
2023	13,400		2,939		16,339
2024	11,471		1,629		13,100
Thereafter	47,448		3,189		50,637
Total	$	136,598	$	17,811	$	154,409

As of December 31, 2019, we have subleased certain office space that is included in the above table to third parties. As of December 31, 2019, the aggregate sublease income to be recognized during the remaining lease terms is $14.2 million, ~~in cash,~~ with ~~$3.5~~approximately an average of $2.2 million ~~paid immediately upon the effective date~~annually for each of the ~~License Agreement~~next five fiscal years and ~~$1.5~~approximately $3.1 million ~~payable upon the earlier of (i) the 120-day period following the effective date of the License Agreement or (ii) signature of a statement of work~~thereafter.

Our operating lease cost was approximately $8.2 million for the ~~engineering services described below. The amount~~three months ended December 31, 2019. Operating lease payments included within operating cash flows were $8.3 million for ~~license was fully paid in fiscal year 2018.~~

~~Additionally, we entered into a service agreement (the "Service Agreement") with Magnet, pursuant to which, Magnet would provide engineering services to assist in integrating~~ the licensed technology into certain of our Enterprise solutions. The fees under the Service Agreement total $2.0 million, payable in six equal monthly installments upon the signature of the statement of work, which was finalized within 90 days following the effective date of the License Agreement. We incurred $2.0 million service costs by the time the integration service was completed on Marchthree months ended December 31, 2019.

~~18.~~17. Segment and Geographic Information

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

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 Automotive segment is primarily engaged in providing automotive manufacturers and their suppliers branded and personalized virtual assistants and connected car services built on our voice recognition and natural language understanding

~~NUANCE COMMUNICATIONS, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

technologies. As more fully disclosed in Note 4, on November 19, 2018, we announced our intent to spin off our Automotive business into an independent publicly-traded company through a pro rata distribution to our common stock holders. Completion of the proposed spin-off is subject to certain conditions, including final approval by our Board of Directors. We expect to complete the spin-off by the beginning of fiscal year 2020.

~~The~~ Other segment includes ~~our SRS business~~voicemail transcription services, Mobile Operator Services, and our Devices business. Our SRS business provides value-added services to mobile operators in India and Brazil ("Mobile Operator Services") and voicemail transcription services to mobile operators in the rest of the world ("Voicemail-to-Text"). Our Devices business provides speech recognition solutions and predictive text technologies to handset devices. Our Devices revenue has been declining due to the ongoing consolidation of our handset manufacturer customer base and continued erosion of our penetration of the remaining market. During the fourth quarter of fiscal 2018, in connection with our comprehensive portfolio and business review efforts, we commenced a wind-down of our Devices and Mobile Operator Services businesses. In May 2019, we completed the sale of our Mobile Operator Services business in Brazil, and July 2019, we completed the sale of our Mobile Operator Services business in India. ~~The sale prices and any gain or loss was immaterial.~~

As more fully described in Note 4, ~~effective~~on October 1, 2019, we completed the spin-off of our Automotive business as an independent publicly traded company. Effective the first quarter of fiscal year ~~2019, the~~2020, our Automotive business's historical results of ~~our Imaging segment, previously a reportable segment,~~operations have been included within discontinued operations due to the completion of the sale of Imaging on February 1, 2019. As a result, effective the first quarter of fiscal year 2019, we changed our corporate overhead allocation methodology to re-allocate the stranded costs related to our Imaging business to the remaining operating segments included within continuing operations. ~~Our segment presentation for the three and nine months ended June 30, 2018 has been restated to reflect the re-allocation of stranded costs.~~ For the three months ended ~~June 30, 2019 and~~December 31, 2018, ~~$1.9 million and $2.1~~$4.2 million of stranded costs previously allocated to our Automotive segment have been ~~included within total segment profits and~~ re-allocated to Healthcare, Enterprise, Automotive, and Other; for the nine months ended June 30, 2019 and 2018, $3.7 million and $5.9 million of stranded costs have been included within total segment profits and re-allocated to Healthcare, Enterprise, Automotive, and Other.

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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


	Three Months Ended						Nine Months Ended
	June 30,						June 30,						Three Months Ended December 31,
	2019			2018			2019			2018			2019			2018
Segment revenues:	(ASC 606)			(ASC 605)			(ASC 606)			(ASC 605)
Healthcare	$	228,384		$	236,194		$	704,911		$	742,969		$	270,534		$	271,978
Enterprise	137,888			119,596			383,217			352,862			138,473			129,692
Automotive	72,982			73,754			222,406			204,202
Other	11,790			22,241			46,885			74,328			9,315			18,358
Total segment revenues	451,044			451,785			1,357,419			1,374,361			418,322			420,028
Less: acquisition-related revenues adjustments	(1,847		)	(2,336		)	(4,985		)	(11,495		)	(89		)	(353		)
Total revenues	449,197			449,449			1,352,434			1,362,866			418,233			419,675
Segment profit:
Healthcare	79,978			76,504			247,036			238,966			93,279			102,556
Enterprise	40,820			32,513			109,015			95,078			42,536			42,282
Automotive	30,662			27,963			76,627			79,708
Other	4,378			2,967			15,819			12,298			5,128			5,335
Total segment profit	155,838			139,947			448,497			426,050			140,943			150,173
Corporate expenses and other, net	(36,904		)	(41,135		)	(104,963		)	(148,214		)	(30,489		)	(35,114		)
Acquisition-related revenues	(1,849		)	(2,336		)	(4,985		)	(11,495		)	(89		)	(353		)
Stock-based compensation	(35,932		)	(33,499		)	(100,143		)	(101,466		)	(31,233		)	(29,497		)
Amortization of intangible assets	(25,391		)	(32,028		)	(78,126		)	(95,838		)	(19,176		)	(21,198		)
Acquisition-related costs, net	(1,154		)	(4,916		)	(6,223		)	(12,837		)	(1,167		)	(2,601		)
Restructuring and other charges, net	(16,118		)	(5,342		)	(60,668		)	(27,792		)	(6,683		)	(14,641		)
Impairment of goodwill	—			—			—			(137,907		)
Other expenses, net	(21,445		)	(31,852		)	(79,366		)	(98,314		)	(33,669		)	(30,888		)
Income (loss) before income taxes	$	17,045		$	(11,161	)	$	14,023		$	(207,813	)
Income before income taxes													$	18,437		$	15,881

~~NUANCE COMMUNICATIONS, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

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				Nine Months Ended
	June 30,				June 30,
	2019		2018		2019		2018		Three Months Ended December 31,
	(ASC 606)		(ASC 605)		(ASC 606)		(ASC 605)		2019		2018
United States	$	337,411	$	333,809	$	1,019,945	$	1,014,295	$	346,810	$	345,977
International	111,786		115,640		332,489		348,571		71,423		73,698
Total revenues	$	449,197	$	449,449	$	1,352,434	$	1,362,866	$	418,233	$	419,675

~~19.~~18. Supplemental Cash Flow Information

Cash paid for Interest and Income Taxes:


	Three Months Ended June 30,				Nine Months Ended June 30,				Three Months Ended December 31,
	2019		2018		2019		2018		2019		2018
	(Dollars in thousands)								(Dollars in thousands)
Interest paid	$	22,657	$	22,536	$	63,411	$	71,244	$	26,692	$	31,568
Income taxes paid	$	7,058	$	2,530	$	14,272	$	9,895	$	1,892	$	2,210

~~Non-Cash Investing and Financing Activities:~~

From time to time, we issue shares of our common stock in connection with our business and asset acquisitions, including shares issued as payment for acquisitions, shares initially held in escrow, and shares issued as payment for contingent consideration, as more fully described in Note 5.

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; 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 ~~artificial intelligence ("AI")~~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, ~~automotive,~~ financial services, ~~telecommunication~~telecommunications and travel industries, among others. We ~~are seeing~~see several trends in our markets, including (i) the growing adoption of cloud-based, connected services and highly interactive mobile applications, (ii) deeper integration of virtual assistant capabilities and services, and (iii) the continued expansion of our core technology portfolio including automated speech recognition ("ASR"), natural language understanding ("NLU"), semantic processing, domain-specific reasoning, dialog management capabilities, AI, and voice biometric speaker authentication. We report our business in ~~four~~three segments, Healthcare, Enterprise, ~~Automotive,~~ and Other.

~~BusinessTrends~~

•

Healthcare. ~~Customers in our~~Our healthcare segment ~~are broadly implementing electronic health record ("EHR")~~provides intelligent systems that support a more natural and ~~are working~~insightful approach to ~~improve~~ clinical documentation, ~~improve quality of care, minimize physician burnout, integrate quality measures~~freeing clinicians to spend more time caring for patients and ~~aid reimbursement. These trends are driving a shift towards more integrated~~helping technicians and health organizations drive meaningful financial and clinical outcomes. Our principal solutions ~~that combine both~~ include dragon medical cloud based solutions ("Dragon Medical ~~cloud-based~~One"), computer assisted clinical documentation ("CAPD"), clinical documentation improvement ("CDI") and coding, diagnostic solutions, and medical transcription services. Recently, higher demand for more integrated solutions have offset declines in legacy, hosted transcription services. Additionally, we have been able to capitalize on healthcare providers’ shift towards hosted, or cloud-based solutions, and away from perpetual licenses, by adding new innovations to our Dragon Medical cloud

solutions including new clinical language understanding and AI capabilities designed to increase productivity and improve clinical documentation at the point of care and within existing electronic medical work flow.

•

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

•

~~Automotive.~~Enterprise. ~~Demand for our embedded~~Our Enterprise segment is a leading provider of AI-powered intelligent customer engagement solutions and ~~cloud-based automotive~~services, which enable enterprises and contact centers to enhance and automate customer service and sales engagement. Our principal solutions ~~is being driven by the growth in personalized, automotive virtual assistants~~include interactive voice responses ("IVR") solutions, intelligent engagement solutions and connected services for cars and by auto manufacturers' desire to create a branded and personalized experience, capable of intelligently integrating users' smart phone and home device preferences and technologies.security & biometric solutions.

On November 19, 2018, we announced our intent to spin off our Automotive business into an independent publicly-traded company through a pro rata distribution to our common stock holders. Completion of the proposed spin-off is subject to certain conditions, including final approval by our Board of Directors. We intend to complete the separation of the business by the beginning of fiscal year 2020.

•

Other. ~~The~~Our Other segment includes ~~our SRS business~~voicemail transcription services, Mobile Operator Services, and our Devices business. Our SRS business provides value-added services to mobile operators in India and Brazil ("Mobile Operator Services") and voicemail transcription services to mobile operators in the rest of the world ("Voicemail-to-Text"). Our Devices business provides speech recognition solutions and predictive text technologies for handset devices. During the fourth quarter of fiscal year 2018, in connection with our comprehensive portfolio and business review efforts, we commenced a wind-down of our Devices and Mobile Operator Services businesses. In May 2019, we completed the sale of our Mobile Operator Services business in Brazil, and in July 2019, we completed the sale of our Mobile Operator Services business in India. ~~The sale prices and any gain or loss was immaterial.~~

•

Discontinued Operations. On November 11, 2018, we entered into a definitive stock purchase agreement, pursuant to which we agreed to sell our Imaging business and associated assets for a total cash consideration of approximately $400.0 million. On February 1, 2019, we completed the sale of ~~the~~our Imaging business and ~~the proceeds~~ received ~~at closing was~~approximately $404.0 million ~~net~~in cash, after estimated transaction expenses. On October 1, 2019, we completed the previously announced spin-off of ~~related fees and expenses, and subject to certain customary post-closing adjustments. Effective~~our Automotive business into an independent public company, Cerence. As a result, the ~~first quarter of fiscal year 2019, Imaging's~~historical results of operations for Imaging and Automotive have been included within discontinued operations ~~and its assets and liabilities within held for sale on~~in our condensed consolidated financial statements.

Key Metrics

~~Effective~~In evaluating the ~~first quarter~~financial condition and operating performance of fiscal year 2019, we implemented ASC 606 using the modified retrospective approach, which requires the results for the current reporting periods be presented under ASC 606, while prior period amounts are not adjustedour business, management focuses on revenue, net income, gross margins, operating margins, cash flow from operations, and ~~continue to be reported~~changes in ~~accordance with our historic accounting policies in accordance with ASC 605, with a cumulative adjustment recorded to accumulated deficit.~~

deferred revenue. A summary of key financial metrics for the ~~nine~~three months ended ~~June 30,~~December 31, 2019, as compared to the ~~nine~~three months ended ~~June 30,~~December 31, 2018, is as follows:

Total revenues ~~under ASC 606 was $1,352.4~~were $418.2 million for the ~~nine~~three months ended ~~June 30,~~December 31, 2019, as compared to ~~$1,362.9~~$419.7 million ~~under ASC 605~~ for the ~~nine~~three months ended ~~June 30,~~December 31, 2018;

Net income from continuing operations ~~under ASC 606~~ for the ~~nine~~three months ended ~~June 30,~~December 31, 2019 was ~~$6.2~~$54.9 million, compared to a net ~~loss~~income from continuing operations of ~~$140.4~~$13.9 million ~~under ASC 605~~for the ~~nine~~three months ended ~~June 30,~~December 31, 2018;

Gross margins ~~under ASC 606~~ for the ~~nine~~three months ended ~~June 30,~~December 31, 2019 ~~was 56.7%~~were 55.9%, compared to ~~54.0% under ASC 605~~56.1% for the ~~nine~~three months ended ~~June 30,~~December 31, 2018;


•	~~Operating margins under ASC 606 for the nine months ended June 30, 2019 was 6.9%, compared to (8.0)% under ASC 605 for nine months ended~~ ~~June 30,~~ Operating margins for the three months ended December 31, 2019 was 12.5%, compared to 11.1% for three months ended December 31, 2018; and

Operating cash flows from continuing operations ~~increased~~decreased by ~~$35.4~~$5.8 million to ~~$292.8~~$66.9 million for the ~~nine~~three months ended ~~June 30,~~December 31, 2019, compared to ~~$257.4~~$72.7 million for the ~~nine~~three months ended ~~June 30, 2018~~December 31, 2018.

~~As of June 30, 2019, as compared to September 30, 2018:~~


•	Total deferred revenue decreased by 6% to $721.5 million as of June 30, 2019 from $765.0 million as of September 30, 2018. Deferred revenue decreased by approximately $43.5 million, primarily as a result of the ASC 606 implementation, offset in part by the continued growth of our Automotive connected solutions and Healthcare bundled offerings.

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
	2019		2018		Dollar Change			Percent Change
Hosting and professional services	$	230.5	$	227.7	$	2.8		1.2	%
Product and licensing	125.2		115.9		9.3			8.0	%
Maintenance and support	62.6		76.1		(13.5		)	(17.7	)%
Total revenues	$	418.2	$	419.7	$	(1.5	)	(0.4	)%

United States	$	346.8	$	346.0	$	0.8		0.2	%
International	71.4		73.7		(2.3		)	(3.1	)%
Total revenues	$	418.2	$	419.7	$	(1.5	)	(0.4	)%

Three Months Ended ASC 605
June 30,
Dollar
Change

Percent
Change
2019 2019 2018
(ASC 606)
(ASC 605)
(ASC 605)

Hosting and professional services $ 260.9
$ 268.8
$ 253.6
$ 15.2
6.0 %
Product and licensing 121.8
127.4
132.8
(5.4 ) (4.1 )%
Maintenance and support 66.5
62.1
63.1
(1.0 ) (1.6 )%
Total revenues $ 449.2
$ 458.3
$ 449.4
$ 8.9
2.0 %
United States $ 337.4
$ 341.3
$ 333.8
$ 7.5
2.2 %
International 111.8
117.0
115.6
1.4
1.2 %
Total revenues $ 449.2
$ 458.3
$ 449.4
$ 8.9
2.0 %

Nine Months Ended ASC 605
June 30,
Dollar
Change

Percent
Change
2019 2019 2018
(ASC 606)
(ASC 605)
(ASC 605)

Hosting and professional services $ 771.6
$ 800.8
$ 785.0
$ 15.8
2.0 %
Product and licensing 377.3
386.9
388.0
(1.1 ) (0.3 )%
Maintenance and support 203.5
183.3
189.9
(6.6 ) (3.5 )%
Total revenues $ 1,352.4
$ 1,371.0
$ 1,362.9
$ 8.1
0.6 %
United States $ 1,019.9
$ 1,030.0
$ 1,014.3
$ 15.7
1.5 %
International 332.5
341.0
348.6
(7.6 ) (2.2 )%
Total revenues $ 1,352.4
$ 1,371.0
$ 1,362.9
$ 8.1
0.6 %

The geographic split ~~under ASC 606~~ was ~~75%~~83% of total revenues in the United States and ~~25%~~17% internationally for the three months ended ~~June 30, 2019. The geographic split under ASC 605 was 74%~~December 31, 2019, as compared to 82% of total revenues in the United States and ~~26%~~18% internationally for the three months ended ~~June 30, 2019, as compared to 74% of total revenues in the United States and 26% internationally for the three months ended June 30, 2018.~~

The geographic split under ASC 606 was 75% of total revenues in the United States and 25% internationally for the nine months ended June 30, 2019. The geographic split under ASC 605 was 75% of total revenues in the United States and 25% internationally for the nine months ended June 30, 2019, as compared to 74% of total revenues in the United States and 26% internationally for the nine months ended June 30,December 31, 2018.

Hosting and Professional Services Revenue

Hosting revenue primarily relates to delivering on-demand hosted services, such as medical transcription, automated customer care applications, ~~mobile operator services, and mobile infotainment and search and transcription,~~ 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									ASC 605
	June 30,									Dollar Change			Percent Change
	2019			2019			2018						Percent Change		Three Months Ended December 31,							Dollar Change				Percent Change
	(ASC 606)			(ASC 605)			(ASC 605)			Dollar Change						2019			2018			Dollar Change
Hosting revenue	$	207.3		$	205.9		$	190.3		$	15.6			8.2	%		$	195.0		$	186.7			$	8.3	Percent Change			4.4	%
Professional services revenue	53.6			63.0			63.3			(0.3		)	(0.5	)%		35.5			41.1				(5.5		)		(13.4	)%
Hosting and professional services revenue	$	260.9		$	268.8		$	253.6		$	15.2		6.0	%		$	230.5		$	227.7			$	2.8			1.2	%
As a percentage of total revenue	58.1		%	58.7		%	56.4		%							55.1		%	54.3		%

Nine Months Ended ASC 605
June 30, Dollar
Change Percent
Change
2019 2019 2018
(ASC 606)
(ASC 605)
(ASC 605)

Hosting revenue $ 608.7
$ 628.9
$ 569.9
$ 59.0
10.4 %
Professional services revenue 162.9
171.9
215.2
(43.3 ) (20.1 )%
Hosting and professional services revenue $ 771.6
$ 800.8
$ 785.0
$ 15.8
2.0 %
As a percentage of total revenue 57.1 % 58.4 % 57.6 %

Three Months Ended ~~June 30,~~December 31, 2019 compared to Three Months Ended ~~June 30,~~December 31, 2018

Hosting revenue ~~under ASC 606~~ for the three months ended ~~June 30,~~December 31, 2019 is $1.4 million higher compared to revenue under ASC 605 for the same period, primarily as a result of the re-allocation of contract consideration to multiple performance obligations based on standalone selling prices. Under ASC 605, Hosting revenue increased by ~~$15.6~~$8.3 million, or ~~8.2%~~4.4%, primarily due to a ~~$13.6~~$13.4 million increase in Healthcare, ~~a $5.2 million increase~~offset in ~~Enterprise segment, and a $4.2 million increase in our Automotive segment, which was partially offset~~part by a ~~$7.4~~$5.7 million decrease in our Other segment. Healthcare hosting revenue increased primarily due to the continued growth in our Dragon Medical cloud-based solutions, offset in part by a decline in our medical transcription services. Enterprise hosting revenue increased primarily due to the strength in our omni-channel hosting solutions. Automotive hosting revenue increased primarily driven by the continued market penetration of our speech recognition and infotainment platform services. Other segment hosting revenue decreased due to the wind-down of Devices and the sale of our Mobile Operator Services business in ~~Brazil.~~Brazil and India during fiscal year 2019. As a percentage of total revenue, Hosting revenue ~~under ASC 605~~ increased from ~~42.3%~~44.5% to ~~44.9%~~46.6% for the three months ended ~~June 30,~~December 31, 2019.

Professional services revenue ~~under ASC 606~~ for the three months ended ~~June 30,~~December 31, 2019 is $9.4 million lower compared to revenue under ASC 605 for the same period, primarily as a result of the re-allocation of contract consideration to multiple performance obligations based on standalone selling prices. Under ASC 605, Professional services revenue decreased by ~~$0.3~~$5.5 million, or ~~0.5%~~13.4%, primarily due to an ~~$8.4~~$2.0 million decrease in Healthcare, ~~mostly offset by~~ a ~~$4.4~~$1.4 million ~~increase~~decrease in Enterprise, and a ~~$3.9~~$2.1 million ~~increase~~decrease in ~~Automotive.~~Other. The Healthcare professional services revenue ~~decreased~~decrease was primarily driven by lower revenue from the EHR implementation and optimization services. Enterprise professional services revenue ~~increased~~decreased primarily due to ~~higher~~lower contact center service revenue as a result of the timing of the services rendered. ~~Automotive~~Other professional services revenue ~~increased~~decreased primarily due to the ~~timing~~wind-down of ~~the services rendered.~~Devices in fiscal year 2019. As a percentage of total revenue, Professional services revenue ~~under ASC 605~~ decreased from ~~14.1%~~9.8% to ~~13.7%~~8.5% for the three months ended ~~June 30, 2019.~~

~~Nine Months Ended June 30, 2019 compared to Nine Months Ended June 30, 2018~~

Hosting revenue under ASC 606 for the nine months ended June 30, 2019 is $20.2 million lower compared to revenue under ASC 605 for the same period, primarily as a result of the re-allocation of contract consideration to multiple performance obligations based on standalone selling prices. Under ASC 605, Hosting revenue increased by $59.0 million, or 10.4%, primarily due to a $39.2 million increase in Healthcare, a $23.9 million increase in Enterprise segment, and a $12.3 million increase in our Automotive segment, which was partially offset by a $16.4 million decrease in our Other segment. Healthcare hosting revenue increased primarily due to the continued growth in our Dragon Medical cloud-based solutions, offset by in part by a decline in our medical transcription services. Enterprise hosting revenue increased primarily due to the strength in our omni-channel hosting solutions. Automotive hosting revenue increased primarily driven by the continued market penetration of our speech recognition and

infotainment platform services. Other segment hosting revenue decreased due to the wind-down of Devices and the sale of Mobile Operator Services business in Brazil. As a percentage of total revenue, Hosting revenue under ASC 605 increased from 41.8% to 45.9% for the three months ended June 30, 2019.

Professional services revenue under ASC 606 for the nine months ended June 30, 2019 is $9.0 million lower compared to revenue under ASC 605 for the same period presented primarily due to re-allocation of contract consideration to multiple performance obligations based on standalone selling prices. Under ASC 605, Professional services revenue decreased by $43.3 million, or 20.1% compared to the prior period, primarily due to lower revenue from the EHR implementation and optimization services in Healthcare. As a percentage of total revenue, Professional services revenue under ASC 605 decreased from 15.8% to 12.5% for the nine months ended June 30,December 31, 2019.

Product and Licensing Revenue

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


	Three Months Ended									ASC 605
	June 30,									Dollar Change			Percent Change
	2019			2019			2018								Three Months Ended December 31,							Dollar Change			Percent Change
	(ASC 606)			(ASC 605)			(ASC 605)									2019			2018
Product and licensing revenue	$	121.8		$	127.4		$	132.8		$	(5.4	)		(4.1	)%		$	125.2		$	115.9		$	9.3		8.0	%
As a percentage of total revenue	27.1		%	27.8		%	29.5		%							29.9		%	27.6		%

Nine Months Ended ASC 605
June 30, Dollar
Change Percent
Change
2019 2019 2018
(ASC 606)
(ASC 605)
(ASC 605)

Product and licensing revenue $ 377.3
$ 386.9
$ 388.0
$ (1.1 ) (0.3 )%
As a percentage of total revenue 27.9 % 28.2 % 28.5 %

Three Months Ended ~~June 30,~~December 31, 2019 compared to Three Months Ended ~~June 30,~~December 31, 2018

Product and licensing revenue ~~under ASC 606~~ for the three months ended ~~June 30,~~December 31, 2019 is $5.6 million lower compared to revenue under ASC 605 for the same period, primarily due to the loss of revenue as a result of the upfront recognition of term license revenue on the opening balance sheet under ASC 606. Under ASC 605, Product and licensing revenue decreasedincreased by ~~$5.4~~$9.3 million, or ~~4.1%~~8.0%, primarily due to a ~~$3.1~~$11.5 million ~~decrease~~increase in Enterprise, ~~a $1.9 million decrease in Automotive, and a $2.2 million decrease in Other, which was~~ offset in part by a ~~$1.8~~$1.1 million ~~increase~~decrease in ~~Healthcare.~~Healthcare, and a $1.1 million decrease in Other. Enterprise product and licensing revenue decreased as a result of lower revenue from our contact center customers. Automotive product and licensing revenue decreased primarily due to lower royalties. Other Segment Product and licensing revenue decreased primarily due to the wind-down of Devices. Healthcare Product and licensing revenue increased primarily driven by ~~higher Dragon Medical~~the timing of IVR license ~~revenue from international markets. As a percentage of total revenue, Product and licensing revenue under ASC 605 decreased from 29.5% to 27.8% for the three months ended June 30, 2019.~~

~~Nine Months Ended June 30, 2019 compared to Nine Months Ended June 30, 2018~~

Product and licensing revenue under ASC 606 for the nine months ended June 30, 2019 is $9.5 million lower compared to revenue under ASC 605 for the same period, primarily due to the loss of revenue as a result of the upfront recognition of term license revenue on the opening balance sheet under ASC 606. Under ASC 605,deals. Healthcare Product and licensing revenue decreased by $1.1 million, or 0.3%, primarily due to a $4.9 million increase in Automotive and a $4.7 million increase in Healthcare, which was offset in part by a $10.1 million decrease in Other. Automotive Product and licensing revenue increased primarily due to higher royalties from existing and new customers. Healthcare Product and licensing revenue increased primarily driven by ~~higher Dragon Medical license revenue~~the continued transition from ~~international markets.~~software sold with maintenance and support to cloud-based solutions. Other Segment Product and licensing revenue decreased primarily due to the wind-down of Devices. As a percentage of total revenue, Product and licensing revenue ~~under ASC 605 decreased~~increased from ~~28.5%~~27.6% to ~~28.2%~~29.9% for the ~~nine~~three months ended ~~June 30,~~December 31, 2019.

Maintenance and Support Revenue

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


	Three Months Ended									ASC 605
	June 30,									Dollar Change			Percent Change
	2019			2019			2018								Three Months Ended December 31,							Dollar Change			Percent Change
	(ASC 606)			(ASC 605)			(ASC 605)									2019			2018
Maintenance and support revenue	$	66.5		$	62.1		$	63.1		$	(1.0	)		(1.6	)%		$	62.6		$	76.1		$	(13.5		)	(17.7	)%
As a percentage of total revenue	14.8		%	13.5		%	14.0		%							15.0		%	18.1		%

Nine Months Ended ASC 605
June 30, Dollar
Change Percent
Change
2019 2019 2018
(ASC 606)
(ASC 605) (ASC 605)

Maintenance and support revenue $ 203.5
$ 183.3
$ 189.9
$ (6.6 ) (3.5 )%
As a percentage of total revenue 15.0 % 13.4 % 13.9 %

Three Months Ended ~~June 30,~~December 31, 2019 compared to Three Months Ended ~~June 30,~~December 31, 2018

Maintenance and support revenue ~~under ASC 606~~ for the three months ended ~~June 30,~~December 31, 2019 is $4.4 million higher compared to revenue under ASC 605 for the same period, primarily as a result of the re-allocation of contract consideration to multiple performance obligations based on standalone selling prices. Under ASC 605, Maintenance and support revenue decreased by ~~$1.0~~$13.5 million, or ~~1.6%~~17.7%, primarily due to the continued ~~customers'~~ transition from ~~licenses~~software sold with maintenance and support to cloud-based solutions in Healthcare. As a percentage of total revenue, Maintenance and support revenue ~~under ASC 605~~ decreased from ~~14.0%~~18.1% to ~~13.5%~~15.0% for the three months ended ~~June 30, 2019.~~

~~Nine Months Ended June 30, 2019 compared to Nine Months Ended June 30, 2018~~

Maintenance and support revenue on ASC 606 basis for the nine months ended June 30, 2019 is $20.1 million higher compared to revenue under ASC 605 for the same period, primarily as a result of the re-allocation of contract consideration to multiple performance obligations based on standalone selling prices. Under ASC 605, Maintenance and support revenue decreased by $6.6 million, or 3.5%, primarily due to continued customers' transition from licenses to cloud-based solutions in Healthcare. As a percentage of total revenue, Maintenance and support revenue under ASC 605 decreased from 13.9% to 13.4% for the nine months ended June 30,December 31, 2019.

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									ASC 605
	June 30,									Dollar Change			Percent Change
	2019			2019			2018								Three Months Ended December 31,							Dollar Change			Percent Change
	(ASC 606)			(ASC 605)			(ASC 605)									2019			2018
Cost of hosting and professional services revenue	$	154.4		$	161.0		$	165.6		$	(4.6	)		(2.8	)%		$	135.8		$	136.6		$	(0.8		)	(0.6	)%
As a percentage of professional services and hosting revenue	59.2		%	59.9		%	65.3		%							58.9		%	60.0		%

Nine Months Ended ASC 605
June 30, Dollar
Change Percent
Change
2019 2019 2018
(ASC 606)
(ASC 605)
(ASC 605)

Cost of hosting and professional services revenue $ 471.2
$ 474.5
$ 517.4
$ (42.9 ) (8.3 )%
As a percentage of professional services and hosting revenue 61.1 % 59.3 % 65.9 %

Three Months Ended ~~June 30,~~December 31, 2019 compared to Three Months Ended ~~June 30,~~December 31, 2018

Cost of hosting and professional services revenue ~~under ASC 606~~ for the three months ended ~~June 30,~~December 31, 2019 is $6.6 million lower than the amount under ASC 605 for the same period, primarily due to a shift from the completed contract method to the percentage-of-completion method. Under ASC 605, Cost of hosting and professional services revenue decreased by ~~$4.6~~$0.8 million, or ~~2.8%~~0.6%, primarily due to lower revenue related to EHR implementation and optimization services, offset in part by higher costs related to our Dragon Medical cloud-based solutions. ~~Under ASC 605, gross~~Gross margin increased by ~~5.4~~1.1 percentage points primarily due to lower revenue from EHR implementation and optimization services, which carries lower ~~margins. Also contributing to the margin improvement was the favorable shift in revenue mix towards higher-margin Dragon Medical cloud-based solutions from lower-margin transcription services.~~

~~Nine Months Ended June 30, 2019 compared to Nine Months Ended June 30, 2018~~

~~Cost of hosting~~margins, and ~~professional services revenue under ASC 606 for the nine months ended June 30, 2019 is $3.3 million lower than the amount under ASC 605 for the same period, primarily due to~~ a shift from the completed contract method to the percentage-of-completion method. Under ASC 605, Cost of hosting and professional services revenue decreased by $42.9 million, or 8.3%, primarily due to lower revenue related to EHR implementation and optimization services, offset in part by higher costs related to our Dragon Medical cloud-based solutions. Under ASC 605, gross margin increased by 6.6 percentage points primarily due to lower revenue from EHR implementation and optimization services, which carries lower margins. Also contributing to the margin improvement was the favorable shift in revenue mix towards higher-margin Dragon Medical cloud-based solutions from lower-margin transcription services.

Cost of Product and Licensing Revenue

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



	Three Months Ended December 31,						Dollar Change		Percent Change
	2019			2018			Dollar Change		Percent Change
Cost of product and licensing revenue	$	34.2		$	32.4		$	1.8	5.6	%
As a percentage of product and licensing revenue	27.3		%	28.0		%

Three Months Ended ASC 605
June 30, Dollar
Change Percent
Change
2019 2019 2018
(ASC 606)
(ASC 605)
(ASC 605)

Cost of product and licensing revenue $ 19.2
$ 17.7
$ 14.0
$ 3.7
26.4 %
As a percentage of product and licensing revenue 15.8 % 13.9 % 10.5 %

Nine Months Ended ASC 605
June 30, Dollar
Change Percent
Change
2019 2019 2018
(ASC 606)
(ASC 605)
(ASC 605)

Cost of product and licensing revenue $ 61.9
$ 49.0
$ 41.9
$ 7.1
17.0 %
As a percentage of product and licensing revenue 16.4 % 12.7 % 10.8 %

Three Months Ended ~~June 30,~~December 31, 2019 compared to Three Months Ended ~~June 30,~~December 31, 2018

Cost of product and licensing revenue ~~under ASC 606~~ for the three months ended ~~June 30,~~December 31, 2019 ~~is $1.5~~increased by $1.8 million, ~~higher than the amount under ASC 605 for the same period,~~or 5.6%, primarily due to ~~the upfront recognition of third-party license royalties~~higher product royalty costs in ~~connection with the upfront recognition of term license revenue. Under ASC 605, Cost of product and licensing revenue~~Healthcare. Gross margin increased by ~~$3.7 million, or 26.4%. Under ASC 605, gross margin decreased by 3.4~~0.7 percentage points, primarily ~~driven by~~due to higher ~~royalty~~licensing revenue on relatively flat licensing costs in ~~Healthcare.~~

~~Nine Months Ended June 30, 2019 compared to Nine Months Ended June 30, 2018~~

~~Cost of product~~Healthcare and licensing revenue under ASC 606 for the nine months ended June 30, 2019 is $12.9 million higher than the amount under ASC 605 for the same period, primarily due to the upfront recognition of third-party license royalties in connection with the upfront recognition of term license revenue. Under ASC 605, Cost of product and licensing revenue increased by $7.1 million, or 17.0%. Under ASC 605, gross margin decreased by 1.9 percentage points, primarily driven by higher royalty costs in Healthcare.Enterprise.

Cost of Maintenance and Support Revenue

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


	Three Months Ended									ASC 605
	June 30,									Dollar Change			Percent Change
	2019			2019			2018								Three Months Ended December 31,							Dollar Change			Percent Change
	(ASC 606)			(ASC 605)			(ASC 605)									2019			2018
Cost of maintenance and support revenue	$	8.2		$	8.4		$	9.6		$	(1.2	)		(12.5	)%		$	7.8		$	7.8		$	—		—	%
As a percentage of maintenance and support revenue	12.3		%	13.5		%	15.2		%							12.5		%	10.2		%

Nine Months Ended ASC 605
June 30, Dollar
Change Percent
Change
2019 2019 2018
(ASC 606)
(ASC 605)
(ASC 605)

Cost of maintenance and support revenue $ 24.9
$ 25.2
$ 28.6
$ (3.4 ) (11.9 )%
As a percentage of maintenance and support revenue 12.2 % 13.7 % 15.1 %

Three Months Ended ~~June 30,~~December 31, 2019 compared to Three Months Ended ~~June 30,~~December 31, 2018

Cost of maintenance and support revenue ~~under ASC 606~~ for the three months ended ~~June 30,~~December 31, 2019 ~~is 0.2 million lower than the amount under ASC 605 for the same period,~~was relatively flat. Gross margins decreased by 2.3 percentage points primarily due to ~~the timing of recognition of third-party service costs. Under ASC 605, Cost of maintenance and support~~lower revenue ~~decreased by $1.2 million, or 12.5%. Under ASC 605, gross margins increased by 1.7 percentage points primarily driven by higher margin~~ on ~~Dragon Medical maintenance and support services in Healthcare.~~

~~Nine Months Ended June 30, 2019 compared~~relatively fixed costs as we continued to ~~Nine Months Ended June 30, 2018~~

~~Cost of maintenance and support revenue under ASC 606 for the nine months ended June 30, 2019 is 0.3 million lower than the amount under ASC 605 for the same period, primarily due~~transition from licenses to the timing of recognition of third-party service costs. Under ASC 605, Cost of maintenance and support revenue decreased by $3.4 million, or 11.9%. Under ASC 605, gross margins increased by 1.4 percentage points primarily driven by higher margin on Dragon Medical maintenance and support servicescloud-based solutions in Healthcare.

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
	2019			2018			Dollar Change		Percent Change
Research and development expense	$	56.6		$	46.9		$	9.7	20.7	%
As a percentage of total revenue	13.5		%	11.2		%

Three Months Ended ASC 605
June 30, Dollar
Change Percent
Change
2019 2019 2018
(ASC 606)
(ASC 605)
(ASC 605)

Research and development expense $ 67.6
$ 67.6
$ 69.4
$ (1.8 ) (2.6 )%
As a percentage of total revenue 15.0 % 14.7 % 15.4 %

Nine Months Ended ASC 605
June 30, Dollar
Change Percent
Change
2019 2019 2018
(ASC 606)
(ASC 605)
(ASC 605)

Research and development expense $ 201.8
$ 201.8
$ 202.2
$ (0.4 ) (0.2 )%
As a percentage of total revenue 14.9 % 14.7 % 14.8 %

Three Months Ended ~~June 30,~~December 31, 2019 compared to Three Months Ended ~~June 30,~~December 31, 2018

R&D expense ~~decreased~~increased by ~~$1.8~~$9.7 million, or ~~2.6%~~20.7%, primarily ~~driven by lower~~due to higher compensation costs ~~due~~as we continued to ~~our recent costs saving initiatives, offset in part by our continued investment in product development and new technologies to support our long-term growth.~~

~~Nine Months Ended June 30, 2019 compared to Nine Months Ended June 30, 2018~~

~~R&D expense decreased by $0.4 million, or 0.2%, primarily driven by lower compensation costs due to our recent costs saving initiatives, offset in part by our continued investment~~invest in product development and new technologies to support our long-term growth.

Sales and Marketing Expense

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



	Three Months Ended December 31,						Dollar Change			Percent Change
	2019			2018			Dollar Change			Percent Change
Sales and marketing expense	$	66.5		$	67.4		$	(0.9	)	(1.3	)%
As a percentage of total revenue	15.9		%	16.1		%

Three Months Ended ASC 605
June 30, Dollar
Change Percent
Change
2019 2019 2018
(ASC 606)
(ASC 605)
(ASC 605)

Sales and marketing expense $ 72.2
$ 73.8
$ 77.8
$ (4.0 ) (5.1 )%
As a percentage of total revenue 16.1 % 16.1 % 17.3 %

Nine Months Ended ASC 605
June 30, Dollar
Change Percent
Change
2019 2019 2018
(ASC 606)
(ASC 605)
(ASC 605)

Sales and marketing expense $ 223.3
$ 224.4
$ 233.2
$ (8.8 ) (3.8 )%
As a percentage of total revenue 16.5 % 16.4 % 17.1 %

Three Months Ended ~~June 30,~~December 31, 2019 compared to Three Months Ended ~~June 30,~~December 31, 2018

Sales and marketing expense ~~under ASC 606~~ for the three months ended ~~June 30,~~December 31, 2019 reflected the amortization of capitalized sales commission expenses over the period of benefit, whereas sales commission was expensed as incurred under ASC 605. Under ASC 605, Sales and marketing expense decreased by ~~$4.0~~$0.9 million, or ~~5.1%~~1.3%, ~~primarily driven~~as higher compensation costs due to expanded sales force was mostly offset by lower ~~sales headcount as a result of ongoing portfolio review~~traveling and ~~optimization.~~entertainment expenses.

~~Nine Months Ended June 30, 2019 compared to Nine Months Ended June 30, 2018~~

Sales and marketing expense under ASC 606 for the nine months ended June 30, 2019 reflected the amortization of capitalized sales commission expenses over the period of benefit, whereas sales commission was expensed as incurred under ASC 605. Under ASC 605, Sales and marketing expense decreased by $8.8 million, or 3.8%, primarily driven by lower sales headcount as a result of ongoing portfolio review and optimization.

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
	2019			2018			Dollar Change			Percent Change
General and administrative expense	$	38.3		$	43.5		$	(5.2	)	(12.0	)%
As a percentage of total revenue	9.2		%	10.4		%

Three Months Ended ASC 605
June 30,
Dollar
Change

Percent
Change
2019 2019 2018
(ASC 606)
(ASC 605)
(ASC 605)

General and administrative expense $ 46.4
$ 46.4
$ 49.7
$ (3.3 ) (6.6 )%
As a percentage of total revenue 10.3 % 10.1 % 11.1 %

Nine Months Ended ASC 605
June 30,
Dollar
Change

Percent
Change
2019 2019 2018
(ASC 606)
(ASC 605)
(ASC 605)

General and administrative expense $ 130.9
$ 130.9
$ 174.6
$ (43.7 ) (25.0 )%
As a percentage of total revenue 9.7 % 9.5 % 12.8 %

Three Months Ended ~~June 30,~~December 31, 2019 compared to Three Months Ended ~~June 30,~~December 31, 2018

G&A expense decreased by ~~$3.3~~$5.2 million, or ~~6.6%~~12.0%, primarily due to higher professional service costs incurred in fiscal year 2018 related to evaluating strategic alternatives for certain businesses and legal expenses related to enforcing our intellectual property rights.

~~Nine Months Ended June 30, 2019 compared to Nine Months Ended June 30, 2018~~

~~G&A expense decreased~~driven by ~~$43.7 million, or 25.0%, primarily due to higher~~lower professional services costs ~~incurred in fiscal year 2018 in connection with establishing Automotive as a separate reportable segment. Also contributing~~and compensation costs due to ~~the decrease was lower employee-related costs as a result of ongoing business review and other~~our cost saving initiatives.

Amortization of Intangible Assets

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


	Three Months Ended				Dollar Change			Percent Change		Nine Months Ended				Dollar Change			Percent Change
	June 30,									June 30,									Three Months Ended December 31,				Dollar Change			Percent Change
	2019		2018							2019		2018							2019		2018		Dollar Change			Percent Change
Cost of revenue	$	8.9	$	12.2	$	(3.3	)	(26.9	)%	$	27.7	$	38.7	$	(11.0	)	(28.5	)%	$	6.6	$	7.4	$	(0.7	)	(9.9	)%
Operating expenses	16.5		19.9		(3.4		)	(16.9	)%	50.4		57.1		(6.7		)	(11.7	)%	12.5		13.8		(1.3		)	(9.3	)%
Total amortization expense	$	25.4	$	32.0	$	(6.6	)	(20.7	)%	$	78.1	$	95.8	$	(17.7	)	(18.5	)%	$	19.2	$	21.2	$	(2.0	)	(9.5	)%

The decreases in total amortization of intangible assets for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2019, as compared to the prior year ~~periods,~~period, were primarily due to certain intangible assets having been fully amortized or written off during fiscal year ~~2018.~~2019.

Acquisition-Related Costs, Net

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


	Three Months Ended						Dollar Change			Percent Change		Nine Months Ended						Dollar Change			Percent Change
	June 30,											June 30,											Three Months Ended December 31,						Dollar Change			Percent Change
	2019			2018								2019			2018								2019			2018			Dollar Change			Percent Change
Transition and integration costs	$	1.5		$	5.4		$	(3.8	)	(71.5	)%	$	6.6		$	12.8		$	(6.2	)	(48.3	)%	$	1.5		$	2.7		$	(1.2	)	(45.3	)%
Professional service fees	1.0			1.3			(0.3		)	(24.2	)%	1.4			2.7			(1.3		)	(48.0	)%	(0.3		)	—			(0.3		)	(708.5	)%
Acquisition-related adjustments	(1.3		)	(1.7		)	0.4			(22.3	)%	(1.8		)	(2.7		)	0.9			(32.3	)%	—			(0.1		)	0.1			(98.1	)%
Total acquisition-related costs, net	$	1.2		$	4.9		$	(3.8	)	(76.5	)%	$	6.2		$	12.8		$	(6.6	)	(51.5	)%	$	1.2		$	2.6		$	(1.4	)	(55.1	)%

The decreases in Acquisition-related cost, net for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2019, as compared to the prior year periods, were primarily due to the decrease in transition and integration costs driven by reduced acquisition activities.

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 June 30,																									Three Months Ended December 31,
	2019													2018												2019													2018
	Personnel			Facilities		Total Restructuring			Other Charges		Total			Personnel		Facilities			Total Restructuring		Other Charges			Total		Personnel		Facilities			Total Restructuring			Other Charges		Total			Personnel		Facilities			Total Restructuring		Other Charges		Total
Healthcare	$	222		$	1	$	223		$	—	$	223		$	377	$	—		$	377	$	—		$	377	$	1,276	$	1,527		$	2,803		$	—	$	2,803		$	1,479	$	127		$	1,606	$	—	$	1,606
Enterprise	(165		)	—		(165		)	—		(165		)	3,412		(197		)	3,215		—			3,215		1,304		505			1,809			—		1,809			2,551		13			2,564		—		2,564
Automotive	(639		)	32		(607		)	14,778		14,171			1,233		—			1,233		—			1,233
Other	529			15		544			239		783			154		54			208		—			208		—		(365		)	(365		)	—		(365		)	1,030		—			1,030		2,507		3,537
Corporate	730			354		1,084			22		1,106			1,148		893			2,041		(1,732		)	309		333		(532		)	(199		)	2,635		2,436			1,153		(290		)	863		6,071		6,934
Total	$	677		$	402	$	1,079		$	15,039	$	16,118		$	6,324	$	750		$	7,074	$	(1,732	)	$	5,342	$	2,913	$	1,135		$	4,048		$	2,635	$	6,683		$	6,213	$	(150	)	$	6,063	$	8,578	$	14,641

Fiscal Year ~~2019~~2020

Fiscal Year ~~2018~~2019

For the ~~nine~~three months ended ~~June 30,~~December 31, 2018, we recorded restructuring charges of ~~$17.5 million, which~~$6.1 million. This included ~~$13.7~~$6.2 million related to the termination of approximately ~~280~~96 employees, ~~and $3.8~~which was offset in part by $0.2 million non-cash adjustments related to certain excess facilities. Of these amount, $7.1 million was recorded for the three months ended June 30, 2018, which included $6.3 million related to employee termination and $0.8 million related to certain excessrestructuring facilities. These actions were part of our strategic initiatives focused on investment rationalization, process optimization and cost reduction.

~~Impairment~~third quarter of ~~Goodwill~~

~~FiscalYear2018~~

As more fully described in Note 6 of the accompanying condensed consolidated financial statements, for the three and nine months ended June 30, 2018, we recorded a goodwill impairment charge of $138.0 million related to Other segment, with $35.1 million related to Devices and $102.8 million related to Mobile Operator Services.

fiscal year 2017.

Other (Expense) Income, Net

A summary is as follows (dollars in millions):


	Three Months Ended						Dollar Change		Percent Change		Nine Months Ended						Dollar Change		Percent Change
	June 30,										June 30,										Three Months Ended December 31,						Dollar Change			Percent Change
	2019			2018							2019			2018							2019			2018			Dollar Change			Percent Change
Interest income	$	3.8		$	2.5		$	1.3	51.6	%	$	10.0		$	6.9		$	3.1	44.5	%	$	2.2		$	2.6		$	(0.4	)	(14.4	)%
Interest expense	(28.4		)	(33.8		)	5.5		(16.2	)%	(91.8		)	(103.8		)	12.0		(11.6	)%	(23.8		)	(32.3		)	8.5			(26.2	)%
Other income (expense), net	3.2			(0.9		)	4.0		(455.6	)%	2.4			(1.5		)	3.9		(260.1	)%
Other expense, net																					(12.0		)	(1.2		)	(10.9		)	923.8	%
Total other expense, net	$	(21.4	)	$	(32.3	)	$	10.8	(33.5	)%	$	(79.4	)	$	(98.4	)	$	19.0	(19.3	)%	$	(33.7	)	$	(30.9	)	$	(2.8	)	9.0	%

The decrease in interest expense for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2019 was primarily due to the ~~repurchase~~repayments of ~~$150.0~~$300.0 million of ~~outstanding~~the 2024 Senior Notes in October 2019 and $300.0 million of the 5.375% Senior Notes due 2020 in September 2018 and the redemption of the $331.2 million outstanding 2.750% convertible debentures in November 2017. Additionally, in March 2019, we redeemed $300.0 million of our 5.375% Senior Notes due 2020 with the net proceeds from the sale of Imaging.February 2019.

Provision (Benefit) for Income Taxes

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

Three Months Ended
Dollar
Change

Percent
Change
Nine Months Ended
Dollar
Change

Percent
Change
June 30, June 30,
2019 2018 2019 2018
Provision (benefit) for income taxes $ 7.8
$ 9.6
$ (1.8 ) (18.5 )% $ 7.8
$ (67.4 ) $ 75.2
(111.6 )%
Effective income tax rate 45.7 % (85.6 )% 55.7 % 32.4 %



	Three Months Ended December 31,						Dollar Change			Percent Change
	2019			2018			Dollar Change			Percent Change
(Benefit) provision for income taxes	$	(36.4	)	$	2.0		$	(38.4	)	(1,922.0	)%
Effective income tax rate	(197.6		)%	12.6		%

Our effective income tax rate was 55.7% for the nine months ended June 30, 2019, compared to 32.4% for the nine months ended June 30, 2018. The effective tax rates for the nine months ended June 30, 2019 and June 30, 2018 differed from the U.S. federal statutory rates of 21.0% and 24.53%, respectively, primarily due to the valuation allowance related to losses in the United States. Additionally, for the nine months ended June 30, 2018, we recognized approximately $87.0 million of deferred tax benefit from the remeasurement of deferred tax assets and liabilities offset by approximately $2.0 million estimated tax provision for deemed repatriated foreign earnings as a result of the Tax Cuts and Jobs Act ("TCJA") enacted in December 2017.

Net Income from Discontinued Operations

As more fully described in Note 4 to the accompanying condensed consolidated financial statements, on ~~November 11, 2018,~~February 1, 2019, we ~~entered into a definitive stock purchase agreement, pursuant to which we agreed to sell~~completed the sale of our Imaging business and ~~associated assets for a total~~received approximately $404.0 million in cash, ~~consideration of approximately $400.0 million. The~~after estimated transaction ~~closed on February~~expenses. On October 1, ~~2019. Effective the first quarter of fiscal year~~ 2019, we ~~present Imaging's~~completed the spin-off of our Automotive business into an independent public company, Cerence. As a result, the historical results of operations for Imaging and Automotive have been included within discontinued ~~operations.~~operations in our condensed consolidated financial statements.

SEGMENT ANALYSIS

As more fully described in Note 4, ~~effective~~on October 1, 2019, we completed the spin-off of our Automotive business as an independent publicly traded company. Effective the first quarter of fiscal year ~~2019, the~~2020, our Automotive business's historical results of ~~our Imaging segment, previously a reportable segment,~~operations have been included within discontinued operations due to the completion of the sale on February 1, 2019. As a result, effective the first quarter of fiscal year 2019, we changed our corporate overhead allocation methodology to re-allocate the stranded costs related to our Imaging business to the remaining operating segments included within continuing operations. ~~Our segment presentation for the three and nine months ended June 30, 2018 has been restated to reflect the re-allocation of stranded costs.~~ For the three months ended ~~June 30, 2019 and~~December 31, 2018, ~~$1.9 million and $2.1~~$4.2 million of stranded costs previously allocated to our Automotive segment have been ~~included within total segment profits and~~ re-allocated to Healthcare, Enterprise, Automotive, and Other; for the nine months ended June 30, 2019 and 2018, $3.7 million and $5.9 million of stranded costs have been included within total segment profits and re-allocated to Healthcare, Enterprise, Automotive, and Other.

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



	Three Months Ended December 31,						Change			Percent Change
	2019			2018			Change			Percent Change
Segment Revenues^(a):
Healthcare	$	270.5		$	272.0		$	(1.4	)	(0.5	)%
Enterprise	138.5			129.7			8.8			6.8	%
Other	9.3			18.4			(9.0		)	(49.3	)%
Total segment revenues	$	418.3		$	420.0		$	(1.7	)	(0.4	)%
Less: acquisition related revenues adjustments	(0.1		)	(0.4		)	0.3			(74.8	)%
Total revenues	$	418.2		$	419.7		$	(1.5	)	(0.4	)%
Segment Profit:
Healthcare	$	93.3		$	102.6		$	(9.3	)	(9.0	)%
Enterprise	42.5			42.3			0.2			0.6	%
Other	5.1			5.3			(0.2		)	(3.9	)%
Total segment profit	$	140.9		$	150.2		$	(9.3	)	(6.2	)%
Segment Profit Margin:
Healthcare	34.5		%	37.7		%	(3.2		)
Enterprise	30.7		%	32.6		%	(1.9		)
Other	55.1		%	29.1		%	26.0
Total segment profit margin	33.7		%	35.8		%	(2.1		)

Three Months Ended ASC 605
June 30, Change Percent
Change
2019 2019 2018
(ASC 606) (ASC 605) (ASC 605)
Segment Revenues^(a):

Healthcare $ 228.4
$ 239.8
$ 236.2
$ 3.6
1.5 %
Enterprise 137.9
128.7
119.6
9.1
7.6 %
Automotive 73.0
79.6
73.8
5.8
7.9 %
Other 11.8
12.1
22.2
(10.1 ) (45.6 )%
Total segment revenues $ 451.0
$ 460.2
$ 451.8
$ 8.4
1.9 %
Less: acquisition related revenues adjustments (1.8 ) (1.9 ) (2.3 ) 0.4
(20.0 )%
Total revenues $ 449.2
$ 458.3
$ 449.4
$ 8.9
2.0 %
Segment Profit:
Healthcare $ 80.0
$ 83.6
$ 76.5
$ 7.1
9.2 %
Enterprise 40.8
38.3
32.5
5.8
17.7 %
Automotive 30.7
31.6
28.0
3.6
13.0 %
Other 4.4
4.7
3.0
1.7
58.0 %
Total segment profit $ 155.8
$ 158.1
$ 139.9
$ 18.2
13.0 %
Segment Profit Margin:
Healthcare 35.0 % 34.8 % 32.4 % 2.5

Enterprise 29.6 % 29.7 % 27.2 % 2.5

Automotive 42.0 % 39.7 % 37.9 % 1.8

Other 37.1 % 38.8 % 13.3 % 25.4

Total segment profit margin 34.5 % 34.4 % 31.0 % 3.4

Nine Months Ended ASC 605
June 30, Change Percent
Change
2019 2019 2018
(ASC 606) (ASC 605) (ASC 605)
Segment Revenues^(a):

Healthcare $ 704.9
$ 720.4
$ 743.0
$ (22.6 ) (3.0 )%
Enterprise 383.2
381.8
352.9
28.9
8.2 %
Automotive 222.4
228.3
204.2
24.1
11.8 %
Other 46.9
46.5
74.3
(27.8 ) (37.5 )%
Total segment revenues $ 1,357.4
$ 1,376.9
$ 1,374.4
$ 2.5
0.2 %
Less: acquisition related revenues adjustments (5.0 ) (6.0 ) (11.5 ) 5.5
(48.1 )%
Total revenues $ 1,352.4
$ 1,371.0
$ 1,362.9
$ 8.1
0.6 %
Segment Profit:
Healthcare $ 247.0
$ 264.4
$ 239.0
$ 25.4
10.7 %
Enterprise 109.0
114.3
95.1
19.2
20.2 %
Automotive 76.6
82.3
79.7
2.6
3.2 %
Other 15.8
15.2
12.3
2.9
23.8 %
Total segment profit $ 448.5
$ 476.3
$ 426.1
$ 50.2
11.8 %
Segment Profit Margin:
Healthcare 35.0 % 36.7 % 32.2 % 4.5

Enterprise 28.4 % 29.9 % 26.9 % 3.0

Automotive 34.5 % 36.1 % 39.0 % (3.0 )
Other 33.7 % 32.8 % 16.5 % 16.2

Total segment profit margin 33.0 % 34.6 % 31.0 % 3.6


^(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 ~~for~~in evaluating management performance.

Segment Revenues

Three Months Ended ~~June 30,~~December 31, 2019 compared to Three Months Ended ~~June 30,~~December 31, 2018


•	Healthcare segment revenue, for the three months ended ~~June 30,~~December 31, 2019, ~~reflected the upfront recognition of term license revenue from Clintegrity, Dragon Medical, and Diagnostic solutions under ASC 606. Under ASC 605, Healthcare segment revenue increased~~decreased by ~~$3.6~~$1.4 million, or ~~1.5%~~0.5%, primarily driven by:


◦	Revenue from Dragon Medical cloud-based solutions increased by ~~$14.7~~$22.3 million, or ~~38.5%~~51.2%, to ~~$52.8~~$65.8 million for the three months ended ~~June 30,~~December 31, 2019 from ~~$38.1~~$43.5 million for the three months ended ~~June 30,~~December 31, 2018, primarily due to the continued market penetration and customer transition to our cloud-based offering.


◦	Revenue from transcription services decreased by ~~$5.5~~$8.3 million, or ~~9.2%~~14.6%, to ~~$54.3~~$48.8 million for the three months ended ~~June 30,~~December 31, 2019 from ~~$59.8~~$57.1 million for the three months ended ~~June 30,~~December 31, 2018.


◦	Revenue from Dragon Medical licensing and maintenance and support decreased by $13.2 million, or 39.9%, to $19.8 million for the three months ended December 31, 2019 from $33.0 million for the three months ended December 31, 2018, primarily driven by the continued transition from software sold with maintenance and support to cloud-based solutions.


◦	Professional services revenue decreased by ~~$8.4~~$0.8 million or ~~26.6%~~5.1%, to ~~$23.1~~$15.6 million for the three months ended ~~June 30,~~December 31, 2019 from ~~$31.4~~$16.4 million for the three months ended ~~June 30,~~December 31, 2018, primarily driven by lower revenue from EHR implementation and optimization services.

•

Enterprise segment revenue, for the three months ended ~~June 30,~~December 31, 2019, reflected the allocation of contract consideration to multiple performance obligations based on standalone selling prices, and the up-front recognition of term license revenue and related costs under ASC 606. Under ASC 605, Enterprise segment revenue increased by ~~$9.1~~$8.8 million, or ~~7.6%~~6.8%, primarily due to the ~~growth~~increases in our ~~omni-channel hosting solutions~~IVR and ~~higher license~~security and ~~service revenue from our contact center customers.~~

•

~~Automotive~~ segment revenue for the three months ended June 30, 2019 reflected the allocation of contract consideration to multiple performance obligations based on standalone selling prices under ASC 606. Under ASC 605, Automotive segment revenue increased by $5.8 million, or 7.9%, primarily due to higher hosting revenues driven by the continued growth in our speech recognition and infotainment platform services.biometrics solutions.

•

Other segment revenue, for the three months ended ~~June 30,~~December 31, 2019, ~~reflected the impact of allocation of contract consideration to multiple performance obligations based on standalone selling prices under ASC 606. Under ASC 605, Other segment revenue~~ decreased by ~~$10.1~~$9.0 million, or ~~45.6%~~49.3%, primarily due to the wind-down of Devices and the sale of Mobile Operator Services business in ~~Brazil.~~

~~Nine Months Ended June 30, 2019 compared to Nine Months Ended June 30, 2018~~


•	~~Healthcare~~ segment revenue for the nine months ended June 30, 2019 reflected the up-front recognition of term license revenue from Clintegrity, Dragon Medical, and Diagnostic solutions under ASC 606. Under ASC 605, Healthcare segment revenue decreased by $22.6 million, or 3.0%, primarily driven by:


◦	Revenue from Dragon Medical cloud-based solutions increased by $56.6 million, or 59.5%, to $151.9 million for the nine months ended June 30, 2019 from $95.2 million for the nine months ended June 30, 2018, primarily due to the continued market penetration and customer transition to our cloud-based offering.


◦	~~Revenue from transcription services decreased by $34.3 million, or 17.0%, to $167.4 million for the nine months ended June 30, 2019 from $201.8 million for the nine months ended June 30, 2018.~~


◦	Professional services revenue decreased by $55.1 million or 46.6%, to $63.2 million for the nine months ended June 30, 2019 from $118.3 million for the nine months ended June 30, 2018, primarily driven by lower revenue from EHR implementation and optimization services.

•

~~Enterprise~~ segment revenue for the nine months ended June 30, 2019 reflected the allocation of contract consideration to multiple performance obligations based on standalone selling prices, and the up-front recognition of term license revenue and related costs under ASC 606. Under ASC 605, Enterprise segment revenue increased by $28.9 million, or 8.2%, primarily due to the growthBrazil in ~~our omni-channel hosting solutions and higher license and service revenue from our contact center customers.~~

•

~~Automotive~~ segment revenue for the nine months ended June 30, 2019 reflected the allocation of contract consideration to multiple performance obligations based on standalone selling prices under ASC 606. Under ASC 605, Automotive segment revenue increased by $24.1 million, or 11.8%, primarily due to higher royalties and hosting revenue driven by the continued growth in our speech recognition and infotainment platform services.


•	~~Other~~ segment revenue for the nine months ended June 30, 2019 reflected the allocation of contract consideration to multiple performance obligations based on standalone selling prices under ASC 606. Under ASC 605, Other segment revenue decreased by $27.8 million, or 37.5%, primarily due to the wind-down of Devices and the sale of Mobile Operator Services business in Brazil.fiscal year 2019.

Segment Profit

Three Months Ended ~~June 30,~~December 31, 2019 compared to Three Months Ended ~~June 30,~~December 31, 2018

•

Healthcare segment profit, for the three months ended ~~June 30,~~December 31, 2019, ~~reflected the upfront recognition of term license revenue and related costs for Clintegrity, Dragon Medical, and Diagnostic solutions under ASC 606. Under ASC 605, Healthcare segment profit increased~~decreased by ~~$7.1~~$9.3 million, or ~~9.2%~~9.0%, primarily due to ~~higher segment~~slightly lower revenue on relatively flat margin, and higher ~~gross margin.~~R&D and sales & marking expenses. The ~~gross margin~~ increase in R&D and sales and marketing expenses was primarily due to ~~a favorable shift in mix~~higher spend to ~~higher margin Dragon Medical cloud-based solution from lower margin medical transcription services,~~support the development and ~~lower revenue from EHR implementation~~sale of new products and ~~optimization services which carried lower margins.~~solutions. As a result, segment profit margin ~~under ASC 605 improved~~declined by ~~2.5~~3.2 percentage points to ~~34.8%~~34.5%.

•

Enterprise segment profit, for the three months ended ~~June 30,~~December 31, 2019, reflected the allocation of contract consideration to multiple performance obligations based on standalone selling prices and the up-front recognition of term license revenue and related costs under ASC 606. Under ASC 605, Enterprise segment profit increased by ~~$5.8~~$0.3 million, or ~~17.7%~~0.6%, primarily due to higher segment revenue, ~~and lower sales and marketing expenses,~~mostly offset ~~in part~~ by lower gross ~~margin.~~margin and higher R&D expenses. Gross margin decline was primarily due to ~~lower licensing revenue, which carries~~ higher ~~margins.~~digital hosting costs. The ~~decrease~~increase in ~~sales and marketing~~R&D expenses was primarily due to ~~lower compensation expenses.~~higher spend on core technology to support future growth. As a result, segment profit margin ~~under ASC 605 increased~~declined by ~~2.5~~1.9 percentage points to ~~29.7%.~~

•

~~Automotive~~ segment profit for the three months ended June 30, 2019 reflected the allocation of contract consideration to multiple performance obligations based on standalone selling prices and the upfront recognition of term license costs under ASC 606. Under ASC 605, Automotive segment profit increased by $3.6 million, or 13.0%, primarily due to higher revenue, offset in part by lower gross margin. Gross margin decreased primarily due to lower revenue from royalties which carries higher margins. As a result, segment profit margin under ASC 605 decreased by 1.8 percentage points to 39.7%30.7%.

•

Other segment profit, for the three months ended ~~June 30,~~December 31, 2019, reflected the allocation of contract consideration to multiple performance obligations based on standalone selling prices and the upfront recognition of term license costs under ASC 606. Under ASC 605, Other segment profit increaseddecreased by ~~$1.7~~$0.2 million, or ~~58.0%~~3.9%, primarily driven by ~~our costs saving initiatives related~~lower revenue, offset by lower expense profile of the remaining business. Lower revenue was primarily due to the wind-down of ~~our~~ Devices and the sale of Mobile Operator Services ~~businesses, offset~~business in ~~part by lower segment revenue.~~

~~Nine Months Ended June 30, 2019 compared to Nine Months Ended June 30, 2018~~

•

~~Healthcare~~ segment profit for the nine months ended June 30, 2019 reflected the upfront recognition of term license revenue and related costs for Clintegrity, Dragon Medical, and Diagnostic solutions under ASC 606. Under ASC 605, Healthcare segment profit increased by $25.4 million, or 10.7%, primarily due to higher gross margin. The gross margin improvement was primarily due to a favorable shiftBrazil in mix to higher margin Dragon Medical cloud-based solution from lower margin medical transcription services, and lower revenue from EHR implementation and optimization services which carried lower margins.fiscal year 2019. As a result, segment profit margin ~~under ASC 605~~ improved by ~~4.5~~26.0% percentage points to ~~36.7%~~55.1%.

•

~~Enterprise~~ segment profit for the nine months ended June 30, 2019 reflected the allocation of contract consideration to multiple performance obligations based on standalone selling prices and the up-front recognition of term license revenue and related costs under ASC 606. Under ASC 605, Enterprise segment profit increased by $19.2 million, or 20.2%, primarily due to higher segment revenue and lower sales and marketing expense, offset in part by lower gross margin. Gross margin decline was primarily due to lower licensing revenue, which carries higher margins. The decrease in sales and marketing expenses was primarily due to lower compensation expenses. As a result, segment profit margin under ASC 605 increased by 3.0 percentage points to 29.9%.

•

~~Automotive~~ segment profit for the nine months ended June 30, 2019 reflected the allocation of contract consideration to multiple performance obligations based on standalone selling prices and the upfront recognition of term license costs under ASC 606. Under ASC 605, Automotive segment profit increased by $2.6 million, or 3.2%, primarily due to higher revenue, offset in part by lower gross margin, and higher operating expenses. Lower gross margin was primarily driven by the continued pricing shift from up-front professional services to per unit license and hosting revenue. Higher operating expenses was primarily driven by higher sales commission expense and our continued investment in R&D. As a result, segment profit margin under ASC 605 decreased by 3.0 percentage points to 36.1%.

•

~~Other~~ segment profit for the nine months ended June 30, 2019 reflected the allocation of contract consideration to multiple performance obligations based on standalone selling prices and the upfront recognition of term license costs under ASC 606. Under ASC 605, Other segment profit increased by $2.9 million, or 23.8%, primarily driven by our costs saving initiatives related to the wind-down of our Devices and Mobile Operator Services businesses, offset in part by lower segment revenue.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

We had ~~Cash~~cash and cash equivalents and ~~Marketable~~marketable securities of ~~$686.2~~$510.0 million as of ~~June 30,~~December 31, 2019, ~~an increase~~a decrease of ~~$212.7~~$254.8 million from ~~$473.5~~$764.8 million as of September 30, ~~2018.~~2019. Our working capital, ~~of continuing operations,~~ defined as total current assets ~~of continuing operations,~~ less total current liabilities offrom continuing operations, was ~~$512.8~~$376.0 million as of ~~June 30,~~December 31, 2019, compared to ~~$199.1~~$591.3 million as of September 30, ~~2018. The increase in our working capital was~~2019, primarily due to the ~~proceeds from the sale~~use of ~~Imaging and the adoption of ASC 606.~~cash to pay down our 2024 Senior Notes on October 1, 2019. As of ~~June 30,~~December 31, 2019, we had ~~$236.7~~$236.6 million available for borrowing under our revolving credit facility. We believe that our existing sources of liquidity are sufficient to support our operating needs, capital requirements and any debt service requirements for the next twelve months.

Cash and cash equivalents and marketable securities held by our international operations totaled ~~$200.7~~$123.8 million as of ~~June 30,~~December 31, 2019 and ~~$112.8~~$135.9 million as of September 30, ~~2018.~~2019. We utilize a variety of financing strategies to ensure that our worldwide cash is available to meet our liquidity needs. We expect the cash held overseas to be permanently invested in our international operations, and our U.S. operation to be funded through its own operating cash flows, cash and marketable securities within the U.S., and if

necessary, borrowing under our revolving credit facility.

Spin-Off of Automotive

~~Disposition of Businesses and Corporate Transformation Program.~~

On ~~February~~October 1, 2019, we completed the ~~sale~~previously announced spin-off of our ~~Imaging~~Automotive business as an independent public company, Cerence, and ~~received approximately $404.0 million in cash, after estimated transaction expenses,~~a pro rata and ~~subject~~tax-free distribution to ~~post-closing finalization~~our stockholders of all of the ~~adjustments set forth~~outstanding shares of Cerence owned by Nuance on October 1, 2019. The distribution was made in the ~~Agreement. As a result, we recorded a gain~~amount of ~~$102.4 million, which is included within Net income from discontinued operations. There are a number~~one share of ~~working capital and other adjustments under~~Cerence common stock for every eight shares of Nuance common stock owned by Nuance’s stockholders of record as of 5:00 p.m. Eastern Time on September 17, 2019.

Upon the ~~Agreement and related ancillary agreements. We do not believe that post-closing working capital adjustments under the Agreement, if any, would have a material impact~~spin-off on ~~our results of operations. In March~~October 1, 2019, we ~~redeemed $300.0~~received an approximately $139.1 million ~~of our 5.375% Senior Notes due 2020 with~~distribution from Cerence. We used the ~~net~~ proceeds from the ~~sale.~~

~~Additionally, on November 19, 2018, we announced our intent~~distribution and existing cash to ~~spin off our Automotive business into an independent publicly-traded company through a pro rata distribution to our common stock holders. Completion~~redeem all the $300.0 million outstanding principal amount of the ~~proposed spin-off is subject to certain conditions, including final approval by our Board~~2024 Senior Notes for $313.5 million, plus accrued and unpaid interest of ~~Directors. We intend to complete~~$4.5 million.

During the ~~separation of the business by the beginning~~first quarter of fiscal year ~~2020.~~

~~For the nine months ended June 30, 2019,~~2020, we incurred ~~cash~~ payments of approximately $59.0 million in connection with our corporate transformation program and $25.0 million to effect the separation of our Imaging business and separation and stand-up of our Automotive business. For the remainder of fiscal year 2019, we expect to spend $5.0 million to $15.0 million related to our corporate transformation program and $15.0 million to $25.0$13.3 million related to the separation and ~~stand-up~~spin-off of our Automotive ~~business.~~business, which have been presented as operating cash flows from discontinued operations.

Net Cash Provided by Operating Activities

Cash provided by operating activities for the ~~nine~~three months ended ~~June 30,~~December 31, 2019 was ~~$297.2~~$53.6 million, ~~an increase~~a decrease of ~~$2.2~~$46.3 million from ~~$295.0~~$99.9 million for the ~~nine~~three months ended ~~June 30,~~December 31, 2018. The ~~increase~~decrease was primarily due to:

~~An increase~~A decrease of ~~$55.8~~$14.2 million in cash provided due to ~~higher income before non-cash charges;~~

~~An increase of $33.4 million due to favorable~~unfavorable changes in working capital, primarily due to the timing of cash collections and cash ~~payments, offset in part by~~payments;

A decrease of ~~$53.8~~$5.0 million in cash provided from changes in deferred revenue. Deferred revenue had a positive effect of ~~$38.3~~$26.9 million on operating cash flows for the ~~nine~~three months ended ~~June 30,~~December 31, 2019, as compared to ~~$92.1~~$31.9 million for the ~~nine~~three months ended ~~June 30, 2018, primarily due to the ASC 606 implementation using the modified retrospective approach in the current period; and~~December 31, 2018;

A decrease of ~~$33.2~~$40.5 million in cash provided from operating cash flows from discontinued ~~operations.~~operations; offset in part by,

An increase of $13.4 million in cash provided due to higher income before non-cash charges.

Net Cash ~~Provided by~~Used in Investing Activities

Cash ~~provided by~~used in investing activities for the ~~nine~~three months ended ~~June 30,~~December 31, 2019 was ~~$378.3~~$17.0 million, an increase of ~~$425.4~~$1.6 million from ~~$47.2~~$15.5 million ~~used~~cash for the ~~nine~~three months ended ~~June 30,~~December 31, 2018. The increase was primarily due to:

~~Net proceeds~~An increase of ~~$407.0 million from the dispositions of businesses, net of transaction fees;~~

~~A decrease of $106.1~~$2.0 million in ~~payments~~cash used for ~~business and asset acquisitions;~~capital expenditures;

~~A decrease~~An increase of ~~$6.7~~$2.3 million in ~~capital expenditures; offset in part by~~

~~A decrease of $94.5 million in~~cash used for the net proceeds from the sale and purchase of marketable securities and other ~~investments.~~investments; offset in part by,

A decrease of $2.7 million in cash used in other investing activities.

Net Cash Used in Financing Activities

Cash used in financing activities for the ~~nine~~three months ended ~~June 30,~~December 31, 2019 was ~~$456.3~~$297.5 million, ~~a decrease~~an increase of ~~$51.2~~$190.0 million from ~~$507.5~~$107.5 million cash used for the ~~nine~~three months ended ~~June 30,~~December 31, 2018. The increase was primarily due to:

~~A decrease~~An increase of ~~$31.2~~$313.5 million in cash used for the repayment and redemption of debt;

An increase of $17.3 million in cash used for share repurchases; offset in part by,

A ~~decrease~~net contribution of ~~$20.8~~$139.1 million ~~related to acquisition payments~~from Cerence in connection with ~~extended payment terms;~~the spin-off of the Automotive segment; and

A decrease of ~~$9.3~~$1.7 million ~~related to~~in cash used for payments for taxes related to net share settlement of equity ~~awards; offset in part by,~~

~~An increase of $9.0 million for share repurchases.~~

awards.

Debt

For a detailed description of the terms and restrictions of the debt and revolving credit facility, see Note 1110 to the accompanying condensed consolidated financial statements.

On February 5, 2020, we announced our intent to redeem the remaining $46.6 million outstanding amount of the 2.75% Convertible Debentures due 2031, which is expected to be completed in March 2020.

We expect to incur a cash interest payment of approximately $49 million in fiscal year 2020, based on the outstanding balance as of December 31, 2019. We expect to fund our debt service requirements through existing sources of liquidity and our operating cash flows.

Share Repurchase Program

We repurchased ~~1.7~~5.7 million shares of our common stock for ~~$29.6~~$92.4 million for the three months ended ~~June 30, 2019, and 7.8~~December 31, 2019. For the three months ended December 31, 2018, we repurchased 4.9 million shares of our common stock for ~~$120.9 million for the nine months ended June 30, 2019. For the three and nine months ended June 30, 2018, we repurchased 8.1 million shares of our common stock for $112.0~~$75.2 million under the program. Since the commencement of the program, we have repurchased an aggregate of ~~63.9~~70.0 million shares for ~~$1,063.6~~$1,162.1 million. The amount paid in excess of par value is recognized in ~~Additional~~additional paid in capital. Shares were retired upon repurchase. As of ~~June 30,~~December 31, 2019, approximately ~~$436.4~~$337.9 million remained available for future repurchases under the program.

Off-Balance Sheet Arrangements, Contractual Obligations

Contractual Obligations

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


	Contractual Payments Due in Fiscal Year										Contractual Payments Due in Fiscal Year
Contractual Obligations	Total		2019		2020 and 2021		2022 and 2023		Thereafter		Total		2020		2021 and 2022		2023 and 2024		Thereafter
Convertible debentures⁽¹⁾	$	1,337.0	$	—	$	—	$	987.0	$	350.0	$	1,337.0	$	—	$	310.5	$	676.5	$	350.0
Senior notes(2)	800.0		—		—		—		800.0		500.0		—		—		—		500.0
Interest payable on long-term debt⁽²⁾⁽³⁾	359.6		15.6		125.0		109.9		109.1		236.3		22.3		84.2		66.7		63.1
Letters of credit⁽³⁾⁽⁴⁾	5.8		0.3		5.5		—		—		5.9		5.9		—		—		—
Lease obligations and other liabilities:
Operating leases(5)	146.8		6.4		41.8		34.1		64.5		136.6		21.0		43.3		24.9		47.4
Operating leases under restructuring⁽⁴⁾	40.2		2.0		14.6		13.0		10.6		17.8		4.0		6.0		4.6		3.2
Purchase commitments⁽⁵⁾	21.7		3.7		14.4		3.6		—
Purchase commitments for inventory, property and equipment⁽⁶⁾											194.3		52.9		100.7		40.7		—
Total contractual cash obligations	$	2,711.1	$	28.0	$	201.3	$	1,147.6	$	1,334.2	$	2,427.9	$	106.1	$	544.7	$	813.4	$	963.7


⁽¹⁾	Pursuant to the terms of each convertible instrument, holders have the right to redeem the debt on specific dates prior to maturity. The repayment schedule above assumes that payment is due on the next redemption date after ~~June 30,~~December 31, 2019.


⁽²⁾	The repayment schedule reflects all the senior notes outstanding as of December 31, 2019.


⁽³⁾	Interest per annum is due and payable semi-annually and is determined based on the outstanding principal as of ~~June 30,~~December 31, 2019, the stated interest rate of each debt instrument and the assumed redemption dates discussed above.


⁽³⁾⁽⁴⁾	Letters of credit are in place primarily to secure future operating lease payments.


⁽⁴⁾⁽⁵⁾	Obligations include contractual lease commitments related to facilities that ~~were part of restructuring plans.~~have subsequently been subleased. As of ~~June 30,~~December 31, 2019, we have subleased certain ~~of the~~ facilities with total sublease income of ~~$46.5~~$14.2 million through fiscal year 2027.


⁽⁵⁾⁽⁶⁾	~~Purchase commitments~~These amounts include non-cancelable purchase commitments for property and equipment as well as inventory ~~and services~~ in the normal course of ~~business. These amounts also include arrangements that require a minimum purchase commitment by us.~~business to fulfill customer backlog.

Total unrecognized tax benefits as of ~~June 30,~~December 31, 2019 were ~~$31.0~~$33.5 million. We do not expect any significant change in the amount of unrecognized tax benefits within the next twelve months.

Contingent Liabilities and Commitments

Certain acquisition payments to selling shareholders were contingent upon the achievement of pre-determined performance target over a period of time after the acquisition. Such contingent payments were recorded at estimated fair values upon the acquisition and re-measured in subsequent reporting periods. As of ~~June 30,~~December 31, 2019, we may be required to pay the ~~maximum amount~~selling stockholders up to $4.8 million upon achieving specified performance goals, including the achievement of ~~payments~~future bookings and sales targets related to ~~be made based on~~ the ~~agreements was $1.7 million if~~products of the ~~specific performance objectives are achieved.~~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. AsAdditionally, as of ~~June 30,~~December 31, 2019, ~~total~~the remaining deferred payment obligations of $17.1 million to certain former stockholders, which are contingent upon their continued employment, will be recognized ratably as compensation ~~to be paid out upon~~expense over the ~~conclusion of~~remaining requisite service ~~periods was $17.1 million.~~periods.

Off-Balance Sheet Arrangements

~~As of June 30,~~Through December 31, 2019, ~~there were no~~we have not entered into any off-balance sheet arrangements ~~that may have a~~or material ~~impact on the condensed consolidated financial statements.~~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, ~~2018.~~2019. There has been no material change to our critical accounting policies since September 30, ~~2018. See Note 4 to the accompanying condensed consolidated financial statements for the critical estimates related to our interim goodwill impairment analysis.~~

2019.

RECENTLY ADOPTED ACCOUNTING STANDARDS AND ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED

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


Item 3.	Quantitative and Qualitative Disclosures about Market Risk

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

Exchange Rate Sensitivity

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

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 ~~may impact~~will have either a positive or negative effect on our financial position and results of operations. Historically, our primary exposure has related to transactions denominated in the euro, British pound, Brazilian real, Canadian dollar, Japanese yen, and Indian rupee.

Periodically, we enter into forward exchange contracts to hedge against foreign exchange rate fluctuations. As of ~~June 30,~~December 31, 2019, we had not designated any contracts as fair value or cash flow hedges. The contracts ~~are not designated as cash flow hedges and~~ generally ~~are for periods~~have a maturity of less than 90 days. As of ~~June 30,~~December 31, 2019, the notional contract amount of outstanding foreign currency exchange contracts was ~~$153.3~~$109.8 million.

Interest Rate Sensitivity

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

At ~~June 30,~~December 31, 2019, we held approximately ~~$686.2~~$510.0 million of cash and cash equivalents and marketable securities ~~primarily~~ consisting of cash, money-market funds, bank deposits and a separately managed investment portfolio. Assuming a one percentage point ~~change~~increase in interest rates, our interest income on our investments classified as cash and cash equivalents and marketable securities would change by approximately ~~$5.6~~$5.1 million per annum, based on the December 31, 2019 reported balances as of ~~June 30, 2019.~~our investment accounts.

At ~~June 30,~~December 31, 2019, we had no outstanding debt subject to variable interest rates.

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 ~~$15.97~~$17.83 as of ~~June 30,~~December 31, 2019 (dollars in millions):


	June 30, 2019								December 31, 2019
	Fair value		Conversion value		Increase to fair value		Increase to conversion value		Fair value		Conversion value		Increase to fair value		Increase to conversion value
2.75% 2031 Debentures	$	46.0	$	23.0	$	0.2	$	2.3	$	46.1	$	29.0	$	0.2	$	2.9
1.5% 2035 Debentures	$	261.2	$	181.2	$	5.9	$	18.1	$	279.4	$	228.3	$	9.8	$	22.8
1.0% 2035 Debentures	$	631.2	$	396.9	$	12.2	$	39.7	$	677.7	$	500.1	$	20.5	$	50.0
1.25% 2025 Debentures	$	343.7	$	251.6	$	14.6	$	25.2	$	388.8	$	317.0	$	20.8	$	31.7


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 ~~were~~have been no material changes toin our internal controls over financial reporting ~~as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f) identified in connection with the evaluation that occurred~~ during the first quarter of fiscal ~~quarter covered by this Quarterly Report on Form 10-Q~~2020 that have materially affected, or are reasonably likely to materially affect, our internal ~~control~~controls over financial reporting. ~~There were no significant changes to our internal control over financial reporting due to the adoption of the new revenue recognition standards.~~

Part II. Other Information

Item 1.Legal Proceedings

This information is included in Note ~~16,~~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, ~~2018 and Item 1A of our Quarterly Report on Form 10-Q for the quarter ended December 31, 2018 set~~2019 sets forth information relating to important risks and uncertainties that could materially affect our business, financial condition or operating results. Those risk factors, in addition to the other information set forth in this report, continue to be relevant to an understanding of our business, financial condition and operating results for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2019. There have been no material changes in our risk factors from those disclosed in our Annual Report. ~~The following risk factor should be read in conjunction with the risk factors included in such Annual Report and Quarter Reports.~~


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

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 ~~June 30,~~December 31, 2019:

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⁾
April 1, 2019 - April 30, 2019 —
—
—
$466.0 million
May 1, 2019 - May 31, 2019 1,102,635
17.59
1,102,635
$441.7million
June 1, 2019 - June 30, 2019 603,181
16.94
603,181
$436.4 million
Total 1,705.816
1,705.816



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, 2019 - October 31, 2019	3,290,344	15.20	3,290,344	$380.4 million
November 1, 2019 - November 30, 2019	—	—	—	$380.4 million
December 1, 2019 - December 31, 2019	2,403,198	17.66	2,403,198	$337.9 million
Total	5,693,542		5,693,542

⁽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 ~~June 30,~~December 31, 2019, approximately ~~$436.4~~$337.9 million remained available for future repurchases under the program.

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


Item 3.	Defaults Upon Senior Securities

None.


Item 4.	Mine Safety Disclosures

Not applicable.


Item 5.	Other Information

None.


Item 6.	Exhibits

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

EXHIBIT INDEX

Incorporated by Reference
Exhibit
Number
Exhibit Description Form File No. Exhibit
Filing
Date

Filed
Herewith
3.1
Amended and Restated Certificate of Incorporation of the Registrant.
10-Q 0-27038 3.2 5/11/2001
3.2
Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Registrant.
10-Q 0-27038 3.1 8/9/2004
3.3
Certificate of Ownership and Merger.
8-K 0-27038 3.1 10/19/2005
3.4
Amended and Restated Bylaws of the Registrant.
10-K 1-36056 3.4 11/20/2018
3.5
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
31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a).
X
31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a).
X
32.1
Certification Pursuant to 18 U.S.C. Section 1350.
X
101.0 The following materials from Nuance Communications, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, formatted in XBRL (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. X

Incorporated by Reference

Exhibit

Number

Exhibit Description

Form

File No.

Exhibit

Filing

Date

Filed

Herewith

3.1

Amended and Restated Certificate of Incorporation of the Registrant.

10-Q

0-27038

3.2

5/11/2001

3.2

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

10-Q

0-27038

3.1

8/9/2004

3.3

Certificate of Ownership and Merger.

8-K

0-27038

3.1

10/19/2005

3.4

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

S-3

333-142182

3.3

4/18/2007

3.5

Amended and Restated Bylaws of the Registrant.

10-K

1-36056

3.4

11/7/2019

10.1

Form of Restricted Stock Unit Award Agreement for use under Nuance Communications, Inc. 2020 Stock Plan (time-vesting awards).

10.2

Form of Performance-Based Restricted Stock Unit Award Agreement for use under Nuance Communications, Inc. 2020 Stock Plan (performance-vesting awards).

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, 2019, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Consolidated Statements of Operations, (ii) the Consolidated Statements of Comprehensive Loss, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements.

104

The cover page of the Quarterly Report on Form 10-Q for the quarter ended December 31, 2019 formatted in Inline XBRL (included in Exhibit 101)

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 ~~August 9, 2019.~~February 7, 2020.




	Nuance Communications, Inc.

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

5547



	For the Three Months Ended June 30, 2019
	As reported, ASC 606		Effect of Implementation			As adjusted, ASC 605
Revenues:
Hosting and professional services	$	260,902	$	7,943		$	268,845
Product and licensing	121,809		5,579			127,388
Maintenance and support	66,486		(4,387		)	62,099
Total revenues	$	449,197	$	9,135		$	458,332

Cost of revenues:
Hosting and professional services	$	154,397	$	6,555		$	160,952
Product and licensing	19,207		(1,496		)	17,711
Maintenance and support	8,192		215			8,407
Amortization of intangible assets	8,895		—			8,895
Total cost of revenues	$	190,691	$	5,274		$	195,965

Sales and marketing	$	72,229	$	1,603		$	73,832

Provision for income taxes	$	7,786	$	(650	)	$	7,136



	As of June 30, 2019
	As reported, ASC 606			Effect of Implementation			As adjusted, ASC 605
Assets:
Accounts receivable	$	313,599		$	26,611		$	340,210
Prepaid expenses and other current assets	$	193,795		$	(65,621	)	$	128,174
Other assets	$	241,271		$	(121,462	)	$	119,809

Liabilities:
Deferred revenue, current	$	310,586		$	36,191		$	346,777
Deferred revenue, noncurrent	$	410,897		$	19,882		$	430,779
Deferred tax liabilities	$	45,456		$	(10,026	)	$	35,430
Other long-term liabilities	$	97,858		$	(11,252	)	$	86,606

Stockholders' Equity:
Accumulated deficit	$	(401,741	)	$	(195,117	)	$	(596,858	)



	Deferred revenue
Balance as of October 1, 2018	$	693,272
Amounts bill but not recognized	712,594
Revenue recognized	(684,383		)
Balance at June 30, 2019	$	721,483



	Within One Year		Two to Five Years		Greater than Five Years		Total
Total revenue	$	754,280	$	1,066,562	$	185,857	$	2,006,699



	September 30, 2018
	(ASC 605)
Major classes of Imaging assets:
Accounts receivable, net	$	30,959
Prepaid expenses and other current assets	3,443
Land, building and equipment, net	2,442
Goodwill	257,352
Intangible assets, net	99,507
Other assets	196
Total assets classified as held for sale	$	393,899

Major classes of Imaging liabilities:
Accounts payable	$	3,604
Accrued expenses and other current liabilities	12,304
Deferred revenue	107,965
Other liabilities	2,658
Total liabilities classified as held for sale	$	126,531



	Intangible Assets
Balance as of September 30, 2018	$	450,001
Acquisitions	1,488
Amortization	(78,126		)
Effect of foreign currency translation	(429		)
Balance at June 30, 2019	$	372,934



	Number of Shares Underlying Restricted Units — Contingent Awards		Number of Shares Underlying Restricted Units — Time-Based Awards
Outstanding at September 30, 2018	3,039,568		6,872,087
Granted	1,342,836		6,214,882
Earned/released	(1,386,735	)	(5,220,312	)
Modification ^(a)	(296,759	)	296,759
Forfeited	(688,835	)	(1,159,444	)
Outstanding at June 30, 2019	2,010,075		7,003,972
Weighted average remaining recognition period of outstanding restricted units	1.6 years		1.6 years
Unrecognized stock-based compensation expense of outstanding restricted units	$27.0 million		$62.2 million
Aggregate intrinsic value of outstanding restricted units ^(b)	$32.1 million		$111.9 million