NUANCE COMMUNICATIONS, INC.
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 AI innovations that bring intelligence to everyday work and life. Our solutions and technologies can understand, analyze and respond to human language to increase productivity and amplify human intelligence. Our solutions are used by businesses in the healthcare, financial services, telecommunications and travel industries, among others. We see several trends in our markets, including (i) the growing adoption of cloud-based, connected services and highly interactive mobile applications, (ii) deeper integration of virtual assistant capabilities and services, and (iii) the continued expansion of our core technology portfolio including automated speech recognition ("ASR"), natural language understanding ("NLU"), semantic processing, domain-specific reasoning, dialog management capabilities, AI, and voice biometric speaker authentication. We report our business in three segments, Healthcare, Enterprise, and Other. • Healthcare. Our healthcare segment provides intelligent systems that support a
more natural and insightful approach to clinical documentation, freeing
clinicians to spend more time caring for patients and helping technicians and
health organizations drive meaningful financial and clinical outcomes. Our
principal solutions include dragon medical cloud based solutions ("Dragon
Medical One"), computer assisted clinical documentation ("CAPD"), clinical
documentation improvement ("CDI") and coding, diagnostic solutions, and
medical transcription services.
• Enterprise. Our Enterprise segment is a leading provider of AI-powered
intelligent customer engagement solutions and services, which enable
enterprises and contact centers to enhance and automate customer service and
sales engagement. Our principal solutions include interactive voice responses
("IVR") solutions, intelligent engagement solutions and security & biometric
solutions.
32--------------------------------------------------------------------------------
Table of Contents
• Other. Our Other segment includes voicemail transcription services, Mobile
Operator Services, and our Devices business. In
sale of our Mobile Operator Services business in
completed the sale of our Mobile Operator Services business in
• Discontinued Operations. On
Imaging business and received approximately
estimated transaction expenses. On
previously announced spin-off of our Automotive business into an independent
public company, Cerence. As a result, the historical results of operations for
Imaging and Automotive have been included within discontinued operations in
our condensed consolidated financial statements.
Key Metrics In evaluating the financial condition and operating performance of our business, management focuses on revenue, net income, gross margins, operating margins, cash flow from operations, and changes in deferred revenue. A summary of key financial metrics for the three months endedDecember 31, 2019 , as compared to the three months endedDecember 31, 2018 , is as follows: • Total revenues were$418.2 million for the three months endedDecember 31 ,
2019, as compared to
2018;
• Net income from continuing operations for the three months ended
2019 was
• Gross margins for the three months ended
compared to 56.1% for the three months ended
• Operating margins for the three months ended
compared to 11.1% for three months ended
• Operating cash flows from continuing operations decreased by
million for the three months ended
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 Percent
2019 2018 Change 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 )%
The geographic split was 83% of total revenues in the United States and 17%
internationally for the three months ended December 31, 2019 , as compared to 82%
of total revenues in the United States and 18% internationally for the three
months ended December 31, 2018 .
33--------------------------------------------------------------------------------
Table of Contents
Hosting and Professional Services Revenue
Hosting revenue primarily relates to delivering on-demand hosted services, such
as medical transcription, automated customer care applications, over a specified
term. Professional services revenue primarily consists of consulting,
implementation and training services for customers. The following table shows
Hosting and Professional Services Revenue, in dollars and as a percentage of
total revenues (dollars in millions):
Three Months Ended December 31, Dollar Percent
2019 2018 Change Change
Hosting revenue $ 195.0 $ 186.7 $ 8.3 4.4 %
Professional services revenue 35.5 41.1 (5.5 ) (13.4 )%
Hosting and professional services revenue $ 230.5 $
227.7$ 2.8 1.2 % As a percentage of total revenue 55.1 % 54.3 % Three Months EndedDecember 31, 2019 compared to Three Months EndedDecember 31, 2018 Hosting revenue for the three months endedDecember 31, 2019 increased by$8.3 million , or 4.4%, primarily due to a$13.4 million increase in Healthcare, offset in part by a$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. Other segment hosting revenue decreased due to the wind-down of Devices and the sale of our Mobile Operator Services business inBrazil andIndia during fiscal year 2019. As a percentage of total revenue, Hosting revenue increased from 44.5% to 46.6% for the three months endedDecember 31, 2019 . Professional services revenue for the three months endedDecember 31, 2019 decreased by$5.5 million , or 13.4%, primarily due to an$2.0 million decrease in Healthcare, a$1.4 million decrease in Enterprise, and a$2.1 million decrease in Other. The Healthcare professional services revenue decrease was primarily driven by lower revenue from the EHR implementation and optimization services. Enterprise professional services revenue decreased primarily due to lower contact center service revenue as a result of the timing of the services rendered. Other professional services revenue decreased primarily due to the wind-down of Devices in fiscal year 2019. As a percentage of total revenue, Professional services revenue decreased from 9.8% to 8.5% for the three months endedDecember 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 December 31, Dollar Percent 2019 2018 Change Change Product and licensing revenue $ 125.2 $ 115.9$ 9.3 8.0 % As a percentage of total revenue 29.9 % 27.6 % Three Months EndedDecember 31, 2019 compared to Three Months EndedDecember 31, 2018 Product and licensing revenue for the three months endedDecember 31, 2019 increased by$9.3 million , or 8.0%, primarily due to a$11.5 million increase in Enterprise, offset in part by a$1.1 million decrease in Healthcare, and a$1.1 million decrease in Other. Enterprise product and licensing revenue increased primarily driven by the timing of IVR license deals. Healthcare Product and licensing revenue decreased primarily driven by the continued transition from 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 increased from 27.6% to 29.9% for the three months endedDecember 31, 2019 . 34
--------------------------------------------------------------------------------
Table of Contents
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 December 31, Dollar Percent
2019 2018 Change Change
Maintenance and support revenue $ 62.6 $ 76.1 $ (13.5 ) (17.7 )%
As a percentage of total revenue 15.0 % 18.1 %
Three Months Ended December 31, 2019 compared to Three Months Ended December 31,
2018
Maintenance and support revenue for the three months ended December 31, 2019
decreased by $13.5 million , or 17.7%, primarily due to the continued transition
from software sold with maintenance and support to cloud-based solutions in
Healthcare. As a percentage of total revenue, Maintenance and support revenue
decreased from 18.1% to 15.0% for the three months ended 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 December 31, Dollar Percent
2019 2018 Change Change
Cost of hosting and professional
services revenue $ 135.8 $ 136.6 $ (0.8 ) (0.6 )%
As a percentage of professional
services and hosting revenue 58.9 % 60.0 %
Three Months Ended December 31, 2019 compared to Three Months Ended December 31,
2018
Cost of hosting and professional services revenue for the three months ended
December 31, 2019 decreased by $0.8 million , or 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. Gross
margin increased by 1.1 percentage points primarily due to lower revenue from
EHR implementation and optimization services, which carries lower margins, and a
favorable shift in revenue mix towards higher-margin Dragon Medical cloud-based
solutions from lower-margin transcription services.
Cost of Product and Licensing Revenue
Cost of product and licensing revenue primarily consists of material and
fulfillment costs, manufacturing and operations costs and third-party royalty
expenses. The following table shows the Cost of product and licensing revenue,
in dollars and as a percentage of product and licensing revenue (dollars in
millions):
Three Months Ended December 31, Dollar Percent
2019 2018 Change 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 December 31, 2019 compared to Three Months Ended December 31,
2018
Cost of product and licensing revenue for the three months ended December 31,
2019 increased by $1.8 million , or 5.6%, primarily due to higher product royalty
costs in Healthcare. Gross margin increased by 0.7 percentage points, primarily
due to higher licensing revenue on relatively flat licensing costs in Healthcare
and Enterprise.
35--------------------------------------------------------------------------------
Table of Contents
Cost of Maintenance and Support Revenue
Cost of maintenance and support revenue primarily consists of compensation for
product support personnel and overhead. The following table shows the Cost of
maintenance and support revenue, in dollars and as a percentage of maintenance
and support revenue (dollars in millions):
Three Months Ended December 31 , Dollar Percent
2019 2018 Change Change
Cost of maintenance and support
revenue $ 7.8 $ 7.8 $ - - %
As a percentage of maintenance and
support revenue 12.5 % 10.2 %
Three Months Ended December 31, 2019 compared to Three Months Ended December 31,
2018
Cost of maintenance and support revenue for the three months ended December 31,
2019 was relatively flat. Gross margins decreased by 2.3 percentage points
primarily due to lower revenue on relatively fixed costs as we continued to
transition from licenses to cloud-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 Percent
2019 2018 Change 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 December 31, 2019 compared to Three Months Ended December 31,
2018
R&D expense increased by $9.7 million , or 20.7%, primarily due to higher
compensation costs as we continued to 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 Percent
2019 2018 Change 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 December 31, 2019 compared to Three Months Ended December 31,
2018
Sales and marketing expense for the three months ended December 31, 2019
decreased by $0.9 million , or 1.3%, as higher compensation costs due to expanded
sales force was mostly offset by lower traveling and entertainment expenses.
36--------------------------------------------------------------------------------
Table of Contents
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 Percent
2019 2018 Change 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 December 31, 2019 compared to Three Months Ended December 31,
2018
G&A expense decreased by $5.2 million , or 12.0%, primarily driven by lower
professional services costs and compensation costs due to 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 December 31, Dollar Percent
2019 2018 Change Change
Cost of revenue $ 6.6 $ 7.4 $ (0.7 ) (9.9 )%
Operating expenses 12.5 13.8 (1.3 ) (9.3 )%
Total amortization expense $ 19.2 $ 21.2 $ (2.0 ) (9.5 )%
The decreases in total amortization of intangible assets for the three months
ended December 31, 2019 , as compared to the prior year period, were primarily
due to certain intangible assets having been fully amortized or written off
during fiscal year 2019.
Acquisition-Related Costs, Net
Acquisition-related costs include costs related to business and asset
acquisitions. These costs consist of (i) transition and integration costs,
including retention payments, transitional employee costs, earn-out payments,
and other costs related to integration activities; (ii) professional service
fees, including financial advisory, legal, accounting, and other outside
services incurred in connection with acquisition activities, and disputes and
regulatory matters related to acquired entities; and (iii) fair value
adjustments to acquisition-related contingencies. A summary of the
Acquisition-related cost, net is as follows (dollars in millions):
Three Months Ended December 31, Dollar Percent
2019 2018 Change Change
Transition and integration costs $ 1.5 $ 2.7 $ (1.2 ) (45.3 )%
Professional service fees (0.3 ) - (0.3 ) (708.5 )%
Acquisition-related adjustments - (0.1 ) 0.1 (98.1 )%
Total acquisition-related costs, net $ 1.2 $ 2.6 The decreases in Acquisition-related cost, net for the three months endedDecember 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. 37
--------------------------------------------------------------------------------
Table of Contents
Restructuring and Other Charges, Net
Restructuring and other charges, net include restructuring expenses together
with other charges that are unusual in nature, are the result of unplanned
events, or arise outside of the ordinary course of our business. While
restructuring and other charges, net are excluded from segment profits, the
table below presents the restructuring and other charges, net associated with
each segment (dollars in thousands):
Three Months Ended December 31,
2019 2018
Other Other
Personnel Facilities Total Restructuring
Charges Total Personnel Facilities Total Restructuring Charges
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
Fiscal Year 2020
For the three months ended December 31, 2019 , we recorded restructuring charges
of $4.0 million , which included $2.9 million related to the termination of
approximately 37 employees and $1.1 million related to certain restructuring
facilities. These actions were part of our strategic initiatives focused on
investment rationalization, process optimization and cost reduction. We expect
the remaining outstanding severance of $1.5 million to be substantially paid
during fiscal year 2020, and the remaining balance of $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 three months ended December 31, 2019 , we recorded $2.8
million costs related to the separation of our Automotive business, which was
offset in part by a $0.2 million cash receipt from insurance claims.
Fiscal Year 2019
For the three months ended December 31, 2018 , we recorded restructuring charges
of $6.1 million . This included $6.2 million related to the termination of
approximately 96 employees, which was offset in part by $0.2 million non-cash
adjustments related to certain restructuring facilities. These actions were part
of our strategic initiatives focused on investment rationalization, process
optimization and cost reduction.
Additionally, for the three months ended December 31, 2018 , we recorded $7.2
million of professional services fees related to the execution of our corporate
transformational efforts, and $2.5 million of accelerated depreciation related
to our Mobile Operator Services business, offset in part by a $1.1 million cash
receipt from insurance claims related to a malware incident that occurred in the
third quarter of fiscal year 2017.
Other (Expense) Income, Net
A summary is as follows (dollars in millions):
Three Months Ended December 31, Dollar Percent
2019 2018 Change Change
Interest income $ 2.2 $ 2.6 $ (0.4 ) (14.4 )%
Interest expense (23.8 ) (32.3 ) 8.5 (26.2 )%
Other expense, net (12.0 ) (1.2 ) (10.9 ) 923.8 %
Total other expense, net $ (33.7 ) $ (30.9 ) $ (2.8 ) 9.0 %
The decrease in interest expense for the three months ended December 31, 2019
was primarily due to the repayments of $300.0 million of the 2024 Senior Notes
in October 2019 and $300.0 million of the 5.375% Senior Notes due 2020 in
February 2019 .
38--------------------------------------------------------------------------------
Table of Contents
Provision (Benefit) for Income Taxes
The following table shows the (benefit) provision for income taxes on continuing
operations and the effective income tax rate (dollars in millions):
Three Months Ended December 31, Dollar Percent
2019 2018 Change 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 (197.6)% for the three months endedDecember 31, 2019 , compared to 12.6% for the three months endedDecember 31, 2018 . The effective tax rate for the three months endedDecember 31, 2019 differed from theU.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 endedDecember 31, 2018 differed from theU.S. federal statutory rate of 21.0% primarily due to the valuation allowance on deferred tax assets inthe United States . Net Income from Discontinued Operations As more fully described in Note 4 to the accompanying condensed consolidated financial statements, onFebruary 1, 2019 , we completed the sale of our Imaging business and received approximately$404.0 million in cash, after estimated transaction expenses. OnOctober 1, 2019 , we completed the spin-off of our Automotive business into an independent public company, Cerence. As a result, the historical results of operations for Imaging and Automotive have been included within discontinued operations in our condensed consolidated financial statements. SEGMENT ANALYSIS As more fully described in Note 4, onOctober 1, 2019 , we completed the spin-off of our Automotive business as an independent publicly traded company. Effective the first quarter of fiscal year 2020, our Automotive business's historical results of operations have been included within discontinued operations. For the three months endedDecember 31, 2018 ,$4.2 million of stranded costs previously allocated to our Automotive segment have been re-allocated to Healthcare, Enterprise, and Other. The following table presents certain financial information about our operating segments (dollars in millions): Three Months Ended December 31, Change Percent 2019 2018 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 )
(a) Segment revenues differ from reported revenues due to certain revenue
adjustments related to acquisitions that would otherwise have been
recognized but for the purchase accounting treatment of the business
combinations. These revenues are included to allow for more complete
comparisons to the financial results of historical operations and in
evaluating management performance.
39--------------------------------------------------------------------------------
Table of Contents
Segment Revenues Three Months EndedDecember 31, 2019 compared to Three Months EndedDecember 31, 2018 • Healthcare segment revenue, for the three months endedDecember 31, 2019 ,
decreased by
• Revenue from Dragon Medical cloud-based solutions increased by
million, or 51.2%, to $65.8 million for the three months ended
December 31, 2019 from $43.5 million for the three months ended
December 31, 2018 , primarily due to the continued market penetration and
customer transition to our cloud-based offering.
• Revenue from transcription services decreased by
to
million for the three months ended 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
ended
software sold with maintenance and support to cloud-based solutions.
• Professional services revenue decreased by
million for the three months ended
for the three months ended
revenue from EHR implementation and optimization services.
• Enterprise segment revenue, for the three months ended
increased by
and security and biometrics solutions.
• Other segment revenue, for the three months ended
decreased by
Devices and the sale of Mobile Operator Services business in
year 2019.
Segment Profit
Three Months Ended December 31, 2019 compared to Three Months Ended December 31,
2018
• Healthcare segment profit, for the three months ended December 31, 2019 ,
decreased by
on relatively flat margin, and higher R&D and sales & marking expenses. The
increase in R&D and sales and marketing expenses was primarily due to higher
spend to support the development and sale of new products and solutions. As a
result, segment profit margin declined by 3.2 percentage points to 34.5%.
• Enterprise segment profit, for the three months ended
increased by
mostly offset by lower gross margin and higher R&D expenses. Gross margin
decline was primarily due to higher digital hosting costs. The increase in
R&D expenses was primarily due to higher spend on core technology to support
future growth. As a result, segment profit margin declined by 1.9 percentage
points to 30.7%.
• Other segment profit, for the three months ended
by
expense profile of the remaining business. Lower revenue was primarily due to
the wind-down of Devices and the sale of Mobile Operator Services business in
Brazil in fiscal year 2019. As a result, segment profit margin improved by 26.0% percentage points to 55.1%. LIQUIDITY AND CAPITAL RESOURCES
Liquidity
We had cash and cash equivalents and marketable securities of$510.0 million as ofDecember 31, 2019 , a decrease of$254.8 million from$764.8 million as ofSeptember 30, 2019 . Our working capital, defined as total current assets less total current liabilities from continuing operations, was$376.0 million as ofDecember 31, 2019 , compared to$591.3 million as ofSeptember 30, 2019 , primarily due to the use of cash to pay down our 2024 Senior Notes onOctober 1, 2019 . As ofDecember 31, 2019 , we had$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$123.8 million as ofDecember 31, 2019 and$135.9 million as ofSeptember 30, 2019 . We utilize a variety of financing strategies to ensure that our worldwide cash is available to meet our liquidity needs. We expect the cash held overseas to be permanently invested in our international operations, and ourU.S. operation to be funded through its own operating cash flows, cash and marketable securities within theU.S. , and if 40
--------------------------------------------------------------------------------
Table of Contents
necessary, borrowing under our revolving credit facility. Spin-Off of Automotive OnOctober 1, 2019 , we completed the previously announced spin-off of our Automotive business as an independent public company, Cerence, and a pro rata and tax-free distribution to our stockholders of all of the outstanding shares of Cerence owned by Nuance onOctober 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 of5:00 p.m. Eastern Time onSeptember 17, 2019 . Upon the spin-off onOctober 1, 2019 , we received an approximately$139.1 million distribution from Cerence. We used the proceeds from the distribution and existing cash to redeem all the$300.0 million outstanding principal amount of the 2024 Senior Notes for$313.5 million , plus accrued and unpaid interest of$4.5 million . During the first quarter of fiscal year 2020, we incurred payments of$13.3 million related to the separation and spin-off of our Automotive business, which have been presented as operating cash flows from discontinued operations. Net Cash Provided by Operating Activities Cash provided by operating activities for the three months endedDecember 31, 2019 was$53.6 million , a decrease of$46.3 million from$99.9 million for the three months endedDecember 31, 2018 . The decrease was primarily due to: • A decrease of$14.2 million in cash provided due to unfavorable changes in
working capital, primarily due to the timing of cash collections and cash
payments;
• A decrease of
Deferred revenue had a positive effect of
flows for the three months ended
million for the three months ended
• A decrease of
discontinued operations; offset in part by,
• An increase of
non-cash charges.
Net Cash Used in Investing Activities Cash used in investing activities for the three months endedDecember 31, 2019 was$17.0 million , an increase of$1.6 million from$15.5 million cash for the three months endedDecember 31, 2018 . The increase was primarily due to: • An increase of$2.0 million in cash used for capital expenditures;
• An increase of
and purchase of marketable securities and other investments; offset in part
by,
• A decrease of
Net Cash Used in Financing Activities Cash used in financing activities for the three months endedDecember 31, 2019 was$297.5 million , an increase of$190.0 million from$107.5 million cash used for the three months endedDecember 31, 2018 . The increase was primarily due to: • An increase of$313.5 million in cash used for the repayment and redemption
of debt;
• An increase of
part by,
• A net contribution of
spin-off of the Automotive segment; and
• A decrease of
share settlement of equity awards.
Debt
For a detailed description of the terms and restrictions of the debt and revolving credit facility, see Note 10 to the accompanying condensed consolidated financial statements. OnFebruary 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 inMarch 2020 . We expect to incur a cash interest payment of approximately$49 million in fiscal year 2020, based on the outstanding balance as ofDecember 31, 2019 . We expect to fund our debt service requirements through existing sources of liquidity and our operating cash flows. 41
--------------------------------------------------------------------------------
Table of Contents
Share Repurchase Program OnApril 29, 2013 , our Board of Directors approved a share repurchase program for up to$500.0 million , which was increased by$500.0 million onApril 29, 2015 . OnAugust 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 5.7 million shares of our common stock for$92.4 million for the three months endedDecember 31, 2019 . For the three months endedDecember 31, 2018 , we repurchased 4.9 million shares of our common stock for$75.2 million under the program. Since the commencement of the program, we have repurchased an aggregate of 70.0 million shares for$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 ofDecember 31, 2019 , approximately$337.9 million remained available for future repurchases under the program. Off-Balance Sheet Arrangements, Contractual Obligations Contractual Obligations The following table outlines our contractual payment obligations (dollars in millions): Contractual Payments Due in Fiscal Year Contractual Obligations Total 2020 2021 and 2022 2023 and 2024 Thereafter Convertible debentures(1)$ 1,337.0 $ - $ 310.5 $ 676.5$ 350.0 Senior notes(2) 500.0 - - - 500.0 Interest payable on long-term debt(3) 236.3 22.3 84.2 66.7 63.1 Letters of credit(4) 5.9 5.9 - - - Lease obligations and other liabilities: Operating leases(5) 136.6 21.0 43.3 24.9 47.4 Operating leases under restructuring 17.8 4.0 6.0 4.6 3.2 Purchase commitments for inventory, property and equipment(6) 194.3 52.9 100.7 40.7 - Total contractual cash obligations$ 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
December 31, 2019 . (2) The repayment schedule reflects all the senior notes outstanding as ofDecember 31, 2019 .
(3) Interest per annum is due and payable semi-annually and is determined based
on the outstanding principal as of
rate of each debt instrument and the assumed redemption dates discussed
above.
(4) Letters of credit are in place primarily to secure future operating lease
payments.
(5) Obligations include contractual lease commitments related to facilities that
have subsequently been subleased. As of
certain facilities with total sublease income of $14.2 million through
fiscal year 2027.
(6) These amounts include non-cancelable purchase commitments for property andequipment as well as inventory in the normal course of business to fulfill
customer backlog.
Total unrecognized tax benefits as ofDecember 31, 2019 were$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 ofDecember 31, 2019 , we may be required to pay the selling stockholders up to$4.8 million upon achieving specified performance goals, including the achievement of future bookings and sales targets related to the products of the acquired entities. In addition, certain deferred compensation payments to selling shareholders contingent upon their continued employment after the acquisition was recorded as compensation expense over the requisite service 42
--------------------------------------------------------------------------------
Table of Contents
period. Additionally, as ofDecember 31, 2019 , 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 expense over the remaining requisite service periods. Off-Balance Sheet Arrangements ThroughDecember 31, 2019 , we have not entered into any off-balance sheet arrangements or material transactions with unconsolidated entities or other persons. CRITICAL ACCOUNTING POLICIES Our critical accounting policies are included in the "Critical Accounting Policies" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Form 10-K for the fiscal year endedSeptember 30, 2019 . There has been no material change to our critical accounting policies sinceSeptember 30, 2019 .
RECENTLY ADOPTED ACCOUNTING STANDARDS AND ISSUED ACCOUNTING STANDARDS NOT YET
ADOPTEDSee 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 intoU.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 theU.S. dollar compared to foreign currencies will have either a positive or negative effect on our financial position and results of operations. Historically, our primary exposure has related to transactions denominated in the euro, British pound, Brazilian real, Canadian dollar, Japanese yen, and Indian rupee. Periodically, we enter into forward exchange contracts to hedge against foreign exchange rate fluctuations. As ofDecember 31, 2019 , we had not designated any contracts as fair value or cash flow hedges. The contracts generally have a maturity of less than 90 days. As ofDecember 31, 2019 , the notional contract amount of outstanding foreign currency exchange contracts was$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. AtDecember 31, 2019 , we held approximately$510.0 million of cash and cash equivalents and marketable securities consisting of cash, money-market funds, bank deposits and a separately managed investment portfolio. Assuming a one percentage point increase in interest rates, our interest income on our investments classified as cash and cash equivalents and marketable securities would change by approximately$5.1 million per annum, based on theDecember 31, 2019 reported balances of our investment accounts. AtDecember 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 43
--------------------------------------------------------------------------------
Table of Contents
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$17.83 as ofDecember 31, 2019 (dollars in millions): December 31, 2019 Increase to Increase to Fair value Conversion value fair value conversion value 2.75% 2031 Debentures$ 46.1 $ 29.0 $ 0.2 $ 2.9 1.5% 2035 Debentures$ 279.4 $ 228.3 $ 9.8 $ 22.8 1.0% 2035 Debentures$ 677.7 $ 500.1$ 20.5 $ 50.0 1.25% 2025 Debentures$ 388.8 $ 317.0$ 20.8 $ 31.7
© Edgar Online, source
