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:
•potential disruption to our business caused by the proposed acquisition of us
by Microsoft;
•our ability to complete the Merger in a timely manner or at all;
•our future bookings, revenues, cost of revenues, research and development
expenses, selling, general and administrative expenses, amortization of
intangible assets and gross margin;
•our strategy relating to our segments;
•our programs to reduce costs and optimize processes;
•market trends;
•technological advancements;
•the potential of future product releases;
•our product development plans and the timing, amount and impact of investments
in research and development;
•future acquisitions, divestitures and other strategic transactions, and
anticipated benefits from such transactions;
•international operations and localized versions of our products;
•the impact of the COVID-19 pandemic; and
•the conduct, timing and outcome of legal proceedings and litigation matters.
You can identify these and other forward-looking statements by the use of words
such as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "intends," "potential," "continue" or the negative of
such terms, or other comparable terminology. Forward-looking statements also
include the assumptions underlying or relating to any of the foregoing
statements. Our actual results could differ materially from those anticipated in
these forward-looking statements for many reasons, including the risks described
in Item 1A - "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q.
You should not place undue reliance on these forward-looking statements, which
speak only as of the date of this Quarterly Report on Form 10-Q. Although we
believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. We undertake no obligation to publicly release any revisions to
the forward-looking statements or reflect events or circumstances after the date
of this document.
OVERVIEW
Business Overview
We are a pioneer and leader in conversational and cognitive AI innovations that
bring intelligence to everyday work and life. Our solutions and technologies can
understand, analyze and respond to human language to increase productivity and
amplify human intelligence. Our solutions are used by businesses in the
healthcare, financial services, telecommunications and travel industries, among
others. We see several trends in our markets, including (i) the growing adoption
of cloud-based, connected services and highly interactive mobile applications,
(ii) deeper integration of virtual assistant capabilities and services, and
(iii) the continued expansion of our core technology portfolio including
automated speech recognition, natural language
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understanding, semantic processing, domain-specific reasoning, dialog management
capabilities, AI, and voice biometric speaker authentication. We report our
business in three segments, Healthcare, Enterprise, and Other.
•Healthcare. Our healthcare segment provides intelligent systems that support a
more natural and insightful approach to clinical documentation, freeing
clinicians to spend more time caring for patients and helping care teams and
health organizations drive meaningful financial and clinical outcomes. Our
principal solutions include Dragon Medical Cloud-based solutions,
Computer-Assisted Physician Documentation, Diagnostic Imaging Solutions, Nuance®
Dragon Ambient eXperience™, Clinical Documentation Improvement and Coding.
•Enterprise. Our Enterprise segment is a leading provider of AI-powered
intelligent customer engagement solutions and services, which enable enterprises
and contact centers to enhance and automate customer service and sales
engagement. Our principal solutions include interactive voice response,
intelligent engagement, digital messaging and security & biometric solutions,
delivered via on-premise and/or cloud.
•Other. Our Other segment currently consists primarily of voicemail
transcription services.
•Discontinued Operations. On November 17, 2020 , we entered into the Agreement to
sell our medical transcription and electronic healthcare record implementation
businesses. On March 1, 2021 , we completed the sale of the Business and received
proceeds of approximately $29.8 million , subject to certain customary
post-closing adjustments. For all periods presented, the Business' results of
operations have been included within discontinued operations in our consolidated
financial statements.
Acquisition of Nuance Communications, Inc. by Microsoft Corporation
On April 11, 2021 , we entered into a Merger Agreement with Microsoft. Subject to
the terms and conditions of the Merger Agreement, Microsoft has agreed to
acquire Nuance for $56.00 per share in an all-cash transaction. Pursuant to the
Merger Agreement, following consummation of the Merger, Nuance will be a
wholly-owned subsidiary of Microsoft. As a result of the Merger, we will cease
to be a publicly traded company. We have agreed to various customary covenants
and agreements, including, among others, agreements to conduct our business in
the ordinary course during the period between the execution of the Merger
Agreement and the effective time of the Merger. We do not believe these
restrictions will prevent us from meeting our debt service obligations, ongoing
costs of operations, working capital needs, or capital expenditure requirements.
If the Merger Agreement is terminated under certain specified circumstances, we
will be required to pay Microsoft a termination fee of $515.0 million . The
consummation of the Merger remains subject to customary closing conditions,
including satisfaction of certain regulatory approvals and other customary
closing conditions. The acquisition has been approved by Nuance's shareholders,
and we expect it to close by the end of the first calendar quarter of 2022,
subject to the satisfaction of certain regulatory approvals and other customary
closing conditions.
For additional information related to the Merger Agreement, please refer to the
definitive proxy statement previously filed with the SEC and other relevant
materials in connection with the transaction that we will file with the SEC and
which will contain important information about Nuance and the Merger.
Key Metrics
In evaluating the financial condition and operating performance of our business,
management focuses on revenue, net (loss) income, gross margins, operating
margins, cash flow from operations, and changes in deferred revenue. A summary
of key financial metrics for the three months ended December 31, 2021 , as
compared to the three months ended December 31, 2020 , is as follows:
•Total revenues were $321.4 million for the three months ended December 31,
2021 , as compared to $345.8 million for the three months ended December 31,
2020 ;
•Net loss from continuing operations for the three months ended December 31,
2021 was $57.6 million , compared to net income from continuing operations of
$7.0 million for the three months ended December 31, 2020 ;
•Gross margins for the three months ended December 31, 2021 were 56.5%, compared
to 61.9% for the three months ended December 31, 2020 ;
•Operating margins for the three months ended December 31, 2021 were (7.0)%,
compared to 9.1% for three months ended December 31, 2020 ; and
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•Operating cash flows from continuing operations decreased by $40.8 million to
$13.9 million for the three months ended December 31, 2021 , compared to $54.6
million for the three months ended December 31, 2020 .
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
2021 2020 Change Change
Hosting and professional services $ 213.7 $ 195.8 $ 17.9 9.1 %
Product and licensing 47.5 86.0 (38.6) (44.8) %
Maintenance and support 60.2 63.9 (3.7) (5.7) %
Total revenues $ 321.4 $ 345.8 $ (24.3) (7.0) %
United States $ 259.8 $ 272.6 $ (12.8) (4.7) %
International 61.7 73.2 (11.5) (15.7) %
Total revenues $ 321.4 $ 345.8 $ (24.3) (7.0) %
The geographic split was 81% of total revenues in the United States and 19%
internationally for the three months ended December 31, 2021 , as compared to 79%
of total revenues in the United States and 21% internationally for the three
months ended December 31, 2020 .
Hosting and Professional Services Revenue
Hosting revenue primarily relates to delivering on-demand hosted services, such
as medical transcription and automated customer care applications, over a
specified term. Professional services revenue primarily consists of consulting,
implementation and training services for customers. The following table shows
hosting and professional services revenue, in dollars and as a percentage of
total revenues (dollars in millions):
Three Months Ended December 31, Dollar Percent
2021 2020 Change Change
Hosting revenue $ 191.2 $ 167.3 $ 23.9 14.3 %
Professional services revenue 22.5 28.5 (6.0) (20.9) %
Hosting and professional services revenue $ 213.7 $ 195.8 $ 17.9 9.1 %
As a percentage of total revenue 66.5 % 56.6 %
Three Months EndedDecember 31, 2021 compared to Three Months EndedDecember 31, 2020 Hosting revenue for the three months endedDecember 31, 2021 increased by$23.9 million , or 14.3%, primarily due to a$26.8 million increase in Healthcare, driven by the growth in our Dragon Medical Cloud solutions and our continued transition from a license model to a cloud-based model. As a percentage of total revenue, hosting revenue increased from 48.4% to 59.5% for the three months endedDecember 31, 2021 . Professional services revenue for the three months endedDecember 31, 2021 decreased by$6.0 million , or 20.9%, primarily due to a$4.7 million decrease in Enterprise, driven by an accelerated transition from an on-premise license model to a recurring, cloud-based model, as well as the timing of customer projects for our Voice Engagement suite of products. As a percentage of total revenue, professional services revenue decreased from 8.2% to 7.0% for the three months endedDecember 31, 2021 . 31 -------------------------------------------------------------------------------- Table of Contents Product and Licensing Revenue Product and licensing revenue primarily consist of sales and licenses of our technology. The following table shows product and licensing revenue, in dollars and as a percentage of total revenues (dollars in millions): Three Months Ended December 31, Dollar Percent 2021 2020 Change Change Product and licensing revenue $ 47.5$ 86.0 $ (38.6) (44.8) % As a percentage of total revenue 14.8 %
24.9 %
Three Months EndedDecember 31, 2021 compared to Three Months EndedDecember 31, 2020 Product and licensing revenue for the three months endedDecember 31, 2021 decreased by$38.6 million , or 44.8%, primarily due to a$20.1 million decrease in Healthcare and a$17.6 million decrease in Enterprise. Healthcare product and licensing revenue decreased primarily due to a wind down of a non-strategic, legacy term license contract that did not renew, and our ongoing transition from term licenses to cloud-based solutions. Enterprise product and licensing revenue decreased primarily due to the timing of certain license contracts and the accelerated transition from an on-premise license model to a recurring, cloud-based model. As a percentage of total revenue, product and licensing revenue decreased from 24.9% to 14.8% for the three months endedDecember 31, 2021 . Maintenance and Support Revenue Maintenance and support revenue primarily consist of technical support and maintenance services. The following table shows maintenance and support revenue, in dollars and as a percentage of total revenues (dollars in millions): Three Months Ended December 31, Dollar Percent 2021 2020 Change Change Maintenance and support revenue $ 60.2$ 63.9 $ (3.7) (5.7) % As a percentage of total revenue 18.7 %
18.5 %
Three Months EndedDecember 31, 2021 compared to Three Months EndedDecember 31, 2020 Maintenance and support revenue for the three months endedDecember 31, 2021 decreased by$3.7 million , or 5.7%, primarily due to a$4.3 million decrease in Healthcare, driven by the continued transition from software sold with maintenance and support to cloud-based solutions, and a legacy contract that did not renew. As a percentage of total revenue, maintenance and support revenue increased from 18.5% to 18.7% for the three months endedDecember 31, 2021 . COSTS AND EXPENSES Cost of Hosting and Professional Services Revenue Cost of hosting and professional services revenue primarily consists of compensation for services personnel, outside consultants and overhead, as well as the hardware, infrastructure and communications fees that support our hosting solutions. The following table shows the cost of hosting and professional services revenue, in dollars and as a percentage of professional services and hosting revenue (dollars in millions): Three Months Ended December 31, Dollar Percent 2021 2020 Change Change Cost of hosting and professional services revenue$ 121.3 $ 105.6 $ 15.6 14.8 % As a percentage of professional services and hosting revenue 56.7 %
53.9 %
Three Months EndedDecember 31, 2021 compared to Three Months EndedDecember 31, 2020 Cost of hosting and professional services revenue for the three months endedDecember 31, 2021 increased by$15.6 million , or 14.8%, primarily driven by increased employee headcount to support the continued growth and expansion of our cloud-based solutions. Gross margin decreased by 2.8 percentage points primarily due to an increase in hosting cost of revenue related to an increased headcount in the Dragon Medical suite of products. 32 -------------------------------------------------------------------------------- Table of Contents 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 2021 2020 Change Change Cost of product and licensing revenue $ 6.7$ 14.4 $ (7.7) (53.6) % As a percentage of product and licensing revenue 14.1 % 16.8 % Three Months EndedDecember 31, 2021 compared to Three Months EndedDecember 31, 2020 Cost of product and licensing revenue for the three months endedDecember 31, 2021 decreased by$7.7 million , or 53.6%, primarily due to a non-strategic legacy term license contract that was not renewed in our Healthcare segment. Gross margin increased by 2.7 percentage points, primarily due to lower licensing revenue being offset by even lower licensing costs. 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 2021 2020 Change Change Cost of maintenance and support revenue $ 6.7$ 7.5 $ (0.8) (10.3) % As a percentage of maintenance and support revenue 11.2 %
11.7 %
Three Months EndedDecember 31, 2021 compared to Three Months EndedDecember 31, 2020 Cost of maintenance and support revenue for the three months endedDecember 31, 2021 decreased by$0.8 million , or 10.3%. Gross margins increased by 0.5 percentage points primarily driven by lower Healthcare maintenance and support costs, consistent with the continued shift to cloud-based solutions. 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 2021 2020 Change Change Research and development expense $ 68.2$ 56.5 $ 11.7 20.7 % As a percentage of total revenue 21.2 %
16.3 %
Three Months EndedDecember 31, 2021 compared to Three Months EndedDecember 31, 2020 R&D expense increased by$11.7 million , or 20.7%, primarily due to a higher employee headcount as we continued to invest in our core technologies to power new products and solutions. Sales and Marketing Expense Sales and marketing expense include salaries and benefits, commissions, advertising, direct mail, public relations, tradeshow costs and other costs of marketing programs, travel expenses associated with our sales organization and overhead. The following table shows sales and marketing expense, in dollars and as a percentage of total revenues (dollars in millions): 33
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Three Months Ended December 31, Dollar Percent
2021 2020 Change Change
Sales and marketing expense $ 84.0 $ 65.4 $ 18.6 28.4 %
As a percentage of total revenue 26.1 % 18.9 %
Three Months EndedDecember 31, 2021 compared to Three Months EndedDecember 31, 2020 Sales and marketing expense for the three months endedDecember 31, 2021 increased by$18.6 million , or 28.4%, primarily due to a higher employee headcount to support our continued growth in our strategic investments, and increased traveling and entertainment expenses. General and Administrative Expense General and administrative ("G&A") expense primarily consists of personnel costs for administration, finance, human resources, general management, fees for external professional advisers including accountants and attorneys, and provisions for doubtful accounts. The following table shows G&A expense, in dollars and as a percentage of total revenues (dollars in millions): Three Months Ended December 31, Dollar Percent 2021 2020 Change Change General and administrative expense $ 35.5$ 41.1 $ (5.6) (13.7) % As a percentage of total revenue 11.0 %
11.9 %
Three Months EndedDecember 31, 2021 compared to Three Months EndedDecember 31, 2020 G&A expense decreased by$5.6 million , or 13.7%, primarily due to continued impacts of our cost savings initiatives. Amortization of Intangible Assets Amortization of acquired patents and technologies are included within cost of revenue and the amortization of acquired customer and contractual relationships, non-compete agreements, acquired trade names and trademarks, and other intangibles are included within Operating expenses. Customer relationships are amortized based upon the pattern in which the economic benefits of the customer relationships are expected to be realized. Other identifiable intangible assets are amortized on a straight-line basis over their estimated useful lives. Amortization expense was recorded as follows (dollars in millions): Three Months Ended December 31, Dollar Percent 2021 2020 Change Change Cost of revenue$ 5.2 $ 4.3 $ 1.0 22.4 % Operating expenses 6.8 10.5 (3.8) (35.9) % Total amortization expense$ 12.0 $ 14.8 $ (2.8) (19.1) % The decrease in total amortization of intangible assets for the three months endedDecember 31, 2021 , as compared to the prior-year period, was primarily due to certain intangible assets that became fully amortized or fully written off during fiscal year 2021 and the first quarter of fiscal year 2022. 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): 34
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Three Months Ended December 31, Dollar Percent
2021 2020 Change Change
Transition and integration costs $ 1.2 $ 0.1 $ 1.2 1,619.4 %
Professional service fees - 0.3 (0.2) (96.0) %
Total Acquisition-related costs, net $ 1.2 $ 0.3 $ 0.9 284.0 %
The increase in acquisition-related cost, net for the three months ended
December 31, 2021 , as compared to the prior-year period, was primarily due to
certain retention bonuses being earned as part of an acquisition that was
completed in the second quarter of fiscal year 2021.
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,
2021 2020
Other
Personnel Facilities Total Restructuring Charges Total Personnel Facilities Total Restructuring Other Charges Total
Healthcare $ 1,804 $ 125 $ 1,929 $ - $ 1,929 $ 2,632 $ 567 $ 3,199 $ - $ 3,199
Enterprise 450 249 699 - 699 1,182 2,472 3,654 - 3,654
Other - (138) (138) - (138) - 29 29 - 29
Corporate 941 (41) 900 5,116 6,016 975 3 978 706 1,684
Total $ 3,195 $ 195 $ 3,390 $ 5,116 $ 8,506 $ 4,789 $ 3,071 $ 7,860 $ 706 $ 8,566
Fiscal Year 2022
For the three months ended December 31, 2021 , we recorded restructuring charges
of $3.4 million , which included $3.2 million related to the termination of
approximately 81 employees and $0.2 million of charges related to closing
certain idle facilities. These actions were part of our strategic initiatives
focused on investment rationalization, process optimization and cost reduction
as we continue to evaluate the geographic footprint of our offices and
facilities. We expect the remaining outstanding severance of $0.8 million to be
substantially paid during fiscal year 2022, and the remaining $15.4 million in
lease payments to be made through fiscal year 2027, in accordance with the terms
of the applicable leases.
Additionally, for the three months ended December 31, 2021 , we recorded
approximately $5.0 million of expenses related to the acquisition of Nuance by
Microsoft, and $0.1 million of insurance recoveries.
Fiscal Year 2021
For the three months ended December 31, 2020 , we recorded restructuring charges
of $7.9 million , which included $4.8 million related to the termination of
approximately 57 employees and a $3.1 million charge related to closing certain
idle facilities. These actions were part of our strategic initiatives focused on
investment rationalization, process optimization and cost reduction as we
continue to evaluate the geographic footprint of our offices and facilities.
Additionally, for the three months ended December 31, 2020 , we recorded
$0.7 million in professional services expenses related to other corporate
initiatives.
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Other Income (Expense), Net
A summary is as follows (dollars in millions):
Three Months Ended December 31, Dollar Percent
2021 2020 Change Change
Interest income $ - $ 0.2 $ (0.2) (90.4) %
Interest expense (12.7) (23.0) 10.4 (45.0) %
Other income, net 1.3 0.5 0.8 154.5 %
Total other expense, net $ (11.4) $ (22.3) $ 10.9 (49.0) %
Interest income for the three months ended December 31, 2021 decreased primarily
due to lower yields and decreases in cash and marketable securities for the
current year period.
Interest expense for the three months ended December 31, 2021 decreased as we
had aggregate redemptions of $521.9 million notional amounts of the 1.0% and
1.5% Convertible Debentures, and holders of our 1.0% and 1.5% Convertible
Debentures exercised their right to convert an aggregate of $226.6 million
notional amount during fiscal year 2021. Additionally, during the first quarter
of fiscal year 2022, we had aggregate redemptions of $28.6 million notional
amounts of our 1.5% 2035 Debentures, 1.0% 2035 Debentures, and 1.25% 2025
Debentures.
Other income, net for the three months ended December 31, 2021 increased
primarily due to indemnification charges related to historical dispositions and
certain investments.
Provision for Income Taxes
The following table shows the provision for income taxes on continuing
operations and the effective income tax rate (dollars in millions):
Three Months Ended December 31, Dollar Percent
2021 2020 Change Change
Provision for income taxes $ 23.6 $ 2.3 $ 21.2 922.6 %
Effective income tax rate (69.2) % 24.9 %
The effective income tax rate is based upon the income for the year, the
geographic mix of our income, the composition of the income in different
countries, changes relating to valuation allowances and the potential tax
consequences of resolving audits or other tax contingencies.
Our effective income tax rate was (69.2)% for the three months ended
December 31, 2021 , compared to 24.9% for the three months ended December 31,
2020 . The effective tax rate for the three months ended December 31, 2021
differed from the U.S. federal statutory rate of 21.0% primarily due to the base
erosion anti-abuse tax, the composition of the mix in income in different
countries, offset by the change in valuation allowance. The effective tax rate
for the three months ended December 31, 2020 differed from the U.S. federal
statutory rate of 21.0% primarily due to the base erosion anti-abuse tax offset
by a change in the valuation allowance in the United States .
Valuation Allowances
As of December 31, 2021 and September 30, 2021 , we had a full valuation
allowance against net domestic deferred tax assets and certain foreign deferred
tax assets. We intend to maintain valuation allowances on these deferred tax
assets until there is sufficient evidence to support the release of all or some
portion of these allowances. A significant portion of our domestic deferred tax
assets relate to U.S. net operating losses. We continue to believe negative
evidence for the release of some or all of the allowances outweighs positive
evidence after considering recent profitability trends and the disposition of
the medical transcription and EHR implementation businesses. We continue to
evaluate all sources of domestic taxable income including both the reversal of
existing deferred tax liabilities and the likelihood that we could sustain
pretax profitability in the future. As of December 31, 2021 , we believe that
there is a reasonable possibility that within the next twelve months these
sources of taxable income may become sufficient positive evidence to support a
conclusion that a substantial portion of the domestic valuation allowance,
excluding capital losses, could be released.
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Net Income from Discontinued Operations
Disposition of Our Medical Transcription and EHR Implementation businesses
On November 17, 2020 , we entered into the Agreement to sell the Business to
Assured Healthcare Partners and Aeries Technology Group . Pursuant to the
Agreement, we sold and transferred, and the Buyer purchased and acquired, (a)
the shares of certain subsidiaries through which we operate a portion of the
Business and (b) certain assets used in or related to the Business; and the
Buyer assumed certain liabilities related to such assets of the Business,
subject to certain exclusions and indemnities as set forth in the Agreement.
On March 1, 2021 , we completed the sale of the Business and received
approximately $29.8 million in cash, subject to post-closing finalization of the
adjustments set forth in the Agreement. As a result, we recorded a loss of
$12.5 million , which is included within net income from discontinued operations
in fiscal year 2021. 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, the Businesses' results of operations have been
included within discontinued operations in our condensed consolidated financial
statements.
SEGMENT ANALYSISThe following table presents certain financial information about our operating segments (dollars in millions):
Three Months Ended December 31, Change Percent
2021 2020 Change
Segment Revenues (a):
Healthcare $ 200.4 $ 199.3 $ 1.1 0.5 %
Enterprise 117.2 139.2 (21.9) (15.8) %
Other 3.8 7.3 (3.5) (47.6) %
Total segment revenues $ 321.4 $ 345.8 $ (24.3) (7.0) %
Segment Profit:
Healthcare $ 43.1 $ 74.8 $ (31.7) (42.3) %
Enterprise 18.7 41.5 (22.7) (54.8) %
Other 2.0 5.0 (3.0) (59.5) %
Total segment profit $ 63.9 $ 121.3 $ (57.4) (47.3) %
Segment Profit Margin:
Healthcare 21.5 % 37.5 % (16.0)
Enterprise 16.0 % 29.8 % (13.8)
Other 52.8 % 68.4 % (15.6)
Total segment profit margin 19.9 % 35.1 % (15.2)
__________
(a)Segment revenues differ from reported revenues due to certain revenue
adjustments related to acquisitions that would otherwise have been recognized
but for the purchase accounting treatment of the business combinations. These
revenues are included to allow for more complete comparisons to the financial
results of historical operations and in evaluating management performance.
Segment Revenues
Three Months Ended December 31, 2021 compared to Three Months Ended December 31,
2020
•Healthcare segment revenue increased by $1.1 million , or 0.5%, driven primarily
by growth in our Dragon Medical and DAX cloud solutions, partly offset by a
decline in Coding. Revenue from Dragon Medical cloud and DAX cloud-based
solutions increased by $23.1 million , or 28.6%, to $103.6 million for the three
months ended December 31, 2021 from $80.6 million for the three months ended
December 31, 2020 , primarily due to the continued market penetration and
customer transition to Dragon Medical One.
•Enterprise segment revenue decreased by $21.9 million , or 15.8%, primarily
driven an accelerated transition from an on-premise license model to a
recurring, cloud-based model and the timing of certain license contracts.
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•Other segment revenue decreased by $3.5 million , or 47.6%, as we continue to
wind down our Other segment.
Segment Profit
Three Months Ended December 31, 2021 compared to Three Months Ended December 31,
2020
•Healthcare segment profit decreased by $31.7 million , or 42.3%, primarily
driven by relatively flat revenue growth being more than offset by higher cost
of sales and operating expenses, resulting from an increased employee headcount
to support the continued growth and expansion of our cloud-based solutions.
Segment profit margin decreased by 16.0 percentage points to 21.5%, primarily
driven by the increased expenses and relatively flat revenues.
•Enterprise segment profit decreased by $22.7 million , or 54.8%, primarily
driven by lower licensing segment revenue and increased R&D operating expenses.
Segment profit margin decreased by 13.8 percentage points to 16.0%, primarily
due to lower segment revenues, and higher operating expenses.
•Other segment profit decreased by $3.0 million , or 59.5%, as we continue to
wind down our Other segment. Segment profit margin decreased by 15.6 percentage
points to 52.8%.
LIQUIDITY AND CAPITAL RESOURCESLiquidity
We had cash and cash equivalents and marketable securities of$91.9 million as ofDecember 31, 2021 , a decrease of$117.5 million from$209.5 million as ofSeptember 30, 2021 . Our working capital, defined as total current assets less total current liabilities, was$(365.4) million as ofDecember 31, 2021 , compared to$(324.8) million as ofSeptember 30, 2021 . Our working capital included$348.7 million and$373.0 million convertible debt as ofDecember 31, 2021 andSeptember 30, 2021 , respectively. As ofDecember 31, 2021 , we had$298.1 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$23.3 million as ofDecember 31, 2021 and$35.7 million as ofSeptember 30, 2021 . 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 necessary, borrowing under our revolving credit facility. Acquisition ofNuance Communications, Inc. by Microsoft Corporation OnApril 11, 2021 , we entered into a Merger Agreement with Microsoft. Subject to the terms and conditions of the Merger Agreement, Microsoft has agreed to acquire Nuance for$56.00 per share in an all-cash transaction. Pursuant to the Merger Agreement, following consummation of the Merger Nuance will be a wholly-owned subsidiary of Microsoft. As a result of the Merger, we will cease to be a publicly traded company. We have agreed to various customary covenants and agreements, including, among others, agreements to conduct our business in the ordinary course during the period between the execution of the Merger Agreement and the effective time of the Merger. We do not believe these restrictions will prevent us from meeting our debt service obligations, ongoing costs of operations, working capital needs, or capital expenditure requirements. The Merger has been approved by Nuance's shareholders, and we expect it to close by the end of the first calendar quarter of 2022, subject to the satisfaction of certain regulatory approvals and other customary closing conditions. For additional information related to the Merger Agreement, please refer to the definitive proxy statement previously filed with theSEC and other relevant materials in connection with the transaction that we will file with theSEC and which will contain important information about Nuance and the Merger. Convertible Debentures During the first quarter of fiscal year 2022, our common stock price exceeded 130% of the applicable conversion price for each of our convertible debentures for at least 20 trading days during the 30 consecutive trading days endingDecember 31, 2021 . As a result, the holders of our 1.25% 2025 Debentures and 1.0% 2035 Debentures have the right to convert all or any portion of their debentures betweenJanuary 1, 2022 andMarch 31, 2022 . All of our convertible notes with a total net book value of$348.7 million were included within current liabilities as ofDecember 31, 2021 . 38 -------------------------------------------------------------------------------- Table of Contents Should any holders elect to convert, the principal amount of the convertible debentures would be payable in cash, and any amount payable in excess of the principal amount would be paid in cash or shares of our common stock at our election. During the first quarter of fiscal year 2022, holders of our 1.5% 2035 Debentures exercised their right to convert and we redeemed$25.1 million notional amount for$25.1 million in cash and 0.8 million shares of common stock. Following these redemptions, none of the 1.5% 2035 Debentures remain outstanding. Additionally, during the first quarter of fiscal year 2022, holders of our 1.0% 2035 Debentures exercised their right to convert$2.3 million notional amount for$2.3 million in cash and 0.1 million shares of common stock, and holders of our 1.25% 2025 Debentures exercised their right to convert$1.2 million notional amount for$1.2 million in cash and 0.04 million shares of common stock. As part of these redemptions, we transferred non-cash consideration in the form of shares of common stock valued at$41.9 million for the 1.5% 2035 Debentures,$3.0 million for the 1.0% 2035 Debentures, and$2.2 million for the 1.25% 2025 Debentures. As ofDecember 31, 2021 ,$128.0 million in aggregate principal amount of the 1.0% 2035 Debentures and$261.4 million in aggregate principal amount of the 1.25% 2025 Debentures remained outstanding. Our convertible debentures are actively traded in the open market. The 1.25% 2025 Debentures trade at a price consistently in excess of their conversion values. Therefore, we believe that it is uneconomic, and thus unlikely, for the holders of the 1.25% 2025 Debentures to early exercise their conversion rights. In the event that holders of any of our debentures presented an amount for settlement that exceeded our then available sources of liquidity, we may need to obtain additional financing, which we believe would be available to us based upon our assessment of the prevailing market and business conditions and our experience of successful capital raising activities. Net Cash Provided by Operating Activities Cash provided by operating activities for the three months endedDecember 31, 2021 was$13.9 million , a decrease of$47.3 million from$61.2 million cash provided for the three months endedDecember 31, 2020 . The decrease was primarily due to: •A decrease of$51.3 million in cash provided due to lower income before non-cash charges; and •A decrease of$10.4 million in cash provided from changes in deferred revenue. Deferred revenue had a positive effect of$13.5 million on operating cash flows for the three months endedDecember 31, 2021 , as compared to a positive effect of$23.8 million for the three months endedDecember 31, 2020 ; and •A decrease of$6.6 million in cash flows provided from discontinued operations; offset in part by, •An increase of$20.9 million in cash provided due to favorable changes in working capital, primarily due to the timing of cash collections and cash payments. Net Cash Provided by (Used in) Investing Activities Cash provided by investing activities for the three months endedDecember 31, 2021 was$4.6 million , an increase of$26.6 million from$22.0 million cash used for the three months endedDecember 31, 2020 . The increase was primarily due to: •An increase of$25.9 million in net proceeds from the sale and purchase of marketable securities and other investments; and •A decrease of$5.0 million in cash used for capital expenditures; and •An increase of$0.8 million in cash provided by other investing activities; offset in part by, •An increase of$5.1 million in cash used for payments for business and asset acquisitions.Net Cash Used in Financing Activities Cash used in financing activities for the three months endedDecember 31, 2021 was$111.5 million , an increase of$67.8 million from$43.7 million cash used for the three months endedDecember 31, 2020 . The increase was primarily due to: •An increase of$28.6 million in cash used for the repayment and redemption of debt; and •An increase of$39.0 million in cash used for payments for taxes related to net share settlement of equity awards. Debt For a detailed description of the terms and restrictions of the debt and revolving credit facility, see Note 11 to the accompanying condensed consolidated financial statements. For the three months endedDecember 31, 2021 , we spent approximately$28.6 million in cash and issued 0.9 million shares of common stock for the redemption of debt. During the first quarter of 39 -------------------------------------------------------------------------------- Table of Contents fiscal year 2022, holders of our 1.5% 2035 Debentures exercised their right to convert and we redeemed$25.1 million notional amount for$25.1 million in cash and 0.8 million shares of common stock, holders of our 1.0% 2035 Debentures exercised their right to convert$2.3 million notional amount for$2.3 million in cash and 0.1 million shares of common stock, and holders of our 1.25% 2025 Debentures exercised their right to convert$1.2 million notional amount for$1.2 million in cash and 0.04 million shares of common stock. Additionally, certain debt holders have exercised their right to convert Debentures that did not settle as ofDecember 31, 2021 . Holders of our 1.0% 2035 Debentures redeemed$25.6 million notional amount for an estimated$25.6 million in cash and 0.6 million shares of common stock for an estimated total consideration of$58.5 million . The settlement of these conversions is expected to occur in the second quarter of fiscal year 2022. As ofDecember 31, 2021 , we were in compliance with all the debt covenants. We may from time to time, depending on market and business conditions, repurchase outstanding debt in the open market or by private negotiation. We expect to incur cash interest payments of$16.2 million for the remainder of fiscal year 2022, based on the stated yields and the outstanding debt principals as ofDecember 31, 2021 . We expect to fund our debt service requirements through existing sources of liquidity and our operating cash flows. 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 are subject to our assessment of the prevailing market conditions, general economic conditions, capital allocation alternatives, and other factors. We did not repurchase any shares of our common stock for the three months endedDecember 31, 2021 and 2020. Since the commencement of the program, we have repurchased 73.8 million shares for$1,238.8 million . As ofDecember 31, 2021 , approximately$261.2 million remained available for future repurchases under the program. Off-Balance Sheet Arrangements, Contractual Obligations Contractual Obligations The following table outlines our contractual payment obligations (dollars in millions):
Contractual Payments Due in Fiscal Year
Remainder of
Contractual Obligations Total 2022 2023 and 2024 2025 and 2026 Thereafter
Convertible debentures (1)$ 389.4 $ 389.4 $ - $ - $ - Senior notes (2) 500.0 - - - 500.0 Interest payable on long-term debt (3) 151.2 16.2 63.0 57.9 14.1 Letters of credit (4) 1.9 1.9 - - - Lease obligations and other liabilities: Operating leases (5) 100.6 16.6 30.2 23.8
30.0
Operating leases under restructuring 14.9 4.4 7.0 3.0
0.5
Purchase commitments for inventory, property and equipment (6) 54.2 47.8 6.4 - - Total contractual cash obligations$ 1,212.2 $ 476.3 $ 106.6 $ 84.7$ 544.6 __________ (1)As ofDecember 31, 2021 , the holders have the right to convert all or any portion of the 1.25% 2025 Debentures and 1.0% 2035 Debentures betweenJanuary 1, 2022 andMarch 31, 2022 . As a result, these convertible debentures were treated as if they were due in fiscal year 2022. (2)The repayment schedule reflects the outstanding principal amount of our 5.625% senior notes due 2026 as ofDecember 31, 2021 . (3)Interest per annum is due and payable semi-annually and is determined based on the outstanding principal as ofDecember 31, 2021 , the stated interest rate of each debt instrument and the assumed redemption dates discussed above. 40 -------------------------------------------------------------------------------- Table of Contents (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 ofDecember 31, 2021 , we have subleased certain facilities with total sublease income of$10.1 million through fiscal year 2027. (6)These amounts include non-cancelable purchase commitments for property and equipment as well as inventory in the normal course of business to fulfill customer backlog. We entered into an agreement with Microsoft in October of 2019 for their Azure cloud computing service with a minimum commitment of$175.0 million . This contract is expected to be in effect through fiscal year 2024. Total unrecognized tax benefits as ofDecember 31, 2021 were$61.3 million . Other than a possible change for the Swiss Court tax proceedings discussed further in Note 15, we do not expect any other significant change in the amount of unrecognized tax benefits within the next twelve months. Contingent Liabilities and Commitments Certain acquisition payments to selling stockholders were contingent upon the achievement of predetermined performance targets 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, 2021 , we do not have any requirements to pay any selling stockholders based upon the achievement of any specified performance goals. In addition, certain deferred compensation payments to selling stockholders contingent upon their continued employment after the acquisition were recorded as compensation expense over the requisite service period. Additionally, as ofDecember 31, 2021 , the remaining deferred payment obligations of$13.6 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. Microsoft Acquisition Contingent Consideration OnApril 11, 2021 , we entered into a Merger Agreement with Microsoft, subject to the terms of which Microsoft has agreed to acquire Nuance. The consummation of the Merger remains subject to customary closing conditions including satisfaction of certain regulatory approvals. The acquisition has been approved by Nuance's shareholders, and we expect it to close by the end of the first calendar quarter of 2022, subject to the satisfaction of certain regulatory approvals and other customary closing conditions. As part of the transaction, Nuance expects to incur liabilities of approximately$114 million that are contingent on the deal consummation. These liabilities include banker fees, legal fees, and certain retention bonuses. 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, 2021 . There has been no material change to our critical accounting policies sinceSeptember 30, 2021 .
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
41
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U.S. dollar compared to foreign currencies will have either a positive or
negative effect on our financial position and results of operations.
Historically, our primary exposure has related to transactions denominated in
the euro, British pound, Brazilian real, Canadian dollar, and Indian rupee.
Periodically, we enter into forward exchange contracts to hedge against foreign
exchange rate fluctuations. As of December 31, 2021 , we had not designated any
contracts as fair value or cash flow hedges. The contracts generally have a
maturity of less than 90 days. As of December 31, 2021 , the notional contract
amount of outstanding foreign currency exchange contracts was $75.1 million .
Interest Rate Sensitivity
We are exposed to interest rate risk as a result of our cash and cash
equivalents and marketable securities.
At December 31, 2021 , we held approximately $91.9 million of cash and cash
equivalents and marketable securities consisting of cash, money-market funds,
bank deposits and a separately managed investment portfolio. Assuming a one
percentage point increase in interest rates, our interest income on our
investments classified as cash and cash equivalents and marketable securities
would increase by approximately $0.9 million per annum, based on the balances of
cash and cash equivalents and marketable securities as of December 31, 2021 .
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 $55.32 as of
December 31, 2021 (dollars in millions):
December 31, 2021
Increase to Increase to
Fair value Conversion value fair value conversion value
1.0% 2035 Debentures $ 293.1 $ 293.5 $ 29.9 $ 29.3
1.25% 2025 Debentures $ 738.3 $ 734.6 $ 72.1 $ 73.5© Edgar Online, source
