10-Q 1 nuan-20211231.htm 10-Q nuan-20211231
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _____________________________________________
Form 10-Q
 _____________________________________________
(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended December 31, 2021
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-27038
 _____________________________________________
NUANCE COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
 _____________________________________________
DE94-3156479
(State or Other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
1 Wayside Road
Burlington,MA01803
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code:
(781565-5000
 _____________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, par value $0.001NUANNasdaq Stock Market LLC
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer," “accelerated filer," “smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated FilerAccelerated Filer
Non-accelerated FilerSmaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.      
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
The number of shares of the Registrant’s Common Stock, outstanding as of January 31, 2022 was 319,385,728.



NUANCE COMMUNICATIONS, INC.
TABLE OF CONTENTS
 
  Page
Item 1.Condensed Consolidated Financial Statements:
Consolidated Statements of Operations for the three months ended December 31, 2021 and 2020
Consolidated Statements of Comprehensive (Loss) Income for the three months ended December 31, 2021 and 2020
Consolidated Balance Sheets at December 31, 2021 and September 30, 2021
Consolidated Statements of Stockholders’ Equity for the three months ended December 31, 2021 and 2020
Consolidated Statements of Cash Flows for the three months ended December 31, 2021 and 2020
Notes to Condensed Consolidated Financial Statements
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Certifications





NUANCE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended December 31,
 20212020
(Unaudited)
(In thousands, except per share amounts)
Revenues:
Hosting and professional services$213,732 $195,832 
Product and licensing47,472 86,037 
Maintenance and support60,231 63,884 
Total revenues321,435 345,753 
Cost of revenues: 
Hosting and professional services121,254 105,615 
Product and licensing6,690 14,415 
Maintenance and support6,718 7,486 
Amortization of intangible assets5,215 4,262 
Total cost of revenues139,877 131,778 
Gross profit181,558 213,975 
Operating expenses:
Research and development68,166 56,457 
Sales and marketing84,002 65,405 
General and administrative35,517 41,145 
Amortization of intangible assets6,754 10,531 
Acquisition-related costs, net1,248 325 
Restructuring and other charges, net8,506 8,566 
Total operating expenses204,193 182,429 
(Loss) income from operations(22,635)31,546 
Other income (expense):  
Interest income22 228 
Interest expense(12,661)(23,014)
Other income, net1,265 497 
(Loss) income before income taxes(34,009)9,257 
Provision for income taxes23,550 2,303 
Net (loss) income from continuing operations(57,559)6,954 
Net income from discontinued operations 7,941 
Net (loss) income$(57,559)$14,895 
Net (loss) income per common share - basic:
Continuing operations$(0.18)$0.02 
Discontinued operations 0.03 
Total net (loss) income per basic common share$(0.18)$0.05 
Net (loss) income per common share - diluted:
Continuing operations$(0.18)$0.02 
Discontinued operations 0.03 
Total net (loss) income per diluted common share$(0.18)$0.05 
Weighted average common shares outstanding:
Basic317,359 283,818 
Diluted317,359 314,210 

See accompanying notes.
1

NUANCE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
 Three Months Ended December 31,
 20212020
(Unaudited)
 (In thousands)
Net (loss) income$(57,559)$14,895 
Other comprehensive (loss) income:
Foreign currency translation adjustment(2,653)15,814 
Pension adjustments35 14 
Unrealized loss on marketable securities(7)(29)
Total other comprehensive (loss) income, net(2,625)15,799 
Comprehensive (loss) income$(60,184)$30,694 








































See accompanying notes.
2

NUANCE COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS 
December 31,
2021
September 30,
2021
(Unaudited)
 (In thousands, except per
share amounts)
ASSETS
Current assets:
Cash and cash equivalents$91,949 $187,307 
Marketable securities 22,168 
Accounts receivable, less allowances for doubtful accounts of $9,536 and $10,073
180,171 162,292 
Prepaid expenses and other current assets203,684 231,778 
Total current assets475,804 603,545 
Land, building and equipment, net147,704 146,660 
Goodwill2,154,658 2,155,270 
Intangible assets, net116,002 128,331 
Right-of-use assets77,905 82,666 
Deferred tax assets45,927 45,927 
Other assets218,557 224,254 
Total assets$3,236,557 $3,386,653 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt$348,669 $372,999 
Contingent and deferred acquisition payments1,882 2,148 
Accounts payable75,326 90,120 
Accrued expenses and other current liabilities154,276 222,340 
Deferred revenue261,010 240,742 
Total current liabilities841,163 928,349 
Long-term debt495,185 494,925 
Deferred revenue, net of current portion99,505 108,317 
Deferred tax liabilities27,723 12,019 
Operating lease liabilities80,444 85,290 
Other liabilities76,915 77,781 
Total liabilities1,620,935 1,706,681 
Commitments and contingencies (Note 16)
Mezzanine Equity40,723 45,038 
Stockholders’ equity:
Common stock, $0.001 par value per share; 560,000 shares authorized; 322,582 and 319,402 shares issued and 318,831 and 315,651 shares outstanding, respectively
323 319 
Additional paid-in capital2,055,139 2,054,994 
Treasury stock, at cost (3,751 shares)
(16,788)(16,788)
Accumulated other comprehensive loss(107,274)(104,649)
Accumulated deficit(356,501)(298,942)
Total stockholders’ equity1,574,899 1,634,934 
Total liabilities and stockholders’ equity$3,236,557 $3,386,653 





See accompanying notes.
3

NUANCE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the three months ended December 31, 2021
 Common StockAdditional Paid-In CapitalTreasury StockAccumulated Other Comprehensive LossAccumulated DeficitTotal Stockholders' Equity
 SharesAmountSharesAmount
 (In thousands)
Balance at September 30, 2021319,402 $319 $2,054,994 (3,751)$(16,788)$(104,649)$(298,942)$1,634,934 
Issuance of common stock under employee stock plans3,875 4 60 — — — — 64 
Cancellation of restricted stock, and repurchase of common stock at cost for employee tax withholding(1,549)(1)(85,374)— — — — (85,375)
Stock-based compensation— — 81,361 — — — — 81,361 
Equity portion of convertible debt puttable— — 4,315 — — — — 4,315 
Redemption of Convertible Notes(a)
854 1 (217)— — — — (216)
Net loss— — — — — — (57,559)(57,559)
Other comprehensive loss— — — — — (2,625)— (2,625)
Balance at December 31, 2021322,582 $323 $2,055,139 (3,751)$(16,788)$(107,274)$(356,501)$1,574,899 
For the three months ended December 31, 2020
 Common StockAdditional Paid-In CapitalTreasury StockAccumulated Other Comprehensive LossAccumulated DeficitTotal Stockholders' Equity
 SharesAmountSharesAmount
 (In thousands)
Balance at September 30, 2020286,703 $287 $1,550,568 (3,751)$(16,788)$(117,918)$(272,216)$1,143,933 
Issuance of common stock under employee stock plans3,117 3 (3)— — — —  
Cancellation of restricted stock, and repurchase of common stock at cost for employee tax withholding(1,151)(1)(43,702)— — — — (43,703)
Stock-based compensation— — 75,455 — — — — 75,455 
Equity portion of convertible debt puttable— — (53,343)— — — — (53,343)
Net income— — — — — — 14,895 14,895 
Other comprehensive income— — — — — 15,799 — 15,799 
Balance at December 31, 2020288,669 $289 $1,528,975 (3,751)$(16,788)$(102,119)$(257,321)$1,153,036 
__________
(a) According to ASC 470-20, cash consideration paid to repurchase and retire our convertible notes was first allocated to debt component based on the actual fair value on the trading date, and the remaining consideration was allocated to additional paid-in capital.

See accompanying notes.
4

NUANCE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months Ended December 31,
 20212020
(Unaudited)
(In thousands)
Cash flows from operating activities:
Net (loss) income from continuing operations$(57,559)$6,954 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation11,019 7,993 
Amortization11,969 14,793 
Stock-based compensation38,399 34,906 
Non-cash interest expense4,144 12,324 
Deferred tax provision (benefit)14,386 (5,435)
Loss on extinguishment of debt215  
Other651 3,028 
Changes in operating assets and liabilities, excluding effects of acquisitions:
Accounts receivable(19,354)(40,023)
Prepaid expenses and other assets40,930 (5,892)
Accounts payable(14,934)11,636 
Accrued expenses and other liabilities(29,480)(9,480)
Deferred revenue13,464 23,814 
  Net cash provided by operating activities - continuing operations13,850 54,618 
  Net cash provided by operating activities - discontinued operations 6,570 
Net cash provided by operating activities13,850 61,188 
Cash flows from investing activities:
Capital expenditures(12,394)(17,400)
Purchases of marketable securities and other investments (41,366)
Proceeds from sales and maturities of marketable securities and other investments22,162 37,582 
Payments for business and asset acquisitions, net of cash acquired(5,375)(250)
Other209 (545)
Net cash provided by (used in) investing activities4,602 (21,979)
Cash flows from financing activities:
Repurchase and redemption of debt(28,646) 
Payments for taxes related to net share settlement of equity awards(82,763)(43,729)
Other financing activities(78)(6)
Net cash used in financing activities(111,487)(43,735)
Effects of exchange rate changes on cash and cash equivalents(2,323)2,739 
Net decrease in cash and cash equivalents(95,358)(1,787)
Cash and cash equivalents at beginning of period187,307 301,233 
Cash and cash equivalents at end of period$91,949 $299,446 










See accompanying notes.
5

NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Presentation
Nuance Communications, Inc. ("we", "Nuance", "our", "us", or the "Company") is a pioneer and leader in conversational and cognitive artificial intelligence ("AI") innovations that bring intelligence to everyday work and life. Our solutions and technologies can understand, analyze and respond to human language to increase productivity and amplify human intelligence. Our solutions are used by businesses in the healthcare, financial services, telecommunications and travel industries, among others. We had three reportable segments as of December 31, 2021: Healthcare, Enterprise, and Other. See Note 18 for a description of each of these segments.
Although we believe the disclosures included herein are adequate to ensure that the condensed consolidated financial statements are fairly presented, certain information and footnote disclosures to the financial statements have been condensed or omitted in accordance with the rules and regulations of the SEC. Accordingly, the condensed consolidated financial statements and the footnotes included herein should be read in conjunction with the audited financial statements and the footnotes included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire fiscal year or any future period.
On April 11, 2021, we entered into an Agreement and Plan of Merger (the " Merger Agreement") with Microsoft Corporation ("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, a wholly-owned subsidiary of Microsoft will merge with and into Nuance (the "Merger") with Nuance surviving as 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 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 Securities and Exchange Commission ("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.
As more fully described in Note 11, 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 ending December 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 between January 1, 2022 and March 31, 2022. All of our convertible notes with a total net book value of $348.7 million were included within current liabilities as of December 31, 2021.
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 of December 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.
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NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2. Summary of Significant Accounting Policies
Issued Accounting Standards Not Yet Adopted
From time to time, new accounting pronouncements are issued by the FASB and are adopted by us as of the specified effective dates. Unless otherwise discussed, such pronouncements did not have or will not have a significant impact on our consolidated financial position, results of operations or cash flows, or do not apply to our operations.
Convertible Notes
In August 2020, the FASB issued ASU 2020-06, "Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity," which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The new guidance eliminates two of the three models in Accounting Standards Codification ("ASC") 470-202 that require separating embedded conversion features from convertible instruments. As a result, only conversion features accounted for under the substantial premium model in ASC 470-20 and those that require bifurcation in accordance with ASC 815-153 will be accounted for separately. For contracts in an entity’s own equity, the new guidance eliminates some of the requirements in ASC 815-404 for equity classification. The guidance also addresses how convertible instruments are accounted for in the diluted earnings per share calculation and requires enhanced disclosures about the terms of convertible instruments and contracts in an entity’s own equity. The guidance will be effective for annual periods beginning after December 15, 2021, and interim periods therein. Early adoption is permitted for all entities for fiscal periods beginning after December 15, 2020, including interim periods within the same fiscal year. Entities are allowed to adopt the guidance using either the modified or full retrospective approach. We are currently assessing the provisions of the guidance and the impact on our condensed consolidated financial statements.
Business Combinations
In August 2021, the FASB issued ASU 2021-08, "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers," which improves the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to: (1) recognition of an acquired contract liability, and (2) payment terms and their effect on subsequent revenue recognized by the acquirer. The new guidance requires that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. The guidance will be effective for annual periods beginning after December 15, 2022, and interim periods therein. Early adoption is permitted for all entities, including interim periods within the same fiscal year. We are currently assessing the provisions of the guidance and the impact on our condensed consolidated financial statements.
3. Revenue Recognition
We derive revenue from the following sources: (1) hosting services, (2) software licenses, including royalties, (3) maintenance and support ("M&S"), (4) professional services, and (5) sale of hardware. Revenue is reported net of applicable sales and use tax, value-added tax and other transaction taxes imposed on the related transaction including mandatory government charges that are passed through to our customers. We account for a contract when both parties have approved and committed to the contract, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and the collectability of the consideration is probable.
The majority of our arrangements with customers typically contain multiple products and services. We account for individual products and services separately if they are distinct, that is, if a product or service is separately identifiable from other items in the contract and if a customer can benefit from it on its own or with other resources that are readily available to the customer.
We recognize revenue after applying the following five steps:
identification of the contract, or contracts, with a customer;
identification of the performance obligations in the contract, including whether they are distinct within the context of the contract;
determination of the transaction price, including the constraint on variable consideration;
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NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
allocation of the transaction price to the performance obligations in the contract; and
recognition of revenue when, or as, performance obligations are satisfied.
We allocate the transaction price of the arrangement based on the relative estimated standalone selling price ("SSP") of each distinct performance obligation. In determining SSP, we maximize observable inputs and consider a number of data points, including:
the pricing of standalone sales (in the instances where available);
the pricing established by management when setting prices for deliverables that are intended to be sold on a standalone basis;
contractually stated prices for deliverables that are intended to be sold on a standalone basis; and
other pricing factors, such as the geographical region in which the products are sold and expected discounts based on the customer size and type.
We only include estimated amounts of variable consideration in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. We reduce transaction prices for estimated returns and other allowances that represent variable consideration under ASU No. 2014-09, "Revenue from Contracts with Customers: Topic 606" ("ASC 606"), which we estimate based on historical return experience and other relevant factors and record a reduction to revenue and accounts receivable. Other forms of contingent revenue or variable consideration are infrequent.
Revenue is recognized when control of these products and services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services.
We assess the timing of the transfer of products or services to the customer as compared to the timing of payments to determine whether a significant financing component exists. In accordance with the practical expedient in ASC 606-10-32-18, we do not assess the existence of a significant financing component when the difference between payment and transfer of deliverables is a year or less. If the difference in timing arises for reasons other than the provision of financing to either the customer or us, no financing component is deemed to exist. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our services, not to receive or provide financing from or to customers. We do not consider set-up fees nor other upfront fees paid by our customers to represent a financing component.
Certain products are sold through distributors or resellers. Certain distributors and resellers have been granted right of return and selling incentives which are accounted for as variable consideration when estimating the amount of revenue to be recognized. Returns and credits are estimated at the contract inception and updated at the end of each reporting period as additional information becomes available. In accordance with the practical expedient in ASC 606-10-10-4, we apply a portfolio approach to estimate the variable consideration associated with this group of customers.
Reimbursements for out-of-pocket costs generally include, but are not limited to, costs related to transportation, lodging and meals. Revenue from reimbursed out-of-pocket costs is accounted for as variable consideration.
Shipping and handling activities are not considered a contract performance obligation. We record shipping and handling costs billed to customers as revenue with offsetting costs recorded as cost of revenue.
Performance Obligations
Hosting
Hosting services, which allow our customers to use the hosted software over the contract period without taking possession of the software, are provided on a usage basis as consumed or on a fixed fee subscription basis. Our hosting contract terms generally range from one to five years.
As each day of providing services is substantially the same and the customer simultaneously receives and consumes the benefits as access is provided, we have determined that our hosting services arrangements are a single performance obligation comprised of a series of distinct services. These services include variable consideration, which is typically a function of usage. We recognize revenue as each distinct service period is performed (i.e., recognized as incurred).
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NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Subscription-based revenue represents a single promise to stand-ready to provide access to our hosting services. Revenue is recognized over time on a ratable basis over the hosting contract term, which generally ranges from one to five years.
Software Licenses
On-premise software licenses sold with non-distinct professional services to customize and/or integrate the underlying software are accounted for as a combined performance obligation. Revenue from the combined performance obligation is recognized over time based upon the progress towards completion of the project, which is measured based on the labor hours already incurred to date as compared to the total estimated labor hours.
Revenue from distinct on-premise software licenses, which do not require professional services to customize and/or integrate the software license, is recognized at the point in time when the software is made available to the customer and control is transferred.
Revenue from software licenses sold on a royalty basis, where the license of intellectual property is the predominant item to which the royalty relates, is recognized in the period the usage occurs in accordance with the practical expedient in ASC 606-10-55-65(A).
Maintenance and Support
Our M&S contracts generally include telephone support and the right to receive unspecified upgrades and updates on a when-and-if available basis. M&S revenue is recognized over time on a ratable basis over the contract period because we transfer control evenly by providing a stand-ready service.
Professional Services
Revenue from distinct professional services, including training, is recognized over time based upon the progress towards completion of the project, which is measured based on the labor hours already incurred to date as compared to the total estimated labor hours.
Hardware
Hardware revenue is recognized at the point in time when control is transferred to the customer, which is typically upon delivery.
Significant Judgments
Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Our license contracts often include professional services to customize and/or integrate the licenses into the customer’s environment. Judgment is required to determine whether the license is considered distinct and accounted for separately, or not distinct and accounted for together with professional services.
Judgments are required to determine the SSP for each distinct performance obligation. When SSP is directly observable, we estimate SSP based upon the historical transaction prices, adjusted for geographic considerations, customer classes, and customer relationship profiles. In instances where SSP is not directly observable, we determine SSP using information that may include market conditions and other observable inputs. We may have more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we may use information such as the size of the customer and geographic region in determining SSP. Determining SSP for performance obligations which we never sell separately also requires significant judgment. In estimating the SSP for such performance obligations, we consider the likely price that would have resulted from established pricing practices had the deliverable been offered separately and the prices a customer would likely be willing to pay.
From time to time, we may enter into arrangements with third party suppliers to resell products or services. In such cases, we evaluate whether we are the principal (i.e. report revenues on a gross basis) or agent (i.e. report revenues on a net basis). In doing so, we first evaluate whether we control the good or service before it is transferred to the customer. If we control the good or service before it is transferred to the customer, we are the principal; if not, we are the agent. Generally, we control a promised good or service before transferring that good or service to the customer and act as the principal to the transaction. Determining whether we control the good or service before it is transferred to the customer may require judgment.
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NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Disaggregated Revenue
We disaggregate revenue from contracts with customers by reportable segment and products and services as this presentation depicts the timing, risks and uncertainty of our revenue streams, which is also in line with how we manage our businesses, assess performance, and determine management compensation. Our disaggregated revenue from continuing operations is as follows (dollars in thousands):
Three Months Ended December 31,
20212020
Hosting and professional servicesProduct and licensingMaintenance and supportTotalHosting and professional servicesProduct and licensingMaintenance and supportTotal
Healthcare$136,297 $34,696 $29,407 $200,400 $110,803 $54,783 $33,746 $199,332 
Enterprise73,760 12,659 30,808 117,227 78,741 30,286 30,125 139,152 
Other3,675 117 16 3,808 6,288 968 13 7,269 
Total revenues$213,732 $47,472 $60,231 $321,435 $195,832 $86,037 $63,884 $345,753 
Hardware revenue comprised approximately $7.3 million of total product and licensing revenue for the three months ended December 31, 2021, and $6.6 million of total product and licensing revenue for the three months ended December 31, 2020.
Contract Acquisition Costs
We are required to capitalize certain contract acquisition costs under ASC 606. The capitalized costs primarily relate to paid commissions and other direct, incremental costs to acquire customer contracts. In accordance with the practical expedient in ASC 606-10-10-4, we apply a portfolio approach to estimate contract acquisition costs for groups of customer contracts. We elect to apply the practical expedient in ASC 340-40-25-4 and will expense contract acquisition costs as incurred where the expected period of benefit is one year or less. Sales commissions paid on renewal maintenance and support are not commensurate with sales commissions paid on the initial maintenance and support contract. Contract acquisition costs are deferred and amortized on a straight-line basis over the period of benefit, which we have estimated to be between one and five years. The period of benefit was determined based on an average customer contract term, expected contract renewals, changes in technology and our ability to retain customers including canceled contracts. Contract acquisition costs are classified as current or noncurrent assets based on when the expense will be recognized. The current and noncurrent portions of contract acquisition costs are included in Prepaid expenses and other current assets, and Other assets, respectively. As of December 31, 2021, we had $49.4 million of current contract acquisition costs and $91.9 million of noncurrent contract acquisition costs. As of September 30, 2021, we had $40.5 million of current contract acquisition costs and $86.1 million of noncurrent contract acquisition costs. Commission expense is primarily included in sales and marketing expense on the consolidated statements of operations. We had amortization expense of $7.0 million and $4.7 million related to contract acquisition costs for the three months ended December 31, 2021 and 2020, respectively. There was no impairment related to commission costs capitalized.
Capitalized Contract Costs
We capitalize incremental costs incurred to fulfill our contracts that (1) relate directly to the contract, (2) are expected to generate resources that will be used to satisfy our performance obligation under the contract, and (3) are expected to be recovered through revenue generated under the contract. Our capitalized costs consist primarily of setup costs, such as costs to stand-up, customize, and develop applications for each customer. These costs are incurred to satisfy our stand-ready obligation to provide access to our connected offerings. The contract costs are expensed to cost of revenue as we satisfy our stand-ready obligation over the contract term, which we estimate to be between one and five years. The contract term estimation was determined based on an average customer contract term, expected contract renewals, changes in technology, and our ability to retain customers including canceled contracts. We classify capitalized contract costs as current or noncurrent based on the timing of when we expect to recognize the expense. The current and noncurrent portions of capitalized contract fulfillment costs are included in Prepaid expenses and other current assets, and Other assets, respectively. As of December 31, 2021, we had $22.8 million of short-term contract costs included with Prepaid expenses and other current assets and $35.5 million of long-term costs included within Other assets. As of September 30, 2021, we had $21.3 million of short-term contract costs included with Prepaid expenses and other current assets and $35.3 million of long-term costs within Other assets.
Trade Accounts Receivable and Contract Balances
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NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We classify our right to consideration in exchange for deliverables as either a receivable or a contract asset. A receivable is a right to consideration that is unconditional (i.e. only the passage of time is required before payment is due). We present such receivables in Accounts receivable, net in our consolidated balance sheets at their net estimated realizable value. We maintain an allowance for doubtful accounts to provide for the estimated amount of receivables that may not be collected. The allowance is based upon an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivables and other applicable factors.
Our contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period.
Contract assets include unbilled amounts from long-term contracts when revenue recognized exceeds the amount billed to the customer, and right to payment is not solely subject to the passage of time. The current and noncurrent portions of contract assets are included in Prepaid expenses and other current assets, and Other assets. As of December 31, 2021, we had $65.2 million of current contract assets and $73.9 million of noncurrent contract assets. As of September 30, 2021, we had $72.6 million of current contract assets and $88.9 million of noncurrent contract assets. The table below shows significant changes in contract assets of continuing operations (dollars in thousands):
Contract assets
Balance as of September 30, 2021$161,512 
Revenues recognized but not billed73,228 
Amounts reclassified to accounts receivable(95,632)
Balance at December 31, 2021$139,108 
Our contract liabilities, or Deferred revenue, consist of advance payments and billings in excess of revenues recognized. We classify Deferred revenue as current or noncurrent based on when we expect to recognize the revenues. As of December 31, 2021, we had $360.5 million of Deferred revenue. The table below shows significant changes in Deferred revenue (dollars in thousands):
Deferred revenue
Balance as of September 30, 2021$349,059 
Amounts bill but not recognized200,167 
Revenue recognized(188,711)
Balance at December 31, 2021$360,515 
Remaining Performance Obligations
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied as of December 31, 2021 (dollars in thousands):
Within One YearTwo to Four YearsGreater than Four YearsTotal
Total revenue$745,007 $993,659 $42,923 $1,781,589 
The table above includes fixed backlogs and does not include variable backlog derived from contingent usage-based activities, such as royalties and usage-based hosting revenue.
4. Disposition of Businesses
Disposition of Our Medical Transcription and EHR Implementation businesses
On November 17, 2020, we entered into a definitive agreement (the “Agreement”) to sell our medical transcription and electronic healthcare record ("EHR") implementation businesses (the "Business") to Assured Healthcare Partners and Aeries Technology Group (together, the “Buyer”). 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.
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NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 (loss) 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.
The following table summarizes the results of the discontinued operations (dollars in thousands):
Three Months Ended December 31,
20212020
 Medical Transcription and EHR ImplementationMedical Transcription and EHR Implementation
Major line items constituting net income of discontinued operations:
RevenueN/A$47,650 
Cost of revenueN/A29,152 
Research and developmentN/A1,298 
Sales and marketingN/A908 
General and administrativeN/A12 
Amortization of intangible assetsN/A2,444 
Restructuring and other charges, netN/A4,438 
Income from discontinued operations before income taxesN/A9,398 
Provision for income taxesN/A1,457 
Net income from discontinued operationsN/A$7,941 
Supplemental information:
DepreciationN/A$1,063 
AmortizationN/A$2,444 
Stock compensationN/A$287 
Capital expendituresN/A$57 
5. Business Acquisitions
As part of our business strategy, we have acquired, and may acquire in the future, certain businesses and technologies primarily to expand our products and service offerings.
Fiscal Year 2021 Acquisitions
For the fiscal year ended September 30, 2021, we completed one acquisition in our Healthcare segment for a total cash consideration of $45.2 million. As a result, we recognized goodwill of $27.4 million and intangible assets of $19.7 million related to technology with a useful life of 5.0 years. The results of operations of the acquired entity have been included within our consolidated statement of operations from the acquisition date. The acquisition was not material to our condensed consolidated financial statements.
Acquisition-Related Costs, net
Acquisition-related costs include costs related to business and asset acquisitions. These costs consist of (i) transition and integration costs, including retention payments, transitional employee costs and earn-out payments, and other costs related to integration activities; (ii) professional service fees, including financial advisory, legal, accounting, and other outside services incurred in connection with acquisition activities, and disputes and regulatory matters related to acquired entities; and (iii) fair value adjustments to acquisition-related contingencies.
A summary of acquisition-related costs, net is as follows (dollars in thousands):
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NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Three Months Ended December 31,
20212020
Transition and integration costs$1,238 $72 
Professional service fees10 253 
Total$1,248 $325 
6. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill by reportable segment for the three months ended December 31, 2021 are as follows (dollars in thousands): 
Goodwill
HealthcareEnterpriseOther Total
Balance as of September 30, 2021$1,453,836 $688,163 $13,271 $2,155,270 
Purchase accounting adjustments150   150 
Effect of foreign currency translation(1,745)896 87 (762)
Balance at December 31, 2021$1,452,241 $689,059 $13,358 $2,154,658 
Other Intangible Assets
The changes in the carrying amount of intangible assets for the three months ended December 31, 2021 are as follows (dollars in thousands):
Intangible Assets
Balance at September 30, 2021$128,331 
Amortization(11,969)
Effect of foreign currency translation(360)
Balance at December 31, 2021$116,002 
7. Financial Instruments and Hedging Activities
Derivatives Not Designated as Hedges
Forward Currency Contracts
We have operations in a number of international locations where currency exchange rates can be volatile. We utilize foreign currency forward contracts to mitigate the risks associated with changes in foreign currency exchange rates so that our exposure to foreign currencies will be mitigated or offset by the gains or losses on the foreign currency forward contracts. Generally, we enter into such contracts for less than 90 days and have no cash requirements until maturity. As of December 31, 2021 and September 30, 2021, we had outstanding contracts with a total notional value of $75.1 million and $52.5 million, respectively.
We did not designate any forward contracts as hedging instruments for the three months ended December 31, 2021 or 2020. Therefore, changes in fair value of foreign currency forward contracts were recognized within Other income, net in our consolidated statements of operations. The cash flows related to the settlement of forward contracts not designated as hedging instruments are included in cash flows from investing activities within our consolidated statement of cash flows.
A summary of the derivative instruments is as follows (dollars in thousands):
Derivatives Not Designated as HedgesBalance Sheet ClassificationFair Value
December 31,
2021
September 30,
2021
Foreign currency forward contractsPrepaid expenses and other current assets$129 $112 
Foreign currency forward contractsAccrued expenses and other current liabilities$(105)$(49)
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NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of other income (expense), net related to foreign currency forward contracts for the three months ended December 31, 2021 and 2020 is as follows (dollars in thousands):
Income Statement ClassificationThree Months Ended December 31,
Derivatives Not Designated as Hedges(Income) Loss Recognized20212020
Foreign currency forward contractsOther income (expense), net$175 $(548)
8. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. Valuation techniques must maximize the use of observable inputs and minimize the use of unobservable inputs. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.
The determination of the applicable level within the hierarchy of a particular financial asset or liability depends on the lowest level of inputs that are significant to the fair value measurement as of the measurement date as follows:
Level 1: Quoted prices for identical assets or liabilities in active markets.
Level 2: Observable inputs other than those described as Level 1.
Level 3: Unobservable inputs that are supportable by little or no market activities and are based on significant assumptions and estimates.
Assets and liabilities measured at fair value on a recurring basis as of December 31, 2021 and September 30, 2021 consisted of the following (dollars in thousands):
 December 31, 2021
Level 1Level 2Level 3Total
Assets:
Money market funds (a)
$60,144 $ $ $60,144 
Time deposits (b)
 1,000  1,000 
Foreign currency exchange contracts (b)
 129  129 
Total assets at fair value$60,144 $1,129 $ $61,273 
Liabilities:
Foreign currency exchange contracts (b)
$ $(105)$ $(105)
Total liabilities at fair value$ $(105)$ $(105)
September 30, 2021
Level 1Level 2Level 3Total
Assets:
Money market funds (a)
$113,186 $ $ $113,186 
Time deposits (b)
 13,889  13,889 
Commercial paper, $18,633 at cost (b)
 18,668  18,668 
Foreign currency exchange contracts (b)
 112  112 
Total assets at fair value$113,186 $32,669 $ $145,855 
Liabilities:
Foreign currency exchange contracts (b)
$ $(49)$ $(49)
Total liabilities at fair value$ $(49)$ $(49)
__________
(a)Money market funds and time deposits with original maturity of 90 days or less are included within cash and cash equivalents in the consolidated balance sheets and are valued at quoted market prices in active markets.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(b)Time deposits, commercial paper, corporate notes and bonds, and foreign currency exchange contracts are recorded at fair market values, which are determined based on the most recent observable inputs for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or are directly or indirectly observable. Time deposits are generally for terms of one year or less. Commercial paper and corporate notes and bonds generally mature within three years and had a weighted average maturity of 0.21 years as of September 30, 2021.
The estimated fair value of our long-term debt approximated $1,547.5 million (face value $889.4 million) as of December 31, 2021 and $1,620.3 million (face value $918.0 million) as of September 30, 2021 based on Level 2 measurements. The fair value of each borrowing was estimated using the average of the bid and ask trading quotes at each respective reporting date. There was no balance outstanding under our revolving credit agreement as of December 31, 2021 or September 30, 2021.
Additionally, contingent acquisition payments are recorded at fair values upon the acquisition and are remeasured in subsequent reporting periods with the changes in fair values recorded within acquisition-related costs, net. Such payments are contingent upon the achievement of specified performance targets and are valued using the option pricing model with Monte Carlo simulation or the probability-weighted discounted cash flow model (Level 3 measurement).
The following table provides a summary of changes in the aggregate fair value of the contingent acquisition payments for all periods presented (dollars in thousands):
Three Months Ended December 31,
20212020
Balance at beginning of period$ $1,796 
Payments and foreign currency translation 51 
Balance at end of period$ $1,847 
As of December 31, 2021, we do not have any required payments based upon any specified performance targets being achieved.
9. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (dollars in thousands): 
December 31,
2021
September 30,
2021
Compensation$78,335 $133,194 
Cost of revenue related liabilities22,517 24,976 
Accrued interest payable2,341 9,038 
Consulting and professional fees14,623 18,130 
Sales and marketing incentives1,201 1,294 
Sales and other taxes payable8,120 8,016 
Operating lease obligations22,870 24,522 
Other4,269 3,170 
Total$154,276 $222,340 
10. Restructuring and Other Charges, net
Restructuring and other charges, net include restructuring expenses together with other charges that are unusual in nature, are the result of unplanned events, and arise outside of the ordinary course of our business.
The following table represents the roll forward of restructuring liabilities for the three months ended December 31, 2021 (dollars in thousands): 
PersonnelFacilitiesTotal
Balance at September 30, 2021$444 $16,946 $17,390 
Restructuring charges, net3,195 195 3,390 
Non-cash adjustment (152)(152)
Cash payments(2,792)(1,638)(4,430)
Balance at December 31, 2021$847 $15,351 $16,198 
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NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The table below presents the Restructuring and other charges, net associated with each segment, but excluded from calculation of each segment's profit (dollars in thousands):
 Three Months Ended December 31,
20212020
PersonnelFacilitiesTotal RestructuringOther ChargesTotalPersonnelFacilitiesTotal RestructuringOther ChargesTotal
Healthcare$1,804 $125 $1,929 $ $1,929 $2,632 $567 $3,199 $ $3,199 
Enterprise450 249 699  699 1,182 2,472 3,654  3,654 
Other (138)(138) (138) 29 29  29 
Corporate941 (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