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YoY shift: Neutral
Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is 0.07pp more bullish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Risk Factors
+0.11pp
Flat
Net-tone change vs last year's 10-K.
MD&A
+0.03pp
Flat
Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
Language change vs prior 10-K
Risk Factors (Item 1A) - words with the biggest YoY frequency increase
Negative rising
litigation+5
adversely+3
delay+3
closing+3
adverse+2
Positive rising
satisfied+4
able+2
better+1
advancing+1
attain+1
Risk Factors (Item 1A)
8,642 words
Item 1A. Risk Factors
You should carefully consider the risks and uncertainties described below when evaluating the company and when deciding whether to invest in the company. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we do not currently believe are important to an investor may also harm our business operations. If any of the events, contingencies, circumstances or conditions described below actually occurs, our business, financial condition or our results of operations could be seriouslyharmed. If that happens, the trading price of our common stock could decline.
Risks Related to Our Business
Our liquidity, operations, business, financial condition, results of operations and cash flows may be adversely impacted by the novel coronavirus (COVID-19).
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On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 to be a pandemic. The global spread of COVID-19 has created significant market volatility, uncertainty and economic disruption. The COVID-19 pandemic may impact our business, financial condition, results of operations, liquidity and cash flows. While we have not experienced significant to our ability to conduct business thus far as a result of the pandemic, we are currently conducting business with substantial modifications to employee travel, employee work locations, virtualization or of customer and employee events, and remote sales, implementation, and support activities, among other modifications.
Language change vs prior 10-K
MD&A (Item 7) - words with the biggest YoY frequency increase
Negative rising
closing+7
losses+5
cease+2
negative+1
termination+1
Positive rising
positive+4
profitability+4
satisfaction+3
effective+1
MD&A (Item 7)
13,302 words
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis is intended to help the reader understand the results of operations and financial condition of our business. The Management’s Discussion and Analysis is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes to the consolidated financial statements.
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)
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the continued expansion of our core technology portfolio including automated speech recognition, natural language understanding, semantic processing, domain-specific reasoning, dialog management capabilities, AI, and voice biometric speaker authentication. We report our business in three segments, Healthcare, Enterprise, and Other.
• Healthcare. Our healthcare segment provides intelligent systems that support a more natural and 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 and Coding.
The extent to which the coronavirus pandemic will impact our business, operations, and financial results in the future will depend on numerous evolving factors that we may not be able to accurately predict, including:
• the duration and scope of the pandemic;
• governmental, business and individual actions taken in response to the pandemic and the impact of those actions on global economic activity;
• the actions taken in response to economic disruption;
• the impact of business disruptions on our customers and partners and the resulting impact on their demand for our products and services;
• our customers’ and partners’ ability to pay for our products and services; and
• our ability to provide our products and services, including as a result of our employees working remotely and/or closures of offices and facilities.
We are closely monitoring the impact of the COVID-19 pandemic and continually assessing its potential effects on our business. Many of our customers are hospitals and other healthcare providers that are facing capital shortages and other changes to their businesses as they focus on fighting the pandemic. As a result, in particular with respect to our healthcare customers, our net new sales may be lower than expected; our ability to recognize revenue may be negatively impacted due to implementation delays, decreased utilization of certain products such as our PowerScribe and DAX solutions, decrease in volumes where we have transaction-based revenue, or other factors; our collections may be delayed, which will negatively affect our cash flows; some customers may go out of business, and we will be unsecured creditors and may not be able to collect what we are owed; our ability to provide 24x7 worldwide support to our customers may be affected; and our employees’ productivity may be negatively impacted as a result of almost all of our workforce working from home. The pandemic and accompanying market volatility, uncertainty and economic disruption may also have the effect of heightening many of the other risks described in the “Risk Factors” set forth in this Annual Report on Form 10-K. The ultimate impact of the COVID-19 pandemic and the effects of the operational changes we have made in response cannot be accurately predicted at this time.
The markets in which we operate are highly competitive and rapidly changing and we may be unable to compete successfully.
There are a number of companies that develop or may develop products that compete in our targeted markets. The markets for our products and services are characterized by intense competition, evolving industry and regulatory standards, emerging business and distribution models, disruptive software and hardware technology developments, short product and service life cycles, price sensitivity on the part of customers, and frequent new product introductions, including alternatives for certain of our products that offer limited functionality at significantly lower costs or free of charge. Current and potential competitors have established, or may establish, cooperative relationships among themselves or with third parties to increase the ability of their technologies to address the needs of our prospective customers. Furthermore, there has been a trend toward industry consolidation in our markets for several years. We expect this trend to continue as companies attempt to strengthen or hold their market positions.
The competition in our targeted markets could adversely affect our operating results by reducing the volume of the products and solutions we license or sell or the prices we can charge. Some of our current or potential competitors have significantly greater financial, technical and marketing resources than we do. These competitors may be able to respond more rapidly than we can to new or emerging technologies or changes in customer requirements. They may also devote greater resources to the development, promotion and sale of their products than we do, and in certain cases may be able to include or combine their competitive products or technologies with other of their products or technologies in a manner whereby the competitive functionality is available at lower cost or free of charge within the larger offering. To the extent they do so, market acceptance and penetration of our products, and therefore our revenue and bookings, may be adversely affected. Our success depends substantially upon our ability to enhance our products and technologies and to develop and introduce, on a timely and cost-effective basis, new products and features that meet changing customer requirements and incorporate technological
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enhancements. If we are unable to develop or acquire new products and enhance functionalities or technologies to adapt to these changes our business will suffer.
Our operating results may fluctuate significantly from period to period, and this may cause our stock price to decline.
Our revenue, bookings and operating results have fluctuated materially in the past and we expect such fluctuations to continue in the future. These fluctuations may cause our results of operations not to meet the expectations of securities analysts or investors which would likely cause the price of our stock to decline. Factors that may contribute to fluctuations in operating results include:
• volume, timing and fulfillment of customer orders and receipt of royalty reports;
• fluctuating sales by our channel partners to their customers;
• customers delaying their purchasing decisions in anticipation of new versions of our products;
• contractual counterparties failing to meet their contractual commitments to us;
• introduction of new products by us or our competitors;
• cybersecurity or data breaches;
• seasonality in purchasing patterns of our customers;
• reduction in the prices of our products in response to competition, market conditions or contractual obligations;
• returns and allowance charges in excess of accrued amounts;
• timing of significant marketing and sales promotions;
• impairment of goodwill or intangible assets;
• the pace of the transition to an on-demand and transactional revenue model;
• delayed realization of synergies resulting from our acquisitions;
• accounts receivable that are not collectible and write-offs of excess or obsolete inventory;
• increased expenditures incurred pursuing new product or market opportunities;
• higher than anticipated costs related to fixed-price contracts with our customers;
• change in costs due to regulatory or trade restrictions;
• expenses incurred in litigation matters, whether initiated by us or brought by third parties against us, and settlements or judgments we are required to pay in connection with disputes; and
• general economic trends as they affect the customer bases into which we sell.
Due to the foregoing factors, among others, our revenue, bookings and operating results are difficult to forecast. Our expense levels are based in significant part on our expectations of future revenue, and we may not be able to reduce our expenses quickly to respond to near-term shortfalls in projected revenue. Therefore, our failure to meet revenue expectations would seriouslyharm our operating results, financial condition and cash flows.
A significant portion of our revenue and bookings are derived, and a significant portion of our research and development activities are based, outside the United States. Our results could be harmed by economic, political, regulatory, foreign currency fluctuation and other risks associated with these international regions.
Because we operate worldwide, our business is subject to risks associated with doing business internationally. We generate most of our international revenue and bookings in Canada and Europe, and we anticipate that revenue and bookings from international operations could increase in the future. In addition, some of our products are developed outside the United States and we have a large number of employees in India who provide transcription and development services, and we also have a large number of employees in Canada, Germany and the United Kingdom who provide professional services. We conduct a significant portion of the development of our voice recognition and natural language understanding solutions in Canada and Germany. We also have significant research and development resources in Austria, Belgium, Italy, and the United Kingdom. We are exposed to fluctuating exchange rates of foreign currencies including the Euro, British pound, Australian dollar, Canadian dollar, Japanese yen, and Indian rupee. Accordingly, our future results could be harmed by a variety of factors associated with international sales and operations, including:
• adverse political and economic conditions, or changes to such conditions, in a specific region or country;
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• trade protection measures, including tariffs and import/export controls, imposed by the United States and/or by other countries or regional authorities such as Canada or the European Union;
• the impact on local and global economies of the United Kingdom leaving the European Union;
• changes in foreign currency exchange rates or the lack of ability to hedge certain foreign currencies;
• compliance with laws and regulations in many countries and any subsequent changes in such laws and regulations;
• geopolitical turmoil, including terrorism and war;
• changing data privacy regulations and customer requirements to locate data centers in certain jurisdictions;
• evolving restrictions on cross-border investment, including recent enhancements to the oversight by the Committee on Foreign Investment in the United States pursuant to the Foreign Investment Risk Preview Modernization Act;
• changes in applicable tax laws;
• difficulties in staffing and managing operations in multiple locations in many countries;
• longer payment cycles of foreign customers and timing of collections in foreign jurisdictions; and
• less effective protection of intellectual property outside the United States.
If we are unable to attract and retain key personnel, our business could be harmed.
To execute our business strategy, we must attract and retain highly qualified personnel. If any of our key employees were to leave, we could face substantial difficulty in hiring qualified successors and could experience a loss in productivity while any successor obtains the necessary training and experience. Although we have arrangements with some of our executive officers designed to promote retention, our employment relationships are generally at-will and we have had key employees leave in the past. We cannot assure you that one or more key employees will not leave in the future. In particular, we compete with many other companies for software developers with high levels of experience in designing, developing and managing software, as well as for skilled information technology, marketing, sales and operations professionals, and we may not be successful in attracting and retaining the professionals we need. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and difficulty in retaining highly skilled employees with appropriate qualifications. In particular, we have experienced a competitive hiring environment in the Greater Boston area, where we are headquartered. In addition, in making employment decisions, particularly in the software industry, job candidates often consider the value of the equity incentives they are to receive in connection with their employment. If the price of our stock declines, or experiences significant volatility, our ability to attract or retain key employees will be adversely affected. We intend to continue to hire additional highly qualified personnel, including research and development and operational personnel, but may not be able to attract, assimilate or retain qualified personnel in the future. Any failure to attract, integrate, motivate and retain these employees could harm our business.
Cybersecurity and data privacy incidents or breaches may damage client relations and inhibit our growth.
The confidentiality and security of our information, and that of third parties, is critical to our business. Our services involve the transmission, use, and storage of our customers’ and their customers' confidential information. We were the victim of a cybercrime in 2017, and future cybersecurity or data privacy incidents could have a material adverse effect on our results of operations and financial condition. While we maintain a broad array of information security and privacy measures, policies and practices, our networks may be breached through a variety of means, resulting in someone obtaining unauthorized access to our information, to information of our customers or their customers, or to our intellectual property; disabling or degrading service; or sabotaging systems or information. In addition, hardware, software, or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. Unauthorized parties may also attempt to gain access to our systems or facilities, or those of third parties with whom we do business, through fraud or other forms of deceiving our employees, contractors, and vendors. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. We will continue to incur significant costs to continuously enhance our information security measures to defendagainst the threat of cybercrime. Any cybersecurity or data privacy incident or breach may result in:
• loss of revenue resulting from the operational disruption;
• loss of revenue or increased bad debt expense due to the inability to invoice properly or to customer dissatisfaction resulting in collection issues;
• loss of revenue due to loss of customers;
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• material remediation costs to restore systems;
• material investments in new or enhanced systems in order to enhance our information security posture;
• cost of incentives offered to customers to restore confidence and maintain business relationships;
• reputational damage resulting in the failure to retain or attract customers;
• costs associated with potential litigation or governmental investigations;
• costs associated with any required notices of a data breach;
• costs associated with the potential loss of critical business data; and
• other consequences of which we are not currently aware but will discover through the remediation process.
Our business is subject to a variety of domestic and international laws, rules, policies and other obligations including data protection, anticorruption and health care reimbursement.
We must comply with, numerous, and sometimes conflicting, legal regimes on matters such as data privacy and protection, anticorruption, employment and labor relations, tax, foreign currency, anti-competition, import/export controls, trade regulations, immigration, anti-kickback laws and healthcare reimbursement laws. The global nature of our operations increases the difficulty of compliance. Compliance with diverse legal requirements is costly, time-consuming and requires significant resources. Violations of one or more of these laws in the conduct of our business could result in significant fines, criminal sanctions against us and/or our employees, prohibitions on doing business, breach of contract damages and harm to our reputation.
In particular, we are subject to a complex array of federal, state and international laws relating to the collection, use, retention, disclosure, security and transfer of personally identifiable information and personal health information, with additional laws applicable in some jurisdictions depending on the type of data collected or where the information is collected from children. In many cases, these laws apply not only to transfers between unrelated third parties but also to transfers between us and our subsidiaries. Many of the laws passed in this area are relatively new and their interpretation is evolving and changing. In the United States, the California Consumer Privacy Act ("CCPA"), went into effect in January 2020. The CCPA imposes privacy and data security obligations on companies and provides California consumers with certain rights as data subjects. Several other U.S. states have proposed data privacy laws that impose similar but non-identical obligations. In addition, some states have passed laws imposing increased data security and breach notification obligations on companies operating in the U.S. In the EU, the European General Data Protection Regulation (the “GDPR”), which went into effect in May 2018, imposes privacy and data security compliance obligations and significant penalties for noncompliance. The GDPR presents numerous privacy-related changes for companies operating in the EU, including rights guaranteed to data subjects, requirements for data portability for EU consumers, data breach notification requirements and significant fines for noncompliance. In GDPR enforcement matters, companies have faced fines for violations of certain provisions. Fines can reach as high as 4% of a company’s annual total revenue, potentially including the revenue of a company’s international affiliates. On July 16, 2020, the Court of Justice of the European Union issued a decision that invalidates the EU-U.S. Privacy Shield framework, a mechanism that companies had previously relied on to transfer information between the EU and U.S., on the basis that such transfer mechanism does not comply with the level of protection required under the GDPR. There is also an increase in regulation of biometric data globally, which may include voiceprints. In addition, we are subject to laws relating specifically to personal health information, including the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") and HITECH Act.
Changes in these data privacy and protection laws and regulations and inconsistencies in the standards that apply to our business in different jurisdictions may impose significant compliance costs, reduce the efficiency of our operations, expose us to enforcement risks, and materially adversely affect our ability to market and sell our products and solutions. Any alleged or actual failure by us, our customers, suppliers or other parties with whom we do business to comply with federal, state or international privacy-related or data protection laws and regulations could cause our customers to lose confidence in our solutions; harm our reputation; expose us to litigation, regulatory investigations and to resulting liabilities including reimbursement of customer costs, damagespenalties or fines imposed by regulatory agencies, and require us to incur significant expenses for remediation.
We are also subject to a variety of anticorruption laws in respect of our international operations, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and the Canadian Corruption of Foreign Public Officials Act, and regulations issued by the U.S. Customs and Border Protection, the U.S. Bureau of Industry and Security, the U.S Treasury Department’s Office of Foreign Assets Control, and various other foreign governmental agencies. We cannot predict the nature, scope or effect of future regulatory requirements to which our international operations might be subject or the manner in which existing
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laws might be administered or interpreted. Actual or allegedviolations of these laws and regulations could lead to enforcement actions and financial penalties that could result in substantial costs.
Many of our customers are subject to various federal and state laws concerning their submission of claims for reimbursement by Medicare, Medicaid and other federal and state government-sponsored health care programs. Such laws include the federal FalseClaims Act (the “FalseClaims Act”), the federal anti-kickback statute, state falseclaims acts and anti-kickback statutes in most states, the federal “Stark Law” and related state laws. In particular, the FalseClaims Act prohibits knowingly submitting, conspiring to submit, or causing to be submitted, falseclaims, records, or statements to the federal government, or knowingly and improperlyfailing to return overpayments, in connection with reimbursement by federal government programs and can be used as a vehicle to enforce each of these other laws. Claims under federal and state falseclaims acts can be brought by the government or by private individuals on behalf of the government through a qui tam or “whistleblower” suit. If there is an adverse decision against us or our customers under these laws relating to use of our products or solutions, we may be required to pay damages, significant fines and/or other monetary penalties, and our ability to market and sell such products or solutions to customers may be materially adversely impacted.
Interruptions or delays in our services, including from data center hosting facilities, could impair the delivery of our services and harm our business.
Because our services are complex and incorporate a variety of third-party hardware and software, our services may have errors or defects that could result in unanticipateddowntime for our customers and harm to our reputation and our business. We have from time to time, found defects in our services, and new errors in our services may be detected in the future. In addition, we currently serve our customers from data center hosting facilities we directly manage and from third party public cloud facilities. Any damage to, or failure of, the systems that serve our customers in whole or in part could result in interruptions in our service. Interruptions in our service may reduce our revenue, cause us to issue credits or pay service-level agreement penalties, cause customers to terminate their on-demand services, and adversely affect our renewal rates and our ability to attract new customers.
We may be unable to fully capture the expected value from strategic transactions.
As part of our business strategy, we have in the past acquired and divested, and expect to continue to acquire and may divest, other businesses and technologies. We also expect to from time to time pursue other strategic transactions including divestitures, joint ventures, minority stakes and strategic alliances. Our acquisitions and divestitures have required substantial integration and management efforts, and we expect future acquisitions, divestitures and other strategic transactions to require similar efforts. Successfully realizing the benefits of acquisitions, divestitures and other strategic transactions involves a number of risks, including:
• difficulty in transitioning and integrating the operations and personnel of the acquired businesses;
• difficulty in separating the operations, personnel and systems of divested businesses:
• potential negative impact on our profitability as a result of losses that may result from a divestiture, including the loss of sales and operating income or decrease in cash flows;
• retained exposure on financial guarantee leases, real estate and other contractual, employment, pension and severance obligations of divested business, and potential liabilities that may arise under law as a result of the disposition or the subsequent failure of an acquirer;
• potential disruption of our ongoing business and distraction of management;
• difficulty in incorporating acquired products and technologies into our products and technologies;
• potential difficulties in completing projects associated with in-process research and development;
• unanticipated expenses and delays in completing acquired development projects and technology integration and upgrades;
• challenges associated with managing additional, geographically remote businesses;
• impairment of relationships with partners and customers;
• assumption of unknown material liabilities of acquired companies;
• the accuracy of revenue and bookings projections of acquired companies;
• customers delaying purchases of our products pending resolution of product integration between our existing and our newly acquired products;
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• entering markets or types of businesses in which we have limited experience; and
• potential loss of key employees of the acquired business or loss of key employees of a divested business.
As a result of these and other risks, we may not realize the anticipated benefits from our acquisitions, divestitures, and other strategic transactions. Any failure to achieve these benefits or failure to successfully integrate acquired businesses and technologies or disaggregate divested businesses and technologies could seriouslyharm our business.
Charges to earnings as a result of our acquisitions may adversely affect our operating results in the foreseeable future, which could have a material and adverse effect on the market value of our common stock.
Under accounting principles generally accepted in the United States, we record the market value of our common stock and other forms of consideration issued in connection with an acquisition as the cost of acquiring the company or business. We allocate that cost to the individual assets acquired and liabilities assumed, including various identifiable intangible assets such as acquired technology, acquired trade names and acquired customer relationships, based on their respective fair values. We base our estimates of fair value upon assumptions believed to be reasonable, but which are inherently uncertain. After we complete an acquisition, the following factors could result in material charges and may adversely affect our operating results and cash flows:
• costs incurred to integrate the operations of businesses we acquire, such as transitional employee expenses and employee retention, redeployment or relocation expenses;
• impairment of goodwill or intangible assets;
• amortization of intangible assets acquired;
• a reduction in the useful lives of intangible assets acquired;
• identification of or changes to assumed contingent liabilities, both income tax and non-income tax related, after our final determination of the amounts for these contingencies or the conclusion of the measurement period (generally up to one year from the acquisition date), whichever comes first;
• charges to our operating results to eliminate certain duplicative pre-merger activities, to restructure our operations or to reduce our cost structure;
• charges to our operating results arising from expenses incurred to effect the acquisition; and
• charges to our operating results due to the expensing of stock awards assumed in acquisitions.
Intangible assets are generally amortized over three to ten years. Goodwill is not subject to amortization but is subject to an impairment analysis, at least annually, which may result in an impairment charge if the carrying value exceeds its implied fair value. As of September 30, 2021, we recorded goodwill of $2,155.3 million and intangible assets of $128.3 million, net of accumulated amortization and impairment charges. In addition, purchase accounting limits our ability to recognize certain revenue that otherwise would have been recognized by the acquired company as an independent business. As a result, the combined company may delay revenue recognition or recognize less revenue than we and the acquired company would have recognized as independent companies.
Impairment of our intangible assets could result in significant charges that would adversely impact our future operating results.
We have significant intangible assets, including goodwill and other intangible assets, which are susceptible to valuation adjustments as a result of changes in various factors or conditions. The most significant intangible assets are customer relationships, patents and core technologies, technologies and trademarks. Customer relationships are amortized on an accelerated basis based upon the pattern in which the economic benefits of customer relationships are being utilized. Other identifiable intangible assets are amortized on a straight-line basis over their estimated useful lives. We assess the potential impairment of intangible assets on an annual basis, as well as whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that could trigger an impairment of such assets include the following:
• significant adjustments to our multi-year operating plans, in connection with our ongoing portfolio review;
• changes in our organization or management reporting structure that could result in additional reporting units, which may require alternative methods of estimating fair values or greater disaggregation or aggregation in our analysis by reporting unit;
• significant under performance relative to historical or projected future operating results;
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• significant changes in the manner of or use of the acquired assets or the strategy for our overall business;
• significant negative industry or economic trends;
• significant decline in our stock price for a sustained period; and
• our market capitalization declining to below net book value.
Future adverse changes in these or other unforeseeable factors could result in an impairment charge that would impact our results of operations and financial position in the reporting period identified.
We have grown, and may continue to grow, through acquisitions, which could dilute our existing stockholders and/or increase our debt levels.
In connection with past acquisitions, we have in the past issued a substantial number of shares of our common stock as transaction consideration, including contingent consideration, and also incurred significant debt to finance the cash consideration used for our acquisitions. We may continue to issue equity securities for future acquisitions, which would dilute existing stockholders, perhaps significantly, depending on the terms of such acquisitions. We may also incur additional debt in connection with future acquisitions, which, if available at all, may place additional restrictions on our ability to operate our business.
Our strategy to transition to cloud-based recurring revenue may adversely affect our near-term revenue growth and results of operations.
We expect our ongoing shift from a software license model to cloud-based services revenue models to create a recurring revenue stream that is more predictable. The transition, however, creates risks related to the timing of revenue recognition. We also incur certain expenses associated with the infrastructures and selling efforts of our hosting offerings in advance of our ability to recognize the revenues associated with these offerings, which may adversely affect our near-term reported revenues, results of operations and cash flows. A decline in renewals of recurring revenue offerings in any period may not be immediately reflected in our results for that period but may result in a decline in our revenue and results of operations in future quarters.
We have a history of operating losses, and may incur losses in the future, which may require us to raise additional capital on unfavorable terms.
We had a total accumulated deficit of $298.9 million and $272.2 million as of September 30, 2021 and 2020, respectively. If we are unable to return to and sustain our profitability, the market price for our stock may decline, perhaps substantially. We cannot assure you that our revenue or bookings will grow or that we will sustain profitability in the future. If we do not achieveprofitability, we may be required to raise additional capital to maintain or grow our operations. Additional capital, if available at all, may be highly dilutive to existing investors or contain other unfavorable terms, such as a high interest rate and restrictive covenants.
Tax matters may cause significant variability in our financial results.
Our businesses are subject to income taxation in the United States, as well as in many tax jurisdictions throughout the world. Tax rates in these jurisdictions may be subject to significant change. If our effective tax rate increases, our operating results and cash flow could be adversely affected. Our effective income tax rate and cash tax payments can vary significantly between periods due to a number of complex factors including:
• projected levels of taxable income;
• pre-tax income being lower than anticipated in countries with lower statutory rates or higher than anticipated in countries with higher statutory rates;
• increases or decreases to valuation allowances recorded against deferred tax assets;
• tax audits conducted and settled by various tax authorities, either through administrative appeals, litigation or other dispute resolution methods;
• adjustments to income taxes upon finalization of income tax returns;
• the ability to claim foreign tax credits;
• the repatriation of non-U.S. earnings for which we have not previously provided for income taxes; and
• changes in tax laws and their interpretations in countries in which we are subject to taxation.
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In December 2017, the United States enacted the Tax Cut and Jobs Act of 2017. We expect this to continue having a material impact on our tax financial results under United States generally accepted accounting principles. Future changes in U.S. and non-U.S. tax laws and regulations could have a material effect on our results of operations in the periods in which such laws and regulations become effective as well as in future periods. In the United States, such law changes could include new tax revenue raising provisions tied to the proposed “Build Back Better” Act which is currently under consideration in Congress. Globally, the OECD Inclusive Framework on Base Erosion and Profit shifting is advancing fundamental changes to the international corporate tax system creating new rules for the allocation of rights to tax global income and a global minimum tax.
The failure to successfully maintain the adequacy of our system of internal control over financial reporting could have a material adverse impact on our ability to report our financial results in an accurate and timely manner.
Under the Sarbanes-Oxley Act of 2002, we were required to develop and are required to maintain an effective system of disclosure controls and internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements. In addition, our management is required to assess and certify the adequacy of our controls on a quarterly basis, and our independent auditors must attest and report on the effectiveness of our internal control over financial reporting on an annual basis. Any failure in the effectiveness of our system of internal control over financial reporting could have a material adverse impact on our ability to report our financial statements in an accurate and timely manner. Inaccurate and/or untimely financial statements could subject us to regulatory actions, civil or criminalpenalties, stockholder litigation, or loss of customer confidence, which could result in an adverse reaction in the financial marketplace and ultimately could negatively impact our stock price due to a loss of investor confidence in the reliability of our financial statements.
Our sales to government clients subject us to risks, including early termination, audits, investigations, sanctions and penalties.
We derive a portion of our revenues and bookings from arrangements with governmental users in the U.S., the U.K. and elsewhere, contracts with the government in the U.S., the U.K. and elsewhere, as well as various state and local governments, and their respective agencies. Government contracts are generally subject to oversight, including audits and investigations which could identify violations of these agreements. Government contract violations could result in a range of consequences including, but not limited to, contract price adjustments, civil and criminalpenalties, contract termination, forfeiture of profit and/or suspension of payment, and suspension or debarment from future government contracts. We could also sufferseriousharm to our reputation if we were found to have violated the terms of our government contracts.
Risks Related to the Merger
The announcement and pendency of the Merger may result in disruptions to our business.
On April 11, 2021, we entered into the Merger Agreement with Microsoft, pursuant to which we will be acquired by Microsoft in an all-cash transaction. The Merger Agreement generally requires us to operate our business in the ordinary course pending consummation of the Merger and restricts us, without Microsoft’s consent, from taking certain specified actions until the Merger is completed. These restrictions may affect our ability to execute our business strategies and attain financial and other goals and may impact our financial condition, results of operations and cash flows.
Further, in connection with the pending Merger, our current and prospective employees may experience uncertainty about their future roles with us following the Merger, which may materially adversely affect our ability to attract and retain key personnel while the Merger is pending. Key employees may depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with us following the Merger, and may depart prior to the consummation of the Merger. Accordingly, no assurance can be given that we will be able to attract and retain key employees to the same extent that we have been able to in the past.
The proposed Merger further could cause disruptions to our business or business relationships, which could have an adverse impact on our results of operations. Parties with which we have business relationships may experience uncertainty as to the future of such relationships and may delay or defer certain business decisions, seek alternative relationships with third parties or seek to alter their present business relationships with us. Parties with whom we otherwise may have sought to establish business relationships may seek alternative relationships with third parties.
The pursuit of the Merger may place a significant burden on management and internal resources. It may also divert management’s time and attention from the day-to-day operation of our remaining businesses and the execution of our other
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strategic initiatives. This could adversely affect our financial results. In addition, we have incurred and will continue to incur other significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed Merger, and many of these fees and costs are payable regardless of whether or not the pending Merger is consummated.
Any of the foregoing could adversely affect our business, our financial condition and our results of operations and prospects.
The Merger may not be completed within the expected timeframe, or at all, and the failure to complete the Merger could adversely affect our business, results of operations, financial condition, and the market price of our common stock.
There can be no assurance that the Merger will be completed in the expected timeframe, or at all. The Merger Agreement contains a number of conditions that must be satisfied or waived prior to the completion of the Merger, including, among others, the approval or clearance of the Merger under the antitrust and foreign investment laws of certain specified countries. There can be no assurance that all required approvals will be obtained or that all closing conditions will otherwise be satisfied (or waived, if applicable), and, if all required approvals are obtained and all closing conditions are satisfied (or waived, if applicable), we can provide no assurance as to the terms, conditions and timing of such approvals or that the Merger will be completed in a timely manner or at all. Many of the conditions to completion of the Merger are not within our control, and we cannot predict when or if these conditions will be satisfied (or waived, as applicable). Even if regulatory approval is obtained, it is possible conditions will be imposed that could result in a material delay in, or the abandonment of, the Merger or otherwise have an adverse effect on us.
If the Merger is not completed within the expected timeframe or at all, we may be subject to a number of material risks. The price of our common stock may decline to the extent that current market prices reflect a market assumption that the Merger will be completed. In addition, some costs related to the Merger must be paid whether or not the Merger is completed, and we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed transaction, as well as the diversion of management and resources towards the Merger, for which we will have received little or no benefit if completion of the Merger does not occur. We may also experience negative reactions from our investors, customers, partners, suppliers, and employees. In addition, if the Merger Agreement is terminated under certain specified circumstances, we will be required to pay Microsoft a termination fee of $515.0 million.
Stockholder litigation could prevent or delay the closing of the pending Merger or otherwise negatively impact our business, operating results and financial condition.
We may incur additional costs in connection with the defense or settlement of any future stockholder litigation in connection with the pending Merger. Such litigation may adversely affect our ability to complete the pending Merger. We could incur significant costs in connection with any such litigation, including costs associated with the indemnification of obligations to our directors.
Risks Related to Our Intellectual Property and Technology
Third parties have claimed and may claim in the future that we are infringing their intellectual property, and we could be exposed to significant litigation or licensing expenses or be prevented from selling our products if such claims are successful.
From time to time, we are subject to claims and legal actions alleging that we or our customers may be infringing or contributing to the infringement of the intellectual property rights of others. We may be unaware of intellectual property rights of others that may cover some of our technologies and products. If it appears necessary or desirable, we may seek licenses for these intellectual property rights. However, we may not be able to obtain licenses from some or all claimants, the terms of any offered licenses may not be acceptable to us, and we may not be able to resolvedisputes without litigation. Any litigation regarding intellectual property could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations. Intellectual property disputes could subject us to significant liabilities, require us to enter into royalty and licensing arrangements on unfavorable terms, prevent us from manufacturing or licensing certain of our products, cause severedisruptions to our operations or the markets in which we compete, or require us to satisfy indemnification commitments to our customers. Any of these could seriouslyharm our business.
Unauthorized use of our proprietary technology and intellectual property could adversely affect our business and results of operations.
Our success and competitive position depend in large part on our ability to obtain and maintain intellectual property rights protecting our products and services. We rely on a combination of patents, copyrights, trademarks, service marks, trade secrets,
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confidentiality provisions and licensing arrangements to establish and protect our intellectual property and proprietary rights. Unauthorized parties may attempt to copy or discover aspects of our products or to obtain, license, sell or otherwise use information that we regard as proprietary. Policing unauthorized use of our products is difficult and we may not be able to protect our technology from unauthorized use. Additionally, our competitors may independently develop technologies that are substantially the same or superior to our technologies and that do not infringe our rights. In these cases, we would be unable to prevent our competitors from selling or licensing these similar or superior technologies. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States. Although the source code for our proprietary software is protected both as a trade secret and as a copyrighted work, litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defendagainstclaims of infringement or invalidity. Litigation, regardless of the outcome, can be very expensive and can divert management efforts.
Our software products may have bugs, which could result in delayed or lost revenue and bookings, expensive correction, liability to our customers and claimsagainst us.
Complex software products such as ours may contain errors, defects or bugs. Defects in the solutions or products that we develop and sell to our customers could require expensive corrections and result in delayed or lost revenue and bookings, adverse customer reaction and negative publicity about us or our products and services. Customers who are not satisfied with any of our products may also bring claimsagainst us for damages, which, even if unsuccessful, would likely be time-consuming to defend, and could result in costlylitigation and payment of damages. Such claims could harm our reputation, financial results and competitive position.
Risks Related to our Indebtedness, Investments and Common Stock
Our debt agreements contain covenant restrictions that may limit our ability to operate our business.
Our debt agreements contain, and any of our other future debt agreements or arrangements may contain, covenant restrictions that limit our ability to operate our business, including restrictions on our ability to:
• incur additional debt or issue guarantees;
• create liens;
• make certain investments;
• enter into transactions with our affiliates;
• sell certain assets;
• repurchase capital stock or make other restricted payments;
• declare or pay dividends or make other distributions to stockholders; and
• merge or consolidate with any entity.
Our ability to comply with these limitations is dependent on our future performance, which will be subject to many factors, some of which are beyond our control, including prevailing economic conditions. As a result of these limitations, our ability to respond to changes in business and economic conditions and to obtain additional financing, if needed, may be significantly restricted, and we may be prevented from engaging in transactions that might otherwise be beneficial to us. In addition, our failure to comply with our debt covenants could result in a default under our debt agreements, which could permit the holders to accelerate our obligation to repay the debt. If any of our debt is accelerated, we may not have sufficient funds available to repay the accelerated debt.
Our significant debt could adversely affect our financial health and prevent us from fulfilling our obligations under our credit facility and our convertible debentures.
We have a significant amount of debt. As of September 30, 2021, we had $918.0 million outstanding principal of debt, including $500.0 million of senior notes due in 2026, $25.1 million of 1.5% 2035 Convertible Debentures redeemable in November 2021, $130.3 million of 1.0% 2035 Convertible Debentures redeemable in December 2022, and $262.6 million of 1.25% 2025 Convertible Debentures redeemable in April 2025. Investors may require us to redeem these convertible debentures earlier than the dates indicated if the closing sale price of our common stock is more than 130% of the then current conversion price of the respective debentures for certain specified periods. If a holder elects to convert, we will be required to pay the principal amount in cash and any amounts payable in excess of the principal amount in cash or shares of our common stock, at
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our election. For example, during the third quarter of fiscal year 2021, holders of $118.3 million of our 1.5% 2035 Convertible Debentures exercised their rights to require us to repurchase such debentures. We also have a $300.0 million Revolving Credit Facility under which $1.9 million was committed to backing outstanding letters of credit issued and $298.1 million was available for borrowing at September 30, 2021. Our debt level could have important consequences. For example, it could:
• require us to use a large portion of our cash flow to pay principal and interest on debt, including the convertible debentures and the credit facility, which will reduce the availability of our cash flow to fund working capital, capital expenditures, acquisitions, research and development, exploit business opportunities, and undertake other business activities;
• place us at a competitive disadvantage compared to our competitors that have less debt; and
• limit, along with the financial and other restrictive covenants related to our debt, our ability to borrow additional funds, dispose of assets or pay cash dividends.
Our ability to meet our payment and other obligations under our debt instruments depends on our ability to generate significant cash flow in the future. This, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors as well as other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations, or that additional capital will be available to us, in an amount sufficient to enable us to meet our payment obligations under the convertible debentures and our other debt and to fund other liquidity needs. If we are not able to generate sufficient cash flow to service our debt obligations, we may need to refinance or restructure our debt, including the convertible debentures, sell assets, reduce or delay capital investments, or seek to raise additional capital. If we are unable to implement one or more of these alternatives, we may not be able to meet our payment obligations under the convertible debentures and our other debt.
Current uncertainty in the global financial markets and the global economy may negatively affect the value of our investment portfolio.
Our investment portfolios, which include investments in money market funds, bank deposits and separately managed investment portfolios, are generally subject to credit, liquidity, counterparty, market and interest rate risks that may be exacerbated by a global financial crisis or by uncertainty surrounding the terms of the United Kingdom's relationship with the European Union or recent changes in tariffs and trade agreements. If the banking system or the fixed income, credit or equity markets deteriorate or remain volatile, our investment portfolio may be impacted, and the values and liquidity of our investments could be adversely affected.
The market price of our common stock has been and may continue to be subject to wide fluctuations, and this may make it difficult for our stockholders to resell the common stock when they want or at prices they find attractive.
Our stock price historically has been, and may continue to be, volatile. Various factors contribute to the volatility of our stock price, including, for example, the status of the potential Merger, quarterly variations in our financial results, new product introductions by us or our competitors and general economic and market conditions. Sales of a substantial number of shares of our common stock by our largest stockholders, or the perception that such sales could occur, could also contribute to the volatility or our stock price. While we cannot predict the individual effect that any of these factors may have on the market price of our common stock, these factors, either individually or in the aggregate, could result in significant volatility in our stock price. Moreover, companies that have experienced volatility in the market price of their stock may be subject to securities class action litigation. Any such litigation could result in substantial costs and divert management's attention and resources.
Future issuances of our common stock could adversely affect the trading price of our common stock and our ability to raise funds in new stock offerings.
Future issuances of substantial amounts of our common stock, whether in the public market or through private placements, including issuances in connection with acquisition activities, or the perception that such issuances could occur, could adversely affect prevailing trading prices of our common stock and could impair our ability to raise capital through future offerings of equity or equity-related securities. In connection with past acquisitions, we issued a substantial number of shares of our common stock as transaction consideration or contingent consideration. We may continue to issue equity securities for future acquisitions, which would dilute existing stockholders, perhaps significantly depending on the terms of such acquisitions. No prediction can be made as to the effect, if any, that future sales of shares of common stock, or the availability of shares of common stock for future sale, will have on the trading price of our common stock.
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Our business could be negatively affected by the actions of activist stockholders.
In the past, certain stockholders have publicly and privately expressed concerns with our performance and with certain governance matters. Responding to actions by activist stockholders can be costly and time-consuming, disrupting our operations and diverting the attention of management and our employees. Furthermore, any perceived uncertainties as to our future direction could result in the loss of potential business opportunities, and may make it more difficult to attract and retain qualified personnel and business partners. In addition, we have enacted certain changes to our bylaws in the past year that may weaken our ability to prevent an unsolicited takeover.
insightful
Improvement
• 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 a definitive agreement (the "Agreement") to sell our medical transcription and electronic healthcare record ("EHR") implementation businesses (the "Business"). 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 Businesses' 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 Merger is currently expected to close by the end of our first quarter or early in our second quarter of fiscal year 2022 .
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 that 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 income, gross margins, operating margins, cash flow from operations, and changes in deferred revenue. A summary of these financial metrics for the year ended September 30, 2021, as compared to the year ended September 30, 2020 is as follows:
• Total revenues were $1,362.4 million for the year ended September 30, 2021, as compared to $1,283.8 million for the year ended September 30, 2020;
• Net loss from continuing operations for the year ended September 30, 2021 was $17.4 million, compared to a net loss from continuing operations of $13.0 million for the year ended September 30, 2020;
• Gross margins for the year ended September 30, 2021 were 61.2%, compared to 59.4% for the year ended September 30, 2020;
• Operating margins for the year ended September 30, 2021 were 6.1%, compared to 4.6% for year ended September 30, 2020; and
• Operating cash flows from continuing operations increased by $46.6 million to $239.2 million for the year ended September 30, 2021, compared to $192.6 million for the year ended September 30, 2020.
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RESULTS OF OPERATIONS
Total Revenues
The following table shows total revenues by product type and by geographic location, based on the location of our customers, in dollars and percentage change (dollars in millions):
Fiscal Year 2021
Fiscal Year 2020
Fiscal Year 2019
% Change 2021 vs. 2020
% Change 2020 vs. 2019
Hosting and professional services
Product and licensing
Maintenance and support
Total revenues
United States
International
Total revenues
Fiscal Year 2021 compared to Fiscal Year 2020
For fiscal year 2021, the geographic split was 80% of total revenues in the United States and 20% internationally, as compared to 79% of total revenues in the United States and 21% internationally for fiscal year 2020.
Fiscal Year 2020 compared to Fiscal Year 2019
For fiscal year 2020, the geographic split was 79% of total revenues in the United States and 21% internationally, as compared to 80% of total revenues in the United States and 20% internationally for fiscal year 2019.
Hosting and Professional Services Revenue
Hosting revenue primarily relates to delivering on-demand hosted services, such as clinical documentation solutions 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):
Fiscal Year 2021
Fiscal Year 2020
Fiscal Year 2019
% Change 2021 vs. 2020
% Change 2020 vs. 2019
Hosting revenue
Professional services revenue
Hosting and professional services revenue
As a percentage of total revenues
Fiscal Year 2021 compared to Fiscal Year 2020
Hosting revenue for the year ended September 30, 2021 increased by $98.8 million, or 16.2%, primarily due to a $103.7 million increase in Healthcare. Healthcare hosting revenue increased primarily due to the growth in our Dragon Medical Cloud solutions and our continued transition from a license model to a cloud based model. As a percentage of total revenues, hosting revenue increased from 47.6% for fiscal year 2020 to 52.1% for fiscal year 2021.
Professional services revenue for the year ended September 30, 2021 decreased by $17.7 million, or 14.7%, primarily due to a $12.2 million decrease in Enterprise, and a $5.4 million decrease in Healthcare. Enterprise professional services revenue decreased primarily due to lower Voice Engagement professional services revenue. Healthcare professional services revenue decreased as we shift away from lower-margin professional services revenue. As a percentage of total revenues, professional services revenue decreased from 9.4% for fiscal year 2020 to 7.6% for fiscal year 2021.
Fiscal Year 2020 compared to Fiscal Year 2019
Hosting revenue for the year ended September 30, 2020 increased by $75.3 million, or 14.1%, primarily due to a $95.0 million increase in Healthcare, offset in part by a $20.1 million decrease in our Other segment. Healthcare hosting revenue increased
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primarily due to the growth in our Dragon Medical Cloud solutions and our continued transition from a license model to a cloud based model. Other hosting revenue decreased due to the wind-down of Devices and the sale of our Mobile Operator Services business in fiscal year 2019. As a percentage of total revenues, hosting revenue increased from 42.1% for fiscal year 2019 to 47.6% for fiscal year 2020.
Professional services revenue for the year ended September 30, 2020 decreased by $7.5 million, or 5.8%, primarily due to a $7.9 million decrease in Healthcare as of result of project deferrals during the COVID-19 pandemic. As a percentage of total revenues, professional services revenue decreased from 10.1% for fiscal year 2019 to 9.4% for fiscal year 2020.
Product and Licensing Revenue
Product and licensing revenue primarily consist of sales and licenses of our technology. The following table shows product and licensing revenue, in dollars, and as a percentage of total revenues (dollars in millions):
Fiscal Year 2021
Fiscal Year 2020
Fiscal Year 2019
% Change 2021 vs. 2020
% Change 2020 vs. 2019
Product and licensing revenue
As a percentage of total revenues
Fiscal Year 2021 compared to Fiscal Year 2020
Product and licensing revenue for the year ended September 30, 2021 increased by $3.5 million, or 1.2%, primarily due to a $10.9 million increase in Enterprise, offset in part by a $4.4 million decrease in Healthcare. Enterprise product and licensing revenue increased primarily due to the growth in our Security & Biometrics and Voice solutions. Healthcare product and licensing revenue decreased primarily due to a non-strategic legacy term license contract, and the continued transition from term licenses to cloud-based solutions. As a percentage of total revenues, product and licensing revenue decreased from 23.0% for fiscal year 2020 to 22.0% for fiscal year 2021.
Fiscal Year 2020 compared to Fiscal Year 2019
Product and licensing revenue for the year ended September 30, 2020 decreased by $43.7 million, or 12.9%, primarily due to a $46.7 million decrease in Healthcare and a $4.9 million decrease in other, offset in part by a $7.9 million increase in Enterprise. Healthcare product and licensing revenue decreased primarily due to the continued transition from term licenses to cloud-based solutions. Enterprise product and licensing revenue increased primarily due to the growth in our digital engagement solutions. Other product and licensing revenue decreased primarily due to the wind-down of Devices during fiscal year 2019. As a percentage of total revenues, product and licensing revenue decreased from 26.7% for fiscal year 2019 to 23.0% for fiscal year 2020.
Maintenance and Support Revenue
Maintenance and support revenue primarily consist of technical support and maintenance services. The following table shows maintenance and support revenue, in dollars, and as a percentage of total revenues (dollars in millions):
Fiscal Year 2021
Fiscal Year 2020
Fiscal Year 2019
% Change 2021 vs. 2020
% Change 2020 vs. 2019
Maintenance and support revenue
As a percentage of total revenues
Fiscal Year 2021 compared to Fiscal Year 2020
Maintenance and support revenue for the year ended September 30, 2021 decreased by $6.0 million, or 2.3%, primarily due to an $8.0 million decrease in Healthcare. Healthcare maintenance and support revenue decreased primarily due to a non-strategic legacy term license contract and the continued transition from software sold with maintenance and support to cloud-based solutions. As a percentage of total revenues, maintenance and support revenue decreased from 20.0% for fiscal year 2020 to 18.4% for fiscal year 2021.
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Fiscal Year 2020 compared to Fiscal Year 2019
Maintenance and support revenue for the year ended September 30, 2020 decreased by $11.5 million, or 4.3%, primarily due to a $19.9 million decrease in Healthcare, offset in part by an $8.6 million increase in Enterprise. Healthcare maintenance and support revenue decreased primarily due to the continued transition from term licenses with maintenance and support to cloud-based solutions in Healthcare. Enterprise maintenance and support revenue increased primarily driven by the growth in digital engagement and security biometrics license transactions. As a percentage of total revenues, maintenance and support revenue decreased from 21.1% for fiscal year 2019 to 20.0% for fiscal year 2020.
COSTS AND EXPENSES
Cost of Hosting and Professional Services Revenue
Cost of hosting and professional services revenue primarily consists of compensation for services personnel, outside consultants and overhead, as well as the hardware, infrastructure and communications fees that support our hosting solutions. The following table shows the cost of hosting and professional services revenue, in dollars and as a percentage of professional services and hosting revenue (dollars in millions):
Fiscal Year 2021
Fiscal Year 2020
Fiscal Year 2019
% Change 2021 vs. 2020
% Change 2020 vs. 2019
Cost of hosting and professional services revenue
As a percentage of hosting and professional services revenue
Fiscal Year 2021 compared to Fiscal Year 2020
Cost of hosting and professional services revenue for the year ended September 30, 2021 increased by $44.1 million, or 11.0%, primarily related to the increase in hosting and professional services revenue in fiscal year 2021. Gross margin remained relatively flat year-over-year.
Fiscal Year 2020 compared to Fiscal Year 2019
Cost of hosting and professional services revenue for the year ended September 30, 2020 increased by $1.4 million, or 0.4%. Gross margin increased by 5.4 percentage points primarily due to the growth in Dragon Medical cloud-based solution, which is margin accretive.
Cost of Product and Licensing Revenue
Cost of product and licensing revenue primarily consists of material and fulfillment costs, manufacturing and operations costs and third-party royalty expenses. The following table shows the cost of product and licensing revenue, in dollars and as a percentage of product and licensing revenue (dollars in millions):
Fiscal Year 2021
Fiscal Year 2020
Fiscal Year 2019
% Change 2021 vs. 2020
% Change 2020 vs. 2019
Cost of product and licensing revenue
As a percentage of product and licensing revenue
Fiscal Year 2021 compared to Fiscal Year 2020
Cost of product and licensing revenue for the year ended September 30, 2021 decreased by $27.0 million, or 44.1%. Gross margin increased by 9.3 percentage points year-over-year. The decrease in cost and increase in gross margin was primarily due to the corresponding costs for a legacy term license transaction in Healthcare that did not renew in fiscal year 2021.
Fiscal Year 2020 compared to Fiscal Year 2019
Cost of product and licensing revenue for the year ended September 30, 2020 decreased by $8.6 million, or 12.3%. The decrease in cost and increase in gross margin were primarily due to the upfront recognition of certain project costs associated with digital engagement in the third quarter of fiscal year 2019. Gross margin decreased by 0.2 percentage points.
Cost of Maintenance and Support Revenue
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Cost of maintenance and support revenue primarily consists of compensation for product support personnel and overhead. The following table shows cost of maintenance and support revenue, in dollars and as a percentage of maintenance and support revenue (dollars in millions):
Fiscal Year 2021
Fiscal Year 2020
Fiscal Year 2019
% Change 2021 vs. 2020
% Change 2020 vs. 2019
Cost of maintenance and support revenue
As a percentage of maintenance and support revenue
Fiscal Year 2021 compared to Fiscal Year 2020
Cost of maintenance and support revenue for the year ended September 30, 2021 decreased by $1.3 million, or 4.0%, primarily due to the continued transition from license transactions with maintenance and support to cloud-based solutions in Healthcare. Gross margin increased by 0.3 percentage points, primarily driven by the maintenance and support costs for a legacy term license transaction in Healthcare that did not renew in fiscal year 2021.
Fiscal Year 2020 compared to Fiscal Year 2019
Cost of maintenance and support revenue for the year ended September 30, 2020 decreased by $2.2 million, or 6.5%, primarily due to the continued transition from license transactions with maintenance and support to cloud-based solutions in Healthcare. Gross margin increase by 0.2 percentage points, primarily driven by higher margin on Dragon Medical maintenance and support services in Healthcare.
Research and Development Expenses
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 research and development expense, in dollars and as a percentage of total revenues (dollars in millions):
Fiscal Year 2021
Fiscal Year 2020
Fiscal Year 2019
% Change 2021 vs. 2020
% Change 2020 vs. 2019
Research and development expense
As a percentage of total revenues
Fiscal Year 2021 compared to Fiscal Year 2020
R&D expense for the year ended September 30, 2021 increased by $29.3 million, or 13.3%, primarily due to higher employee headcount and our continued investment in product development and new technologies to support our long-term growth.
Fiscal Year 2020 compared to Fiscal Year 2019
R&D expense for the year ended September 30, 2020 increased by $38.1 million, or 21.0%, primarily due to 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):
Fiscal Year 2021
Fiscal Year 2020
Fiscal Year 2019
% Change 2021 vs. 2020
% Change 2020 vs. 2019
Sales and marketing expense
As a percentage of total revenues
Fiscal Year 2021 compared to Fiscal Year 2020
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Sales and marketing expenses for the year ended September 30, 2021 increased by $24.3 million, or 9.0%, primarily due to higher traveling and entertainment expenses, as well as a higher employee headcount as we continue to invest in our sales force to support new products and solutions.
Fiscal Year 2020 compared to Fiscal Year 2019
Sales and marketing expenses for the year ended September 30, 2020 increased by $0.4 million, or 0.2%, as lower traveling and entertainment expenses during the COVID-19 pandemic were more than offset by our investment in sales force to support new products and solutions.
General and Administrative Expenses
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):
Fiscal Year 2021
Fiscal Year 2020
Fiscal Year 2019
% Change 2021 vs. 2020
% Change 2020 vs. 2019
General and administrative expense
As a percentage of total revenues
Fiscal Year 2021 compared to Fiscal Year 2020
General and administrative expenses decreased by $28.6 million, or 18.3%, primarily driven by a $24.0 million benefit from a legal settlement reached in the fourth quarter of fiscal year 2021.
Fiscal Year 2020 compared to Fiscal Year 2019
General and administrative expenses decreased by $16.8 million, or 9.7%, primarily driven by decreases in compensation and professional services costs due to our cost saving initiatives, and lower traveling and entertainment expenses during the COVID-19 pandemic.
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):
Fiscal Year 2021
Fiscal Year 2020
Fiscal Year 2019
% Change 2021 vs. 2020
% Change 2020 vs. 2019
Cost of revenues
Operating expenses
Total amortization expense
As a percentage of total revenues
Fiscal Year 2021 compared to Fiscal Year 2020
Amortization of intangible assets expense for fiscal year 2021 decreased by $5.9 million. The decrease in cost of revenues amortization expense was primarily due to certain intangible assets becoming fully amortized in fiscal year 2021, and the increase in operating amortization expense was primarily due to acquired technology assets from a recent acquisition.
Fiscal Year 2020 compared to Fiscal Year 2019
Amortization of intangible assets expense for fiscal year 2020 decreased by $0.1 million.
Acquisition-Related Costs, Net
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Acquisition-related costs, net 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 costs, net is as follows (dollars in millions):
Fiscal Year 2021
Fiscal Year 2020
Fiscal Year 2019
% Change 2021 vs. 2020
% Change 2020 vs. 2019
Transition and integration costs
Professional service fees
Acquisition-related adjustments
Total acquisition-related costs, net
As a percentage of total revenues
Fiscal Year 2021 compared to Fiscal Year 2020
Acquisition-related costs, net increased by $0.8 million, primarily due to certain retention bonuses being earned as part of the terms of a recent acquisition in fiscal year 2021.
Fiscal Year 2020 compared to Fiscal Year 2019
Acquisition-related costs, net decreased by $3.6 million, primarily due to overall reduced acquisition and integration activities as we focused on portfolio optimization and organizational simplification to drive organic growth.
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):
Personnel
Facilities
Total Restructuring
Other Charges
Total
Fiscal Year 2021
Healthcare
Enterprise
Other
Corporate
Total fiscal year 2021
Fiscal Year 2020
Healthcare
Enterprise
Other
Corporate
Total fiscal year 2020
Fiscal Year 2019
Healthcare
Enterprise
Other
Corporate
Total fiscal year 2019
Fiscal Year 2021
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For fiscal year 2021, we recorded restructuring charges of $16.9 million, which included $6.1 million related to the termination of approximately 80 employees and $10.8 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 $0.4 million to be substantially paid during fiscal year 2022, and the remaining $16.9 million lease payments to be made through fiscal year 2027, in accordance with the terms of the applicable leases.
Additionally, during fiscal year 2021, we recorded approximately $21.0 million of expenses related to the acquisition of Nuance by Microsoft, and $1.4 million of professional service expenses related to other corporate initiatives, offset in part by $3.1 million of insurance recoveries.
Fiscal Year 2020
For fiscal year 2020, we recorded restructuring charges of $10.7 million, which included $5.1 million related to the termination of approximately 191 employees and $5.5 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 footprint of our offices and facilities.
Additionally, during fiscal year 2020, we recorded $5.1 million expenses related to the separation of our Automotive business, and a $2.0 million impairment charge related to a right-of-use asset due to the COVID-19 pandemic, offset in part by $0.3 million of insurance recoveries.
Fiscal Year 2019
For fiscal year 2019, we recorded restructuring charges of $17.4 million, which included $15.2 million related to the termination of approximately 305 employees and $2.2 million in charges related to the closing of certain idle facilities. These actions were part of our strategic initiatives focused on investment rationalization, process optimization and cost reduction.
Additionally, during fiscal year 2019, we recorded $9.9 million of professional services fees related to our corporate transformational efforts and $3.3 million accelerated depreciation related to our Mobile Operator Services, offset in part by $0.5 million of insurance recoveries.
Other Income (Expense), Net
Other expenses, net consists primarily of interest income, interest expense, foreign exchange gains (losses), and net gains (losses) from other non-operating activities. A summary of other income (expense), net is as follows (dollars in millions):
Fiscal Year 2021
Fiscal Year 2020
Fiscal Year 2019
% Change 2021 vs. 2020
% Change 2020 vs. 2019
Interest income
Interest expense
Other expense, net
Total other expenses, net
Fiscal Year 2021 compared to Fiscal Year 2020
The decrease in interest income was primarily due to lower yields and the decreases in cash and marketable securities for the current year period.
The decrease in interest expense was due to redemptions of $521.9 million notional amounts of the 1.0% and 1.5% Convertible Debentures during the third quarter of fiscal year 2021. Additionally, holders of our 1.0% and 1.5% Convertible Debentures exercised their right to convert $226.6 million notional amount during fiscal year 2021.
The increase of other expense, net was primarily due to losses on conversions and redemptions of debt in fiscal year 2021.
Fiscal Year 2020 compared to Fiscal Year 2019
The decrease in interest income was primarily due to lower yields and the decreases in cash and marketable securities for the current year period.
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The decrease in interest expense was primarily due to the repayments of $300.0 million of the 2020 Senior Notes in March 2019 and $300.0 million of the 2024 Senior Notes in October 2019, as well as the repurchases of $123.8 million notional amounts of the 1.25% and 1.5% Convertible Debentures during the second quarter of fiscal year 2020.
The increase of other expense, net was primarily due to losses on redemption and repurchases of debt in fiscal year 2020, offset
in part by higher gains on foreign currency transactions.
Provision (Benefit) for Income Taxes
The following table shows the provision (benefit) for income taxes on continuing operations and the effective income tax rate (dollars in millions):
Fiscal Year 2021
Fiscal Year 2020
Fiscal Year 2019
% Change 2021 vs. 2020
% Change 2020 vs. 2019
Provision (benefit) for income taxes
Effective income tax rate
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.
Fiscal Year 2021 compared to Fiscal Year 2020
The effective income tax rate in fiscal year 2021 differs from the U.S. federal statutory rate of 21.0% primarily due to a change in the valuation allowance in the United States as well as the addition of uncertain tax positions partially offset by base erosion and anti-abuse planning initiatives.
Provision for income taxes increased by $36.3 million in fiscal year 2021 compared to fiscal year 2020, primarily due to a net $29.9 million deferred tax benefit from adjustments to domestic valuation allowance primarily related to the Cerence spin-off and a foreign tax benefit of $14.8 million related to fiscal year 2019 intangible property transfers offset by base erosion and anti-abuse planning initiatives.
Fiscal Year 2020 compared to Fiscal Year 2019
The effective income tax rate in fiscal year 2020 differs from the U.S. federal statutory rate of 21.0% primarily due to a net $29.9 million deferred tax benefit from adjustments to domestic valuation allowance primarily related to the Cerence spin-off, a foreign tax benefit of $14.8 million related to prior year intangible property transfers, offset in part by uncertain tax positions of $17.1 million and the base erosion and anti-abuse tax of $4.3 million.
Benefit for income taxes increased by $7.7 million in fiscal year 2020 compared to fiscal year 2019, primarily due to a $29.9 million net deferred tax benefit from adjustments to the domestic valuation allowance primarily related to the Cerence spin-off.
Valuation Allowances
As of September 30, 2021 and September 30, 2020, we had a full valuation allowance against net domestic deferred tax assets and certain foreign deferred tax assets. We intend to maintain valuation allowances on these deferred tax assets until there is sufficient evidence to support the release of all or some portion of these allowances. A significant portion of our domestic deferred tax assets relate to U.S. net operating losses. 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 September 30, 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.
Net (Loss) Income from Discontinued Operations
Disposition of Our Medical Transcription and EHR Implementation businesses
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On November 17, 2020, we entered into the Agreement to sell 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.
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 (loss) income from discontinued operations. There are a number of working capital and other adjustments under the Agreement and related ancillary agreements. We do not believe that post-closing working capital adjustments under the Agreement, if any, will have a material impact on our results of operations.
For all periods presented, the Businesses' results of operations have been included within discontinued operations in our consolidated financial statements.
SEGMENT ANALYSIS
For further details of financial information about our operating segments, see Note 22 to the accompanying consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. The following table presents certain financial information about our operating segments (dollars in millions):
Fiscal Year 2021
Fiscal Year 2020
Fiscal Year 2019
% Change 2021 vs. 2020
% Change 2020 vs. 2019
Segment Revenues (a) :
Healthcare
Enterprise
Other
Total segment revenues
Less: acquisition related revenues adjustments
Total revenues
Segment Profit:
Healthcare
Enterprise
Other
Total segment profit
Segment Profit Margin:
Healthcare
Enterprise
Other
Total segment profit margin
(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
Fiscal Year 2021 compared to Fiscal Year 2020
• Healthcare segment revenue for fiscal year 2021 increased by $85.9 million, or 11.9%, driven primarily by growth in the Dragon Medical and CAPD cloud offerings. Revenue from Dragon Medical cloud and DAX cloud-based solutions increased by $78.3 million, or 28.0%, to $358.4 million for fiscal year 2021 from $280.1 million for fiscal year 2020, primarily due to the continued market penetration and customer transition to DMO.
• Enterprise segment revenue for fiscal year 2021 increased by $5.4 million, or 1.0%, primarily due to the growth in our Security and Biometrics solutions.
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• Other segment revenue for fiscal year 2021 decreased by $13.0 million, or 38.3%, as we continue to wind down our Other segment.
Fiscal Year 2020 compared to Fiscal Year 2019
• Healthcare segment revenue for fiscal year 2020 increased by $19.7 million, or 2.8%, primarily due to the growth in Dragon Medical and DAX cloud-based solutions.
• Enterprise segment revenue for fiscal year 2020 increased by $19.2 million, or 3.8%, primarily due to the growth in digital engagement solutions.
• Other segment revenue for fiscal year 2020 decreased by $27.6 million, or 44.9%, due to the wind-down of Devices and the sale of our Mobile Operator Services business in fiscal year 2019.
Segment Profit
Fiscal Year 2021 compared to Fiscal Year 2020
• Healthcare segment profit for the year ended September 30, 2021 increased by $35.4 million, or 15.4%, primarily driven by revenue growth in the Dragon Medical, CAPD, and CDI cloud offerings. Segment profit margin increased by 1.0 percentage points to 32.9%, primarily driven by growth in our Dragon Medical cloud-based solution, which is margin accretive.
• Enterprise segment profit for the year ended September 30, 2021 decreased by $7.1 million, or 4.9%, as higher segment revenue was more than offset by higher operating expenses. Segment profit margin decreased by 1.6 percentage points to 25.7%, primarily due to higher operating expenses, which was only partially offset by higher segment revenues.
• Other segment profit for the year ended September 30, 2021 decreased by $8.4 million, or 42.5%, as we continue to wind down our Other segment. Segment profit margin decreased by 4.0 percentage points to 54.1%.
Fiscal Year 2020 compared to Fiscal Year 2019
• Healthcare segment profit for the year ended September 30, 2020 decreased by $22.9 million, or 9.1%, primarily due to higher R&D and sales and marketing expenses, offset in part by higher revenue and gross margin improvement. Gross margin increased primarily due to a favorable shift in mix to higher margin Dragon Medical cloud-based solution. The increases in R&D and sales and marketing expenses were primarily due to higher spend to support the development and launch of new products and solutions. As a result, segment profit margin decreased by 4.2 percentage points to 31.9%.
• Enterprise segment profit for the year ended September 30, 2020 increased by $17.6 million, or 13.8%, primarily due to higher segment revenue and gross margin, offset in part by higher R&D and sales expenses. Gross margin improvement was primarily driven by a favorable shift in revenue mix towards higher-margin license revenue. The increase in R&D expense was primarily due to higher spend on core technologies to support future growth. The increase in sales expense was primarily driven by higher commission costs due to higher bookings, offset in part by lower travel and entertainment expenses during the pandemic. As a result, segment profit margin increased by 2.4 percentage points to 27.3%.
• Other segment profit for the year ended September 30, 2020 increased by $0.3 million, or 1.5%, primarily driven by lower expense profile of the remaining business, offset in part by lower revenue. As a result, segment profit margin increased by 26.5 percentage points to 58.1%
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
We had cash and cash equivalents and marketable securities of $209.5 million as of September 30, 2021, a decrease of $162.9 million from $372.3 million as of September 30, 2020. Our working capital, defined as total current assets less total current liabilities of continuing operations, was $(324.8) million as of September 30, 2021, compared to $(256.5) million as of September 30, 2020. Our working capital included $373.0 million and $432.2 million convertible debt as of September 30, 2021 and 2020, respectively. As of September 30, 2021, we had $298.1 million available for borrowing under our revolving
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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 $35.7 million as of September 30, 2021 and $60.9 million as of September 30, 2020. We utilize a variety of financing strategies to ensure that our worldwide cash is available to meet our liquidity needs. We expect the cash held overseas to be permanently invested in our international operations, and our U.S. operation to be funded through its own operating cash flows, cash and marketable securities within the U.S., and if necessary, borrowing under our revolving credit facility.
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. The consummation of the Merger is subject to certain conditions, including the satisfaction of certain regulatory approvals and other customary closing conditions, but it is currently expected to close by the end of our first quarter or early in our second quarter of fiscal year 2022 .
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 that will contain important information about Nuance and the Merger.
Disposition of Our Medical Transcription and EHR Implementation Businesses
In connection with our ongoing comprehensive portfolio and business review, on November 17, 2020, we entered into a definitive agreement to sell our medical transcription and EHR implementation businesses.
On March 1, 2021, we completed the sale of the Business and received approximately $29.8 million in cash, subject to post- losing 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 (loss) income from discontinued operations. There are a number of working capital and other adjustments under the Agreement and related ancillary agreements. We do not believe that post-closing working capital adjustments under the Agreement, if any, will have a material impact on our results of operations.
Convertible Debentures
During the fourth quarter of fiscal year 2021, our common stock price exceeded the conversion threshold price of 130% of the applicable conversion price per share for each of our convertible debentures for at least 20 trading days during the 30 consecutive trading days ending September 30, 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 October 1, 2021 and December 31, 2021. Additionally, on November 5, 2021, we redeemed all of the outstanding 1.5% 2035 Debentures. All three convertible notes, with a total net book value of $373.0 million, were included within current liabilities as of September 30, 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 fiscal year 2021, holders of our 1.5% 2035 Debentures exercised their right to convert $137.4 million notional amount for $137.4 million in cash and 4.1 million shares of common stock, and holders of our 1.0% 2035 Debentures exercised their right to convert $89.2 million notional amount for $89.2 million in cash and 2.1 million shares of common stock. Additionally, during fiscal year 2021, we induced the exchange of $457.0 million notional amount of our 1.0% 2035 Debentures for $5.0 million in cash and 18.9 million shares of common stock, and $64.9 million notional amount of our 1.5% 2035 Debentures for $0.5 million in cash and 3.2 million shares of common stock. As of September 30, 2021, $130.3 million in aggregate principal amount of the 1.0% 2035 Debentures and $25.1 million in aggregate principal amount of the 1.5% 2035 Debentures remained outstanding.
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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
Fiscal Year 2021 compared to Fiscal Year 2020
Cash provided by operating activities for fiscal year 2021 was $247.6 million, a decrease of $6.9 million from $254.6 million cash provided by operating activities for fiscal year 2020. The net decrease was primarily due to:
• A decrease of $53.5 million in operating cash flows from discontinued operations; and
• A decrease of $30.6 million from changes in deferred revenue. Deferred revenue had a negative effect of $9.3 million on operating cash flows for fiscal year 2021, as compared to a positive effect of $21.3 million for fiscal year 2020; offset in part by,
• An increase of $33.3 million due to favorable changes in working capital, primarily related to the timing of cash collections and cash payments;
• An increase of $43.8 million due to lower non-cash charges, primarily related to the timing of deferred tax benefits.
Fiscal Year 2020 compared to Fiscal Year 2019
Cash provided by operating activities for fiscal year 2020 was $254.6 million, a decrease of $146.8 million from $401.4 million cash provided by operating activities for fiscal year 2019. The net decrease was primarily due to:
• A decrease of $95.1 million due to unfavorable changes in working capital, primarily related to the timing of cash collections and cash payments; and
• A decrease of $116.5 million in operating cash flows from discontinued operations; offset in part by,
• An increase of $42.4 million due to higher income before non-cash charges; and
• An increase of $22.3 million from changes in deferred revenue. Deferred revenue had a positive effect of $21.3 million on operating cash flows for fiscal year 2020, as compared to $1.1 million for fiscal year 2019.
Net Cash (Used in) Provided by Investing Activities
Fiscal Year 2021 compared to Fiscal Year 2020
Cash used in investing activities for fiscal year 2021 was $42.4 million, a decrease of $115.2 million from $72.7 million cash provided by operating activities in fiscal year 2020. The net decrease was primarily due to:
• A decrease of $84.8 million in net proceeds from the sale and purchase of marketable securities and other investments; and
• A decrease of $0.4 million in cash provided by other investing activities; and
• An increase of $44.4 million in payments for business and asset acquisitions; offset in part by,
• An increase of $9.7 million in net proceeds from the disposition of businesses, primarily from the sale of our medical transcription and EHR implementation businesses; and
• A decrease of $4.8 million in cash used for capital expenditures.
Fiscal Year 2020 compared to Fiscal Year 2019
Cash provided by investing activities for fiscal year 2020 was $72.7 million, a decrease of $223.3 million from $296.0 million cash provided by operating activities in fiscal year 2019. The net decrease was primarily due to:
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• Net proceeds of $406.9 million, primarily from the sale of our Imaging business during the second quarter of fiscal year 2019; and
• An increase of $17.1 million in cash used for capital expenditures; offset in part by,
• An increase of $179.7 million in net proceeds from the sale and purchase of marketable securities and other investments; and
• A decrease of $19.9 million in payments for business and asset acquisitions.
Net Cash Used in Financing Activities
Fiscal Year 2021 compared to Fiscal Year 2020
Cash used in financing activities for fiscal year 2021 was $322.7 million, a decrease of $263.5 million from $586.2 million cash used in fiscal year 2020. The net decrease was primarily due to:
• A decrease of $283.6 million in cash used for the repayment and redemption of debt; and
• A decrease of $169.2 million in share repurchases; offset in part by,
• An increase of $48.1 million related to payments for taxes related to net share settlement of equity awards; and
• An increase of $2.1 million cash used for other financing activities; and
• A net contribution of $139.1 million from Cerence in connection with the spin-off of our Automobile business during the first quarter of fiscal year 2020.
Fiscal Year 2020 compared to Fiscal Year 2019
Cash used in financing activities for fiscal year 2020 was $586.2 million, an increase of $134.2 million from $452.0 million cash used in fiscal year 2019. The net increase was primarily due to:
• An increase of $213.6 million in the repayment and redemption of debt;
• Net proceeds of $9.9 million from sale of noncontrolling interests in a subsidiary in fiscal year 2019;
• An increase of $42.3 million in share repurchases;
• An increase of $4.6 million related to payments for taxes related to net share settlement of equity awards; offset in part by,
• A net contribution of $139.1 million from Cerence in connection with the spin-off of our Automobile business during the first quarter of fiscal year 2020.
Debt
For a detailed description of the terms and restrictions of the debt and revolving credit facility, see Note 10 to the accompanying consolidated financial statements. For the year ended September 30, 2021, we spent approximately $232.1 million in cash and issued 28.2 million shares of common stock for the redemption of debt:
• In May 2021, holders of our 1.5% 2035 Debentures exercised their right to convert $118.3 million notional amount for $118.3 million in cash and 3.5 million shares of common stock.
• During the third quarter of fiscal year 2021, we induced the exchange of $457.0 million notional amount of our 1.0% 2035 Debentures for $5.0 million in cash and 18.9 million shares of common stock, and $64.9 million notional amount of 1.5% 2035 Debentures for $0.5 million in cash and 3.2 million shares of common stock.
• During the fourth quarter of fiscal year 2021, holders of our 1.5% 2035 Debentures exercised their right to convert $19.0 million notional amount for $19.0 million in cash and 0.6 million shares of common stock, and holders of our 1.0% 2035 Debentures exercised their right to convert $89.2 million notional amount for $89.2 million in cash and 2.1 million shares of common stock.
Additionally, certain debt holders have exercised their right to convert Debentures that did not settle on or prior to September 30, 2021. 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. Additionally, holders of our 1.25% 2025 Debentures exercised
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their right to convert $1.2 million notional amount for $1.2 million in cash and 0.04 million shares of common stock. The settlements of these conversions occurred subsequent to September 30, 2021, but before the filing of this Annual Report on Form 10-K.
On September 29, 2021, we issued a notice calling for redemption all of our outstanding 1.5% 2035 Debentures, pursuant to which, the holders had the right to receive cash at a price equal to 100% of the principal amount of the 1.5% 2035 Debentures plus any accrued and unpaid interest, including any additional interest to, but excluding, the repurchase date of November 5th, 2021. In lieu of redemption, holders had the right to convert all or any portion of their debentures at the aforementioned conversion ratio until the close of business on November 4, 2021. Upon the conclusion of the conversion period on November 4, 2021, holders of $25.0 million notional amount exercised their right to convert. Additionally, we redeemed the remaining outstanding $0.1 million 1.5% 2035 Debentures for $0.1 million in cash. On November 5, 2021, we settled all of the outstanding 1.5% 2035 Debentures for $25.1 million in cash and 0.8 million shares of common stock. Following these redemptions and conversions, none of the 1.5% 2035 Debentures remain outstanding.
As of September 30, 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 $32.9 million during fiscal year 2022. We expect to fund our debt service requirements through existing sources of liquidity and our operating cash flows.
Share Repurchases
On April 29, 2013, our Board of Directors approved a share repurchase program for up to $500.0 million, which was increased by $500.0 million on April 29, 2015. On August 1, 2018, our Board of Directors approved an additional $500.0 million under our share repurchase program. Under the terms of the share repurchase program, we have the ability to repurchase shares from time to time through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades, accelerated share 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 during the fiscal year ended September 30, 2021, and repurchased 9.5 million shares and 8.2 million shares for $169.2 million and $126.9 million during the fiscal years ended September 30, 2020 and 2019, respectively, under the program. The amount paid in excess of par value is recognized in additional paid in capital and these shares were retired upon repurchase. Since the commencement of the program, we have repurchased 73.8 million shares for $1,238.8 million. The amount paid in excess of par value is recognized in additional paid in capital. Shares were retired upon repurchase. As of September 30, 2021, approximately $261.2 million remained available for future repurchases under the program.
Off-Balance Sheet Arrangements, Contractual Obligations, Contingent Liabilities and Commitments
Contractual Obligations
The following table outlines our contractual payment obligations for continuing operations as of September 30, 2021 (dollars in millions):
Contractual payments Due in Fiscal Year
Contractual Obligations
Total
2023 and 2024
2025 and 2026
Thereafter
Convertible debentures (1)
Senior notes (2)
Interest payable on long-term debt (3)
Letters of credit (4)
Lease obligations and other liabilities:
Operating leases (5)
Operating leases under restructuring
Purchase commitments for inventory, property and equipment (6)
Total contractual cash obligations
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(1) As of September 30, 2021, the holders have the right to convert all or any portion of the 1.25% 2025 Debentures, 1.5% 2035 Debentures, and 1.0% 2035 Debentures between October 1, 2021 and December 31, 2021. 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 of September 30, 2021.
(3) Interest per annum is due and payable semi-annually and is determined based on the outstanding principal as of September 30, 2021, the stated interest rate of each debt instrument and the assumed redemption dates discussed above.
(4) Letters of credit are in place primarily to secure future operating lease payments.
(5) Obligations include contractual lease commitments related to facilities that have subsequently been subleased. As of September 30, 2021, we have subleased certain facilities with total sublease income of $10.8 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.
As of September 30, 2021, $60.1 million of the unrecognized tax benefits, if recognized, would impact our effective income tax rate. We recognized interest and penalties related to uncertain tax positions in our provision for income taxes of $1.7 million, $1.1 million, and $0.4 million during fiscal years 2021, 2020, and 2019, respectively. We recorded interest and penalties of $3.5 million and $1.7 million as of September 30, 2021 and 2020, respectively.
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 of September 30, 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 of September 30, 2021, the remaining deferred payment obligations of $15.0 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
On April 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 Merger is currently expected to close by the end of our first quarter or early in our second quarter of fiscal year 2022. As part of the transaction, Nuance expects to incur liabilities of approximately $114.0 million that are contingent on the deal consummation. These liabilities include banker fees, legal fees, and certain retention bonuses.
Financial Instruments
We use financial instruments to manage our foreign exchange risk. We operate our business in countries throughout the world and transact business in various foreign currencies. Our foreign currency exposures typically arise from transactions denominated in currencies other than the functional currency of our operations. We have a program that primarily utilizes foreign currency forward contracts to offset the risks associated with the effect of certain foreign currency exposures. Our program is designed so that increases or decreases in our foreign currency exposures are offset by gains or losses on the foreign currency forward contracts in order to mitigate the risks and volatility associated with our foreign currency transactions. Generally, we enter into such contracts for less than 90 days and have no cash requirements until maturity. As of September 30, 2021 and 2020, we had outstanding contracts with a total notional value of $52.5 million and $40.7 million, respectively.
Defined Benefit Plans
We sponsor certain defined benefit plans that are offered primarily by our foreign subsidiaries. Many of these plans were assumed through our acquisitions or are required by local regulatory requirements. We may deposit funds for these plans with insurance companies, third party trustees, or into government-managed accounts consistent with local regulatory requirements, as applicable. Our defined benefit pension income was $0.2 million, $0.4 million, and $0.5 million for fiscal years 2021, 2020, and 2019, respectively. The aggregate projected benefit obligation as of September 30, 2021 and September 30, 2020 was $34.9 million and $35.4 million, respectively. The aggregate net liability of our defined benefit plans as of September 30, 2021 and September 30, 2020 was $10.1 million and $13.2 million, respectively.
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Off-Balance Sheet Arrangements
Through September 30, 2021, we have not entered into any off-balance sheet arrangements or material transactions with unconsolidated entities or other persons.
CRITICAL ACCOUNTING POLICIES, JUDGMENTS, AND ESTIMATES
The preparation of financial statements in conformity with U.S. generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, assumptions and judgments, including those related to revenue recognition; allowance for doubtful accounts and sales returns; accounting for deferred costs; accounting for internally developed software; the valuation of goodwill and intangible assets; accounting for business combinations, including contingent consideration; accounting for stock-based compensation; accounting for derivative instruments; accounting for income taxes and related valuation allowances; and loss contingencies. Our management bases its estimates on historical experience, market participant fair value considerations, projected future cash flows and various other factors that are believed to be reasonable under the circumstances. Actual results could differ from these estimates.
We believe the following critical accounting policies most significantly affect the portrayal of our financial condition and results of operations and require our most difficult and subjective judgments.
Revenue Recognition
We derive revenue from the following sources: (1) hosting services, (2) software licenses, including royalties, (3) maintenance and support ("M&S"), (4) professional services, and (5) sale of hardware. Revenue is reported net of applicable sales and use tax, value-added tax and other transaction taxes imposed on the related transaction including mandatory government charges that are passed through to our customers. We account for a contract when both parties have approved and committed to the contract, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and the collectibility of the consideration is probable.
The majority of our arrangements with customers typically contain multiple products and services. We account for individual products and services separately if they are distinct, that is, if a product or service is separately identifiable from other items in the contract and if a customer can benefit from it on its own or with other resources that are readily available to the customer.
We recognize revenue after applying the following five steps:
• identification of the contract, or contracts, with a customer;
• identification of the performance obligations in the contract, including whether they are distinct within the context of the contract;
• determination of the transaction price, including the constraint on variable consideration;
• allocation of the transaction price to the performance obligations in the contract; and
• recognition of revenue when, or as, performance obligations are satisfied.
We allocate the transaction price of the arrangement based on the relative estimated standalone selling price ("SSP") of each distinct performance obligation. In determining SSP, we maximize observable inputs and consider a number of data points, including:
• the pricing of standalone sales (in the instances where available);
• the pricing established by management when setting prices for deliverables that are intended to be sold on a standalone basis;
• contractually stated prices for deliverables that are intended to be sold on a standalone basis; and
• other pricing factors, such as the geographical region in which the products are sold, and expected discounts based on the customer size and type.
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We only include estimated amounts of variable consideration in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. We reduce transaction prices for estimated returns and other allowances that represent variable consideration under ASC 606, which we estimate based on historical return experience and other relevant factors, and record a 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 finance to either the customer or us, no financing component is deemed to exist. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our services, not to receive or provide financing from or to customers. We do not consider set-up fees nor other upfront fees paid by our customers to represent a financing component.
Certain products are sold through distributors or resellers. Certain distributors and resellers have been granted right of return and selling incentives which are accounted for as variable consideration when estimating the amount of revenue to be recognized. Returns and credits are estimated at the contract inception and updated at the end of each reporting period as additional information becomes available. In accordance with the practical expedient in ASC 606-10-10-4, we apply a portfolio approach to estimate the variable consideration associated with this group of customers.
Reimbursements for out-of-pocket costs generally include, but are not limited to, costs related to transportation, lodging and meals. Revenue from reimbursed out-of-pocket costs is accounted for as variable consideration.
Shipping and handling activities are not considered a contract performance obligation. We record shipping and handling costs billed to customers as revenue with offsetting costs recorded as cost of revenue.
Performance Obligations
Hosting
Hosting services, which allow our customers to use the hosted software over the contract period without taking possession of the software, are provided on a usage basis as consumed or on a fixed fee subscription basis. Our hosting contract terms generally range from one to five years.
As each day of providing services is substantially the same and the customer simultaneously receives and consumes the benefits as access is provided, we have determined that our hosting services arrangements are a single performance obligation comprised of a series of distinct services. These services include variable consideration, which is typically a function of usage. We recognize revenue as each distinct service period is performed (i.e., recognized as incurred).
Subscription basis revenue represents a single promise to stand-ready to provide access to our hosting services. Revenue is recognized over time on a ratable basis over the hosting contract term, which generally ranges from one to five years.
Software Licenses
On-premise software licenses sold with non-distinct professional services to customize and/or integrate the underlying software are accounted for as a combined performance obligation. Revenue from the combined performance obligation is recognized over time based upon the progress towards completion of the project, which is measured based on the labor hours already incurred to date as compared to the total estimated labor hours.
Revenue from distinct on-premise software licenses, which do not require professional services to customize and/or integrate the software license, is recognized at the point in time when the software is made available to the customer and control is transferred.
Revenue from software 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).
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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, 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.
Goodwill Impairment Analysis
Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired. Goodwill and intangible assets with indefinite lives are not amortized, but rather the carrying amounts of these assets are assessed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. Goodwill is tested for impairment annually on July 1, the first day of the fourth quarter of the fiscal year. In fiscal year 2017, we elected to early adopt ASU 2017-04, “Simplifying the Test for Goodwill Impairment” for its annual goodwill impairment test. ASU 2017-04 removes Step 2 of the goodwill impairment test requiring a hypothetical purchase price allocation. Goodwill impairment, if any, is determined by comparing the reporting unit's fair value to its carrying value. An impairmentloss is recognized in an amount equal to the excess of the reporting unit's carrying value over its fair value, up to the amount of goodwill allocated to the reporting unit. There was no goodwill impairment for fiscal year 2021 and 2020.
For the purpose of testing goodwill for impairment, all goodwill acquired in a business combination is assigned to one or more reporting units. A reporting unit represents an operating segment or a component within an operating segment for which discrete financial information is available and is regularly reviewed by segment management for performance assessment and resource allocation. Components of similar economic characteristics are aggregated into one reporting unit for the purpose of
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goodwill impairment assessment. Reporting units are identified annually and re-assessed periodically for recent acquisitions or any changes in segment reporting structure.
Corporate assets and liabilities are allocated to each reporting unit based on the reporting unit’s revenue, total operating expenses or operating income as a percentage of the consolidated amounts. Corporate debt and other financial liabilities that are not directly attributable to the reporting unit's operations and would not be transferred to hypothetical purchasers of the reporting units are excluded from a reporting unit's carrying amount.
We evaluated goodwill for impairment using a qualitative analysis and determined goodwill was not impaired. As part of that analysis we assessed goodwill using an entity valuation, which was derived based on the attribution of the agreed-upon purchase price for the announced Microsoft acquisition of Nuance. We use key financial metrics to allocate the purchase price to each reporting unit.
Intangible Assets and long-lived Asset groups
Long-lived assets with definite lives are tested for impairment whenever events or changes in circumstances indicate the carrying value of a specific asset or asset group may not be recoverable. We assess the recoverability of long-lived assets with definite lives at the asset group level. Asset groups are determined based upon the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. When the asset group is also a reporting unit, goodwill assigned to the reporting unit is also included in the carrying amount of the asset group. For the purpose of the recoverability test, we compare the total undiscounted future cash flows from the use and disposition of the assets with its net carrying amount. When the carrying value of the asset group exceeds the undiscounted future cash flows, the asset group is deemed to be impaired. The amount of the impairmentloss represents the excess of the asset or asset group’s carrying value over its estimated fair value, which is generally determined based upon the present value of estimated future pre-tax cash flows that a market participant would expect from use and disposition of the long-lived asset or asset group.
Income Taxes
Deferred Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. This method also requires the recognition of future tax benefits such as net operating loss carryforwards, to the extent that realization of such benefits is more likely than not after consideration of all available evidence. As the income tax returns are not due and filed until after the completion of our annual financial reporting requirements, the amounts recorded for the current period reflect estimates for the tax-based activity for the period. In addition, estimates are often required with respect to, among other things, the appropriate state and foreign income tax rates to use, the potential utilization of operating loss carry-forwards and valuation allowances required, if any, for tax assets that may not be realizable in the future. Tax laws and tax rates vary substantially in these jurisdictions, and are subject to change given the political and economic climate. We report and pay income tax based on operational results and applicable law. Our tax provision contemplates tax rates currently in effect to determine both our current and deferred tax provisions.
Any significant fluctuation in rates or changes in tax laws could cause our estimates of taxes we anticipate either paying or recovering in the future to change. Such changes could lead to either increases or decreases in our effective tax rate.
We have historically estimated the future tax consequence of certain items, including bad debts, inventory valuation, and accruals that cannot be deducted for income tax purposes until such expenses are paid or the related assets are disposed. We believe the procedures and estimates used in our accounting for income taxes are reasonable and in accordance with established tax law. The income tax estimates used have not resulted in material adjustments to income tax expense in subsequent periods when the estimates are adjusted to the actual filed tax return amounts.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the fiscal years in which those temporary differences are expected to be recovered or settled. With respect to earnings expected to be indefinitely reinvested offshore, we do not accrue tax for the repatriation of such foreign earnings.
Valuation Allowance
We regularly review our deferred tax assets for recoverability considering historical profitability, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. In assessing the need
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for a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. If positive evidence regarding projected future taxable income, exclusive of reversing taxable temporary differences, existed it would be difficult for it to outweigh objective negative evidence of recent financial reporting losses. Generally, cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome in determining that a valuation allowance is not needed.
As of September 30, 2021 and September 30, 2020, we had a full valuation allowance against net domestic deferred tax assets and certain foreign deferred tax assets. We intend to maintain valuation allowances on these deferred tax assets until there is sufficient evidence to support the release of all or some portion of these allowances. A significant portion of our domestic deferred tax assets relate to U.S. net operating losses. We continue to believe negative evidence regarding the deferred tax assets 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 September 30, 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.
Uncertain Tax Positions
We operate in multiple jurisdictions through wholly-owned subsidiaries and our global structure is complex. The estimates of our uncertain tax positions involve judgments and assessment of the potential tax implications related to legal entity restructuring, credits, intercompany transfer and acquisition or divestiture. We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.
Our tax positions are subject to audit by taxing authorities across multiple global jurisdictions and the resolution of such audits may span multiple years. Tax law is complex and often subject to varied interpretations, accordingly, the ultimate outcome with respect to taxes we may owe may differ from the amounts recognized.
RECENTLY ADOPTED ACCOUNTING STANDARDS
See Note 2 to the accompanying consolidated financial statements for a description of recently adopted accounting standards.
ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED
See Note 2 to the accompanying consolidated financial statements for a description of certain issued accounting standards that have not been adopted and may impact our financial statements in future reporting periods.
