NUAN 06.30.2015 10-Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _____________________________________________
Form 10-Q
 _____________________________________________
(Mark One)
ý    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
Or
 ¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-36056
 _____________________________________________
NUANCE COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
 _____________________________________________
Delaware
 
94-3156479
(State or Other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
1 Wayside Road
Burlington, Massachusetts
 
01803
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:
(781) 565-5000
 _____________________________________________
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
ý
 
 
Accelerated filer
 
¨
Non-accelerated filer
¨
 (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The number of shares of the Registrant’s Common Stock, outstanding as of July 31, 2015 was 309,792,980.




NUANCE COMMUNICATIONS, INC.
TABLE OF CONTENTS
 
 
 
 
Page
Item 1.
Condensed Consolidated Financial Statements (unaudited):
 
 
 
a) Consolidated Statements of Operations for the three and nine months ended June 30, 2015 and 2014
 
 
b) Consolidated Statements of Comprehensive Loss for the three and nine months ended June 30, 2015 and 2014
 
 
c) Consolidated Balance Sheets at June 30, 2015 and September 30, 2014
 
 
d) Consolidated Statements of Cash Flows for the nine months ended June 30, 2015 and 2014
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.
 
 
 
Certifications
 
 






Part I. Financial Information 

Item 1. Condensed Consolidated Financial Statements (unaudited)

NUANCE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(Unaudited)
(In thousands, except per share amounts)
Revenues:
 
 
 
 
 
 
 
Product and licensing
$
162,806

 
$
168,224

 
$
506,945

 
$
521,480

Professional services and hosting
234,253

 
231,698

 
684,927

 
677,359

Maintenance and support
80,880

 
75,582

 
235,145

 
222,298

Total revenues
477,939

 
475,504

 
1,427,017

 
1,421,137

Cost of revenues:
 
 
 
 
 
 
 
Product and licensing
21,276

 
23,934

 
68,498

 
74,598

Professional services and hosting
153,924

 
163,587

 
462,188

 
475,604

Maintenance and support
13,715

 
13,566

 
41,151

 
38,533

Amortization of intangible assets
15,776

 
15,006

 
46,538

 
45,542

Total cost of revenues
204,691

 
216,093

 
618,375

 
634,277

Gross profit
273,248

 
259,411

 
808,642

 
786,860

Operating expenses:
 
 
 
 
 
 
 
Research and development
79,050

 
87,137

 
236,393

 
252,188

Sales and marketing
99,285

 
99,783

 
303,789

 
316,969

General and administrative
40,977

 
43,732

 
137,278

 
131,890

Amortization of intangible assets
26,371

 
27,287

 
78,526

 
81,330

Acquisition-related costs, net
2,423

 
9,110

 
13,702

 
18,710

Restructuring and other charges, net
10,808

 
8,622

 
12,703

 
17,178

Total operating expenses
258,914

 
275,671

 
782,391

 
818,265

Income (loss) from operations
14,334

 
(16,260
)
 
26,251

 
(31,405
)
Other income (expense):
 
 
 
 
 
 
 
Interest income
670

 
535

 
1,859

 
1,728

Interest expense
(29,486
)
 
(31,926
)
 
(89,417
)
 
(99,872
)
Other (expense) income, net
(18,375
)
 
363

 
(19,270
)
 
(3,007
)
Loss before income taxes
(32,857
)
 
(47,288
)
 
(80,577
)
 
(132,556
)
Provision for income taxes
6,533

 
6,959

 
23,406

 
16,331

Net loss
$
(39,390
)
 
$
(54,247
)
 
$
(103,983
)
 
$
(148,887
)
Net loss per share:
 
 
 
 
 
 
 
Basic
$
(0.13
)
 
$
(0.17
)
 
$
(0.33
)
 
$
(0.47
)
Diluted
$
(0.13
)
 
$
(0.17
)
 
$
(0.33
)
 
$
(0.47
)
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
312,680

 
317,610

 
319,415

 
316,334

Diluted
312,680

 
317,610

 
319,415

 
316,334

See accompanying notes.

1




NUANCE COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(Unaudited) (In thousands)
Net loss
$
(39,390
)
 
$
(54,247
)
 
$
(103,983
)
 
$
(148,887
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
17,007

 
9,693

 
(60,733
)
 
15,170

Pension adjustments
245

 
520

 
(489
)
 
520

Unrealized (loss) gain on marketable securities
(22
)
 

 
7

 

Total other comprehensive income (loss), net
17,230


10,213

 
(61,215
)
 
15,690

Comprehensive loss
$
(22,160
)
 
$
(44,034
)
 
$
(165,198
)
 
$
(133,197
)




































See accompanying notes.



2

Table of Contents

NUANCE COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS 
 
June 30, 2015
 
September 30, 2014
 
(Unaudited)
 
(In thousands, except per
share amounts)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
397,116

 
$
547,230

Marketable securities
54,697

 
40,974

Accounts receivable, less allowances for doubtful accounts of $8,067 and $11,491
365,661

 
428,266

Prepaid expenses and other current assets
87,424

 
92,040

Deferred tax assets
61,323

 
55,990

Total current assets
966,221

 
1,164,500

Marketable securities
36,876

 

Land, building and equipment, net
191,814

 
191,411

Goodwill
3,392,844

 
3,410,893

Intangible assets, net
847,205

 
915,483

Other assets
154,061

 
137,997

Total assets
$
5,589,021

 
$
5,820,284

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
Current portion of long-term debt
$
4,834

 
$
4,834

Contingent and deferred acquisition payments
21,929

 
35,911

Accounts payable
42,771

 
61,760

Accrued expenses and other current liabilities
203,547

 
241,279

Deferred revenue
327,736

 
298,225

Total current liabilities
600,817

 
642,009

Long-term debt
2,113,741

 
2,127,392

Deferred revenue, net of current portion
319,895

 
249,879

Deferred tax liabilities
170,087

 
156,235

Other liabilities
57,221

 
62,777

Total liabilities
3,261,761

 
3,238,292

 
 
 
 
Commitments and contingencies (Note 15)

 

 
 
 
 
Stockholders’ equity:
 
 
 
Common stock, $0.001 par value; 560,000 shares authorized; 314,691 and 324,621 shares issued and 310,940 and 320,870 shares outstanding, respectively
315

 
325

Additional paid-in capital
3,144,108

 
3,153,033

Treasury stock, at cost (3,751 shares)
(16,788
)
 
(16,788
)
Accumulated other comprehensive loss
(85,230
)
 
(24,015
)
Accumulated deficit
(715,145
)
 
(530,563
)
Total stockholders’ equity
2,327,260

 
2,581,992

Total liabilities and stockholders’ equity
$
5,589,021

 
$
5,820,284

See accompanying notes.

3

Table of Contents

NUANCE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Nine Months Ended June 30,
 
2015
 
2014
 
(Unaudited)
(In thousands)
Cash flows from operating activities:
 
 
 
Net loss
$
(103,983
)
 
$
(148,887
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
171,892

 
165,280

Stock-based compensation
119,972

 
147,541

Non-cash interest expense
22,078

 
28,187

Loss on extinguishment of debt
17,714

 

Deferred tax provision
7,529

 
2,351

Other
5,641

 
(4,294
)
Changes in operating assets and liabilities, net of effects from acquisitions:
 
 
 
Accounts receivable
50,990

 
(4,706
)
Prepaid expenses and other assets
(14,709
)
 
(9,453
)
Accounts payable
(14,647
)
 
(25,003
)
Accrued expenses and other liabilities
(43,167
)
 
3,634

Deferred revenue
116,660

 
107,563

Net cash provided by operating activities
335,970

 
262,213

Cash flows from investing activities:
 
 
 
Capital expenditures
(48,159
)
 
(41,359
)
Payments for business and technology acquisitions, net of cash acquired
(82,034
)
 
(136,183
)
Purchases of marketable securities and other investments
(114,765
)
 
(19,613
)
Proceeds from sales and maturities of marketable securities and other investments
49,481

 
32,851

Net cash used in investing activities
(195,477
)
 
(164,304
)
Cash flows from financing activities:
 
 
 
Payments of debt
(259,843
)
 
(3,855
)
Proceeds from issuance of convertible debt, net of issuance costs
256,212

 

Payments for repurchase of common stock
(238,203
)
 
(26,483
)
Payments for settlement of share-based derivatives
(340
)
 
(5,286
)
Payments of other long-term liabilities
(2,383
)
 
(2,216
)
Proceeds from issuance of common stock from employee stock plans
12,335

 
13,525

Cash used to net share settle employee equity awards
(53,273
)
 
(35,318
)
Net cash used in financing activities
(285,495
)
 
(59,633
)
Effects of exchange rate changes on cash and cash equivalents
(5,112
)
 
542

Net (decrease) increase in cash and cash equivalents
(150,114
)
 
38,818

Cash and cash equivalents at beginning of period
547,230

 
808,118

Cash and cash equivalents at end of period
$
397,116

 
$
846,936

See accompanying notes.


4

Table of Contents

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

1.
Organization and Presentation
The consolidated financial statements include the accounts of Nuance Communications, Inc. (“Nuance”, “we”, or “the Company”) and our wholly-owned subsidiaries. We prepared these unaudited interim consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (the “U.S.” or the "United States") and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The condensed consolidated financial statements reflect all adjustments that, in our opinion, are necessary to present fairly our financial position, results of operations and cash flows for the periods indicated. The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts and classifications of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Although we believe the disclosures in these financial statements are adequate to make the information presented not misleading, certain information in the footnote disclosures of the financial statements has been condensed or omitted where it substantially duplicates information provided in our latest audited consolidated financial statements, in accordance with the rules and regulations of the SEC. Accordingly, these financial statements should be read in conjunction with the audited financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2014. The results of operations for the nine months ended June 30, 2015 and June 30, 2014, respectively, are not necessarily indicative of the results for the entire fiscal year or any future period.
We have evaluated subsequent events through the date of the issuance of these condensed consolidated financial statements.

2.
Summary of Significant Accounting Policies
Effective October 1, 2014, we implemented Accounting Standards Update No. 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists", which did not have a significant impact on our consolidated financial statements.
We have made no material changes to the significant accounting policies disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2014.
Recently Issued Accounting Standards
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board and are adopted by us as of the specified effective dates. Unless otherwise discussed, such pronouncements did not have or will not have a significant impact on our condensed consolidated financial position, results of operations and cash flows or do not apply to our operations.
In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs" ("ASU 2015-03"). The amendments in the ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for us in the first quarter of fiscal year 2017, with early adoption permitted. ASU 2015-03 should be applied on a retrospective basis to each individual period presented. Upon implementation, the change in reporting debt issuance costs will require us to reclassify our deferred financing costs from an asset to a reduction of the reported debt balance. ASU 2015-03 will reduce our assets and liabilities but will have no impact on our shareholders' equity, results of operations or cash flows.
In February 2015, the FASB issued Accounting Standards Update No. 2015-02, “Amendments to the Consolidation Analysis” ("ASU 2015-02"). The amendments in ASU 2015-02 provide guidance on evaluating whether a company should consolidate certain legal entities. In accordance with the guidance, all legal entities are subject to reevaluation under the revised consolidation model. ASU 2015-02 is effective for us in the first quarter of fiscal year 2017 with early adoption permitted. We do not believe that ASU 2015-02 will have a material impact on our consolidated financial statements.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, "Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern" ("ASU 2014-15"), to provide guidance on management's responsibility in evaluating whether there is substantial doubt about a company's ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for us in the first quarter of fiscal year 2017, with early adoption permitted. We do not believe that ASU 2014-15 will have a material impact on our consolidated financial statements.

5

NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


In June 2014, the FASB issued Accounting Standards Update No. 2014-12, "Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period" ("ASU 2014-12"). ASU 2014-12 requires that a performance target that affects vesting and could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in ASC 718, "Compensation - Stock Compensation," as it relates to such awards. ASU 2014-12 is effective for us in our first quarter of fiscal year 2017 with early adoption permitted using either of two methods: (i) prospective to all awards granted or modified after the effective date; or (ii) retrospective to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter, with the cumulative effect of applying ASU 2014-12 as an adjustment to the opening retained earnings balance as of the beginning of the earliest annual period presented in the financial statements. We are currently evaluating the impact of our pending adoption on ASU 2014-12 on our consolidated financial statements.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers: Topic 606" ("ASU 2014-09"), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for us in our first quarter of fiscal year 2018 using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements.
In April 2014, the FASB issued Accounting Standards Update No. 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity" ("ASU 2014-08"), to change the criteria for determining which disposals can be presented as discontinued operations and enhanced the related disclosure requirements. ASU 2014-08 is effective for us on a prospective basis in our first quarter of fiscal year 2016 with early adoption permitted for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued. We are currently evaluating the impact of our pending adoption of ASU 2014-08 on our consolidated financial statements.
3.
Business Acquisitions
During fiscal year 2015, we acquired several immaterial businesses in our Mobile and Consumer and Healthcare segments for total initial cash consideration of $47.9 million together with future contingent payments. The future contingent payments may require us to make payments up to $19.9 million as additional consideration contingent upon the achievement of specified objectives, which at closing had an estimated fair value of $16.1 million. In allocating the total purchase consideration for these acquisitions based on preliminary estimated fair values, we recorded $22.6 million of goodwill and $35.8 million of identifiable intangibles assets. Intangible assets acquired included customer relationships and core and completed technology with weighted average useful lives of 6.6 years. The most significant of these acquisitions are treated as asset purchases, and the goodwill resulting from these acquisitions is expected to be deductible for tax purposes.
We have not furnished pro forma financial information related to our current year acquisitions because such information is not material, individually or in the aggregate, to our financial results.
During fiscal year 2014, we acquired several immaterial businesses in our Imaging, Healthcare and Enterprise segments for total initial cash consideration of $258.3 million together with future contingent payments. In allocating the total purchase consideration for these acquisitions based on preliminary estimated fair values, we recorded $139.4 million of goodwill and $134.5 million of identifiable intangibles assets. Intangible assets acquired included customer relationships and core and completed technology with weighted average useful lives of 10.2 years. The most significant of these acquisitions are treated as stock purchases, and the goodwill resulting from these acquisitions is not expected to be deductible for tax purposes.
The fair value estimates for the assets acquired and liabilities assumed for acquisitions completed during fiscal years 2015 and 2014 were based upon preliminary calculations and valuations, and our estimates and assumptions for each of these acquisitions are subject to change as we obtain additional information during the respective measurement periods (up to one year from the respective acquisition dates). The primary areas of preliminary estimates that were not yet finalized related to certain assets and liabilities acquired. There were no significant changes to the fair value estimates during the current year.

6

NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Acquisition-Related Costs, net
Acquisition-related costs include costs related to business and other acquisitions, including potential acquisitions. These costs consist of (i) transition and integration costs, including retention payments, transitional employee costs and earn-out payments treated as compensation expense, as well as the costs of integration-related activities including services provided by third-parties; (ii) professional service fees, including third party costs related to the acquisitions, and legal and other professional service fees associated with disputes and regulatory matters related to acquired entities; and (iii) adjustments to acquisition-related items that are required to be marked to fair value each reporting period, such as contingent consideration, and other items related to acquisitions for which the measurement period has ended.
The components of acquisition-related costs, net are as follows (dollars in thousands):
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
2015
 
2014
 
2015
 
2014
Transition and integration costs
$
2,923

 
$
5,612

 
$
9,160

 
$
14,041

Professional service fees
1,431

 
3,363

 
7,117

 
9,101

Acquisition-related adjustments
(1,931
)
 
135

 
(2,575
)
 
(4,432
)
Total
$
2,423

 
$
9,110

 
$
13,702

 
$
18,710

Included in acquisition-related adjustments for the nine months ended June 30, 2014, is income of $7.7 million related to the elimination of contingent liabilities established in the original allocation of purchase price for acquisitions closed in fiscal year 2008, following the expiration of the applicable statute of limitations.
4.
Goodwill and Intangible Assets
The changes in the carrying amount of goodwill and intangible assets for the nine months ended June 30, 2015, are as follows (dollars in thousands): 
 
Goodwill
 
Intangible
Assets
Balance at September 30, 2014
$
3,410,893

 
$
915,483

Acquisitions
22,552

 
65,622

Dispositions

 
(2,806
)
Purchase accounting adjustments
(1,237
)
 
(554
)
Amortization

 
(125,064
)
Effect of foreign currency translation
(39,364
)
 
(5,476
)
Balance at June 30, 2015
$
3,392,844

 
$
847,205

In October 2014, we realigned certain of our product offerings among reporting units. We have reallocated goodwill among the affected reporting units, based on their relative fair value. We reallocated $29.9 million of goodwill from our Dragon Consumer reporting unit into our Mobile reporting unit, and reallocated $10.5 million of goodwill from our Mobile reporting unit to our Enterprise reporting unit. As a result of this change, we determined that we had a triggering event requiring us to perform an impairment test on our Dragon Consumer ("DNS"), Mobile, and Enterprise reporting units. We completed our impairment test during the first quarter of fiscal year 2015, and the fair value of the reorganized reporting units substantially exceeded their carrying values.


7

NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


5.
Financial Instruments and Hedging Activities
Derivatives Not Designated as Hedges
Forward Currency Contracts
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. At June 30, 2015 and September 30, 2014, we had outstanding contracts with a total notional value of $161.9 million and $283.1 million, respectively.
We have not designated these forward contracts as hedging instruments pursuant to the authoritative guidance for derivatives and hedging, and accordingly, we record the fair value of these contracts at the end of each reporting period in our consolidated balance sheet, with the unrealized gains and losses recognized immediately in earnings as other (expense) income, net in our consolidated statements of operations. The cash flows related to the settlement of these contracts are included in cash flows from investing activities within our condensed consolidated statement of cash flows.
Security Price Guarantees
From time to time we enter into agreements that allow us to issue shares of our common stock as part or all of the consideration related to business acquisitions, partnering and technology acquisition activities. Some of these shares are issued subject to security price guarantees, which are accounted for as derivatives. We have determined that these instruments would not be considered equity instruments if they were freestanding. Certain of the security price guarantees require payment from either us to a third party, or from a third party to us, based upon the difference between the price of our common stock on the issue date and an average price of our common stock approximately six months following the issue date. We have also issued minimum price guarantees that may require payments from us to a third party based on the average share price of our common stock approximately six months following the issue date if our stock price falls below the minimum price guarantee. Changes in the fair value of these security price guarantees are reported in other (expense) income, net in our consolidated statements of operations. We have no outstanding shares subject to security price guarantees at June 30, 2015.
 
 
 
 
 
 
 
The following table provides a quantitative summary of the fair value of our derivative instruments as of June 30, 2015 and September 30, 2014 (dollars in thousands): 
Derivatives Not Designated as Hedges:
 
Balance Sheet Classification
 
Fair Value
 
June 30, 2015
 
September 30, 2014
Foreign currency contracts
 
Accrued expenses and other current liabilities
 
$
(550
)
 
$
(272
)
Security Price Guarantees
 
Accrued expenses and other current liabilities
 

 
(135
)
Net fair value of non-hedge derivative instruments
 
$
(550
)
 
$
(407
)
The following tables summarize the activity of derivative instruments for the three and nine months ended June 30, 2015 and 2014 (dollars in thousands):
 
 
 
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
Derivatives Not Designated as Hedges
 
Location of Gain (Loss) Recognized in Income
 
2015
 
2014
 
2015
 
2014
Foreign currency contracts
 
Other income (expense), net
 
$
3,078

 
$
2,965

 
$
(16,019
)
 
$
9,338

Security price guarantees
 
Other income (expense), net
 
$
334

 
$
650

 
$
(204
)
 
$
(3,572
)
Other Financial Instruments
Financial instruments including cash equivalents, accounts receivable and accounts payable are carried in the consolidated financial statements at amounts that approximate their fair value based on the short maturities of those instruments. Marketable securities and derivative instruments are carried at fair value.

8

NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


The estimated fair value of our long-term debt approximated $2,243.4 million (face value $2,221.4 million) and $2,179.2 million (face value $2,217.4 million) at June 30, 2015 and September 30, 2014, respectively. These fair value amounts represent the value at which our lenders could trade our debt within the financial markets and do not represent the settlement value of these long-term debt liabilities to us at each reporting date. The fair value of the long-term debt issues will continue to vary each period based on fluctuations in market interest rates, as well as changes to our credit ratings. The Senior Notes, the term loan portion of our Credit Facility, and the Convertible Debentures are traded and the fair values of each borrowing was estimated using the averages of the bid and ask trading quotes at each respective reporting date. We had no outstanding balance on the revolving credit line portion of our Credit Facility at June 30, 2015 or September 30, 2014.
6.Fair Value Measures
Fair value is defined as the price that would be received for an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. Valuation techniques must maximize the use of observable inputs and minimize the use of unobservable inputs. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.
The following summarizes the three levels of inputs required to measure fair value, of which the first two are considered observable and the third is considered unobservable:
Level 1. Quoted prices for identical assets or liabilities in active markets which we can access.
Level 2. Observable inputs other than those described as Level 1.
Level 3. Unobservable inputs based on the best information available, including management’s estimates and assumptions.
Assets and liabilities measured at fair value on a recurring basis at June 30, 2015 and September 30, 2014 consisted of (dollars in thousands):
 
June 30, 2015
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Money market funds(a)
$
245,742

 
$

 
$

 
$
245,742

US government agency securities(a)
1,000

 

 

 
1,000

Time deposits(b)

 
57,378

 

 
57,378

Commercial paper, $3,784 at cost(b)

 
3,788

 

 
3,788

Corporate notes and bonds, $46,139 at cost(b)

 
46,142

 

 
46,142

Total assets at fair value
$
246,742

 
$
107,308

 
$

 
$
354,050

Liabilities:
 
 
 
 
 
 
 
Foreign currency exchange contracts(b)
$

 
$
(550
)
 
$

 
$
(550
)
Contingent acquisition payments(d)

 

 
(20,187
)
 
(20,187
)
Total liabilities at fair value
$

 
$
(550
)
 
$
(20,187
)
 
$
(20,737
)
 

9

NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 
September 30, 2014
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Money market funds(a)
$
407,749

 
$

 
$

 
$
407,749

US government agency securities(a)
1,000

 

 

 
1,000

Time deposits(b)

 
46,604

 

 
46,604

Total assets at fair value
$
408,749

 
$
46,604

 
$

 
$
455,353

Liabilities:
 
 
 
 
 
 
 
Foreign currency exchange contracts(b)
$

 
$
(272
)
 
$

 
$
(272
)
Security price guarantees(c)

 
(135
)
 

 
(135
)
Contingent acquisition payments(d)

 

 
(6,864
)
 
(6,864
)
Total liabilities at fair value
$

 
$
(407
)
 
$
(6,864
)
 
$
(7,271
)
 
(a) 
Money market funds and U.S. government agency securities, included in cash and cash equivalents in the accompanying balance sheets, are valued at quoted market prices in active markets.
(b) 
The fair values of our time deposits, commercial paper, corporate notes and bonds, and foreign currency exchange contracts are based on the most recent observable inputs for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or are directly or indirectly observable.
(c) 
The fair values of the security price guarantees are determined using a modified Black-Scholes model, derived from observable inputs such as U.S. treasury interest rates, our common stock price, and the volatility of our common stock. The valuation model values both the put and call components of the guarantees simultaneously, with the net value of those components representing the fair value of each instrument.
(d) 
The fair value of our contingent consideration arrangements are determined based on our evaluation as to the probability and amount of any earn-out that will be achieved based on expected future performance by the acquired entity.
Time deposits are generally for terms of one year or less. The commercial paper and corporate notes and bonds mature within three years and have a weighted average maturity of 1.56 years.
The changes in the fair value of contingent acquisition payment liabilities are as follows (dollars in thousands):
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2015
 
2015
Balance at beginning of period
$
3,931

 
$
6,864

Earn-out liabilities established at time of acquisition
15,997

 
16,082

Payments upon settlement
(174
)
 
(3,112
)
Adjustments to fair value included in acquisition-related costs, net
433

 
353

Balance at end of period
$
20,187

 
$
20,187

Our financial liabilities valued based upon Level 3 inputs are composed of contingent consideration arrangements relating to our acquisitions. We are contractually obligated to pay contingent consideration to the selling shareholders upon the achievement of specified objectives, including the achievement of future bookings and sales targets related to the products of the acquired entities and therefore are recorded as contingent consideration liabilities at the time of the acquisitions. We update our assumptions each reporting period based on new developments and record such amounts at fair value based on the revised assumptions until the consideration is paid upon the achievement of the specified objectives or eliminated upon failure to achieve the specified objectives.
Contingent acquisition payment liabilities are scheduled to be paid in periods through fiscal year 2016. As of June 30, 2015, we could be required to pay up to $36.0 million for contingent consideration arrangements if the specified objectives are achieved. We have determined the fair value of the liabilities for the contingent consideration based on a probability-weighted discounted cash flow analysis. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. The fair value of the contingent consideration liability associated with future payments was based on several factors, the most significant of which are the estimated cash flows projected from future product sales and the risk adjusted discount rate for the fair value measurement.

10

NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


7.
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (dollars in thousands): 
 
June 30, 2015
 
September 30, 2014
Compensation
$
107,547

 
$
146,730

Cost of revenue related liabilities
25,331

 
22,340

Accrued interest payable
23,435

 
15,092

Professional fees
9,307

 
10,852

Sales and marketing incentives
7,847

 
10,188

Sales and other taxes payable
6,024

 
9,367

Acquisition costs and liabilities
5,505

 
9,307

Facilities related liabilities
5,514

 
5,720

Liability for unsettled share repurchases
4,463

 

Other
8,574

 
11,683

Total
$
203,547

 
$
241,279


8.
Deferred Revenue
Deferred maintenance revenue consists of prepaid fees received for post-contract customer support for our products, including telephone support and the right to receive unspecified upgrades/updates on a when-and-if-available basis. Unearned revenue includes upfront fees for setup and implementation activities related to hosted offerings; certain software arrangements for which we do not have fair value of post-contract customer support, resulting in ratable revenue recognition for the entire arrangement on a straight-line basis; and fees in excess of estimated earnings on percentage-of-completion service contracts.
Deferred revenue consisted of the following (dollars in thousands): 
 
June 30, 2015
 
September 30, 2014
Current liabilities:
 
 
 
Deferred maintenance revenue
$
153,941

 
$
140,737

Unearned revenue
173,795

 
157,488

Total current deferred revenue
$
327,736

 
$
298,225

Long-term liabilities:
 
 
 
Deferred maintenance revenue
$
61,505

 
$
60,398

Unearned revenue
258,390

 
189,481

Total long-term deferred revenue
$
319,895

 
$
249,879

9.
Restructuring and Other Charges, net
Restructuring and other charges, net include restructuring expenses together with other charges that are unusual in nature and are the result of unplanned events, and arise outside of the ordinary course of continuing operations. Restructuring expenses consist of employee severance costs and may also include charges for excess facility space and other contract termination costs. Other charges may include gains or losses on non-controlling strategic equity interests, litigation contingency reserves and gains or losses on the sale or disposition of certain non-strategic assets or product lines.

11

NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


The following table sets forth accrual activity relating to restructuring reserve for the nine months ended June 30, 2015 (dollars in thousands): 
 
Personnel
 
Facilities
 
Total
Balance at September 30, 2014
$
3,258

 
$
1,468

 
$
4,726

Restructuring charges, net
8,461

 
920

 
9,381

Cash payments
(9,339
)
 
(1,622
)
 
(10,961
)
Balance at June 30, 2015
$
2,380

 
$
766

 
$
3,146

Restructuring and other charges, net by segment are as follows (dollars in thousands):
 
Three Months Ended June 30,
 
2015
 
2014
 
Personnel
 
Facilities
 
Total Restructuring
 
Other Charges
 
Total
 
Personnel
 
Facilities
 
Total Restructuring
 
Other Charges
 
Total
Healthcare
$
659

 
$
634

 
$
1,293

 
$

 
$
1,293

 
$
1,811

 
$
11

 
$
1,822

 
$
78

 
$
1,900

Mobile and Consumer
3,253

 
30

 
3,283

 
3,322

 
6,605

 
1,115

 
622

 
1,737

 

 
1,737

Enterprise
674

 

 
674

 

 
674

 
4,014

 

 
4,014

 

 
4,014

Imaging
568

 

 
568

 

 
568

 
309

 
107

 
416

 

 
416

Corporate
1,668

 

 
1,668

 

 
1,668

 
555

 

 
555

 

 
555

Total
$
6,822

 
$
664

 
$
7,486

 
$
3,322

 
$
10,808

 
$
7,804

 
$
740

 
$
8,544

 
$
78

 
$
8,622

 
Nine Months Ended June 30,
 
2015
 
2014
 
Personnel
 
Facilities
 
Total Restructuring
 
Other Charges
 
Total
 
Personnel
 
Facilities
 
Total Restructuring
 
Other Charges
 
Total
Healthcare
$
450

 
$
634

 
$
1,084

 
$

 
$
1,084

 
$
2,211

 
$
11

 
$
2,222

 
$
78

 
$
2,300

Mobile and Consumer
3,140

 
(142
)
 
2,998

 
3,322

 
6,320

 
1,305

 
622

 
1,927

 

 
1,927

Enterprise
963

 
95

 
1,058

 

 
1,058

 
5,759

 

 
5,759

 

 
5,759

Imaging
2,047

 
333

 
2,380

 

 
2,380

 
440

 
107

 
547

 

 
547

Corporate
1,861

 

 
1,861

 

 
1,861

 
1,182

 
2,463

 
3,645

 
3,000

 
6,645

Total
$
8,461

 
$
920

 
$
9,381


$
3,322

 
$
12,703

 
$
10,897

 
$
3,203

 
$
14,100


$
3,078

 
$
17,178

During May 2015, our management approved a restructuring plan, as part of our initiatives to reduce costs and optimize processes, under which we reduced headcount by approximately 200 employees and closed certain excess facility space resulting in a charge of $7.5 million for the three months ended June 30, 2015. We expect that the remaining severance payments of $2.4 million will be substantially paid by the end of fiscal year 2015.
In addition, during the three months ended June 30, 2015, we have recorded certain other charges that totaled $3.3 million for the impairment of certain long-lived assets as a result of our strategic realignment of our product portfolio.

12

NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


10.
Debt and Credit Facilities
At June 30, 2015 and September 30, 2014, we had the following borrowing obligations (dollars in thousands): 
 
June 30, 2015
 
September 30, 2014
5.375% Senior Notes due 2020, net of unamortized premium of $4.0 million and $4.6 million, respectively. Effective interest rate 5.28%.
$
1,054,014

 
$
1,054,601

2.75% Convertible Debentures due 2031, net of unamortized discount of $43.4 million and $88.8 million, respectively. Effective interest rate 7.43%.
390,400

 
601,226

1.50% Convertible Debentures due 2035, net of unamortized discount of $62.7 million at June 30, 2015. Effective interest rate 5.50%.
201,237

 

Credit Facility, net of unamortized original issue discount of $0.8 million and $1.0 million respectively.
472,924

 
476,399

Total long-term debt
$
2,118,575

 
$
2,132,226

Less: current portion
4,834

 
4,834

Non-current portion of long-term debt
$
2,113,741

 
$
2,127,392

1.50% Convertible Debentures due in 2035
In June 2015, we issued $263.9 million in aggregate principal amount of 1.50% Senior Convertible Debentures due in 2035 (the “2035 Debentures”) in exchange for $256.2 million in aggregate principal amount of our 2.75% Senior Convertible Debentures due in 2031 (the “2031 Debentures”). Total proceeds, net of debt issuance costs, were $253.5 million. The 2035 Debentures were issued at 97.09% of the principal amount, which resulted in a discount of $7.7 million. The 2035 Debentures bear interest at 1.50% per year, payable in cash semi-annually in arrears, beginning on November 1, 2015. In addition to ordinary interest and default additional interest, beginning with the semi-annual interest period commencing on November 1, 2021, contingent interest will accrue during any regular semi-annual interest period where the average trading price of our 2035 Debentures for the ten trading day period immediately preceding the first day of such semi-annual period is greater than or equal to $1,200 per $1,000 principal amount of our 2035 Debentures, in which case, contingent interest will accrue at a rate of 0.50% per annum of such average trading price. The 2035 Debentures mature on November 1, 2035, subject to the right of the holders to require us to redeem the 2035 Debentures on November 1, 2021, 2026, or 2031. The 2035 Debentures are general senior unsecured obligations and rank equally in right of payment with all of our existing and future unsecured, unsubordinated indebtedness and senior in right of payment to any indebtedness that is contractually subordinated to the 2035 Debentures. The 2035 Debentures will be effectively subordinated to indebtedness and other liabilities of our subsidiaries.
We account separately for the liability and equity components of the 2035 Debentures in accordance with authoritative guidance for convertible debt instruments that may be settled in cash upon conversion. The guidance requires the carrying amount of the liability component to be estimated by measuring the fair value of a similar liability that does not have an associated conversion feature and record the remainder in stockholders’ equity. At issuance, we allocated $208.6 million to long-term debt, and $55.3 million has been recorded as additional paid-in capital. The aggregate debt discount of $63.0 million is being amortized to interest expense using the effective interest rate method through November 2021. As of June 30, 2015, the ending unamortized deferred debt issuance costs were $2.2 million.
If converted, the principal amount of the 2035 Debentures is payable in cash and any amounts payable in excess of the principal amount, will (based on an initial conversion rate, which represents an initial conversion price of approximately $23.26 per share, subject to adjustment) be paid in cash or shares of our common stock, at our election, only in the following circumstances and to the following extent: (i) prior to May 1, 2035, on any date during any fiscal quarter beginning after September 30, 2015 (and only during such fiscal quarter) if the closing sale price of our common stock was more than 130% of the then current conversion price for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of the previous fiscal quarter; (ii) during the five consecutive business-day period following any five consecutive trading-day period in which the trading price for $1,000 principal amount of the 2035 Debentures for each day during such five trading-day period was less than 98% of the closing sale price of our common stock multiplied by the then current conversion rate; (iii) upon the occurrence of specified corporate transactions, as described in the indenture for the 2035 Debentures; or (iv) at the option of the holder at any time on or after May 1, 2035. Additionally, we may redeem the 2035 Debentures, in whole or in part, on or after November 5, 2021 for cash at a price equal to 100% of the principal amount of the 2035 Debentures to be purchased plus any accrued and unpaid interest, including any additional interest to, but excluding, the repurchase date. Each holder shall have the right, at such holder’s option, to require us to repurchase all or any portion of the 2035 Debentures held by such holder on November 1, 2021, November 1, 2026, or November 1, 2031 at par plus accrued and unpaid interest. Upon repurchase, we will pay the principal amount in cash and any amounts payable in excess of the principal amount will be paid in cash or shares of our common stock, at our election,

13

NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


with the exception that we may not elect to pay cash in lieu of more than 80% of the number of our common shares we would be obligated to deliver. If we undergo a fundamental change (as described in the indenture for the 2035 Debentures) prior to maturity, holders will have the option to require us to repurchase all or any portion of their debentures for cash at a price equal to 100% of the principal amount of the 2035 Debentures to be purchased plus any accrued and unpaid interest, including any additional interest to, but excluding, the repurchase date. As of June 30, 2015, none of the conversion criteria were met for the 2035 Debentures. If the conversion criteria were met, we could be required to repay all or some of the aggregate principal amount in cash prior to the maturity date.
2.75% Convertible Debentures due in 2031
In June 2015, we entered into separate privately negotiated agreements with certain holders of our 2031 Debentures to exchange, in a private placement, $256.2 million in aggregate principal amount of our 2031 Debentures for approximately $263.9 million in aggregate principal amount of our new 2035 Debentures. In accordance with the authoritative guidance for convertible debt instruments, a loss on extinguishment is equal to the difference between the reacquisition price and the net carrying amount of the extinguished debt for our 2031 Debentures, including any unamortized debt discount or issuance costs, and $17.7 million was recorded in other (expense) income, net. Following the closings of the exchange, $433.8 million in aggregate principal amount of our 2031 Debentures remain outstanding. As of June 30, 2015 and September 30, 2014 the ending unamortized deferred debt issuance costs were $2.6 million and $5.5 million, respectively. As of June 30, 2015 and September 30, 2014, none of the conversion criteria were met for the 2031 Debentures. If the conversion criteria were met, we could be required to repay all or some of the aggregate principal amount in cash prior to the maturity date.
Credit Facility
The Credit Facility includes a term loan and a $75.0 million revolving credit line, including letters of credit. The term loans mature on August 7, 2019 and the revolving credit line matures on August 7, 2018. As of June 30, 2015, there were $5.7 million of letters of credit issued, and there were no other outstanding borrowings under the revolving credit line.
Under the terms of the amended and restated credit agreement, interest is payable monthly at a rate equal to the applicable margin plus, at our option, either (a) the base rate which is the corporate base rate of Morgan Stanley, the Administrative Agent, or (b) LIBOR (equal to (i) the British Bankers’ Association Interest Settlement Rates for deposits in U.S. dollars divided by (ii) one minus the statutory reserves applicable to such borrowing). The applicable margin for the borrowings at June 30, 2015 is as follows: 
Description
 
Base Rate Margin
 
 
LIBOR Margin
 
Term loans maturing August 2019
 
1.75%
 
 
2.75%
 
Revolving facility due August 2018
 
0.50% - 0.75%
(a) 
 
1.50% - 1.75%
(a) 
 
(a) 
The margin is determined based on our net leverage ratio at the date the interest rates are reset on the revolving credit line.

At June 30, 2015, the applicable margin for the term loans was 2.75%, with an effective rate of 2.94%, on the outstanding balance of $473.8 million maturing in August 2019. We are required to pay a commitment fee for unutilized commitments under the revolving credit facility at a rate ranging from 0.250% to 0.375% per annum, based upon our net leverage ratio. As of June 30, 2015, the commitment fee rate was 0.375%.
The Credit Facility contains covenants including, among other things, covenants that restrict our ability and those of our subsidiaries to incur certain additional indebtedness or issue guarantees, create or permit liens on assets, enter into sale-leaseback transactions, make loans or investments, sell assets, make certain acquisitions, pay dividends, repurchase stock, or merge or consolidate with any entity, and enter into certain transactions with affiliates. The agreement also contains events of default, including failure to make payments of principal or interest, failure to observe covenants, breaches of representations and warranties, defaults under certain other material indebtedness, failure to satisfy material judgments, a change of control and certain insolvency events. As of June 30, 2015, we were in compliance with the covenants under the Credit Facility. The covenants on our other long-term debt are less restrictive, and as of June 30, 2015, we were in compliance with the requirements of our other long-term debt.
Our obligations under the Credit Facility are unconditionally guaranteed by, subject to certain exceptions, each of our existing and future direct and indirect wholly-owned domestic subsidiaries. The Credit Facility and the guarantees thereof are secured by first priority liens and security interests in the following: 100% of the capital stock of substantially all of our domestic subsidiaries and 65% of the outstanding voting equity interests and 100% of the non-voting equity interests of first-tier foreign subsidiaries, all our material tangible and intangible assets and those of the guarantors, and any present and future intercompany debt. The Credit Facility also contains provisions for mandatory prepayments of outstanding term loans upon receipt of the

14

NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


following, and subject to certain exceptions: 100% of net cash proceeds from asset sales, 100% of net cash proceeds from issuance or incurrence of debt, and 100% of extraordinary receipts. We may voluntarily prepay borrowings under the Credit Facility without premium or penalty other than breakage costs, as defined with respect to LIBOR-based loans.
The Credit Facility includes a provision for an annual excess cash flow sweep, as defined in the agreement, payable in the first quarter of each fiscal year, based on the excess cash flow generated in the previous fiscal year. No excess cash flow sweep was required in the first quarter of fiscal year 2015 as no excess cash flow, as defined in the agreement, was generated in fiscal year 2014. At the current time, we are unable to predict the amount of the outstanding principal, if any, that we may be required to repay in future fiscal years pursuant to the excess cash flow sweep provisions.
11.
Stockholders' Equity
Share Repurchases
On April 29, 2013, our Board of Directors approved a share repurchase program for up to $500.0 million of our outstanding shares of common stock. On April 29, 2015, our Board of Directors approved an additional $500.0 million under our share repurchase program. We repurchased 16.5 million shares for $242.7 million during the nine months ended June 30, 2015. Since the commencement of the program, we have repurchased 27.9 million shares for $453.5 million. Approximately $546.5 million remained available for share repurchases as of June 30, 2015 pursuant to our share repurchase program. Under the terms of the share repurchase program, we expect to continue to repurchase shares from time to time through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades, accelerated stock repurchase transactions, or any combination of such methods. The timing and the amount of any purchases will be determined by management based on an evaluation of market conditions, capital allocation alternatives, and other factors. 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.
12.
Net Loss Per Share
Common equivalent shares are excluded from the computation of diluted net loss per share if their effect is anti-dilutive. Potentially dilutive common equivalent shares aggregating to 10.0 million and 12.1 million shares for the three months ended June 30, 2015 and 2014, respectively, and 10.4 million and 12.1 million shares for the nine months ended June 30, 2015 and 2014, respectively, have been excluded from the computation of diluted net loss per share because their inclusion would be anti-dilutive.
 
 
 
 
13.
Stock-Based Compensation
We recognize stock-based compensation expense over the requisite service period. Our share-based awards are accounted for as equity instruments. The amounts included in the consolidated statements of operations relating to stock-based compensation are as follows (dollars in thousands): 
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
2015
 
2014
 
2015
 
2014
Cost of product and licensing
$
148

 
$
238

 
$
331

 
$
1,200

Cost of professional services and hosting
7,833

 
10,528

 
20,185

 
24,346

Cost of maintenance and support
1,002

 
1,290

 
2,576

 
2,480

Research and development
9,210

 
12,960

 
26,387

 
33,703

Selling and marketing
11,760

 
13,656

 
32,176

 
39,110

General and administrative
11,748

 
16,710

 
38,317

 
46,702

Total
$
41,701

 
$
55,382

 
$
119,972

 
$
147,541


15

NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Stock Options
The table below summarizes activity relating to stock options for the nine months ended June 30, 2015:
 
Number of
Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value(a)
Outstanding at September 30, 2014
3,723,342

 
$
13.46

 
 
 
 
Exercised
(327,844
)
 
$
10.33

 
 
 
 
Forfeited
(892
)
 
$
20.04

 
 
 
 
Expired
(30,976
)
 
$
19.30

 
 
 
 
Outstanding at June 30, 2015
3,363,630

 
$
13.71

 
1.5 years
 
$
12.9
 million
Exercisable at June 30, 2015
3,362,385

 
$
13.71

 
1.5 years
 
$
12.9
 million
Exercisable at June 30, 2014
3,749,438

 
$
13.45

 
2.5 years
 
$
20.0
 million
 
(a) 
The aggregate intrinsic value in this table was calculated based on the positive difference, if any, between the closing market value of our common stock on June 30, 2015 ($17.51) and the exercise price of the underlying options.
The weighted-average intrinsic value of stock options exercised during the nine months ended June 30, 2015 and 2014 was $2.1 million and $3.1 million, respectively.
 
Restricted Units
Restricted units are not included in issued and outstanding common stock until the shares are vested and released. The purchase price for vested restricted units is $0.001 per share. The table below summarizes activity relating to restricted units for the nine months ended June 30, 2015:
 
Number of Shares Underlying Restricted Units — Contingent Awards
 
Number of Shares Underlying Restricted Units — Time-Based Awards
Outstanding at September 30, 2014
5,726,385

 
8,349,107

Granted
1,771,610

 
7,375,369

Earned/released
(1,891,051
)
 
(6,493,760
)
Forfeited
(646,222
)
 
(552,253
)
Outstanding at June 30, 2015
4,960,722

 
8,678,463

Weighted average remaining recognition period of outstanding restricted units
1.4 years

 
1.7 years

Unearned stock-based compensation expense of outstanding restricted units
$65.2 million
 
$94.5 million
Aggregate intrinsic value of outstanding restricted units(a)
$86.9 million
 
$152.0 million

(a) 
The aggregate intrinsic value in this table was calculated based on the positive difference between the closing market value of our common stock on June 30, 2015 ($17.51) and the purchase price of the underlying Restricted Units.
A summary of weighted-average grant-date fair value for awards granted and intrinsic value of all restricted units vested during the periods noted is as follows: 
 
Nine Months Ended June 30,
2015
 
2014
Weighted-average grant-date fair value per share
$
15.36

 
$
15.39

Total intrinsic value of shares vested (in millions)
$
125.1

 
$
82.7


16

NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Restricted Stock Awards
Restricted stock awards are included in the issued and outstanding common stock at the date of grant. The table below summarizes activity related to restricted stock awards for the nine months ended June 30, 2015:
 
Number of Shares Underlying Restricted Stock
 
Weighted Average Grant Date Fair Value
Outstanding at September 30, 2014
750,000

 
$
21.28

Vested
(250,000
)
 
$
25.80

Outstanding at June 30, 2015
500,000

 
$
19.01

Weighted average remaining recognition period of outstanding restricted stock awards
0.3 years

 
 
Unearned stock-based compensation expense of outstanding restricted stock awards
$2.2 million
 
 
Aggregate intrinsic value of outstanding restricted stock awards
$8.8 million
 
 
A summary of weighted-average grant-date fair value for awards granted and intrinsic value of all restricted stock awards vested during the periods noted is as follows: 
 
Nine Months Ended June 30,
2015
 
2014
Weighted-average grant-date fair value per share
$

 
$
15.71

Total intrinsic value of shares vested (in millions)
$
3.9

 
$
3.9

14.
Income Taxes
The components of loss before income taxes are as follows (dollars in thousands):
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
2015
 
2014
 
2015
 
2014
Domestic
$
(65,222
)
 
$
(51,233
)
 
$
(166,157
)
 
$
(172,860
)
Foreign
32,365

 
3,945

 
85,580

 
40,304

Loss before income taxes
$
(32,857
)
 
$
(47,288
)
 
$
(80,577
)
 
$
(132,556
)
The components of provision from income taxes are as follows (dollars in thousands):
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
2015
 
2014
 
2015
 
2014
Domestic
$
1,728

 
$
4,710

 
$
11,414

 
$
8,505

Foreign
4,805

 
2,249

 
11,992

 
7,826

Provision for income taxes
$
6,533

 
$
6,959

 
$
23,406

 
$
16,331

Effective tax rate
(19.9
)%
 
(14.7
)%
 
(29.0
)%
 
(12.3
)%

The effective income tax rate was (19.9)% and (29.0)% for the three and nine months ended June 30, 2015, respectively. Our current effective tax rate differs from the U.S. federal statutory rate of 35% primarily due to current period losses in the U.S. that require an additional valuation allowance that provide no benefit to the provision and our earnings in foreign operations that are subject to a significantly lower tax rate than the U.S. statutory tax rate, driven primarily by our subsidiaries in Ireland. In addition, the three and nine months ended June 30, 2015 also include $3.5 million and $10.6 million, respectively, of deferred tax expense related to tax deductible goodwill in the U.S., offset by the release of $2.1 million in reserves for the settlement of a state tax audit during the three months ended June 30, 2015.
Our effective income tax rate is based upon the income for the year, the composition of income in different countries, changes relating to valuation allowances for certain countries if and as necessary, and adjustments, if any, for potential tax consequences resulting from audits or other tax contingencies. Our aggregate income tax rate in foreign jurisdictions is lower than our income tax rate in the United States. Our effective tax rate may be adversely affected by earnings being lower than anticipated in countries where we have lower statutory tax rates and higher than anticipated in countries where we have higher statutory tax rates.

17

NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


At June 30, 2015 and September 30, 2014, we had gross tax effected unrecognized tax benefits of $21.9 million and $21.2 million, respectively, and is included in other long term liabilities. If these benefits were recognized, they would favorably impact the effective tax rate. We do not expect a significant change in the amount of unrecognized tax benefits within the next 12 months.
15.
Commitments and Contingencies
Litigation and Other Claims
Similar to many companies in the software industry, we are involved in a variety of claims, demands, suits, investigations and proceedings that arise from time to time relating to matters incidental to the ordinary course of our business, including actions with respect to contracts, intellectual property, employment, benefits and securities matters. We have estimated the amount of probable losses that may result from all currently pending matters, and such amounts are reflected in our consolidated financial statements. These recorded amounts are not material to our consolidated financial position or results of operations and no additional material losses related to these pending matters are reasonably possible. While it is not possible to predict the outcome of these matters with certainty, we do not expect the results of any of these actions to have a material adverse effect on our results of operations or financial position. However, each of these matters is subject to uncertainties, the actual losses may prove to be larger or smaller than the accruals reflected in our consolidated financial statements, and we could incur judgments or enter into settlements of claims that could adversely affect our financial position, results of operations or cash flows.
Guarantees and Other
We include indemnification provisions in the contracts we enter into with customers and business partners. Generally, these provisions require us to defend claims arising out of our products’ infringement of third-party intellectual property rights, breach of contractual obligations and/or unlawful or otherwise culpable conduct. The indemnity obligations generally cover damages, costs and attorneys’ fees arising out of such claims. In most, but not all cases, our total liability under such provisions is limited to either the value of the contract or a specified, agreed upon amount. In some cases our total liability under such provisions is unlimited. In many, but not all cases, the term of the indemnity provision is perpetual. While the maximum potential amount of future payments we could be required to make under all the indemnification provisions is unlimited, we believe the estimated fair value of these provisions is minimal due to the low frequency with which these provisions have been triggered.
We indemnify our directors and officers to the fullest extent permitted by Delaware law, which provides among other things, indemnification to directors and officers for expenses, judgments, fines, penalties and settlement amounts incurred by such persons in their capacity as a director or officer of the company, regardless of whether the individual is serving in any such capacity at the time the liability or expense is incurred. Additionally, in connection with certain acquisitions we have agreed to indemnify the former officers and members of the boards of directors of those companies, on similar terms as described above, for a period of six years from the acquisition date. In certain cases we purchase director and officer insurance policies related to these obligations, which fully cover the six year period. To the extent that we do not purchase a director and officer insurance policy for the full period of any contractual indemnification, and such directors and officers do not have coverage under separate insurance policies, we would be required to pay for costs incurred, if any, as described above.
16.
Segment and Geographic Information
We operate in, and report financial information for, the following four reportable segments: Healthcare, Mobile and Consumer, Enterprise, and Imaging. Segment profit is an important measure used for evaluating performance and for decision-making purposes and reflects the direct controllable costs of each segment together with an allocation of sales and corporate marketing expenses, and certain research and development project costs that benefit multiple product offerings. Segment profit represents income from operations excluding stock-based compensation, amortization of intangible assets, acquisition-related costs, net, restructuring and other charges, net, costs associated with intellectual property collaboration agreements, other income (expense), net and certain unallocated corporate expenses.
In October 2014, we realigned certain of our product offerings which were previously reported in the Mobile and Consumer segment into the Enterprise segment. Accordingly, the segment results in prior periods have been reclassified to conform to the current period segment reporting presentation.

18

NUANCE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


We do not track our assets by operating segment; consequently, it is not practical to show assets or depreciation by segment. The following table presents segment results along with a reconciliation of segment profit to loss before income taxes (dollars in thousands): 
 
Three Months Ended
 
Nine Months Ended
June 30,
 
June 30,
2015
 
2014
 
2015
 
2014
Segment revenues(a):
 
 
 
 
 
 
 
Healthcare
$
236,855

 
$
240,099

 
$
696,439

 
$
704,382

Mobile and Consumer
108,577

 
106,978

 
332,614

 
326,690

Enterprise
86,966

 
87,286

 
260,911

 
269,020

Imaging
56,258

 
52,451

 
175,785

 
166,740

Total segment revenues
488,656

 
486,814

 
1,465,749

 
1,466,832

Acquisition-related revenues
(10,717
)
 
(11,310
)
 
(38,732
)
 
(45,695
)
Total consolidated revenues
477,939

 
475,504

 
1,427,017

 
1,421,137

Segment profit:
 
 
 
 
 
 
 
Healthcare
81,846

 
84,916

 
239,966

 
254,853

Mobile and Consumer
26,959

 
19,677

 
72,468

 
48,507

Enterprise
24,895

 
18,346

 
68,909

 
59,019

Imaging
21,762

 
16,887

 
63,770

 
60,271

Total segment profit
155,462

 
139,826

 
445,113

 
422,650

Corporate expenses and other, net
(31,226
)
 
(25,292
)
 
(102,344
)
 
(86,624
)
Acquisition-related revenues and cost of revenues adjustment
(10,198
)
 
(10,450
)
 
(36,576
)
 
(42,319
)
Stock-based compensation
(41,701
)
 
(55,382
)
 
(119,972
)
 
(147,541
)
Amortization of intangible assets
(42,147
)
 
(42,293
)
 
(125,064
)
 
(126,872
)
Acquisition-related costs, net
(2,423
)
 
(9,110
)
 
(13,702
)
 
(18,710
)
Restructuring and other charges, net
(10,808
)
 
(8,622
)
 
(12,703
)
 
(17,178
)
Costs associated with IP collaboration agreements
(2,625
)
 
(4,937
)
 
(8,501
)
 
(14,811
)
Other expense, net
(47,191
)
 
(31,028
)
 
(106,828
)
 
(101,151
)
Loss before income taxes
$
(32,857
)
 
$
(47,288
)
 
$
(80,577
)
 
$
(132,556
)
 
(a) 
Segment revenues differ from reported revenues due to certain revenue adjustments related to acquisitions that will not be fully recognized in accordance with authoritative guidance for the purchase accounting of business combinations. Segment revenues also include revenue that the business would have otherwise recognized had we not acquired intellectual property and other assets from the same customer. These revenues are included to allow for more complete comparisons to the financial results of historical operations and in evaluating management performance.
There were no countries outside of the United States that provided greater than 10% of our total revenues. Revenues, classified by the major geographic areas in which our customers are located, were as follows (dollars in thousands): 
 
Three Months Ended
 
Nine Months Ended
June 30,
 
June 30,
2015
 
2014
 
2015
 
2014
United States
$
352,033

 
$
350,363

 
$
1,052,155

 
$
1,040,135

International
125,906

 
125,141

 
374,862

 
381,002

Total revenues
$
477,939

 
$
475,504

 
$
1,427,017

 
$
1,421,137



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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis is intended to help the reader understand the results of operations and financial condition of our business. Management’s Discussion and Analysis is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes to the condensed consolidated financial statements.
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q including the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosure About Market Risk” under Items 2 and 3, respectively, of Part I of this report, and the sections entitled “Legal Proceedings” and “Risk Factors,” under Items 1 and 1A, respectively, of Part II of this report, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks, uncertainties and assumptions that, if they never materialize or if they prove incorrect, could cause our consolidated results to differ materially from those expressed or implied by such forward-looking statements. These forward-looking statements include predictions regarding:
our future bookings, revenues, cost of revenues, research and development expenses, selling, general and administrative expenses, amortization of intangible assets and gross margin;
our strategy relating to our segments;
our transformation program to reduce costs and optimize processes;
market trends;
technological advancements;
the potential of future product releases;
our product development plans and the timing, amount and impact of investments in research and development;
future acquisitions, and anticipated benefits from acquisitions;
international operations and localized versions of our products; and
the conduct, timing and outcome of legal proceedings and litigation matters.
You can identify these and other forward-looking statements by the use of words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks described in Item 1A — “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q.
You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.
OVERVIEW
Business Overview
We are a leading provider of voice and language solutions for businesses and consumers around the world. Our solutions are used in the healthcare, mobile, consumer, enterprise customer service, and imaging markets. We are seeing several trends in our markets, including (i) the growing adoption of cloud-based, connected services and highly interactive mobile applications, (ii) deeper integration of virtual assistant capabilities and services, and (iii) the continued expansion of our core technology portfolio from speech recognition to natural language understanding, semantic processing, domain-specific reasoning and dialog management capabilities.
Healthcare.  Trends in our healthcare business include continuing customer preference for hosted solutions and other time-based licenses and increasing interest in the use of mobile devices to access healthcare systems and records. We continue to see strong demand for transactions which involve the sale and delivery of both software and non-software related services or products, as well as transactions which involve the sale of multiple solutions, such as both hosted transcription services and Dragon Medical licenses. Although the volume processed in our hosted transcription services has steadily increased due to the expanding customer base, we have experienced some erosion in lines processed when customers adopt electronic medical record ("EMR") systems and when in some cases customers use our licensed Dragon Medical product to support input into the EMR. We believe an important trend in the healthcare market is the desire to improve efficiency in the coding and revenue cycle management process. Our solutions reduce costs by increasing

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automation of this important workflow, and also enable hospitals to improve documentation used to support billings. In addition to improved efficiency, there is an impending change in the industry coding standard from ICD-9 to ICD-10, which will significantly increase the number of possible codes, and therefore, increase the complexity of this process, which in turn reinforces our customers' desire for improved efficiency. We are investing to expand our product set to address the various healthcare opportunities, including deeper integration with our clinical documentation solutions, as well as expand our international capabilities, and reduce our time from contract signing to initiation of billable services.
Mobile and Consumer.  Trends in our mobile and consumer segment include device manufacturers requiring custom applications to deliver unique and differentiated products such as virtual assistants, broadening keyboard technologies to take advantage of touch screens, increasing hands-free capabilities on cell phones and in automobiles, the adoption of our technology for use on and with a broadening scope of devices, such as televisions, set-top boxes, e-book readers, tablet and laptop computers, cameras and third-party applications. The more powerful capabilities of mobile devices require us to supply a broader set of technologies to support the increasing scope and complexity of the solutions. These technologies include cloud-based speech recognition, natural language understanding, dialog management, text-to-speech and enhanced text input. Within given levels of our technology set, we have seen pricing pressures from our OEM partners in our mobile handset business. We continue to see an increasing proportion of revenue from on-demand and transactional arrangements as opposed to traditional upfront licensing of our mobile products and solutions. Although this has a negative impact on near-term revenue, we believe this model will build stronger and more predictable revenues over time. We are investing to increase our capabilities and capacity to help device manufacturers build custom applications, to increase the capacity of our data centers, to increase the number, kinds and capacity of network services, to enable developers to access our technology, and to expand both awareness and channels for our direct-to-consumer products.
Enterprise.  Trends in our enterprise business include increasing interest in the use of mobile applications and web sites to access customer care systems and records, voice-based authentication of users, increasing interest in coordinating actions and data across customer care channels, and the ability of a broader set of hardware providers and systems integrators to serve the market. In fiscal year 2014, revenues and bookings from on-demand solutions increased significantly, as a growing proportion of customers chose our cloud-based solutions for call center, Web and mobile customer care solutions. We expect these trends to continue in fiscal year 2015. We are investing to expand our product set to address these opportunities, to increase efficiency of our hosted applications, expand our capabilities and capacity to help customers build custom applications, and broaden our relationships with new hardware providers and systems integrator partners serving the market.
Imaging.  The imaging market is evolving to include more networked solutions, mobile access to networked solutions, multi-function devices, and away from packaged software. We expect to expand our traditional packaged software sales with subscription versions. We are investing to improve mobile access to our networked products, expand our distribution channels and embedding relationships, and expand our language coverage.
Confronted by dramatic increases in electronic information, consumers, business personnel and healthcare professionals must use a variety of resources to retrieve information, transcribe patient records, conduct transactions and perform other job-related functions. We believe that the power of our solutions can transform the way people use the Internet, telecommunications systems, EMRs, wireless and mobile networks and related corporate infrastructure to conduct business.
The areas in which we are focusing investments include connected services in automobiles and consumer electronics, Healthcare clinical documentation and clinical information management, automated multi-channel customer care, and MFP Print and Scan management. We continue to expect some volume erosion in our healthcare on-demand base, as users migrate toward use of electronic medical records, often in combination with our Dragon Medical solution. Our growth opportunity in mobile handsets is limited by the consolidation of this market to a limited number of customers. In addition, our Dragon NaturallySpeaking business has been challenged by market conditions, and our Enterprise on-premise business has been challenged by customers’ growing preference for on-demand implementations.
Although on-demand revenue has trended upward over the last several quarters, on-demand revenue has been negatively affected by the volume erosion in our Healthcare transcription on-demand base and some migration of our Healthcare transcription on-demand and mobile operator services businesses from semi-automated services to lower-priced, fully automated solutions. In contrast, on-demand revenue from Mobile connected services and Enterprise customer care solutions has grown. These trends are also reflected in the recent declines in our Estimated 3-Year Value of Total On-Demand contracts, with reduced Healthcare on-demand and mobile operator services expectations offsetting strong net new bookings in Mobile connected services and Enterprise on-demand contracts.

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Strategy
During fiscal year 2015, we continue to focus on growth by providing market-leading, value-added solutions for our customers and partners through a broad set of technologies, service offerings and channel capabilities. We have increased our focus on operating efficiencies, expense and hiring discipline and acquisition synergies to improve gross margins and operating margins. As part of this effort, during the third quarter of fiscal year 2015, we began a transformation program. In addition, we have started to reallocate investments to our highest growth opportunities from more mature businesses. We intend to continue to pursue growth through the following key elements of our strategy:
Extend Technology Leadership.  Our solutions are recognized as among the best in their respective categories. We intend to leverage our global research and development organization and our broad portfolio of technologies, applications and intellectual property to foster technological innovation and to maintain customer preference for our solutions. We also intend to continue to invest in our engineering resources and to seek new technological advancements that further expand the addressable markets for our solutions.
Broaden Expertise in Vertical Markets.  Businesses are increasingly turning to us for comprehensive solutions rather than for a single technology product. We intend to broaden our expertise and capabilities to continue to deliver targeted solutions for a range of industries including mobile device manufacturers, healthcare, telecommunications, financial services and government administration. We also intend to expand professional services capabilities to help our customers and partners design, integrate and deploy innovative solutions.
Increase Subscription and Transaction Based Recurring Revenue.  We intend to increase our subscription and transaction based offerings in all of our segments. This will enable us to deliver applications that our customers use, and pay for, on a repeat basis, providing us with the opportunity to enjoy the benefits of recurring revenue streams.
Expand Global Presence.  We intend to further expand our international resources to better serve our global customers and partners and to leverage opportunities in established markets such as Europe, and also emerging markets within Asia and Latin America. We continue to add regional sales employees across geographic regions to better address demand for voice and language based solutions and services.
Pursue Strategic Acquisitions and Partnerships.  We have selectively pursued strategic acquisitions to expand our technology, solutions and resources and to complement our organic growth. We use these acquisitions to deliver enhanced value to our customers, partners, employees and shareholders. We intend to continue to pursue acquisitions that enhance our solutions, serve specific vertical markets and strengthen our technology portfolio. We have, however, recently slowed the pace and reduced the size of acquisitions to focus our resources more on driving organic growth. We also have formed key partnerships with other important companies in our markets of interest and intend to continue to do so in the future where it will enhance the value of our business.
Key Metrics
In evaluating the financial condition and operating performance of our business, management focuses on revenues, net income, gross margins, operating margins and cash flow from operations. A summary of these key financial metrics is as follows:
For the nine months ended June 30, 2015, as compared to the nine months ended June 30, 2014:
Total revenues increased by $5.9 million to $1,427.0 million;
Net loss decreased by $44.9 million to a loss of $104.0 million;
Gross margins increased by 1.3 percentage points to 56.7%;
Operating margins increased by 4.0 percentage points to 1.8%; and
Cash provided by operating activities increased $73.8 million to $336.0 million.
As of June 30, 2015, as compared to June 30, 2014:
Total deferred revenue increased 23.7% from $523.4 million to $647.6 million driven by Mobile connected services, maintenance and support contracts and Enterprise on-demand services.
In addition to the above key financial metrics, we also focus on certain operating metrics. A summary of these key operating metrics for the period ended June 30, 2015, as compared to the period ended June 30, 2014, is as follows:

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Annualized line run-rate in our on-demand healthcare solutions decreased 1% from one year ago to approximately 5.5 billion lines per year. The annualized line run-rate is determined using billed equivalent line counts in a given quarter, multiplied by four;
Net new bookings increased 46.6% from one year ago to $484.4 million. Our net new bookings depend on the timing of large multi-year contracts, resulting in quarter-to-quarter variability. Net new bookings performance was impacted by a large booking in our connected car business last year. In addition, current year net new bookings was impacted by fluctuation in currency exchange rates.
Bookings represent the estimated gross revenue value of transactions at the time of contract execution, except for maintenance and support offerings. For fixed price contracts, the bookings value represents the gross total contract value. For contracts where revenue is based on transaction volume, the bookings value represents the contract price multiplied by the estimated future transaction volume during the contract term, whether or not such transaction volumes are guaranteed under a minimum commitment clause. Actual results could be different than our initial estimate. The maintenance and support bookings value represents the amounts billed in the period the customer is invoiced. Because of the inherent estimates required to determine bookings and the fact that the actual resultant revenue may differ from our initial bookings estimates, we consider bookings one indicator of potential future revenue and not as an arithmetic measure of backlog.
Net new bookings represents the estimated revenue value at the time of contract execution from new contractual arrangements or the estimated revenue value incremental to the portion of value that will be renewed under pre-existing arrangements;
Estimated three-year value of on-demand contracts increased 2.4% from one year ago to approximately $2.3 billion. We determine this value as of the end of the period reported, by using our best estimate of three years of anticipated future revenue streams under signed on-demand contracts then in place, whether or not they are guaranteed through a minimum commitment clause. Our best estimate is based on estimates used in evaluating the contracts and determining sales compensation, adjusted for changes in estimated launch dates, actual volumes achieved and other factors deemed relevant. For contracts with an expiration date beyond three years, we include only the value expected within three years. For other contracts, we assume renewal consistent with historic renewal rates unless there is a known cancellation. Contracts are generally priced by volume of usage and typically have no or low minimum commitments. Actual revenue could vary from our estimates due to factors such as cancellations, non-renewals or volume fluctuations; and
Total recurring revenue represented 65.9% and 64.3% of total revenue for nine months ended June 30, 2015 and June 30, 2014, respectively. Total recurring revenue represents the sum of recurring product and licensing, on-demand, and maintenance and support revenues as well as the portion of professional services revenue that is delivered under ongoing subscription contracts.
RESULTS OF OPERATIONS
Total Revenues
The following tables show total revenues by product type and by geographic location, based on the location of our customers, in dollars and percentage change (dollars in millions): 
 
Three Months Ended
 
Dollar
Change
 
Percent
Change
 
Nine Months Ended
 
Dollar
Change
 
Percent
Change
June 30,
 
 
June 30,
 
2015
 
2014
 
 
2015
 
2014
 
Product and licensing
$
162.8

 
$
168.2

 
$
(5.4
)
 
(3.2
)%
 
$
506.9

 
$
521.5

 
$
(14.6
)
 
(2.8
)%
Professional services and hosting
234.3

 
231.7

 
2.6

 
1.1
 %
 
684.9

 
677.3

 
7.6

 
1.1
 %
Maintenance and support
80.9

 
75.6

 
5.3

 
7.0
 %
 
235.1

 
222.3

 
12.8

 
5.8
 %
Total Revenues
$
477.9

 
$
475.5

 
$
2.4

 
0.5
 %
 
$
1,427.0

 
$
1,421.1

 
$
5.9

 
0.4
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States
$
352.0

 
$
350.4

 
$
1.6

 
0.5
 %
 
$
1,052.2

 
$
1,040.1

 
$
12.1

 
1.2
 %
International
125.9

 
125.1

 
0.8

 
0.6
 %
 
374.9

 
381.0

 
(6.1
)
 
(1.6
)%
Total Revenues
$
477.9

 
$
475.5

 
$
2.4

 
0.5
 %
 
$
1,427.0

 
$
1,421.1

 
$
5.9

 
0.4
 %
The geographic split for the three months ended June 30, 2015 and 2014 was 74% of total revenues in the United States and 26% internationally. International revenue was negatively impacted by weakening foreign currencies offset by an increase in revenue driven by a recent acquisition.

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The geographic split for the nine months ended June 30, 2015 was 74% of total revenues in the United States and 26% internationally, compared to 73% of total revenues in the United States and 27% internationally for the same period last year. International revenue was negatively impacted by weakening foreign currencies.
Product and Licensing Revenue
Product and licensing revenue primarily consists of sales and licenses of our technology. The following table shows product and licensing revenue, in dollars and as a percentage of total revenues (dollars in millions): 
 
Three Months Ended
 
Dollar
Change
 
Percent
Change
 
Nine Months Ended
 
Dollar
Change
 
Percent
Change
June 30,
 
 
June 30,
 
2015
 
2014
 
 
2015
 
2014
 
Product and licensing revenue
$
162.8

 
$
168.2

 
$
(5.4
)
 
(3.2
)%
 
$
506.9

 
$
521.5

 
$
(14.6
)
 
(2.8
)%
As a percentage of total revenue
34.1
%
 
35.4
%
 
 
 
 
 
35.5
%
 
36.7
%
 
 
 
 
Product and licensing revenue for the three months ended June 30, 2015, as compared to the three months ended June 30, 2014, was primarily driven by a $5.4 million decrease in the Mobile and Consumer segment and a $3.5 million decrease in the Healthcare segment. This was offset by a $3.8 million increase in the Enterprise segment. The decrease in Mobile and Consumer revenue was driven primarily by lower embedded license sales. The decrease in Healthcare revenue was driven primarily by lower license sales of our clinical documentation solutions as we continue to see a migration to hosted solutions. The increase in Enterprise revenue was driven primarily by strong on-premise sales.
The decrease in product and licensing revenue for the nine months ended June 30, 2015, as compared to the nine months ended June 30, 2014, was primarily driven by a $14.6 million decrease in the Healthcare segment and a $2.2 million decrease in Mobile and Consumer segment. This decrease was offset by a $3.2 million increase in Enterprise segment. Within our Healthcare segment, license sales of our clinical documentation solutions decreased $16.8 million, offset by a $2.2 million increase in our Clintegrity sales. Within our Mobile and Consumer segment, automotive license sales increased $21.7 million, partially offset by an $11.3 million decrease in mobile handset license sales as the handset market continues to consolidate, as well as a $9.9 million decrease in Dragon desktop consumer products sales. The increase in Enterprise revenue was driven primarily by strong on-premise license sales during the three months ended June 30, 2015.
Professional Services and Hosting Revenue
Professional services revenue primarily consists of consulting, implementation and training services for customers. Hosting revenue primarily relates to delivering on-demand hosted services, such as medical transcription, automated customer care applications, voice message transcription, and mobile infotainment, search and transcription, over a specified term. The following table shows professional services and hosting revenue, in dollars and as a percentage of total revenues (dollars in millions): 
 
Three Months Ended
 
Dollar
Change
 
Percent
Change
 
Nine Months Ended
 
Dollar
Change
 
Percent
Change
June 30,
 
 
June 30,
 
2015
 
2014
 
 
2015
 
2014
 
Professional services and hosting revenue
$
234.3

 
$
231.7

 
$
2.6

 
1.1
%
 
$
684.9

 
$
677.3

 
$
7.6

 
1.1
%
As a percentage of total revenue
49.0
%
 
48.7
%
 
 
 
 
 
48.0
%
 
47.7
%
 
 
 
 
The increase in professional services and hosting revenue for the three months ended June 30, 2015, as compared to the three months ended June 30, 2014, was primarily driven by a $7.7 million increase in hosting revenue, partially offset by a $5.1 million decrease in professional services revenue. In our hosting business, on-demand revenue in our Mobile and Consumer segment increased by $9.9 million primarily driven by a recent acquisition and growth in our Mobile connected services business. This increase in on-demand revenue was partially offset by a $2.6 million decrease in the Healthcare hosting revenue as we continue to experience some volume erosion in our transcription services. In our professional services business, the decrease in revenue was driven by lower professional services from our Enterprise on-premise offerings.
The increase in professional services and hosting revenue for the nine months ended June 30, 2015, as compared to the nine months ended June 30, 2014, was primarily driven by a $12.8 million increase in hosting revenue, partially offset by a $5.3 million decrease in professional services revenue. In our hosting business, on-demand revenue in our Mobile and Consumer segment increased by $11.6 million primarily driven by a growth in our Mobile connected services business. On-demand revenue in our Enterprise segment also increased $6.4 million driven by growth in our automated multi-channel customer care services. These increases were partially offset by a $5.1 million decrease in the Healthcare hosting revenue as we continue to experience some volume erosion in our transcription services.

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Table of Contents

Maintenance and Support Revenue
Maintenance and support revenue primarily consists of technical support and maintenance services. The following table shows maintenance and support revenue, in dollars and as a percentage of total revenues (dollars in millions): 
 
Three Months Ended
 
Dollar
Change
 
Percent
Change
 
Nine Months Ended
 
Dollar
Change
 
Percent
Change
June 30,
 
 
June 30,
 
2015
 
2014
 
 
2015
 
2014
 
Maintenance and support revenue
$
80.9

 
$
75.6

 
$
5.3

 
7.0
%