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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 March 31, 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 April 30, 2015 was 313,828,530.




NUANCE COMMUNICATIONS, INC.
TABLE OF CONTENTS
 
 
 
 
Page
Item 1.
Condensed Consolidated Financial Statements (unaudited):
 
 
 
a) Consolidated Statements of Operations for the three and six months ended March 31, 2015 and 2014
 
 
b) Consolidated Statements of Comprehensive Loss for the three and six months ended March 31, 2015 and 2014
 
 
c) Consolidated Balance Sheets at March 31, 2015 and September 30, 2014
 
 
d) Consolidated Statements of Cash Flows for the six months ended March 31, 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 March 31,
 
Six Months Ended March 31,
 
2015
 
2014
 
2015
 
2014
 
(Unaudited)
(In thousands, except per share amounts)
Revenues:
 
 
 
 
 
 
 
Product and licensing
$
174,451

 
$
174,819

 
$
344,139

 
$
353,256

Professional services and hosting
224,504

 
227,526

 
450,674

 
445,661

Maintenance and support
76,104

 
73,308

 
154,265

 
146,716

Total revenues
475,059

 
475,653

 
949,078

 
945,633

Cost of revenues:
 
 
 
 
 
 
 
Product and licensing
23,252

 
25,226

 
47,222

 
50,435

Professional services and hosting
151,021

 
157,437

 
308,264

 
312,017

Maintenance and support
13,395

 
12,359

 
27,436

 
25,196

Amortization of intangible assets
15,631

 
15,342

 
30,762

 
30,536

Total cost of revenues
203,299

 
210,364

 
413,684

 
418,184

Gross profit
271,760

 
265,289

 
535,394

 
527,449

Operating expenses:
 
 
 
 
 
 
 
Research and development
74,776

 
84,581

 
157,343

 
165,051

Sales and marketing
93,254

 
98,280

 
204,504

 
217,186

General and administrative
45,734

 
43,682

 
96,301

 
88,158

Amortization of intangible assets
25,328

 
26,571

 
52,155

 
54,043

Acquisition-related costs, net
6,523

 
6,802

 
11,279

 
9,600

Restructuring and other charges, net
(333
)
 
4,719

 
1,895

 
8,556

Total operating expenses
245,282

 
264,635

 
523,477

 
542,594

Income (loss) from operations
26,478

 
654

 
11,917

 
(15,145
)
Other income (expense):
 
 
 
 
 
 
 
Interest income
627

 
774

 
1,189

 
1,193

Interest expense
(30,034
)
 
(33,987
)
 
(59,931
)
 
(67,946
)
Other income (expense), net
(110
)
 
(274
)
 
(895
)
 
(3,370
)
Loss before income taxes
(3,039
)
 
(32,833
)
 
(47,720
)
 
(85,268
)
Provision for income taxes
11,059

 
6,394

 
16,873

 
9,372

Net loss
$
(14,098
)
 
$
(39,227
)
 
$
(64,593
)
 
$
(94,640
)
Net loss per share:
 
 
 
 
 
 
 
Basic
$
(0.04
)
 
$
(0.12
)
 
$
(0.20
)
 
$
(0.30
)
Diluted
$
(0.04
)
 
$
(0.12
)
 
$
(0.20
)
 
$
(0.30
)
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
322,879

 
316,593

 
322,331

 
315,696

Diluted
322,879

 
316,593

 
322,331

 
315,696

See accompanying notes.

1




NUANCE COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2015
 
2014
 
2015
 
2014
 
(Unaudited) (In thousands)
Net loss
$
(14,098
)
 
$
(39,227
)
 
$
(64,593
)
 
$
(94,640
)
Other comprehensive (loss) income:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(49,522
)
 
(1,127
)
 
(77,740
)
 
5,477

Pension adjustments
(759
)
 

 
(734
)
 

Unrealized gain on marketable securities
58

 

 
29

 

Total other comprehensive (loss) income, net
(50,223
)

(1,127
)
 
(78,445
)
 
5,477

Comprehensive loss
$
(64,321
)
 
$
(40,354
)
 
$
(143,038
)
 
$
(89,163
)




































See accompanying notes.



2


NUANCE COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS 
 
March 31, 2015
 
September 30, 2014
 
(Unaudited)
 
(In thousands, except per
share amounts)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
474,650

 
$
547,230

Marketable securities
63,044

 
40,974

Accounts receivable, less allowances for doubtful accounts of $12,204 and $11,491
394,054

 
428,266

Prepaid expenses and other current assets
92,118

 
92,040

Deferred tax assets
56,128

 
55,990

Total current assets
1,079,994

 
1,164,500

Marketable securities
29,228

 

Land, building and equipment, net
185,985

 
191,411

Goodwill
3,354,734

 
3,410,893

Intangible assets, net
852,561

 
915,483

Other assets
147,325

 
137,997

Total assets
$
5,649,827

 
$
5,820,284

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

 
$
4,834

Contingent and deferred acquisition payments
8,556

 
35,911

Accounts payable
58,053

 
61,760

Accrued expenses and other current liabilities
180,003

 
241,279

Deferred revenue
343,651

 
298,225

Total current liabilities
595,097

 
642,009

Long-term debt
2,137,738

 
2,127,392

Deferred revenue, net of current portion
294,154

 
249,879

Deferred tax liabilities
162,499

 
156,235

Other liabilities
58,753

 
62,777

Total liabilities
3,248,241

 
3,238,292

 
 
 
 
Commitments and contingencies (Note 15)

 

 
 
 
 
Stockholders’ equity:
 
 
 
Common stock, $0.001 par value; 560,000 shares authorized; 321,784 and 324,621 shares issued and 318,034 and 320,870 shares outstanding, respectively
322

 
325

Additional paid-in capital
3,151,882

 
3,153,033

Treasury stock, at cost (3,751 shares)
(16,788
)
 
(16,788
)
Accumulated other comprehensive loss
(102,460
)
 
(24,015
)
Accumulated deficit
(631,370
)
 
(530,563
)
Total stockholders’ equity
2,401,586

 
2,581,992

Total liabilities and stockholders’ equity
$
5,649,827

 
$
5,820,284

See accompanying notes.

3


NUANCE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Six Months Ended March 31,
 
2015
 
2014
 
(Unaudited)
(In thousands)
Cash flows from operating activities:
 
 
 
Net loss
$
(64,593
)
 
$
(94,640
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
114,020

 
109,417

Stock-based compensation
78,271

 
92,159

Non-cash interest expense
14,918

 
19,443

Deferred tax provision
6,386

 
3,446

Other
1,427

 
(5,258
)
Changes in operating assets and liabilities, net of effects from acquisitions:
 
 
 
Accounts receivable
16,988

 
6,518

Prepaid expenses and other assets
(13,213
)
 
(11,695
)
Accounts payable
1,869

 
(32,097
)
Accrued expenses and other liabilities
(50,017
)
 
(10,301
)
Deferred revenue
109,575

 
88,190

Net cash provided by operating activities
215,631

 
165,182

Cash flows from investing activities:
 
 
 
Capital expenditures
(30,758
)
 
(24,719
)
Payments for business and technology acquisitions, net of cash acquired
(31,891
)
 
(135,537
)
Purchases of marketable securities and other investments
(91,348
)
 
(11,504
)
Proceeds from sales and maturities of marketable securities and other investments
23,165

 
21,634

Net cash used in investing activities
(130,832
)
 
(150,126
)
Cash flows from financing activities:
 
 
 
Payments of debt
(2,418
)
 
(2,516
)
Payments for repurchase of common stock
(109,838
)
 
(26,435
)
Payments for settlement of share-based derivatives
(340
)
 
(5,286
)
Payments of other long-term liabilities
(1,526
)
 
(1,519
)
Proceeds from issuance of common stock from employee stock plans
9,149

 
11,922

Cash used to net share settle employee equity awards
(46,953
)
 
(31,047
)
Net cash used in financing activities
(151,926
)
 
(54,881
)
Effects of exchange rate changes on cash and cash equivalents
(5,453
)
 
9

Net decrease in cash and cash equivalents
(72,580
)
 
(39,816
)
Cash and cash equivalents at beginning of period
547,230

 
808,118

Cash and cash equivalents at end of period
$
474,650

 
$
768,302

See accompanying notes.


4


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 U.S. generally accepted accounting principles (GAAP) for interim periods. In our opinion, these financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of our financial position for the periods disclosed. Intercompany transactions have been eliminated.
Although we believe the disclosures in these financial statements are adequate to make the information presented not misleading, certain information normally included in the footnotes prepared in accordance with GAAP has been omitted. 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. Interim results are not necessarily indicative of the results that may be expected for a full year.
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
In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs." The amendments in the ASU 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. The amendments are effective for us in the first quarter of fiscal 2017, with early adoption permitted. The amendments 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. This will reduce our assets and liabilities but will have no impact on earnings, cash flows or shareholders' equity.
In February 2015, the FASB issued Accounting Standards Update No. 2015-02, “Amendments to the Consolidation Analysis.”  The amendments in this update 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. The pronouncement is effective for us in the first quarter of fiscal 2017 with early adoption permitted. We do not believe that this 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 2017, with early adoption permitted. We do not believe that this will have a material impact on our consolidated financial statements.
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 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

5

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


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 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 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 the first six months of fiscal 2015, we have not made any material acquisitions.
During fiscal 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 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.
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 March 31,
 
Six Months Ended March 31,
2015
 
2014
 
2015
 
2014
Transition and integration costs
$
2,756

 
$
4,590

 
$
6,237

 
$
8,429

Professional service fees
3,485

 
2,399

 
5,686

 
5,738

Acquisition-related adjustments
282

 
(187
)
 
(644
)
 
(4,567
)
Total
$
6,523

 
$
6,802

 
$
11,279

 
$
9,600

Included in acquisition-related adjustments for the six months ended March 31, 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 2008, following the expiration of the applicable statute of limitations.

6

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


4.
Goodwill and Intangible Assets
The changes in the carrying amount of goodwill and intangible assets for the six months ended March 31, 2015, are as follows (dollars in thousands): 
 
Goodwill
 
Intangible
Assets
Balance at September 30, 2014
$
3,410,893

 
$
915,483

Acquisitions

 
27,830

Purchase accounting adjustments
(1,788
)
 
(554
)
Amortization

 
(82,917
)
Effect of foreign currency translation
(54,371
)
 
(7,281
)
Balance at March 31, 2015
$
3,354,734

 
$
852,561

In October 2014, we realigned certain of our product offerings among reporting units. As required by Accounting Standards Codification 350-20, "Intangibles - Goodwill and Other", 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 2015, and the fair value of the reorganized reporting units substantially exceeded their carrying values.

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 at March 31, 2015 and September 30, 2014, we had outstanding contracts with a total notional value of $141.4 million and $283.1 million, respectively.
We have not designated these forward contracts as hedging instruments pursuant to ASC 815, 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 changes in the fair value recorded in earnings as other income (expense), net in our consolidated statements of operations.
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 earnings in each period as other income (expense), net in our consolidated statements of operations.

7

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


The following is a summary of the outstanding shares subject to security price guarantees at March 31, 2015 (dollars in thousands):
Issue Date
 
Number of Shares Issued
 
Settlement Date
 
Total Value of Shares on Issue Date
November 10, 2014
 
288,148

 
May 12, 2015
 
$
4,469

The following table provides a quantitative summary of the fair value of our derivative instruments as of March 31, 2015 and September 30, 2014 (dollars in thousands): 
Derivatives Not Designated as Hedges:
 
Balance Sheet Classification
 
Fair Value
 
March 31, 2015
 
September 30, 2014
Foreign currency contracts
 
Prepaid expenses and other current assets
 
$
379

 
$

Foreign currency contracts
 
Accrued expenses and other current liabilities
 
(383
)
 
(272
)
Security Price Guarantees
 
Contingent and deferred acquisition payments
 
(334
)
 

Security Price Guarantees
 
Accrued expenses and other current liabilities
 

 
(135
)
Net fair value of non-hedge derivative instruments
 
$
(338
)
 
$
(407
)
The following tables summarize the activity of derivative instruments for the three and six months ended March 31, 2015 and 2014 (dollars in thousands):
 
 
 
 
Three Months Ended March 31,
 
Six Months Ended March 31,
Derivatives Not Designated as Hedges
 
Location of Gain (Loss) Recognized in Income
 
2015
 
2014
 
2015
 
2014
Foreign currency contracts
 
Other income (expense), net
 
$
(12,813
)
 
$
2,046

 
$
(19,096
)
 
$
6,372

Security price guarantees
 
Other income (expense), net
 
$
23

 
$
(72
)
 
$
(539
)
 
$
(4,222
)
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.
The estimated fair value of our long-term debt approximated $2,220.2 million (face value $2,215.0 million) and $2,179.2 million (face value $2,217.4 million) at March 31, 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 March 31, 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.
ASC 820, Fair Value Measures and Disclosures, establishes a value hierarchy based on three levels of inputs, 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.

8

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


Assets and liabilities measured at fair value on a recurring basis at March 31, 2015 and September 30, 2014 consisted of (dollars in thousands):
 
March 31, 2015
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Money market funds(a)
$
275,478

 
$

 
$

 
$
275,478

US government agency securities(a)
1,000

 

 

 
1,000

Time deposits

 
53,190

 

 
53,190

Commercial paper, $9,080 at cost (b)

 
9,087

 

 
9,087

Corporate notes and bonds, $41,838 at cost (b)

 
41,860

 

 
41,860

Foreign currency exchange contracts(b)

 
379

 

 
379

Total assets at fair value
$
276,478

 
$
104,516

 
$

 
$
380,994

Liabilities:
 
 
 
 
 
 
 
Foreign currency exchange contracts(b)
$

 
$
(383
)
 
$

 
$
(383
)
Security price guarantees(c)

 
(334
)
 

 
(334
)
Contingent acquisition payments (d)

 

 
(3,931
)
 
(3,931
)
Total liabilities at fair value
$

 
$
(717
)
 
$
(3,931
)
 
$
(4,648
)
 
 
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 1.31 years.

9

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


The changes in the fair value of contingent acquisition payment liabilities are as follows (dollars in thousands):
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2015
 
2015
Balance at beginning of period
$
5,440

 
$
6,864

Earn-out liability established at time of acquisition
(554
)
 
85

Payments upon settlement
(1,476
)
 
(2,938
)
Adjustments to fair value included in acquisition-related costs, net
521

 
(80
)
Balance at end of period
$
3,931

 
$
3,931

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 2016. As of March 31, 2015, we could be required to pay up to $16.0 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.
7.
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (dollars in thousands): 
 
March 31, 2015
 
September 30, 2014
Compensation
$
91,455

 
$
146,730

Cost of revenue related liabilities
19,632

 
22,340

Accrued interest payable
15,106

 
15,092

Liability for unsettled share repurchases
10,465

 

Professional fees
9,844

 
10,852

Sales and marketing incentives
8,006

 
10,188

Sales and other taxes payable
5,916

 
9,367

Acquisition costs and liabilities
5,494

 
9,307

Facilities related liabilities
5,207

 
5,720

Other
8,878

 
11,683

Total
$
180,003

 
$
241,279

 

10

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


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): 
 
March 31, 2015
 
September 30, 2014
Current liabilities:
 
 
 
Deferred maintenance revenue
$
150,983

 
$
140,737

Unearned revenue
192,668

 
157,488

Total current deferred revenue
$
343,651

 
$
298,225

Long-term liabilities:
 
 
 
Deferred maintenance revenue
$
58,412

 
$
60,398

Unearned revenue
235,742

 
189,481

Total long-term deferred revenue
$
294,154

 
$
249,879

9.
Restructuring and Other Charges, net
Restructuring and other charges, net include restructuring expenses together with other expenses 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 duplicate facilities and other contract termination costs. Other amounts may include gains or losses on non-controlling strategic equity interests, and gains or losses on sales of non-strategic assets or product lines.
The following table sets forth accrual activity relating to our restructuring reserves for the six months ended March 31, 2015 (dollars in thousands): 
 
Personnel
 
Facilities
 
Total
Balance at September 30, 2014
$
3,258

 
$
1,468

 
$
4,726

Restructuring charges, net
1,639

 
256

 
1,895

Cash payments
(4,191
)
 
(1,372
)
 
(5,563
)
Balance at March 31, 2015
$
706

 
$
352

 
$
1,058

Restructuring charges, net by segment are as follows (dollars in thousands):
 
Three Months Ended March 31,
2015
 
2014
Personnel
 
Facilities
 
Total
 
Personnel
 
Facilities
 
Total
Healthcare
$
(81
)
 
$

 
$
(81
)
 
$
186

 
$

 
$
186

Mobile and Consumer
(125
)
 
(172
)
 
(297
)
 
(12
)
 

 
(12
)
Enterprise
71

 

 
71

 
1,568

 

 
1,568

Imaging
(1
)
 
(60
)
 
(61
)
 
131

 

 
131

Corporate
35

 

 
35

 
(199
)
 
45

 
(154
)
Total restructuring expense
$
(101
)
 
$
(232
)
 
$
(333
)
 
$
1,674

 
$
45

 
$
1,719

Included in restructuring charges, net for the three months ended March 31, 2015, is the benefit resulting from lower charges than originally estimated related to final settlement on abandoned facilities.

11

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


 
Six Months Ended March 31,
2015
 
2014
Personnel
 
Facilities
 
Total
 
Personnel
 
Facilities
 
Total
Healthcare
$
(209
)
 
$

 
$
(209
)
 
$
400

 
$

 
$
400

Mobile and Consumer
(113
)
 
(172
)
 
(285
)
 
190

 

 
190

Enterprise
289

 
95

 
384

 
1,745

 

 
1,745

Imaging
1,479

 
333

 
1,812

 
131

 

 
131

Corporate
193

 

 
193

 
627

 
2,463

 
3,090

Total restructuring expense
$
1,639

 
$
256

 
$
1,895

 
$
3,093

 
$
2,463

 
$
5,556

For the six months ended March 31, 2015, we recorded net restructuring charges of $1.9 million, which included a $1.6 million severance charge related to the elimination of approximately 60 personnel to eliminate duplicative positions resulting from acquisitions, and $0.3 million primarily resulting from the restructuring of facilities that will no longer be utilized.
10.
Debt and Credit Facilities
At March 31, 2015 and September 30, 2014, we had the following borrowing obligations (dollars in thousands): 
 
March 31, 2015
 
September 30, 2014
5.375% Senior Notes due 2020, net of unamortized premium of $4.2 million and $4.6 million, respectively. Effective interest rate 5.28%.
$
1,054,209

 
$
1,054,601

2.75% Convertible Debentures due 2031, net of unamortized discount of $75.7 million and $88.8 million, respectively. Effective interest rate 7.43%.
614,280

 
601,226

Credit Facility, net of unamortized original issue discount of $0.9 million and $1.0 million respectively.
474,083

 
476,399

Total long-term debt
$
2,142,572

 
$
2,132,226

Less: current portion
4,834

 
4,834

Non-current portion of long-term debt
$
2,137,738

 
$
2,127,392

2.75% Convertible Debentures due 2031
As of March 31, 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 principal amount in cash prior to maturity.
Credit Facility
The Credit Facility includes a term loan and a $75 million revolving credit line, including letters of credit. The term loan matures on August 7, 2019 and the revolving credit line matures on August 7, 2018. As of March 31, 2015, there were $5.4 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 March 31, 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 March 31, 2015, the applicable margin for the term loans was 2.75%, with an effective rate of 2.93%, on the outstanding balance of $475.0 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 March 31, 2015, the commitment fee rate was 0.375%.

12

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


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 March 31, 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 March 31, 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 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 2015 as no excess cash flow, as defined in the agreement, was generated in fiscal 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 million of our outstanding shares of common stock. Approximately $168.9 million remained available for share repurchases as of March 31, 2015 pursuant to our repurchase program. We repurchased 8.6 million shares for $120.3 million during the six months ended March 31, 2015. Since the commencement of the program, we have repurchased 20.0 million shares for $331.1 million. On April 29, 2015, our Board of Directors approved an additional $500 million under our share repurchase program. Under the terms of the 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 9.7 million and 12.5 million shares for the three months ended March 31, 2015 and 2014, respectively, and 11.2 million and 13.1 million shares for the six months ended March 31, 2015 and 2014, respectively, have been excluded from the computation of diluted net loss per share because their inclusion would be anti-dilutive.
 
 
 
 

13

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


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 March 31,
 
Six Months Ended March 31,
2015
 
2014
 
2015
 
2014
Cost of product and licensing
$
96

 
$
697

 
$
183

 
$
962

Cost of professional services and hosting
4,729

 
7,199

 
12,352

 
13,818

Cost of maintenance and support
631

 
406

 
1,574

 
1,190

Research and development
6,668

 
10,455

 
17,177

 
20,743

Selling and marketing
7,882

 
10,210

 
20,416

 
25,454

General and administrative
10,911

 
15,953

 
26,569

 
29,992

Total
$
30,917

 
$
44,920

 
$
78,271

 
$
92,159

Stock Options
The table below summarizes activity relating to stock options for the six months ended March 31, 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
(98,845
)
 
$
2.03

 
 
 
 
Forfeited
(892
)
 
$
20.04

 
 
 
 
Expired
(29,248
)
 
$
20.38

 
 
 
 
Outstanding at March 31, 2015
3,594,357

 
$
13.72

 
1.8 years
 
$
4.7
 million
Exercisable at March 31, 2015
3,592,132

 
$
13.71

 
1.8 years
 
$
4.7
 million
Exercisable at March 31, 2014
3,919,399

 
$
13.39

 
2.6 years
 
$
15.0
 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 March 31, 2015 ($14.35) and the exercise price of the underlying options.
The weighted-average intrinsic value of stock options exercised during the six months ended March 31, 2015 and 2014 was $1.2 million and $2.1 million, respectively.
 

14

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


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 six months ended March 31, 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
1,312,530

 
5,551,512

Earned/released
(1,847,551
)
 
(5,604,407
)
Forfeited
(603,889
)
 
(321,467
)
Outstanding at March 31, 2015
4,587,475

 
7,974,745

Weighted average remaining recognition period of outstanding Restricted Units
1.6 years

 
1.6 years

Unearned stock-based compensation expense of outstanding Restricted Units
$57.6 million
 
$88.1 million
Aggregate intrinsic value of outstanding Restricted Units(a)
$65.8 million
 
$114.5 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 March 31, 2015 ($14.35) 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: 
 
Six Months Ended March 31,
2015
 
2014
Weighted-average grant-date fair value per share
$
14.87

 
$
15.26

Total intrinsic value of shares vested (in millions)
$
110.9

 
$
70.2

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 six months ended March 31, 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 March 31, 2015
500,000

 
$
19.01

Weighted average remaining recognition period of outstanding Restricted Awards
0.6 years

 
 
Unearned stock-based compensation expense of outstanding Restricted Awards
$4.2 million
 
 
Aggregate intrinsic value of outstanding Restricted Awards
$7.2 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: 
 
Six Months Ended March 31,
2015
 
2014
Weighted-average grant-date fair value per share
$

 
$
15.71

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

 
$
3.9


15

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


14.
Income Taxes
The components of (loss) income before income taxes are as follows (dollars in thousands):
 
Three Months Ended March 31,
 
Six Months Ended March 31,
2015
 
2014
 
2015
 
2014
Domestic
$
(37,225
)
 
$
(55,683
)
 
$
(100,935
)
 
$
(121,628
)
Foreign
34,186

 
22,850

 
53,215

 
36,360

(Loss) income before income taxes
$
(3,039
)
 
$
(32,833
)
 
$
(47,720
)
 
$
(85,268
)
The components of provision from income taxes are as follows (dollars in thousands):
 
Three Months Ended March 31,
 
Six Months Ended March 31,
2015
 
2014
 
2015
 
2014
Domestic
$
5,832

 
$
5,250

 
$
9,634

 
$
3,795

Foreign
5,227

 
1,144

 
7,239

 
5,577

Provision for income taxes
$
11,059

 
$
6,394

 
$
16,873

 
$
9,372

Effective tax rate
(363.9
)%
 
(19.5
)%
 
(35.4
)%
 
(11.0
)%

The effective income tax rate was (363.9)% and (35.4)% for the three and six months ended March 31, 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 and provide no benefit to the provision. The three and six months ended March 31, 2015 also include$3.5 million and $7.1 million, respectively, of deferred tax expense related to tax deductible goodwill. In addition, included in the three and six months ended March 31, 2015 is a $2.5 million increase to the valuation allowance resulting from an allocation period adjustment related to an acquisition. Earnings in foreign operations are subject to a significantly lower tax rate than the U.S. statutory tax rate, driven primarily by our subsidiaries in Ireland.
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.
At March 31, 2015 and September 30, 2014, the liability for income taxes associated with uncertain tax positions was $22.1 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
Like 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 condition. Because litigation is inherently unpredictable, however, the actual amounts of loss may prove to be larger or smaller than the amounts reflected in our consolidated financial statements, and we could incur judgments or enter into settlements of claims that could adversely affect our financial position, operating results 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

16

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


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.

17

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 operating 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
 
Six Months Ended
March 31,
 
March 31,
2015
 
2014
 
2015
 
2014
Segment revenues(a):
 
 
 
 
 
 
 
Healthcare
$
228,604

 
$
236,997

 
$
459,584

 
$
464,283

Mobile and Consumer
116,691

 
107,254

 
224,037

 
219,712

Enterprise
83,302

 
89,728

 
173,945

 
181,734

Imaging
59,466

 
55,994

 
119,527

 
114,289

Total segment revenues
488,063

 
489,973

 
977,093

 
980,018

Acquisition-related revenues
(13,004
)
 
(14,320
)
 
(28,015
)
 
(34,385
)
Total consolidated revenues
475,059

 
475,653

 
949,078

 
945,633

Segment profit:
 
 
 
 
 
 
 
Healthcare
79,842

 
91,477

 
158,120

 
169,937

Mobile and Consumer
33,816

 
16,697

 
45,509

 
28,830

Enterprise
19,282

 
18,230

 
44,014

 
40,673

Imaging
22,080

 
20,704

 
42,008

 
43,384

Total segment profit
155,020

 
147,108

 
289,651

 
282,824

Corporate expenses and other, net
(35,450
)
 
(30,126
)
 
(71,118
)
 
(61,332
)
Acquisition-related revenues and cost of revenues adjustment
(12,088
)
 
(13,037
)
 
(26,378
)
 
(31,869
)
Stock-based compensation
(30,917
)
 
(44,920
)
 
(78,271
)
 
(92,159
)
Amortization of intangible assets
(40,959
)
 
(41,913
)
 
(82,917
)
 
(84,579
)
Acquisition-related costs, net
(6,523
)
 
(6,802
)
 
(11,279
)
 
(9,600
)
Restructuring and other charges, net
333

 
(4,719
)
 
(1,895
)
 
(8,556
)
Costs associated with IP collaboration agreements
(2,938
)
 
(4,937
)
 
(5,876
)
 
(9,874
)
Other expense, net
(29,517
)
 
(33,487
)
 
(59,637
)
 
(70,123
)
Loss before income taxes
$
(3,039
)
 
$
(32,833
)
 
$
(47,720
)
 
$
(85,268
)
 
(a)
Segment revenues differ from reported revenues due to certain revenue adjustments related to acquisitions that would otherwise have been recognized but for the purchase accounting treatment of the business combinations. 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.
No country outside of the United States provided greater than 10% of our total revenue. Revenue, classified by the major geographic areas in which our customers are located, was as follows (dollars in thousands): 
 
Three Months Ended
 
Six Months Ended
March 31,
 
March 31,
2015
 
2014
 
2015
 
2014
United States
$
352,448

 
$
346,587

 
$
700,122

 
$
689,772

International
122,611

 
129,066

 
248,956

 
255,861

Total revenues
$
475,059

 
$
475,653

 
$
949,078

 
$
945,633



18



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;
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 automation of this important workflow, and also enable hospitals to improve documentation used to support billings. In

19


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 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 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, electronic medical records (EMR's), 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 transcription on-demand base and migration of our voicemail-to-text business from a semi-automated service to a lower-priced, fully automated solution. 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 voicemail-to-text expectations offsetting strong net new bookings in mobile connected services and Enterprise on-demand contracts.

20


Strategy
During fiscal 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. 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 six months ended March 31, 2015, as compared to the six months ended March 31, 2014:
Total revenues increased by $3.5 million to $949.1 million;
Net loss decreased by $30.0 million to a loss of $64.6 million;
Gross margins increased by 0.6 percentage points to 56.4%;
Operating margins increased by 2.9 percentage points to 1.3%; and
Cash provided by operating activities increased $50.4 million to $215.6 million.
As of March 31, 2015, as compared to March 31, 2014:
Total deferred revenue increased 26.3% to $637.8 million driven by Mobile connected services, Healthcare term licenses, and maintenance contracts.
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 March 31, 2015, as compared to the period ended March 31, 2014, is as follows:
Annualized line run-rate in our on-demand healthcare solutions decreased 3% from one year ago to approximately 5.3 billion lines per year. The annualized line run-rate is determined using billed equivalent line counts in a given quarter, multiplied by four;

21


Net new bookings decreased 27.4% from one year ago to $304.7 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 decreased 0.8% from one year ago to approximately $2.2 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 64.9% and 64.1% of total revenue for six months ended March 31, 2015 and March 31, 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
 
Six Months Ended
 
Dollar
Change
 
Percent
Change
March 31,
 
 
March 31,
 
2015
 
2014
 
 
2015
 
2014
 
Product and licensing
$
174.5

 
$
174.8

 
$
(0.3
)
 
(0.2
)%
 
$
344.1

 
$
353.3

 
$
(9.2
)
 
(2.6
)%
Professional services and hosting
224.5

 
227.6

 
(3.1
)
 
(1.4
)%
 
450.7

 
445.6

 
5.1

 
1.1
 %
Maintenance and support
76.1

 
73.3

 
2.8

 
3.8
 %
 
154.3

 
146.7

 
7.6

 
5.2
 %
Total Revenues
$
475.1

 
$
475.7

 
$
(0.6
)
 
(0.1
)%
 
$
949.1

 
$
945.6

 
$
3.5

 
0.4
 %
United States
$
352.5

 
$
346.6

 
$
5.9

 
1.7
 %
 
$
700.1

 
$
689.8

 
$
10.3

 
1.5
 %
International
122.6

 
129.1

 
(6.5
)
 
(5.0
)%
 
249.0

 
255.8

 
(6.8
)
 
(2.7
)%
Total Revenues
$
475.1

 
$
475.7

 
$
(0.6
)
 
(0.1
)%
 
$
949.1

 
$
945.6

 
$
3.5

 
0.4
 %
The geographic split for the three months ended March 31, 2015, was 74% of total revenues in the United States and 26% internationally as compared to 73% of total revenues in the United States and 27% internationally for the same period last year. The geographic split for the six months ended March 31, 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.

22


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
 
Six Months Ended
 
Dollar
Change
 
Percent
Change
March 31,
 
 
March 31,
 
2015
 
2014
 
 
2015
 
2014
 
Product and licensing revenue
$
174.5

 
$
174.8

 
$
(0.3
)
 
(0.2
)%
 
$
344.1

 
$
353.3

 
$
(9.2
)
 
(2.6)%
As a percentage of total revenue
36.7
%
 
36.7
%
 
 
 
 
 
36.3
%
 
37.4
%
 
 
 
 
Product and licensing revenue for the three months ended March 31, 2015, as compared to the three months ended March 31, 2014, was flat. Revenues in the Mobile and Consumer segment increased by $10.7 million offset by a $9.3 million decrease in the Healthcare segment. Within our Mobile and Consumer segment, automotive license sales increased by $21.1 million, offset by a $6.1 million decrease in mobile handset license sales as the handset market continues to consolidate. Within our Healthcare segment, license sales of our clinical documentation solutions decreased by $10.4 million.
The decrease in product and licensing revenue for the six months ended March 31, 2015, as compared to the six months ended March 31, 2014, was primarily driven by an $11.1 million decrease in the Healthcare segment offset by an increase of $3.2 million in the Mobile and Consumer segment. Within our Healthcare segment, license sales of our clinical documentation solutions decreased $13.2 million, offset by a $2.1 million increase in our Clintegrity sales. Within our Mobile and Consumer segment, automotive license sales increased $27.4 million, offset by a $13.3 million decrease in mobile handset license sales as the handset market continues to consolidate, as well as a $9.0 million decrease in Dragon desktop consumer products sales.
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
 
Six Months Ended
 
Dollar
Change
 
Percent
Change
March 31,
 
 
March 31,
 
2015
 
2014
 
 
2015
 
2014
 
Professional services and hosting revenue
$
224.5

 
$
227.6

 
$
(3.1
)
 
(1.4
)%
 
$
450.7

 
$
445.6

 
$
5.1

 
1.1%
As a percentage of total revenue
47.3
%
 
47.8
%
 
 
 
 
 
47.5
%
 
47.1
%
 
 
 
 
The decrease in professional services and hosting revenue for the three months ended March 31, 2015, as compared to the three months ended March 31, 2014, was primarily driven by a $4.2 million decrease in professional services, offset by an increase of $1.1 million in hosting revenue. The decrease in professional services revenue consisted of a $6.0 million decrease in the Enterprise segment driven by lower professional services for our on-premise offerings. This was offset by a $2.1 million increase in the Healthcare segment driven by our Clintegrity offerings. In our hosting business, the Enterprise segment revenue increased by $1.9 million driven by our multi-channel solutions, offset by a $1.8 million decrease in the Healthcare segment as we continue to experience some erosion of lines processed in our transcription services.
The increase in professional services and hosting revenue for the six months ended March 31, 2015, as compared to the six months ended March 31, 2014, was driven by growth in our on-demand revenue while professional services revenue remained flat. The growth in our on-demand revenue was lead by the Enterprise segment increasing revenue by $6.1 million. This was offset by a $2.5 million decrease in the Healthcare segment as we continue to experience some erosion of volumes in our transcription services.


23


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
 
Six Months Ended
 
Dollar
Change
 
Percent
Change
March 31,
 
 
March 31,
 
2015
 
2014
 
 
2015
 
2014
 
Maintenance and support revenue
$
76.1

 
$
73.3

 
$
2.8

 
3.8
%
 
$
154.3

 
$
146.7

 
$
7.6

 
5.2%
As a percentage of total revenue
16.0
%
 
15.5
%
 
 
 
 
 
16.2
%
 
15.5
%
 
 
 
 
The increase in maintenance and support revenue for the three months ended March 31, 2015, as compared to the three months ended March 31, 2014, included a $2.0 million increase in Healthcare, primarily driven by sales of clinical documentation solutions.
The increase in maintenance and support revenue for the six months ended March 31, 2015, as compared to the six months ended March 31, 2014, included a $5.0 million increase in Healthcare revenue, primarily driven by sales of clinical documentation solutions, together with an increase of $2.7 million in Imaging revenue.

Costs and Expenses
Cost of Product and Licensing Revenue
Cost of product and licensing revenue primarily consists of material and fulfillment costs, manufacturing and operations costs and third-party royalty expenses. The following table shows the cost of product and licensing revenue, in dollars and as a percentage of product and licensing revenue (dollars in millions): 
 
Three Months Ended
 
Dollar
Change
 
Percent
Change
 
Six Months Ended
 
Dollar
Change
 
Percent
Change
March 31,
 
 
March 31,
 
2015
 
2014
 
 
2015
 
2014
 
Cost of product and licensing revenue
$
23.3

 
$
25.2

 
$
(1.9
)
 
(7.5
)%
 
$
47.2

 
$
50.4

 
$
(3.2
)
 
(6.3
)%
As a percentage of product and licensing revenue
13.4
%
 
14.4
%
 
 
 
 
 
13.7
%
 
14.3
%
 
 
 
 
The decrease in cost of product and licensing revenue for the three months ended March 31, 2015, as compared to the three months ended March 31, 2014, primarily consisted of a $1.2 million decrease in Mobile and Consumer costs driven by lower costs related to Dragon desktop consumer products sales.
The decrease in cost of product and licensing revenue for the six months ended March 31, 2015, as compared to the six months ended March 31, 2014, consisted of a $1.9 million decrease in Mobile and Consumer costs driven by lower costs related to Dragon desktop consumer products sales together with a $1.4 million decrease in Imaging costs.
Cost of Professional Services and Hosting Revenue
Cost of professional services and hosting revenue primarily consists of compensation for services personnel, outside c