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

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2020
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-27038
 _____________________________________________
NUANCE COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
 _____________________________________________
DE
 
94-3156479
(State or Other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
 
1 Wayside Road
Burlington,
 
MA
 
01803
(Address of principal executive offices)
 
 
 
(Zip Code)
Registrant’s telephone number, including area code:
(781565-5000
 _____________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, par value $0.001
NUAN
Nasdaq Stock Market LLC
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer," “accelerated filer," “smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
 
Accelerated Filer
Non-accelerated Filer
 
Smaller Reporting Company
 
 
 
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.      
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
The number of shares of the Registrant’s Common Stock, outstanding as of April 30, 2020 was 281,271,002.
 




NUANCE COMMUNICATIONS, INC.
TABLE OF CONTENTS
 
 
 
 
 
Page
Item 1.
 
Condensed Consolidated Financial Statements:
 
 
 
 
Consolidated Statements of Operations for the three and six months ended March 31, 2020 and 2019
 
 
 
Consolidated Statements of Comprehensive Income for the three and six months ended March 31, 2020 and 2019
 
 
 
Consolidated Balance Sheets at March 31, 2020 and September 30, 2019
 
 
 
Consolidated Statements of Stockholders’ Equity for the three and six months ended March 31, 2020 and 2019
 
 
 
Consolidated Statements of Cash Flows for the six months ended March 31, 2020 and 2019
 
 
 
Notes to Condensed Consolidated Financial Statements
 
Item 2.
 
 
Item 3.
 
 
Item 4.
 
 
 
Item 1.
 
 
Item 1A.
 
 
Item 2.
 
 
Item 3.
 
 
Item 4.
 
 
Item 5.
 
 
Item 6.
 
 
 
 
Certifications
 
 







NUANCE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2020
 
2019
 
2020
 
2019
 
(Unaudited)
(In thousands, except per share amounts)
Revenues:
 
 
 
 
 
 
 
Hosting and professional services
$
235,514

 
$
217,527

 
$
465,991

 
$
445,244

Product and licensing
69,599

 
58,226

 
194,779

 
174,115

Maintenance and support
64,224

 
60,831

 
126,800

 
136,900

Total revenues
369,337

 
336,584

 
787,570

 
756,259

Cost of revenues:
 
 
 
 
 
 
 
Hosting and professional services
133,196

 
134,294

 
268,986

 
270,892

Product and licensing
9,316

 
9,373

 
43,494

 
41,778

Maintenance and support
7,965

 
8,911

 
15,759

 
16,672

Amortization of intangible assets
6,616

 
6,681

 
13,243

 
14,037

Total cost of revenues
157,093

 
159,259

 
341,482

 
343,379

Gross profit
212,244

 
177,325

 
446,088

 
412,880

Operating expenses:
 
 
 
 
 
 
 
Research and development
57,909

 
45,758

 
114,462

 
92,624

Sales and marketing
71,024

 
67,683

 
137,496

 
135,053

General and administrative
38,376

 
39,857

 
76,690

 
83,323

Amortization of intangible assets
11,821

 
13,824

 
24,370

 
27,666

Acquisition-related costs, net
1,680

 
2,051

 
2,847

 
4,652

Restructuring and other charges, net
6,329

 
9,858

 
13,012

 
24,499

Total operating expenses
187,139

 
179,031

 
368,877

 
367,817

Income (loss) from operations
25,105

 
(1,706
)
 
77,211

 
45,063

Other (expense) income:
 
 
 
 
 
 
 
Interest income
1,512

 
3,671

 
3,698

 
6,225

Interest expense
(23,629
)
 
(31,152
)
 
(47,444
)
 
(63,418
)
Other (expense) income, net
(1,688
)
 
199

 
(13,728
)
 
(977
)
Income (loss) before income taxes
1,300

 
(28,988
)
 
19,737

 
(13,107
)
Provision (benefit) for income taxes
14,810

 
(591
)
 
(21,630
)
 
1,409

Net (loss) income from continuing operations
(13,510
)
 
(28,397
)
 
41,367

 
(14,516
)
Net income (loss) from discontinued operations

 
105,729

 
(6,192
)
 
110,938

Net (loss) income
$
(13,510
)
 
$
77,332

 
$
35,175

 
$
96,422

 
 
 
 
 
 
 
 
Net (loss) income per common share - basic:
 
 
 
 
 
 
 
Continuing operations
$
(0.05
)
 
$
(0.10
)
 
$
0.15

 
$
(0.05
)
Discontinued operations

 
0.37

 
(0.03
)
 
0.39

Total net (loss) income per basic common share
$
(0.05
)
 
$
0.27

 
$
0.12

 
$
0.34

 
 
 
 
 
 
 
 
Net (loss) income per common share - diluted:
 
 
 
 
 
 
 
Continuing operations
$
(0.05
)
 
$
(0.10
)
 
$
0.14

 
$
(0.05
)
Discontinued operations

 
0.37

 
(0.02
)
 
0.39

Total net (loss) income per diluted common share
$
(0.05
)
 
$
0.27

 
$
0.12

 
$
0.34

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
282,576

 
285,866

 
283,366

 
286,849

Diluted
282,576

 
285,866

 
288,214

 
286,849








See accompanying notes.

3

Table of Contents

NUANCE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2020
 
2019
 
2020
 
2019
 
(Unaudited)
 
(In thousands)
Net (loss) income
$
(13,510
)
 
$
77,332

 
$
35,175

 
$
96,422

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(15,538
)
 
5,255

 
(11,114
)
 
(3,047
)
Cerence Spin-off

 

 
12,331

 

Pension adjustments

 
46

 
2,007

 
(314
)
Unrealized (loss) gain on marketable securities
(496
)
 
158

 
(528
)
 
156

Total other comprehensive (loss) income, net
(16,034
)

5,459

 
2,696

 
(3,205
)
Comprehensive (loss) income
$
(29,544
)
 
$
82,791

 
$
37,871

 
$
93,217











































See accompanying notes.

4

Table of Contents

NUANCE COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS 
 
March 31,
2020
 
September 30,
2019
 
(Unaudited)
 
(In thousands, except per
share amounts)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
397,907

 
$
560,961

Marketable securities
123,373

 
186,555

Accounts receivable, less allowances for doubtful accounts of $9,977 and $9,797
222,474

 
240,673

Prepaid expenses and other current assets
148,494

 
175,166

Current assets of discontinued operations

 
91,858

Total current assets
892,248

 
1,255,213

Marketable securities
4,897

 
17,287

Land, building and equipment, net
127,721

 
121,203

Goodwill
2,125,053

 
2,127,896

Intangible assets, net
253,414

 
291,371

Right-of-use assets
110,838

 

Other assets
242,579

 
316,215

Long-term assets of discontinued operations

 
1,236,608

Total assets
$
3,756,750

 
$
5,365,793

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
Current portion of long-term debt
$
230,000

 
$
1,142,870

Contingent and deferred acquisition payments
14,676

 
17,470

Accounts payable
75,638

 
90,826

Accrued expenses and other current liabilities
187,401

 
249,570

Deferred revenue
259,639

 
214,223

Current liabilities of discontinued operations

 
130,117

Total current liabilities
767,354

 
1,845,076

Long-term debt
1,512,859

 
793,536

Deferred revenue, net of current portion
113,705

 
133,783

Deferred tax liabilities
63,942

 
54,216

Operating lease liabilities
108,420

 

Other liabilities
74,753

 
79,378

Long-term liabilities of discontinued operations

 
286,654

Total liabilities
2,641,033

 
3,192,643

Commitments and contingencies (Note 15)

 

 
 
 
 
Stockholders’ equity:
 
 
 
Common stock, $0.001 par value per share; 560,000 shares authorized; 284,832 and 289,680 shares issued and 281,081 and 285,930 shares outstanding, respectively
285

 
290

Additional paid-in capital
1,520,734

 
2,597,889

Treasury stock, at cost (3,751 shares)
(16,788
)
 
(16,788
)
Accumulated other comprehensive loss
(130,077
)
 
(132,773
)
Accumulated deficit
(258,437
)
 
(293,612
)
Total Nuance Communications, Inc. stockholders’ equity
1,115,717

 
2,155,006

Noncontrolling interests

 
18,144

Total stockholders’ equity
1,115,717

 
2,173,150

Total liabilities and stockholders’ equity
$
3,756,750

 
$
5,365,793


See accompanying notes.

5

Table of Contents

NUANCE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


For the three months ended March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
Common Stock
 
Additional Paid-In Capital
 
Treasury Stock
 
Other Comprehensive Loss
 
Accumulated Deficit
 
Noncontrolling Interests
 
Total Stockholders' Equity
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
 
 
 
Balance at December 31, 2019
287,626

 
$
288

 
$
1,615,989

 
3,751

 
$
(16,788
)
 
$
(114,043
)
 
$
(244,927
)
 
$

 
$
1,240,519

Issuance of common stock under employee stock plans
1,138

 
1

 
7,203

 

 

 

 

 

 
7,204

Cancellation of restricted stock, and repurchase of common stock at cost for employee tax withholding
(169
)
 

 
(3,478
)
 

 

 

 

 

 
(3,478
)
Stock-based compensation

 

 
23,911

 

 

 

 

 

 
23,911

Repurchase and retirement of common stock
(3,763
)
 
(4
)
 
(76,770
)
 

 

 

 

 

 
(76,774
)
Repurchases of convertible notes (a)

 

 
(46,121
)
 

 

 

 

 

 
(46,121
)
Net loss

 

 

 

 

 

 
(13,510
)
 

 
(13,510
)
Other comprehensive loss

 

 

 

 

 
(16,034
)
 

 

 
(16,034
)
Balance at March 31, 2020
284,832

 
$
285

 
$
1,520,734

 
3,751

 
$
(16,788
)
 
$
(130,077
)
 
$
(258,437
)
 
$

 
$
1,115,717

For the six months ended March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
Common Stock
 
Additional Paid-In Capital
 
Treasury Stock
 
Other Comprehensive Loss
 
Accumulated Deficit
 
Noncontrolling Interests
 
Total Stockholders' Equity
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
 
 
(In thousands)
Balance at September 30, 2019
289,680

 
$
290

 
$
2,597,889

 
3,751

 
$
(16,788
)
 
$
(132,773
)
 
$
(293,612
)
 
$
18,144

 
$
2,173,150

Cerence Spin-off

 

 
(922,567
)
 

 

 
12,331

 

 
(18,144
)
 
(928,380
)
Issuance of common stock under employee stock plans
6,720

 
7

 
7,253

 

 

 

 

 

 
7,260

Cancellation of restricted stock, and repurchase of common stock at cost for employee tax withholding
(2,111
)
 
(2
)
 
(36,605
)
 

 

 

 

 

 
(36,607
)
Stock-based compensation


 


 
90,093

 

 

 

 

 

 
90,093

Repurchases and retirement of common stock
(9,457
)
 
(10
)
 
(169,208
)
 

 

 

 

 

 
(169,218
)
Repurchases of convertible notes (a)

 

 
(46,121
)
 

 

 

 

 

 
(46,121
)
Net income

 

 

 

 

 

 
35,175

 

 
35,175

Other comprehensive loss

 

 

 

 

 
(9,635
)
 

 

 
(9,635
)
Balance at March 31, 2020
284,832

 
$
285

 
$
1,520,734

 
3,751

 
$
(16,788
)
 
$
(130,077
)
 
$
(258,437
)
 
$

 
$
1,115,717

                     
(a) According to ASC 470-20, cash consideration paid to repurchase and retire our convertible notes was first allocated to debt component based on the actual fair value on the trading date, and the remaining consideration was allocated to additional paid-in capital.

6

Table of Contents

NUANCE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
For the three months ended March 31, 2019
 
Common Stock
 
Additional Paid-In Capital
 
Treasury Stock
 
Accumulated Other
 
Accumulated Deficit
 
Total Stockholders' Equity
 
Shares
 
Amount
 
 
Shares
 
Amount
 
Comprehensive Loss
 
 
 
 
Balance at December 31, 2018
290,035

 
$
290

 
$
2,578,496

 
3,751

 
$
(16,788
)
 
$
(131,527
)
 
$
(488,332
)
 
$
1,942,139

Issuance of common stock under employee stock plans
1,426

 
1

 
8,642

 

 

 

 

 
8,643

Cancellation of restricted stock, and repurchase of common stock at cost for employee tax withholding
(252
)
 

 
(4,040
)
 

 

 

 

 
(4,040
)
Stock-based compensation

 

 
25,774

 

 

 

 

 
25,774

Repurchase and retirement of common stock
(1,171
)
 
(1
)
 
(16,164
)
 

 

 

 

 
(16,165
)
Reclassification of currency translation differences into earnings as a result of the disposition of our Imaging business

 

 

 

 

 
5,605

 

 
5,605

Net income

 

 

 

 

 

 
77,332

 
77,332

Other comprehensive income

 

 

 

 

 
5,459

 

 
5,459

Balance at March 31, 2019
290,038

 
$
290

 
$
2,592,708

 
3,751

 
$
(16,788
)
 
$
(120,463
)
 
$
(411,000
)
 
$
2,044,747

For the six months ended March 31, 2019
 
Common Stock
 
Additional Paid-In Capital
 
Treasury Stock
 
Accumulated Other
 
Accumulated Deficit
 
Total Stockholders' Equity
 
Shares
 
Amount
 
 
Shares
 
Amount
 
Comprehensive Loss
 
 
 
(In thousands)
Balance at September 30, 2018
291,504

 
$
291

 
$
2,597,693

 
3,751

 
$
(16,788
)
 
$
(122,863
)
 
$
(740,837
)
 
$
1,717,496

Adoption of ASC 606

 

 

 

 

 

 
233,415

 
233,415

Issuance of common stock under employee stock plans
6,579

 
7

 
8,636

 

 

 

 

 
8,643

Cancellation of restricted stock, and repurchase of common stock at cost for employee tax withholding
(1,982
)
 
(2
)
 
(31,558
)
 

 

 

 

 
(31,560
)
Stock-based compensation

 

 
109,252

 

 

 

 

 
109,252

Repurchase and retirement of common stock
(6,063
)
 
(6
)
 
(91,315
)
 

 

 

 

 
(91,321
)
Reclassification of currency translation differences into earnings as a result of the disposition of our Imaging business

 

 

 

 

 
5,605

 

 
5,605

Net income

 

 

 

 

 

 
96,422

 
96,422

Other comprehensive loss

 

 

 

 

 
(3,205
)
 

 
(3,205
)
Balance at March 31, 2019
290,038

 
$
290

 
$
2,592,708

 
3,751

 
$
(16,788
)
 
$
(120,463
)
 
$
(411,000
)
 
$
2,044,747



See accompanying notes.

7

Table of Contents

NUANCE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Six Months Ended March 31,
 
2020
 
2019
 
(Unaudited)
(In thousands)
Cash flows from operating activities:
 
 
 
Net income (loss) from continuing operations
$
41,367

 
$
(14,516
)
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
19,150

 
26,368

Amortization
37,613

 
41,703

Stock-based compensation
64,895

 
54,295

Non-cash interest expense
25,318

 
24,686

Deferred tax benefit
(39,255
)
 
(11,642
)
Loss on extinguishment of debt
18,656

 
910

Other
1,576

 
805

Changes in operating assets and liabilities, excluding effects of acquisitions:
 
 
 
Accounts receivable
19,934

 
19,773

Prepaid expenses and other assets
6,358

 
(14,698
)
Accounts payable
(6,219
)
 
2,584

Accrued expenses and other liabilities
(61,686
)
 
(7,081
)
Deferred revenue
27,031

 
28,951

  Net cash provided by operating activities - continuing operations
154,738

 
152,138

  Net cash (used in) provided by operating activities - discontinued operations
(13,307
)
 
51,418

Net cash provided by operating activities
141,431

 
203,556

Cash flows from investing activities:
 
 
 
Capital expenditures
(31,187
)
 
(23,434
)
Proceeds from disposition of businesses, net of transaction fees

 
404,045

Purchases of marketable securities and other investments
(148,880
)
 
(119,165
)
Proceeds from sales and maturities of marketable securities and other investments
224,987

 
117,661

Other
1,332

 
(2,553
)
Net cash provided by investing activities
46,252

 
376,554

Cash flows from financing activities:
 
 
 
Repurchase and redemption of debt
(513,642
)
 
(300,000
)
Net distribution from Cerence upon the spin-off
139,090

 

Payments for repurchase of common stock
(169,218
)
 
(91,321
)
Proceeds from issuance of common stock from employee stock plans
7,204

 
8,643

Proceeds from the revolving credit facility
230,000

 

Payments for taxes related to net share settlement of equity awards
(36,488
)
 
(38,191
)
Other financing activities
(2,834
)
 
(1,210
)
Net cash used in financing activities
(345,888
)
 
(422,079
)
Effects of exchange rate changes on cash and cash equivalents
(4,849
)
 
782

Net (decrease) increase in cash and cash equivalents
(163,054
)
 
158,813

Cash and cash equivalents at beginning of period
560,961

 
315,963

Cash and cash equivalents at end of period
$
397,907

 
$
474,776












See accompanying notes.

8

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


1. Organization and Presentation
Nuance Communications, Inc. ("We", "Nuance", "our", "us", or the "Company") is a pioneer and leader in conversational and cognitive artificial intelligence ("AI") innovations that bring intelligence to everyday work and life. Our solutions and technologies can understand, analyze and respond to human language to increase productivity and amplify human intelligence. Our solutions are used by businesses in the healthcare, financial services, telecommunications and travel industries, among others. We had three reportable segments: Healthcare, Enterprise, and Other as of March 31, 2020. See Note 17 for a description of each of these segments.
As more fully described in Note 4, on October 1, 2019, we completed the spin-off of our Automotive business as an independent public company, Cerence Inc. ("Cerence"). The historical results of our Automotive business are included within discontinued operations for all the historical periods presented.
Although we believe the disclosures included herein are adequate to ensure that the condensed consolidated financial statements are fairly presented, certain information and footnote disclosures to the financial statements have been condensed or omitted in accordance with the rules and regulations of the SEC. Accordingly, the condensed consolidated financial statements and the footnotes included herein should be read in conjunction with the audited financial statements and the footnotes included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire fiscal year or any future period.
2. Summary of Significant Accounting Policies
Recently Adopted Accounting Standards
Leases
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, "Leases" ("ASC 842"), which became effective for fiscal years beginning after December 15, 2018 and interim periods therein, with early adoption permitted. ASC 842 requires lessees to recognize on the balance sheet a right-of-use asset, representing its right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. The standard initially required the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply. We adopted ASC 842 in the first quarter of fiscal year 2020.
In July 2018, the FASB issued ASU 2018-10, "Codification Improvements to Topic 842, Leases" and ASU 2018-11, "Leases Topic 842 Targeted Improvements", which provide an additional (and optional) transition method whereby the new lease standard is applied at the adoption date and recognized as an adjustment to retained earnings. Additionally, in March 2019, the FASB issued ASU 2019-01, "Codification Improvements to Topic 842", which provides guidance in the following areas: (1) determining the fair value of the underlying asset by lessors that are not manufacturers or dealers and (2) clarification of interim disclosure requirements during transition. We adopted ASC 842, as amended, as of October 1, 2019 under the optional transition method and elected the package of practical expedients under the transition guidance.
As a result of the adoption, we recognized $120 million of operating lease right-of-use assets, and approximately $140 million of operating lease obligations. Approximately $20 million of deferred rent balances were reclassified against the costs of the right-of-use assets. The cumulative-effect adjustment to retained earnings as of October 1, 2019 was immaterial. The adoption of the guidance did not have a material impact on our condensed consolidated statement of operations or consolidated statement of cash flows.
Income Taxes
In January 2018, the FASB issued ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("AOCI"), which became effective for fiscal years beginning after December 15, 2018 and interim periods therein. The guidance gives entities the option to reclassify to retained earnings the tax effects resulting from the Tax Cuts and Jobs Act ("TCJA") related to items in AOCI. The guidance may be applied retrospectively to each period in which the effect of the TCJA is recognized in the period of adoption. The adoption of the guidance did not have a material impact on our condensed consolidated financial statements.

9


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

Issued Accounting Standards Not Yet Adopted
Internal-Use Software
In August 2018, the FASB issued ASU 2018-15, "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract", which is effective for fiscal year beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The guidance requires that implementation costs related to a hosting arrangement that is a service contract be capitalized and amortized over the term of the hosting arrangement, starting when the module or component of the hosting arrangement is ready for its intended use. The guidance will be applied retrospectively to each period presented. We do not expect the implementation to have a material impact on our condensed consolidated financial statements.
3. Revenue Recognition
We derive revenue from the following sources: (1) hosting services, (2) software licenses, including royalties, (3) maintenance and support ("M&S"), (4) professional services, and (5) sale of hardware. Revenue is reported net of applicable sales and use tax, value-added tax and other transaction taxes imposed on the related transaction including mandatory government charges that are passed through to our customers. We account for a contract when both parties have approved and committed to the contract, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and the collectibility of the consideration is probable.
The majority of our arrangements with customers typically contain multiple products and services. We account for individual products and services separately if they are distinct--that is, if a product or service is separately identifiable from other items in the contract and if a customer can benefit from it on its own or with other resources that are readily available to the customer.
We recognize revenue after applying the following five steps:
identification of the contract, or contracts, with a customer;
identification of the performance obligations in the contract, including whether they are distinct within the context of the contract;
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