-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KQQ31IJTFP+hm59cTjBA2XebG/swOzkndDFQ1d20jxm3KDo/eRLlW1fTkRUgS9Ca 6rGwv8CZmw1wtz9xqN7WFw== 0000950135-06-005024.txt : 20060814 0000950135-06-005024.hdr.sgml : 20060814 20060814121137 ACCESSION NUMBER: 0000950135-06-005024 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20060808 ITEM INFORMATION: Results of Operations and Financial Condition ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20060814 DATE AS OF CHANGE: 20060814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Nuance Communications, Inc. CENTRAL INDEX KEY: 0001002517 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 943156479 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-27038 FILM NUMBER: 061028088 BUSINESS ADDRESS: STREET 1: 1 WAYSIDE ROAD CITY: BURLINGTON STATE: MA ZIP: 01803 BUSINESS PHONE: 781-565-5000 MAIL ADDRESS: STREET 1: 1 WAYSIDE ROAD CITY: BURLINGTON STATE: MA ZIP: 01803 FORMER COMPANY: FORMER CONFORMED NAME: SCANSOFT INC DATE OF NAME CHANGE: 19990312 FORMER COMPANY: FORMER CONFORMED NAME: VISIONEER INC DATE OF NAME CHANGE: 19951020 8-K 1 b61920nce8vk.htm NUANCE COMMUNICATIONS, INC. e8vk
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): August 8, 2006
NUANCE COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
         
Delaware   000-27038   94-3156479
(State or other jurisdiction of   (Commission   (IRS Employer
incorporation)   File Number)   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
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
o   Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o   Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o   Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o   Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
 

 

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ITEM 2.02 Results of Operation and Financial Condition
ITEM 9.01 Financial Statements and Exhibits
SIGNATURE
EXHIBIT INDEX
Ex-99.1 Press Release dated August 8, 2006
Ex-99.2 Transcript of conference call dated August 8, 2006

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ITEM 2.02 Results of Operation and Financial Condition
On August 8, 2006, Nuance Communications, Inc. (the “Company”) announced its financial results for its third quarter ended June 30, 2006. The press release and the reconciliation contained therein, which have been attached as Exhibit 99.1 and incorporated herein, disclose certain financial measures that may be considered non-GAAP financial measures. Also on August 8, 2006, the Company held a conference call to discuss its financial results for the fiscal quarter ended June 30, 2006. The transcript of the call and the accompanying reconciliation, which have been attached hereto as Exhibit 99.2 and incorporated herein by reference, disclose certain financial measures that may be considered non-GAAP financial measures.
Management utilizes a number of different financial measures, both GAAP and non-GAAP, in analyzing and assessing the overall performance of our business, for making operating decisions and for forecasting and planning for future periods. We consider the use of non-GAAP revenue helpful in understanding the performance of our business, as it excludes the purchase accounting impact on acquired deferred revenue. We also consider the use of non-GAAP earnings per share helpful in assessing the organic performance of the continuing operation of our business from a cash perspective. By organic performance we mean performance as if we had not incurred certain costs and expenses associated with acquisitions. By continuing operations we mean the ongoing results of the business excluding certain unplanned costs. While our management uses these non-GAAP financial measures as a tool to enhance their understanding of certain aspects of our financial performance, our management does not consider these measures to be a substitute for, or superior to, the information provided by GAAP revenue and earnings per share. Consistent with this approach, we believe that disclosing non-GAAP revenue and non-GAAP earnings per share to the readers of our financial statements provides such readers with useful supplemental data that, while not a substitute for GAAP revenue and earnings per share, allows for greater transparency in the review of our financial and operational performance. In assessing the overall health of our business during the fiscal third quarter ended June 30, 2006, and, in particular, in evaluating our revenue and earnings per share, our management has either included or excluded items in three general categories, each of which are described below.
Acquisition Related Revenues and Expenses. We included revenue related to our acquisition of Dictaphone that we would otherwise recognize but for the purchase accounting treatment of this transaction to allow for more accurate comparisons to our financial results of our historical operations, forward looking guidance and the financial results of our peer companies. We also excluded certain expense items resulting from acquisitions to allow more accurate comparisons of our financial results to our historical operations, forward looking guidance and the financial results of our peer companies. These items include the following: (i) acquisition-related integration costs; (ii) amortization of intangible assets associated with our acquisitions; and (iii) costs associated with the investigation of the restatement of the financial results of an acquired entity (SpeechWorks International, Inc.). In recent years, we have completed a number of acquisitions, which result in non-continuing operating expenses which would not otherwise have been incurred. For example, we have incurred transition and integration costs such as retention bonuses for Former Nuance employees. In addition, actions taken by an acquired company, prior to an acquisition, could result in expenses being incurred by us, such as expenses incurred as a result of the restatement of the financial results of SpeechWorks International, Inc. We believe that providing non-GAAP information for certain revenue and expenses related to material acquisitions allows the users of our financial statements to review both the GAAP revenue and expenses in the period, as well as the non-GAAP expenses, thus providing for enhanced understanding of our historic and future financial results and facilitating comparisons to less acquisitive peer companies. Additionally, had we internally developed the products acquired, the amortization of intangible assets would have been expensed historically, and we believe the assessment of our operations excluding these costs is relevant to our assessment of internal operations and comparisons to industry performance.
Non-Cash Expenses. We provide non-GAAP information relative to the following non-cash expenses: (i) stock-based compensation; (ii) certain accrued interest; and (iii) certain accrued income taxes. Because of varying available valuation methodologies, subjective assumptions and the variety of award types, we believe that the exclusion of stock-based compensation allows for more accurate comparisons of our operating results to our peer companies. Further, we believe that excluding stock-based compensation expense allows for a more accurate comparison of our financial results to previous periods during which our equity compensation programs relied more heavily on equity-based awards that were not required to be reflected on our income statement. We believe that excluding non-cash interest expense and non-cash income taxes provides our senior management as well as other users of our financial statements, with a valuable perspective on the cash based performance and health of the

 

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business, including our current near-term projected liquidity.
Other Expenses. We exclude certain other expenses that are the result of other, unplanned events to measure our operating performance as well as our current and future liquidity both with and without these expenses. Included in these expenses are items such as: (i) non-acquisition-related restructuring charges and (ii) redundant costs associated with a change in independent accountants. These events are unplanned and arose outside of the ordinary course of our continuing operations. We assess our operating performance with these amounts included, but also excluding these amounts; the amounts relate to costs which are unplanned, and therefore by providing this information we believe our management and the users of our financial statements are better able to understand the financial results of what we consider to be our organic continuing operations.
We believe that providing the non-GAAP information to investors, in addition to the GAAP presentation, allows investors to view our financial results in the way management views the operating results. We further believe that providing this information allows investors to not only better understand our financial performance but more importantly, to evaluate the efficacy of the methodology and information used by management to evaluate and measure such performance.
The non-GAAP financial measures described above, and used in this press release, should not be considered in isolation from, or as a substitute for, a measure of financial performance prepared in accordance with GAAP. Further, investors are cautioned that there are material limitations associated with the use of non-GAAP financial measures as an analytical tool. In particular, many of the adjustments to the Company’s GAAP financial measures reflect the inclusion or exclusion of items that are recurring and will be reflected in the Company’s financial results for the foreseeable future. In addition, other companies, including other companies in the Company’s industry, may calculate non-GAAP net income (loss) differently than the Company, limiting it’s usefulness as a comparative tool. Management compensates for these limitations by providing specific information regarding the GAAP amounts included and excluded from the non-GAAP financial measures. In addition, as noted above, the Company’s management evaluates the non-GAAP financial measures together with the most directly comparable GAAP financial information.
ITEM 9.01 Financial Statements and Exhibits
  (d)   Exhibits
             
 
    99.1     Press Release dated August 8, 2006 by Nuance Communications, Inc.
 
    99.2     Transcript of conference call of Nuance Communications, Inc. dated August 8, 2006.

 

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SIGNATURE
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
         
  NUANCE COMMUNICATIONS, INC.
 		  
Date: August 14, 2006  By:   /s/ James R. Arnold, Jr.    
    James R. Arnold, Jr.    
    Chief Financial Officer   
 

 

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EXHIBIT INDEX
     
99.1
  Press Release dated August 8, 2006 by Nuance Communications, Inc.
99.2
  Transcript of conference call of Nuance Communications, Inc. dated August 8, 2006.

 

EX-99.1 2 b61920ncexv99w1.htm EX-99.1 PRESS RELEASE DATED AUGUST 8, 2006 exv99w1
 

Exhibit 99.1
News Release
From Nuance Communications
 
Contacts:

For Investors and Press   For Press
Richard Mack   Erica Hill
Nuance Communications, Inc.   Nuance Communications, Inc.
Tel: 781-565-5000   Tel: 781-565-5000
Email: richard.mack@nuance.com   Email: erica.hill@nuance.com
     
Nuance Announces Fiscal 2006 Third Quarter Results
 
Performance of Healthcare, Embedded Speech and Imaging
Drive Revenue and Earnings above Expectations
 
BURLINGTON, Mass., August 8, 2006 – Nuance Communications, Inc. (Nasdaq: NUAN) today announced financial results for the third quarter ended June 30, 2006.
Nuance reported revenues of $113.1 million in the quarter ended June 30, 2006, a 100 percent increase over revenues of $56.8 million in the quarter ended June 30, 2005. In addition to using GAAP results in evaluating the business, management also believes it is useful to evaluate results using non-GAAP measures. Using a non-GAAP measure, the Company reported non-GAAP revenue of $121.0 million which includes $7.9 million in revenue lost to purchase accounting in conjunction with Company’s acquisition of Dictaphone Corporation.
On a GAAP basis, Nuance recognized a net loss of $9.4 million, or $(0.06) per share, in the quarter ended June 30, 2006, compared with net income of $0.2 million, or $0.00 per diluted share, in the quarter ended June 30, 2005. Using a non-GAAP measure, Nuance reported non-GAAP net income of $19.7 million, or $0.11 per diluted share, for the period ending June 30, 2006, compared to non-GAAP net income of $5.9 million, or $0.05 per diluted share, in the quarter ended June 30, 2005.
These non-GAAP figures exclude non-cash taxes and interest, amortization of intangible assets, non-cash amortization of stock-based compensation, and acquisition-related transition and integration costs and charges, and include revenue lost to purchase accounting in conjunction with Company’s acquisition of Dictaphone Corporation. See “GAAP to non-GAAP Reconciliation” below for further information on the Company’s non-GAAP measures.
“Strong performance from our healthcare business, including Dictaphone, embedded speech and our imaging products fueled revenues and earnings above our expectations,” said Paul Ricci, chairman and CEO at Nuance. “In particular, we believe early results for Dictaphone reflect a smooth integration and strong demand for its enterprise and hosted dictation solutions. We experienced a very strong quarter in our imaging business. In addition, demand for our network speech solutions was up from the previous quarter. Our results from embedded speech are noteworthy, especially in international where we secured several important contracts and design wins.”

 

 

Consistent with the Company’s strategy and recent trends, highlights from the quarter include:
•   Dictaphone Healthcare – After the close of the Dictaphone acquisition on March 31, 2006, Nuance established a Dictaphone Healthcare division that expands the Company’s solutions portfolio, market reach and revenue streams within the large and rapidly growing healthcare vertical. In its first quarter within Nuance, Dictaphone generated revenues consistent with expectations owing to the rapid adoption of speech-based transcription solutions within its base and through new customer wins.
 
•   Embedded Speech – Revenues from embedded speech were a record in the quarter, up more than 35 percent year-over-year. Nuance secured strategic design wins with Alpine, Audi, Casio, Ford and Samsung. Within the mobile phone market, Nuance signed an important contract with a significant handset manufacturer in Asia-Pacific.
 
•   Enterprise Speech – The Company continued to generate revenue growth from its network speech solutions, benefiting from new and expanded agreements with enterprises and telecommunications providers, including AT&T, EchoStar, Nestle, Verizon and Wachovia. In addition, the Company strengthened its international presence through Conversations Europe, an inaugural event that drew participation from more than 200 partners, customers and industry experts.
 
•   Dictation – Nuance’s Dragon NaturallySpeaking products continued to perform well in the healthcare industry and led to expanded contracts within Kaiser-Permanente and the VA Hospital network. As expected however, total dictation revenues were down year-over-year as the Company prepared for the launch of Dragon NaturallySpeaking version 9 which launched subsequently in July 2006.
 
•   Imaging Solutions – Nuance’s imaging revenues were strong in the quarter, increasing 35 percent over the previous year. In the quarter, Nuance signed contracts with OEMs and enterprises including Brother, Kinkos, Kodak, the U.S. Chamber of Commerce and Xerox.
 
•   Operational Achievement – Nuance continued its disciplined approach to acquisition integration, cost synergies and expense controls which resulted in additional improvements and leverage in its operating margins. The Company noted it is on track to achieve its synergy targets associated with the acquisition of Dictaphone Corporation.
Nuance to Host Quarterly Conference Call at 4:30 p.m. Today
In conjunction with today’s announcement, Nuance will broadcast its quarterly conference call over the Internet at 4:30 p.m. ET. Those who wish to listen to the live broadcast should visit the Investor Relations section of the Company’s Web site at www.nuance.com at least 15 minutes prior to the event and follow the instructions provided to ensure that the necessary audio applications are downloaded and installed.
The conference call can also be heard via telephone by dialing (800) 288-8961 or (612) 332-0228 five minutes prior to the call and referencing conference code 837791. A replay of the call will be available within 24 hours of the announcement. To access the replay, dial (800) 475-6701 or (320) 365-3844 and refer to access code 837791.
About Nuance Communications, Inc .
Nuance Communications, Inc. (Nasdaq: NUAN) is the leading provider of speech and imaging solutions for businesses and consumers around the world. Its technologies, applications and services make the user experience more compelling by transforming the way people interact with information and how they create, share and use documents. Every day, millions of users and thousands of businesses experience Nuance’s proven applications. For more information, please visit www.nuance.com.
###

 

 

Trademark reference: Nuance, the Nuance logo, Dictaphone, Dragon, and NaturallySpeaking are registered trademarks or trademarks of Nuance Communications, Inc. or its affiliates in the United States and/or other countries. All other trademarks referenced herein are the property of their respective owners.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
Statements in this document regarding the future demand for, performance of, and opportunities for growth in Nuance’s speech, imaging, healthcare and dictation solutions; the size of the market for Nuance’s solutions within the healthcare industry; the strength of our sales pipeline; the continued strength of existing products, services and relationships as well as the development and introduction of new products, services and relationships; the integration planning efforts; and any other statements about Nuance managements’ future expectations, beliefs, goals, plans or prospects constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements that are not statements of historical fact (including statements containing the words “believes,” “plans,” “anticipates,” “expects,” or “estimates” or similar expressions) should also be considered to be forward-looking statements. There are a number of important factors that could cause actual results or events to differ materially from those indicated by such forward-looking statements, including: fluctuations in demand for Nuance’s existing and future products; economic conditions in the United States and abroad; Nuance’s ability to control and successfully manage its expenses, inventory and cash position; the effects of competition, including pricing pressure; possible defects in Nuance’s products and technologies; the ability of Nuance’s to successfully integrate operations and employees of acquired businesses; the ability to realize anticipated synergies from acquired businesses; and the other factors described in Nuance’s Annual Report on Form 10 K/A for the year ended September 30, 2005 and Nuance’s most recent quarterly report on Form 10-Q filed with the SEC. Nuance disclaims any obligation to update any forward-looking statements as a result of developments occurring after the date of this document.
DISCUSSION OF NON-GAAP FINANCIAL MEASURES
Management utilizes a number of different financial measures, both GAAP and non-GAAP, in analyzing and assessing the overall performance of our business, for making operating decisions and for forecasting and planning for future periods. We consider the use of non-GAAP revenue helpful in understanding the performance of our business, as it excludes the purchase accounting impact on acquired deferred revenue. We also consider the use of non-GAAP earnings per share helpful in assessing the organic performance of the continuing operation of our business from a cash perspective. By organic performance we mean performance as if we had not incurred certain costs and expenses associated with acquisitions. By continuing operations we mean the ongoing results of the business excluding certain unplanned costs. While our management uses these non-GAAP financial measures as a tool to enhance their understanding of certain aspects of our financial performance, our management does not consider these measures to be a substitute for, or superior to, the information provided by GAAP revenue and earnings per share. Consistent with this approach, we believe that disclosing non-GAAP revenue and non-GAAP earnings per share to the readers of our financial statements provides such readers with useful supplemental data that, while not a substitute for GAAP revenue and earnings per share, allows for greater transparency in the review of our financial and operational performance. In assessing the overall health of our business during the fiscal third quarter ended June 30, 2006, and, in particular, in evaluating our revenue and earnings per share, our management has either included or excluded items in three general categories, each of which are described below.
Acquisition Related Revenues and Expenses. We included revenue related to our acquisition of Dictaphone that we would otherwise recognize but for the purchase accounting treatment of this transaction to allow for more accurate comparisons to our financial results of our historical operations, forward looking guidance and the financial results of our peer companies. We also excluded certain expense items resulting from acquisitions to allow more accurate comparisons of our financial results to our historical operations, forward looking guidance and the financial results of our peer companies. These items include the following: (i) acquisition-related integration costs; (ii) amortization of intangible assets associated with our acquisitions; and (iii) costs associated with the investigation of the restatement of the financial results of an acquired entity (SpeechWorks International, Inc.). In recent years, we have completed a number of acquisitions, which result

 

 

in non-continuing operating expenses which would not otherwise have been incurred. For example, we have incurred transition and integration costs such as retention bonuses for Former Nuance employees. In addition, actions taken by an acquired company, prior to an acquisition, could result in expenses being incurred by us, such as expenses incurred as a result of the restatement of the financial results of SpeechWorks International, Inc. We believe that providing non-GAAP information for certain revenue and expenses related to material acquisitions allows the users of our financial statements to review both the GAAP revenue and expenses in the period, as well as the non-GAAP expenses, thus providing for enhanced understanding of our historic and future financial results and facilitating comparisons to less acquisitive peer companies. Additionally, had we internally developed the products acquired, the amortization of intangible assets would have been expensed historically, and we believe the assessment of our operations excluding these costs is relevant to our assessment of internal operations and comparisons to industry performance.
Non-Cash Expenses. We provide non-GAAP information relative to the following non-cash expenses: (i) stock-based compensation; (ii) certain accrued interest; and (iii) certain accrued income taxes. Because of varying available valuation methodologies, subjective assumptions and the variety of award types, we believe that the exclusion of stock-based compensation allows for more accurate comparisons of our operating results to our peer companies. Further, we believe that excluding stock-based compensation expense allows for a more accurate comparison of our financial results to previous periods during which our equity compensation programs relied more heavily on equity-based awards that were not required to be reflected on our income statement. We believe that excluding non-cash interest expense and non-cash income taxes provides our senior management as well as other users of our financial statements, with a valuable perspective on the cash based performance and health of the business, including our current near-term projected liquidity.
Other Expenses. We exclude certain other expenses that are the result of other, unplanned events to measure our operating performance as well as our current and future liquidity both with and without these expenses. Included in these expenses are items such as: (i) non-acquisition-related restructuring charges and (ii) redundant costs associated with a change in independent accountants. These events are unplanned and arose outside of the ordinary course of our continuing operations. We assess our operating performance with these amounts included, but also excluding these amounts; the amounts relate to costs which are unplanned, and therefore by providing this information we believe our management and the users of our financial statements are better able to understand the financial results of what we consider to be our organic continuing operations.
We believe that providing the non-GAAP information to investors, in addition to the GAAP presentation, allows investors to view our financial results in the way management views the operating results. We further believe that providing this information allows investors to not only better understand our financial performance but more importantly, to evaluate the efficacy of the methodology and information used by management to evaluate and measure such performance.
The non-GAAP financial measures described above, and used in this press release, should not be considered in isolation from, or as a substitute for, a measure of financial performance prepared in accordance with GAAP. Further, investors are cautioned that there are material limitations associated with the use of non-GAAP financial measures as an analytical tool. In particular, many of the adjustments to the Company’s GAAP financial measures reflect the inclusion or exclusion of items that are recurring and will be reflected in the Company’s financial results for the foreseeable future. In addition, other companies, including other companies in the Company’s industry, may calculate non-GAAP net income (loss) differently than the Company, limiting it’s usefulness as a comparative tool. Management compensates for these limitations by providing specific information regarding the GAAP amounts included and excluded from the non-GAAP financial measures. In addition, as noted above, the Company’s management evaluates the non-GAAP financial measures together with the most directly comparable GAAP financial information.
Nuance Financial Tables Follow

 

 

Nuance Communications, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
Unaudited
                                 
    Three months ended     Nine months ended  
    June 30,     June 30,  
    2006     2005     2006     2005  
 
                                
Product
   $ 60,535     $ 40,958     $ 162,271     $ 125,380  
Maintenance
     27,441       3,227       43,014       9,629  
Professional services
     25,099       12,629       55,071       35,496  
 
                        
Total revenue
     113,075       56,814       260,356       170,505  
 
                                
Costs and expenses:
                                
Cost of product
     8,553       4,782       18,290       14,769  
Cost of maintenance
     6,223       1,363       9,573       3,293  
Cost of professional services
     19,824       8,899       42,144       26,295  
Cost of revenue from amortization of intangible assets
     2,468       1,752       7,419       7,260  
 
                        
Total costs of revenue
     37,068       16,796       77,426       51,617  
 
                                
Gross Margin
     76,007       40,018       182,930       118,888  
 
                                
Research and development
     16,457       9,891       41,516       29,291  
Selling and marketing
     36,474       18,866       90,159       57,353  
General and administrative
     15,018       7,686       40,571       21,714  
Amortization of other intangible assets
     6,377       1,083       10,361       2,731  
Restructuring and other charges
     67       2,080       (1,233 )     2,739  
 
                        
Total operating expenses
     74,393       39,606       181,374       113,828  
 
                                
Income (loss) from operations
     1,614       412       1,556       5,060  
 
                                
Other income (expense), net
     (6,867 )     108       (8,052 )     (458 )
 
                        
 
                                
Income (loss) before income taxes
     (5,253 )     520       (6,496 )     4,602  
 
                                
Provision (benefit from) for income taxes
     4,168       360       8,524       2,303  
 
                        
 
                                
Income (loss) before cumulative effect of accounting change
     (9,421 )     160       (15,020 )     2,299  
 
                                
Cumulative effect of accounting change
     —       —       672       —  
 
                        
 
                                
Net income (loss)
   $ (9,421 )   $ 160     $ (15,692 )   $ 2,299  
 
                        
 
                                
Net Income (loss) per share: basic & fully diluted
   $ (0.06 )   $ 0.00     $ (0.10 )   $ 0.02  
 
                        
 
                                
Weighted average common shares outstanding:
                                
Basic
     167,482       108,713       162,400       106,414  
 
                        
Fully Diluted
     167,482       116,417       162,400       114,029  
 
                        

 

 

Nuance Communications, Inc.
Condensed Consolidated Balance Sheet
(Unaudited, in thousands)
                 
Assets
   June 30, 2006     September 30, 2005  
 
                
Current assets:
                
Cash and cash equivalents
   $ 82,620     $ 71,687  
Marketable Securities
     —       24,127  
Accounts receivable, net
     111,969       66,488  
Acquired unbilled accounts receivable
     30,487       3,052  
Prepaid expenses and other current assets
     17,415       9,548  
 
            
Total current assets
     242,491       174,902  
 
                
Goodwill
     693,918       458,313  
Other intangible assets, net
     230,602       92,350  
Property and equipment, net
     28,099       14,333  
Other assets
     27,154       17,314  
 
            
Total assets
   $ 1,222,264     $ 757,212  
 
            
 
                
Liabilities and Stockholders’ Equity
                
 
                
Current liabilities:
                
Current portion of long term debt and notes payable
   $ 4,068     $ 27,711  
Accounts payable and accrued expenses
     74,679       77,500  
Deferred revenue
     91,673       24,120  
Deferred acquisition payments, net
     19,023       16,414  
Accrued business combination costs
     15,186       17,027  
 
            
Total current liabilities
     204,629       162,772  
 
            
 
                
Long term portion of deferred revenue
     10,098       291  
Long term debt and notes payable
     350,971       35  
Deferred tax liability
     17,781       4,241  
Deferred acquisition payment, net
     —       16,266  
Accrued business combination costs and other
     47,161       54,972  
Other liabilites
     19,706       3,970  
 
            
Total liabilities
     650,346       242,547  
 
                
Stockholders’ equity
     571,918       514,665  
 
            
Total liabilities and stockholders’ equity
   $ 1,222,264     $ 757,212  
 
            
 
                
 
   $ —          

 

 

Nuance Communications, Inc.
Reconciliation of Supplemental Financial Information
(in thousands, except per share amounts)
Unaudited
                                 
    Three months ended     Nine months ended  
    June 30,     June 30,  
    2006     2005     2006     2005  
 
                                
GAAP total revenue
   $ 113,075     $ 56,814     $ 260,356     $ 170,505  
Purchase accounting adjustment — Dictaphone revenue
     7,915       —       7,915       —  
 
                        
Total Non-GAAP revenue
   $ 120,990     $ 56,814     $ 268,271     $ 170,505  
 
                                
GAAP net income (loss)
   $ (9,421 )   $ 160     $ (15,692 )   $ 2,299  
Cost of revenue from amortization of intangible assets
     2,468       1,752       7,419       7,260  
Amortization of other intangible assets
     6,377       1,083       10,361       2,731  
Non-cash stock based compensation (1)
     5,553       580       15,196       1,934  
Restructuring and other charges
     67       2,080       (1,233 )     2,739  
Non-cash interest expense
     1,180       286       2,880       638  
Non-cash taxes
     2,782       4       5,588       1,008  
Purchase accounting adjustment — Dictaphone cost of revenue (3)
     (1,987 )     —       (1,987 )     —  
Purchase accounting adjustment — Dictaphone revenue (3)
     7,915       —       7,915       —  
Acquisition related transition and integration costs (2)
     4,775       —       10,909       —  
 
                        
Non-GAAP net income
   $ 19,709     $ 5,945     $ 41,356     $ 18,609  
 
                        
 
                                
Non-GAAP net income diluted:
   $ 0.11     $ 0.05     $ 0.23     $ 0.16  
 
                        
 
                                
Shares used in computing non-GAAP net income per share:
                                
 
                                
Weighted average common shares outstanding:
                                
Basic
     167,482       108,713       162,400       106,414  
 
                        
Fully Diluted
     183,475       116,417       178,989       114,029  
 
                        
                                 
    Three months ended     Nine months ended  
    June 30,     June 30,  
(1) Non-cash stock based compensation   2006     2005     2006     2005  
Cost of product licenses
   $ 17     $ 4     $ 65     $ 9  
Cost of maintenance
     186       3       298       5  
Cost of professional services
     490       22       1,199       75  
Research and development
     1,097       (97 )     3,157       67  
Selling and marketing
     2,081       199       4,836       560  
General and administrative
     1,682       449       4,969       1,218  
Cumulative effect of accounting change
     —       —       672       —  
 
                        
Total
   $ 5,553     $ 580     $ 15,196     $ 1,934  
 
                        
 
                                
(2) Acquisition related transition and integration costs
                                
Cost of product licenses
   $ 49     $ —     $ 49     $ —  
Cost of maintenance
     —       —       115       —  
Cost of professional services
     887       —       1,018       —  
Research and development
     707       —       831       —  
Selling and marketing
     642       —       1,036       —  
General and administrative
     2,490       —       7,860       —  
 
                        
Total
   $ 4,775     $ —     $ 10,909     $ —  
 
                        
 
                                
(3) Purchase accounting adjustment
                                
Revenue
   $ 7,915     $ —     $ 7,915     $ —  
Cost of product licenses
     (1,987 )     —       (1,987 )     —  
 
                        
Total
   $ 5,628     $ —     $ 5,628     $ —  
 
                        

 

EX-99.2 3 b61920ncexv99w2.htm EX-99.2 TRANSCRIPT OF CONFERENCE CALL DATED AUGUST 8, 2006 exv99w2
 

Exhibit 99.2
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Nuance Communications investors call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions will be given at that time. If you should require assistance during the call, please press star than zero. As a reminder, this conference is being recorded. With us today are Chairman and CEO Mr. Paul Ricci and CFO Jamie Arnold. I would now like to turn the conference over to our host, Mr. Paul Ricci. Please go ahead.
Paul Ricci - Nuance Communications — Chairman and CEO
Thank you. Good afternoon, everyone and thank you for joining us today. Before we begin, I need to remind everyone that the matters we are discussing this afternoon include predictions, estimates, expectations, and other forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially. You should refer to our recent SEC filings for a detailed list of risk factors.
Our third quarter saw the achievement of important operational milestones. These include solid revenue growth, both as reported and organic; the first quarter of operations and integrations of Dictaphone; the launch of several new initiatives in our network and imbedded speech product lines; the release of Paper Port 11; preparation for the launch of Dragon 9, which was released subsequent to the quarter’s end on July 18th; and operating expenses below planned, which assisted us in turn to exceed our expectations for earnings in the quarter. From our press release this afternoon, you will see we recorded results above our expectations. We reported non-GAAP revenue of 121 million in the quarter, which includes approximately 7.9 million of non-GAAP Dictaphone revenue in accordance with the treatment we discussed at last quarter’s conference call. Excluding these revenues on a GAAP basis, revenue was 113.1 million for the quarter. Non-GAAP revenues grew by 113%. Organic revenues grew by 20%, as reported GAAP revenues grew by 100%. Our growth in Q3 derived from the sustained performance across most of our major product lines, and from solid execution in our integration and synergy efforts. Turning first to our imbedded speech solutions business, we saw excellent growth this quarter, with revenues up more than 35% year over year in the quarter. This result represents continuation of momentum from Q2. Embedded revenues in Q3 attained a new record. We secured a number of high-profile design wins in both automotive and handsets, including wins with Alpine, Audi, Bosch, Casio, Ford, and Samsung.
In addition, we signed an important IT license with one of the world’s largest cell phone manufacturers, strengthening our position in this market by creating additional business opportunities with that and other prominent manufacturers. And in automotive this past quarter, we introduced a suite of enhanced solutions for capabilities such as MP3 control, voice destination entry, hands-free cell phones, and advanced command and control. Extending our presence in embedded and mobile markets in the quarter, we launched Nuance mobile, a solutions portfolio that delivers speech applications that unify search, communications, and device control from mobile consumers and professionals. We continue to demonstrate these capabilities to customers and partners from whom I believe it’s fair to say we’ve received considerable interest. And although we remain in the early stages, we can now say that we’re entering trials, and we have begun to generate modest revenues. And while it’s premature to predict the potential size of the opportunity, I do expect meaningful contributions from Nuance mobile and fiscal year 2007.
We also continued growth and progress in our network business. Revenues as reported were up 55% and, excluding contributions from the former Nuance, we are up 15% organically. Revenues were up about 6% sequentially from the last quarter, and growth was balanced between North America and International. We signed new or follow-up contracts with companies including AT&T, Echostar, Nestle, Verizon, and Wachovia. In addition, Nuance provided the speech between two high-profile applications in the quarter. The information portal for the World Cup and 1(800)Free411, a directory assistance service that has captured the attention of users impressed for it’s automated service and for bringing an advertising-based revenue model to cell phone services. In the quarter, we expand our technology leadership in this market through several important initiatives. We introduced Nuance Open Call Steering, a call routing solution that allows customers, within an automated system, to describe their needs in their own words and move directly to a destination. This solution builds on the increased demand for improving the caller experience in customer satisfaction by helping businesses eliminate complex touch-tone mazes. Open Call Steering is another component of our Human Touch Initiative that offers solutions, capabilities, and best practices for creating a superior caller experience. One where people can interact naturally with automated systems.
You’ll recall last quarter we referenced several opportunities with enterprise prospects in the formal Nuance pipeline that did not close. We realized some of these revenues in Q3 and expect to realize more in Q4, as well as Q1 of fiscal year 2007. So I’m comfortable reporting progress in this respect. Nonetheless, though, I’d say our sales execution in these accounts is still not at the level it can be. I’m confident in the steps we have taken to improve this. As evidence, we do expect network revenues this quarter, the fourth quarter, to increase sequentially from the third quarter. Moving to our dictation revenues, but leaving aside for the moment Dictaphone, our sales of our Dragon product line in health care were

 

 

quite good, following some challenges last quarter in the wake of the Dictaphone announcement. Indeed, even including the challenges of last quarter, DNS (Dragon) health-care related revenues fiscal year to date were up about 40% over the same nine month period in the previous year.
Outside of health care, sales of Dragon were at expected; weak. You’ll recall from our conference call in May we anticipated third quarter revenues in non-health care Dragon would be down as our channels prepared for the launch of Dragon 9. Which, as you know, we subsequently launched in mid-July. I can say with confidence based upon the early results and extraordinary reception to DNS 9, the effects last quarter were limited solely to this pre-launch phenomenon. Imaging revenues for the quarter were 21.6 million, above our plan and up 35% from the June quarter last year. This performance owes to the successful launch of Paper port 11. The sale of multi seat licenses for our PDF family, robust sales of our Omnipage Software Developer Kit following the new version launch last spring, and revenues generated from our imaging IT. Key wins in the quarter in imaging included agreements that have expanded our partnership with Xerox, Brother, FedEx, Kinkos, as well as new agreements with Kodak, Stellant, and the U.S. Chamber of Commerce. It’s worth noting that our revenues, nine month year-to-date in our imaging business grew more than 10%, somewhat higher than we’ve seen in imaging in recent years.
Let me move to Dictaphone, and then offer some summary comments before turning the call over to Jamie. I’m pleased at the early results we’ve seen with Dictaphone, both with the integration process and the performance of the business. Non-GAAP revenues from Dictaphone were about 43 million, or 35.1 million on a GAAP basis, and roughly consistent with our expectations. This performance reflects a smooth integration and strong demand for both enterprise and a host of dictation solutions. The integration has progressed well after one quarter; we’re perhaps slightly ahead of our synergy targets. In fact, our confidence in the business is such that we initiated additional investments in health-care, including sales, marketing, R&D, and partner development, intending to allow us to further accelerate our growth in this market in fiscal year ‘07.
In summary, I’m pleased at how the organization performed in the quarter, handling a diverse agenda of product launches, growth initiatives, integration of Dictaphone and synergy attainment. Jamie will comment in greater detail about expenses, but from our press release, you can see that total operating expenses well below planned in conjunction with our revenues this quarter allowed us to improve results as compared with our previous guidance. I believe that this accomplishment, along with the other highlights I’ve mentioned, position us for a solid close to 2006. Before I discuss that in more detail, I want to turn the call over too Jamie. Jamie?
James Arnold - Nuance Communications — CFO and SR. VP
Thank you, Paul. Good afternoon, everyone. As Paul indicated, Nuance GAAP revenues in the quarter were 113.1 million, up 99% over the same period 2005, owing largely in revenue contribution from Dictaphone and former Nuance. Our GAAP revenues exclude approximately 7.9 million of revenues that were lost to purchase accounting in conjunction with the Dictaphone acquisition. This revenue has crossed all categories, included licensed professional services, maintenance, with these revenues included in the way we review management performance Nuance non-GAAP revenues were 121 million for the quarter.
Total GAAP speech revenues were 91.5 million. Non-GAAP speech revenue was 99.4 million, which included 36 million in network revenue, 9.6 million in imbedded revenue, and 53.8 million in dictation revenue. Imaging revenue was 21.6 million. GAAP license revenue was 60.5 million. Non-GAAP license revenue was 66.4 million, up 25.5 million from 40.9 million a year ago. GAAP professional services revenue including subscription and posted applications was 25.1 million. Non-GAAP professional services revenue was 26.8 million, up 14.2 million compared to 12.6 million for the same period last year. GAAP maintenance revenue — maintenance and support revenue was 27.4 million. Non-GAAP maintenance and support revenue was 27.7 million, up 24.5 million from the 3.2 million a year ago.
North American revenue accounted for approximately 77% of total revenue in the third quarter. Compared with 67% in the same period a year ago. The increase is largely attributable to Dictaphone-related products which derived a majority of revenue from North America. On a GAAP basis, Nuance recognized a net loss of 9.4 million or $0.06 per share in the quarter compared with net income of $200,000, or break-even per share for the comparable period in fiscal 2005. In addition to using GAAP results, we believe it is useful to measure performance using an non-GAAP measure of net income or loss, which excludes acquisition, transaction, and integration costs and as applicable, noncash taxes, interest, and stock-based compensation, amortization of intangible assets, and restructuring and other charges, and includes Dictaphone revenues lost to purchase accounting.
Using a non-GAAP measure, net income was 19.7 million or $0.11 per diluted share in the quarter. Compared with net income of 5.9 million or $0.05 per share a year ago. Cost of revenue in the quarter was approximately 29% of revenue for a gross margin of 71%. A 3% decline from one year ago, and owing to the revenue mix within Dictaphone which includes a higher proportion of hardware within product revenue. Please note that these gross margins exclude acquisition-related amortization. Product gross margins were 83% in this quarter as compared to 89% in the comparable quarter for fiscal 2005. Gross margins for professional services were 33% in the quarter as compared to 30% in the same period last

 

 

year. Service margins again improved sequentially year over year. Maintenance margins were 79% in the quarter as compared to 58% in the same period last year. These improvements in margin owe primarily to the contributions for maintenance revenues from the former Nuance and Dictaphone. These gross margin numbers again exclude acquisition-related amortization and stock-based compensation.
Now, as I turn to operating expenses, I remind that the operating cost I’m describing exclude certain transition and integration costs. Please see the reconciliation on our web site. R&D was approximately 14.6 million, or 12% of revenue versus 10 million or 18% of revenue a year ago. The increase in absolute dollars can be attributed to the additional headcount throughout our product line. Sales and marketing spending was 33.8 million or 28% of revenue as compared to 18.7 million or 33% of revenue a year ago. This increase corresponds to a large infusion of additional sales employees from the Dictaphone acquisition and to a lesser extent, the Nuance acquisition, as well as the expansion of sales personnel and marketing programs associated with our other product line.
General and administrative expenses were 10.8 million or 9% of revenue as compared to 7.2 million or 13% of revenue in the same quarter last year. The increase in dollars was due to additional employees supporting the larger business as well as additional professional fees.
Turning to the balance sheet, DSOs, net of deferred revenues, were 43 days versus 57 days last quarter. Depreciation was 2.8 million, and capital expenditures were approximately $1 million. We exited the quarter with unrestricted cash and marketable securities of approximately $82 million. And now, I’ll turn the call back over to Paul.
Paul Ricci - Nuance Communications — Chairman and CEO
Thanks, Jamie. As I’ve said in my earlier comments, I believe the third quarter positions us well for strong results in the fourth quarter. And for continued momentum as we began fiscal year 2007. We have numerous factors that work in the fourth quarter, and I want to comment upon them in some detail.
First, and perhaps most significantly, we are in the midst of a new launch release of our Dragon Naturally Speaking product family. I can say, without hyperbole, that both press reception for that product and our sales in the first few weeks since the launch date meaningfully exceed our historical experience from past launches. Notwithstanding that DNS 8, the previous version, itself established new benchmarks on both these accounts. Nevertheless, please be mindful that in order to meet our full quarter plan, we must continue with strong launch performance unabated through the end of our quarter. Please also be aware that we have a major launch of one of our imaging products scheduled later this quarter. We expect revenues from this launch beginning in September and throughout the following quarter to be robust. But because the launch occurs late in the quarter, post-launch revenues will not fully offset the normal reduction we see of sales during the period of the quarter leading up to the launch.
We believe are imbedded business remains on a trajectory of rapid growth. During the summer months, though, we normally see royalty reports somewhat lower than other quarters. So while year over year growth in the quarter should remain strong, we do not anticipate the same sequential growth in imbedded as we saw in the last quarter over the second quarter. Network revenues will, we expect, rise sequentially in the fourth quarter. Although the June/September quarter is typically weak for enterprise sales, our experience from fiscal year 2005 suggest that the motivations for sales personnel to finish the year strongly overcomes the summer effect. While we’re confident of a solid quarter in the network market, we hardly need remind you that an outstanding quarter will depend upon the success rate in which we can close licensed contracts in the 500,000 to $2 million range. Likewise, I expect our health care dictation and transcription revenues, which will include Dictaphone and the Dragon Medical Line to be up in the fourth quarter. Our experience with Dictaphone is obviously quite new and we therefore want to be prudent. Furthermore, hospital revenues are historically weaker during the summer months. But nonetheless, our current forecasts indicate that we expect sequential growth in this quarter over the third quarter.
Considering all these factors together, we expect non-GAAP revenue in the fourth quarter to be in the range of 122 to 126 million. GAAP revenues, after the associated reduction related to Dictaphone, should be therefore in the range of 115 to 120 million. We expect non-GAAP earnings to be about $0.11 to $0.12 per share in the fiscal Q4. We therefore are narrowing our guidance for full-year non-GAAP EPS, which we had previously set at $0.31 to $0.34 per share to be now at $0.33 to $0.34 per share. On a GAAP basis, we expect a net loss per share of $0.03 for the fourth quarter, and a net loss per share of $0.12 for the full year.
Let me comment very briefly on fiscal year 2007. Our policy has been to provide full year guidance at the time of our fiscal fourth quarter conference call. We don’t want to change that policy now, but we would offer that we are comfortable with the range of current analyst expectations for both revenue and earnings in that full year. This concludes our formal remarks and we will now take questions.

 

 

Operator
[OPERATOR INSTRUCTIONS] And one moment. The first question comes from [Jeff Van He] from [Craig Hallium]. Please go ahead.
Jeff Van He - Craig Hallium — Analyst
Close enough. Nice quarter, guys, very nice. A couple questions. Maybe, Paul, if you would start on the network side. Talk to me about longer-term. What do think the market’s doing, what kind of growth rates do you expect from that longer-term. I think it said organically it was 15%. And secondly, comment on the acquired Nuance revenue stream and maybe tie that into your commentary that you expect improving sales execution and you’ve taken some steps to address that. Can you fill that in in a little more detail for us?
Paul Ricci - Nuance Communications — Chairman and CEO
Sure. With respect to the first question, the growth, I said in the past, and I continue to believe now, that the network business is going to generate growth in the range of 20 to 30%. It has sometimes been a little higher, it has on rare occasions been a little lower. I think if we look at the organic growth rate for ScanSoft and Nuance in the network business since the acquisition of Speechworks, it would have averaged in the 25% range over that period of time. That pattern has been a little perturbed in the acquisition of the former Nuance, and I think at the end of the day, the sales of the former Nuance telephony platform licenses will simply have ended up being lower than during that transitional period than we expected. As you know, that was not a long-term significant revenue stream as an independent licensed product for us, but in the 12 months following the sale — the purchase of the business we expected it would contribute more revenue than it has. I don’t think that that speaks at all, though, negatively to the long-term growth of the combined business. With respect to sales execution; I was reviewing the performance for the last four quarters or so of the network sales team, and it’s extremely high compared to their objectives with a handful of exceptions, and Steve Chambers who runs that business has taken actions to remediate that, and I see it as a relatively minor operational issue.
Jeff Van He - Craig Hallium — Analyst
I’m sorry, say that last part again? You said that their performance was extremely high relative to expectations but there was a small number —.
Paul Ricci - Nuance Communications — Chairman and CEO
There were a couple areas of problems, and I think Steve has addressed those.
Jeff Van He - Craig Hallium — Analyst
All right. And then with respect to Dictaphone, I think the initial guidance for Dictaphone was 80 to 85. I think you said you did 43 here. I guess, modestly exceeding expectations. I guess, two questions. Your thoughts on the growth for that business now that you’ve had little more time to look at it and see it work out in the field, and secondly, in your prepared remarks I think you commented you had some intentions to spend on sales, marketing, R&D, and partner development. Can you just color in with modest out performance so far and being very early on, why it is that you’re talking about ratcheting up investment in light of how early we are?
Paul Ricci - Nuance Communications — Chairman and CEO
I think there was a consulate of events at work in health care market that is making an automated dictation solution compelling and attractive. And those forces at work include things that we discussed before, but just to remind you, the pressures upon the health care industry to contain costs, pressures upon the health-care industry to move to a more electronic-based records management, the growing concerns around privacy and security of patient data and a great deal of dislocation in the old transcriptionist industry that was a labor-based industry serving that market, and just a general deterioration among the many companies serving the market. I think you put all those things together and you add into it the fact that speech technology is now demonstrably providing quantifiable cost savings in large hospitals, and I think you get the right chemistry to allow this expansion of the business, and we have concluded that we are in a very good position to take advantage of that. The Dictaphone team is very

 

 

compelling in their presentation of that opportunity, and even though it has been a short period, it was a compelling-enough case that we decided to expand the sales, services and marketing efforts along with some additional R&D investments to seize more of that growth opportunity.
Jeff Van He - Craig Hallium — Analyst
In terms of the dollar amounts there, you had talked about cost synergies from Dictaphone of 20 to 25, and I think there been a number of points of commentary along the way that at least the high end of that range was an area that you were comfortable with based on what you had seen so far. To what extent does this offset it? Can you put any broad dollar amount around these reinvestments into Dictaphone?
Paul Ricci - Nuance Communications — Chairman and CEO
I can’t, but you shouldn’t really think of it as deteriorating the contribution of the synergies to the business. As we go into fiscal year ‘07, we’re going to have substantial growth in revenues, and we have to make portfolio decisions about where we invest additional money and support of those revenues, and I think the way to view it is that we’re going to — relative to some other opportunities, we have simply decided the Dictaphone opportunity comes to rest higher on the prioritization than it might have — we might have assumed 30 or 60 days ago.
Jeff Van He - Craig Hallium — Analyst
And then on Dictaphone, your thoughts on growth? Longer-term growth on Dictaphone?
Paul Ricci - Nuance Communications — Chairman and CEO
Well, I said previously that I believed we could get 15 to 20% growth on Dictaphone excluding the vestigial pieces of the business that we are gradually phasing out. And I think I should hold to that. Maybe we’ll be able to update that further in the future, but I don’t think I should change it now.
Jeff Van He - Craig Hallium — Analyst
Great. Thanks. Nice work.
Operator
Thank you. The next question comes from the line of Mike Lattimore from Raymond James. Please go ahead.
Mike Lattimore - Raymond James — Analyst
Good afternoon, nice quarter there. So on the cost synergies at Dictaphone; you basically feel like you have hit the upper end of that 20 to 25 million range that you were guiding?
Paul Ricci - Nuance Communications — Chairman and CEO
Yes. I think there’s still a little more cost synergy to be achieved, but I think meaningfully, yes.
Mike Lattimore - Raymond James — Analyst
And in terms of the product and service mix at Dictaphone, was that kind of as expected in the quarter?
Paul Ricci - Nuance Communications — Chairman and CEO

 

 

Yes.
Mike Lattimore - Raymond James — Analyst
In the growth that you’re seeing within the Speech part of the business as well as the ESP part of the business; that continues to be healthy?
Paul Ricci - Nuance Communications — Chairman and CEO
It was very healthy. The ESP business was — well, actually, business generally was very healthy but the ESP business was extraordinary.
Mike Lattimore - Raymond James — Analyst
In terms of the version nine of DNS; are there any particular new verticals that you think that will attach relative to version eight?
Paul Ricci - Nuance Communications — Chairman and CEO
Well, our primary focus in Dragon, even before Dictaphone, was first and foremost health care, and as I alluded to in the comment earlier, that has done well for. And as I said just in the earlier question about the health-care market, we think that health care business itself is ripe for more investments. So we wouldn’t want to just focus ourselves in Dragon from health care. As we go into next year, we do have other sales teams that are increasing their interest in legal, public safety, and a couple of other small vertical efforts, but probably, the market that will get somewhat more attention as we go into fiscal year ‘07 is legal. Which has already been a pretty good market for us in Europe.
Mike Lattimore - Raymond James — Analyst
Okay. And on the professional service side of things, how you feel about the utilization rates there; do you think that could go a fair amount higher, or not?
Paul Ricci - Nuance Communications — Chairman and CEO
Are you speaking generally across the company, or — .
Mike Lattimore - Raymond James — Analyst
Yes. The services organization.
Paul Ricci - Nuance Communications — Chairman and CEO
We have additional gross margin improvements available to us in services, but I wouldn’t want to — As I said in previous calls, we’ve had a track record now of probably two years or a bit more since we put new management into that organization of constant improvement. So the gains that we will have are going to be marginally smaller than they have been in the past, just because we’re working ourselves towards a pretty high utilization and profitability in that business.
Mike Lattimore - Raymond James — Analyst
Okay. And then on the digital imaging side of things; can you tell us what that operating margin was on that?
James Arnold - Nuance Communications — CFO and SR. VP
No, we don’t give that. I’m sorry.

 

 

Mike Lattimore - Raymond James — Analyst
And lastly, some guidance on tax rates in the fourth quarter — maybe ‘07, too, if you could do that.
James Arnold - Nuance Communications — CFO and SR. VP
Don’t have ‘07 for you, yet, Mike, but tax rate should be just below 10%.
Mike Lattimore - Raymond James — Analyst
Okay. Thank you.
Operator
Thank you. Our next question comes from the line of Richard Davis with Needham Company. Please go ahead.
Richard Davis - Needham Co. — Analyst
Hey, thanks very much. Probably a question for Paul. Maybe not. Longer term, I know we are infatuated about the last 90 days and stuff, but do you think the company that you’ve assembled today — I think you make that it’s a good stock, and that’s what has happen — but do you think this is a business you can kind of continue to grow, the revenues 15 to 20% annually, and then get operating margins in the neighborhood of say 25% some three years from now? Is a reasonable assumption and if there’s any attorneys on the line, I’ll ask them to hang up at this point; but in general when you think about the business, is this the kind of thing that you would envision?
Paul Ricci - Nuance Communications — Chairman and CEO
Yes. Let me be a little bit more specific. I think that speaking first about revenues, that our aggregated speech business can grow above 20%, and maybe including the embedded business, even closer to 25, but certainly above 20%. I think that we have seen our PDF product line growing at twice what we believed the PDF market is growing at, so I have some confidence that we can grow our imaging business in the to 8 to 10% range. And I think if you blend those therefore, you get something certainly close to 20%. With respect to operating margins, our objective for the company has been to deliver 20% organic growth without acquisitions, and a couple of percentage points in operating margins improvement per year. We did better than that — we will do better than that this year because there have been a lot of changes. But I think that a couple points of operating margin improvements successively over the next two to three years is a reasonable target for us. A couple of points per year, I mean.
Richard Davis - Needham Co. — Analyst
Yes. That makes sense. That was the main question I had. Thank you very much.
Operator
Thank you. Our next question comes from the line of [Keith Gay] with Tom Weisel. Please go ahead.
Keith Gay - Thomas Weisel Partners — Analyst
Good afternoon. Paul, you talk in your guidance discussion about the major imaging product launch in September, and that post launch revs won’t offset the prelaunch reduction in sales. Is that product release on schedule? Is it coming out at the point in the quarter which you had originally planned, or is it coming out later than you had originally planned?

 

 

Paul Ricci - Nuance Communications — Chairman and CEO
The revenue is in September. The launch is late in August. I think it might be a couple of weeks later, but not meaningfully later.
Keith Gay - Thomas Weisel Partners — Analyst
Okay, and then on your network business, you talked about it being up sequentially, comfortable of the solid quarter. Given it’s the end of your fiscal year, do you expect — I mean, the sales force on the enterprise I would assume has some end-of-year incentives. It sounds like you’re being somewhat conservative just because you’re not sure when the larger-size deals might hit. What’s the pipeline look like, and do you expect, based on sales incentives, that you could see more than just up a little bit sequentially?
Paul Ricci - Nuance Communications — Chairman and CEO
Well, I expect what I said earlier, and I don’t want to find myself requalifying the fourth quarter guidance. If I’m cautious, it’s because in Europe — and Europe’s not an inconsequential part of our business — there really is a downward pull on enterprise business in the September quarter. You get people returning in September, but as you know, they are nowhere to be found in August. So there’s that effect. But you are right; it is the weakness of the summer months in enterprise business that’s counteracted by the end-of-year incentives for our sales people to achieve their objectives, and as I said earlier, I think the net of those will be some sequential growth.
Richard Davis - Needham Co. — Analyst
And on your Dictaphone integration, how much longer do you feel in total you can have it as a fully-integrated entity in terms of product, people, etc.
Paul Ricci - Nuance Communications — Chairman and CEO
I think essentially everything will be done in the next 90 days or so, except for the support of their ERP system. I think I mentioned in a previous call that they had a fairly robust development of their financial systems around [BON] and the migration of that to our financial systems, which are based on Oracle, is going to take a bit longer, probably into early next year. So there will be some modest expenses associated with that. But other than that, I think that we are in the last 90 days of that or so.
Richard Davis - Needham Co. — Analyst
Okay. Thank you.
Operator
Our next question comes from the line of Daniel Ives with SBR. Please go ahead.
Daniel Ives - SBR — Analyst
Good quarter. First question, what was cash flow for operations in the quarter?
James Arnold - Nuance Communications — CFO and SR. VP
We are just finalizing the schedule right now, and so rather than give you a preliminary number, we will be publishing tomorrow when we publish our Q.
Daniel Ives - SBR — Analyst

 

 

Okay. So your publishing a Q tomorrow?
James Arnold - Nuance Communications — CFO and SR. VP
That’s correct.
Daniel Ives - SBR — Analyst
So could you just — Obviously you have a range — Was over 10 million?
James Arnold - Nuance Communications — CFO and SR. VP
I think it’s under 10 million.
Daniel Ives - SBR — Analyst
Under 10, but over five?
Paul Ricci - Nuance Communications — Chairman and CEO
I think you just have to accept we’re going to publish it tomorrow. We don’t want to give you an inaccurate number.
Daniel Ives - SBR — Analyst
Can you talk about — just in general — the network speech opportunity, called the upgrade from touchtone to speech, and how that market has matured, and the growth there, and what you think is the catalyst driving the market? Thanks.
Paul Ricci - Nuance Communications — Chairman and CEO
I didn’t hear the first half of your question. I’m sorry.
Daniel Ives - SBR — Analyst
In the network speech market, when you look at the upgrades from touchtone to speech in the call center, what do you think is really the catalyst driving that from what you have seen in the upgrading to speech. And maybe talk about the maturation of that market as you’ve seen it mature over the past year or two?
Paul Ricci - Nuance Communications — Chairman and CEO
Well, I think the catalyst have been a couple. First, there are straightforward cost benefits to the companies doing the automation because they get better automation rates, and therefore reduce use of human operators, which has historically been an important — perhaps the most important — driver of their consideration. But increasingly, over the last 18 months, we have seen, and have begun to focus on, the interest around using speech as part of crafting a higher-quality caller experience. And I made some comments earlier today about initiatives that we’ve launched under the umbrella of our Human Touch Program to try and take advantage of that increased interest. So, I think there’s a bimodal interest of cost on the one hand and interest in caller experience and customer satisfaction on the other hand. I don’t think that there has been a terrific change in the business over the last year and a half except what I just mentioned, and certainly as well a growing sense by us about the importance of providing a complete solution, meaning the technologies, the applications on top of the core technologies, and services to install that. And that’s put a lot of pressure on us to grow our services organization in order to address that solution capability, and we’ve talked in previous quarters about the

 

 

importance of doing that, and it remains an important part of the business today. I don’t have the precise numbers, but I would suspect that if I were to look at the hiring log for professional services people in that part of the business, it’s probably right now 20 or 30 openings.
Operator
I’m sorry. Was your question answered? Mr. Ives?
Daniel Ives - SBR — Analyst
Yes. My question was answered.
Operator
Ladies and gentlemen, once again if you have a question, please press star one at this time. And our next question comes from the line of [Karen Payne] from Pacific Edge. Please go ahead.
Karen Payne - Pacific Edge — Analyst
Thanks, I have two questions. Just to confirm, you said imaging revenue in the quarter of 21.6 million? Can you let me know — You talked about extended agreements with large OEMs. Were there any large one-time transactions that were included in the 21.6 million associated with these large OEM agreements? And my second question relates to the accrued business combination costs. There’s a total of about 60 — Just over 60 million combining short-term and long-term. Can you give me an idea of how much will be cash-related? Thanks.
Paul Ricci - Nuance Communications — Chairman and CEO
On the first question, all revenue transactions are one-time until you get the next one, so I don’t think there’s anything that I want to add to that. We do a lot of license deals and a lot of sales, and there’s no guarantee that you’re going to win the next sales from those customers. I will say that our experience is that when you develop business with a customer, you typically get more business from that customer in the future, but that’s not always the case. With respect to the cash —
James Arnold - Nuance Communications — CFO and SR. VP
The business combination costs are primarily cash that will go out. They include the cost of a large lease that we took over with the Nuance acquisition.
Karen Payne - Pacific Edge — Analyst
And so what should we assume about the duration of the long-term part of the costs? How long will it take for the cash payment?
James Arnold - Nuance Communications — CFO and SR. VP
It’s about seven years.
Karen Payne - Pacific Edge — Analyst
Okay. But just to follow up on the answer to the imaging — Of the 21.6 million, were there several transactions that were more than 10% of that?
James Arnold - Nuance Communications — CFO and SR. VP

 

 

There were transactions in the 21.6 million that were more than $1 million, and that’s not uncommon to have large transactions in the imaging business.
Karen Payne - Pacific Edge — Analyst
Okay. Thanks.
Operator
Ladies and gentleman, that was our last question. This conference will be available for replay after 8:00 p.m. today Central Time until 11:59 p.m. Central Time on August 22nd. You may access the AT&T executive playback service at any time by dialing 1-800-475-6701 and entering the access code of 837791. International participants may dial 1-320-365-3844. Those numbers again are 1-800-475-6701 and international participants, 1-320-365-3844, entering the access code of 837791. That does conclude our conference for today. Thank you for your participation, and for using AT&T Executive Teleconference Service. You may now disconnect.

 

 

Nuance Communications, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
Unaudited
                                                 
    Three months ended     Three months ended  
    June 30,     June 30,  
    GAAP             Non-GAAP     GAAP             Non-GAAP  
    2006     Adjustments     2006     2005     Adjustments     2005  
Product
   $ 60,535     $ 5,900 (3)   $ 66,435     $ 40,958     $ —     $ 40,958  
Maintenance
     27,441       300 (3)     27,741       3,227       —       3,227  
Professional services
     25,099       1,715 (3)     26,814       12,629       —       12,629  
 
                                    
Total revenue
     113,075       7,915       120,990       56,814       —       56,814  
 
                                                
Costs and expenses:
                                                
Cost of product
     8,553       1,921 (1,2,3)     10,474       4,782       (4 )(1)     4,778  
Cost of maintenance
     6,223       (186 )(1)     6,037       1,363       (3 ) (1)     1,360  
Cost of professional services
     19,824       (1,377 )(1,2)     18,447       8,899       (22 )(1)     8,877  
Cost of revenue from amortization of intangible assets
     2,468       (2,468 )     —       1,752       (1,752 )     —  
 
                                    
Total costs of revenue
     37,068       (2,110 )     34,958       16,796       (1,781 )     15,015  
 
                                                
Gross Margin
     76,007       10,025       86,032       40,018       1,781       41,799  
 
                                                
Research and development
     16,457       (1,804 )(1,2)     14,653       9,891       97 (1)     9,988  
Selling and marketing
     36,474       (2,723 )(1,2)     33,751       18,866       (199 )(1)     18,667  
General and administrative
     15,018       (4,172 )(1,2)     10,846       7,686       (449 )(1)     7,237  
Amortization of other intangible assets
     6,377       (6,377 )     —       1,083       (1,083 )     —  
Restructuring and other charges
     67       (67 )     —       2,080       (2,080 )     —  
 
                                    
Total operating expenses
     74,393       (15,143 )     59,250       39,606       (3,714 )     35,892  
 
                                                
Income (loss) from operations
     1,614       25,168       26,782       412       5,495       5,907  
 
                                                
Other income (expense), net
     (6,867 )     1,180       (5,687 )     108       286       394  
 
                                    
 
                                                
Income (loss) before income taxes
     (5,253 )     26,348       21,095       520       5,781       6,301  
 
                                                
Provision (benefit from) for income taxes
     4,168       (2,782 )     1,386       360       (4 )     356  
 
                                    
 
                                                
Income (loss) before cumulative effect of accounting change
     (9,421 )     29,130       19,709       160       5,785       5,945  
 
                                                
Cumulative effect of accounting change
     —       —       —       —       —       —  
 
                                    
 
                                                
Net income (loss)
   $ (9,421 )   $ 29,130     $ 19,709     $ 160     $ 5,785     $ 5,945  
 
                                    
 
                                                
Net Income (loss) per share: basic & fully diluted
   $ (0.06 )   $ 0.16     $ 0.11     $ 0.00     $ 0.05     $ 0.05  
 
                                    
 
                                                
Weighted average common shares outstanding:
                                                
Basic
     167,482       —       167,482       108,713       —       108,713  
 
                                    
Fully Diluted
     183,475       —       183,475       116,417       —       116,417  
 
                                    
 
                 
    2006     2005  
(1) Non-cash stock based compensation
                
Cost of product licenses
   $ 17     $ 4  
Cost of maintenance
     186       3  
Cost of professional services
     490       22  
Research and development
     1,097       (97 )
Selling and marketing
     2,081       199  
General and administrative
     1,682       449  
 
            
Total
   $ 5,553     $ 580  
 
            
                 
(2) Acquisition related transition and integration costs
                
Cost of product licenses
   $ 49     $ —  
Cost of professional services
     887       —  
Research and development
     707       —  
Selling and marketing
     642       —  
General and administrative
     2,490     $ —  
 
            
Total
   $ 4,775     $ —  
 
            
                 
    2006     2005  
(3) Purchase accounting adjustment
                
Revenue
   $ 7,915     $ —  
Cost of product licenses
     (1,987 )     —  
 
            
Total
   $ 5,928     $ —  
 
            
 
                
Dicatphone GAAP revenue
   $ 35,144          
Purchase accounting adjustment
     7,915          
 
              
Dicatphone non-gaap revenue
     43,059          
 
              

 

 

Nuance Communications, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
Unaudited
                                                 
    Nine months ended     Nine months ended  
    June 30,     June 30,  
    GAAP             Non-GAAP     GAAP             Non-GAAP  
    2006     Adjustments     2006     2005     Adjustments     2005  
Product
   $ 162,271     $ 5,900 (3)   $ 168,171     $ 125,380     $ —     $ 125,380  
Maintenance
     43,014       300 (3)     43,314       9,629               9,629  
Professional services
     55,071       1,715 (3)     56,786       35,496               35,496  
 
                                    
Total revenue
     260,356       7,915       268,271       170,505       —       170,505  
 
                                                
Costs and expenses:
                                                
Cost of product
     18,290       1,873 (1,2,3)     20,163       14,769       (9 )(1)     14,760  
Cost of maintenance
     9,573       (413 )(1,2)     9,160       3,293       (5 ) (1)     3,288  
Cost of professional services
     42,144       (2,217 )(1,2)     39,927       26,295       (75 ) (1)     26,220  
Cost of revenue from amortization of intangible assets
     7,419       (7,419 )     —       7,260       (7,260 )     —  
 
                                    
Total costs of revenue
     77,426       (8,176 )     69,250       51,617       (7,349 )     44,268  
 
                                                
Gross Margin
     182,930       16,091       199,021       118,888       7,349       126,237  
 
                                                
Research and development
     41,516       (3,988 )(1,2)     37,528       29,291       (67 )(1)     29,224  
Selling and marketing
     90,159       (5,872 )(1,2)     84,287       57,353       (560 )(1)     56,793  
General and administrative
     40,571       (12,829 )(1,2)     27,742       21,714       (1,218 )(1)     20,496  
Amortization of other intangible assets
     10,361       (10,361 )     —       2,731       (2,731 )     —  
Restructuring and other charges
     (1,233 )     1,233       —       2,739       (2,739 )     —  
 
                                    
Total operating expenses
     181,374       (31,817 )     149,557       113,828       (7,315 )     106,513  
 
                                                
Income (loss) from operations
     1,556       47,908       49,464       5,060       14,664       19,724  
 
                                                
Other income (expense), net
     (8,052 )     2,880       (5,172 )     (458 )     638       180  
 
                                    
 
                                                
Income (loss) before income taxes
     (6,496 )     50,788       44,292       4,602       15,302       19,904  
 
                                                
Provision (benefit from) for income taxes
     8,524       (5,588 )     2,936       2,303       (1,008 )     1,295  
 
                                    
 
                                                
Income (loss) before cumulative effect of accounting change
     (15,020 )     56,376       41,356       2,299       16,310       18,609  
 
                                                
Cumulative effect of accounting change
     672       (672 )     —       —       —       —  
 
                                    
 
                                                
Net income (loss)
   $ (15,692 )   $ 57,048     $ 41,356     $ 2,299     $ 16,310     $ 18,609  
 
                                    
 
                                                
Net Income (loss) per share: basic & fully diluted
   $ (0.10 )   $ 0.32     $ 0.23     $ 0.02     $ 0.14     $ 0.16  
 
                                    
 
                                                
Weighted average common shares outstanding:
                                                
Basic
     162,400       —       162,400       106,414       —       106,414  
 
                                    
Fully Diluted
     178,989       —       178,989       114,029       —       114,029  
 
                                    
 
                 
    2006     2005  
(1) Non-cash stock based compensation
                
Cost of product licenses
   $ 65     $ 9  
Cost of maintenance
     298       5  
Cost of professional services
     1,199       75  
Research and development
     3,157       67  
Selling and marketing
     4,836       560  
General and administrative
     4,969       1,218  
Cumulative effect of accounting change
     672       —  
 
            
Total
   $ 15,196     $ 1,934  
 
            
 
                
(2) Acquisition related transition and integration costs
                
Cost of product licenses
   $ 49     $ —  
Cost of maintenance
     115       —  
Cost of professional services
     1,018       —  
Research and development
     831       —  
Selling and marketing
     1,036       —  
General and administrative
     7,860       —  
 
            
Total
   $ 10,909     $ —  
 
            
 
                
(3) Purchase accounting adjustment
                
Revenue
   $ 7,915     $ —  
Cost of product licenses
     (1,987 )     —  
 
            
Total
   $ 5,928     $ —  
 
            

 

 

Nuance Communications, Inc.
Reconciliation of Supplemental Financial Information
(in thousands, except per share amounts)
Unaudited
GAAP: Fiscal Fourth Quarter 2006
   Net Income Per Share Guidance
                 
    Three months ended  
    September 30, 2006  
    Low     High  
GAAP Total revenue
   $ 116,000     $ 120,000  
Purchase accounting adjustment — Dictaphone revenue
     6,000       6,000  
 
            
Total Non-GAAP revenue
   $ 122,000     $ 126,000  
 
                
GAAP net income (loss), per share
   $ (0.03 )   $ (0.03 )
Cost of revenue from amortization of intangible assets, per share
     0.01       0.01  
Amortization of intangible assets, per share
     0.03       0.03  
Stock based compensation, per share
     0.03       0.03  
Restructuring and other charges, per share
     0.00       0.00  
Acquisition related transition and integration costs, per share
     0.03       0.03  
Non-cash interest expense, per share
     0.01       0.01  
Non-cash taxes, per share
     0.00       0.01  
Purchase accounting adjustment, dictaphone revenue
     0.03       0.03  
 
            
Non-GAAP net income (loss), per share
   $ 0.11     $ 0.12  
 
            
 
                
Shares used in computing non-gaap net income (los) per share:
                
 
                
Weighted average common shares: basic
     168,000       168,000  
 
            
 
                
Weighted average common and common equivalent shares: diluted
     185,000       185,000  
 
            

 

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