Nuance Communications, Inc.
Q4 2020 Earnings Call Transcript

Published: 18 Nov 2020

[Operator:]

Good day and welcome to the Nuance Communications' Fourth Quarter Earnings Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I'd now like to turn the conference over to Mike Maguire, Head of Investor Relations. Please go ahead.

[Michael Maguire:]

Good afternoon and welcome to our Q4 2020 call. I hope everyone is healthy and remaining safe during these times. Joining me today to discuss our Q4 and fiscal year '20 results are Chief Executive Officer, Mark Benjamin; and Chief Financial Officer, Dan Tempesta. Additionally, during the Q&A portion of the call, we will be joined by Chief Revenue Officer, Rob Dahdah.

[Mark Benjamin:]

Thanks, Mike, and good everyone and thank you all for joining us. I'd like to start by saying that our thoughts continue to be with those who have been affected by COVID-19 and we want to express our deepest gratitude to all the frontline workers, particularly all the doctors, nurses, and clinical staff who are working tirelessly on the front lines to keep our communities safe. As you know, it's been an unprecedented year and I am extremely proud of how we finished FY '20. Q4 marked yet another quarter of solid execution against our strategic initiatives and a strong end to our fiscal year. We delivered revenue and EPS at the high end of our guidance range expectations at $353 million and $0.18 respectively. In healthcare, we over delivered on our cloud based ARR surpassing our August guidance range and ending the year at $386 million, right in the middle of our original pre-COVID guidance. We generated strong year-over-year growth in Dragon Medical One as we continued to move our installed base to the cloud and more importantly expanded our addressable markets to ambulatory settings in the US and internationally. We remain encouraged by the strength of our radiology business as we make progress in our transition from on-premise to cloud while building on our platform approach selling add-on offerings on top of PowerScribe One. Additionally, we continue to see exciting traction in our selling motion of our Dragon Ambient Experience or DAX offering landing several promising logos and announcing an integration with Microsoft Teams for Telehealth. In enterprise, we executed on our AI First approach, seeing persistent demand for our intelligent engagement and cloud-based offerings as highlighted with some exciting strategic wins in the quarter, which I'll touch on in a moment. And finally, today we announced the planned sale of our medical transcription and EHR Services business, perhaps the final step on our strategic transformation that began a little over 30 months ago with a clear target on growth of our cloud solutions and strategic addressable markets. Overall, we are very pleased with our performance during the quarter and are excited about our position as we enter FY '21, and I'd like to take this opportunity to highlight some of our Q4 successes.

[Dan Tempesta:]

Thanks, Mark. And thanks, everyone for joining us today. I want to start by reiterating Mark's acknowledgement of the hard work of our employees over the past 12 months, driving us towards a successful 2020 through these volatile times. I’m extremely proud of the resilience of our entire workforce and feel it shines through in our strong Q4 performance. Turning to our results, I’ll begin with a brief discussion of our Q4 and fiscal year 2020 performance. As part of that discussion, I’ll provide some detail on the changes we have made to our Healthcare segment financial disclosures then, as Mark mentioned, I will provide additional color on the plan sale of our HIM and EHR businesses. And finally, I’ll conclude by discussing our fiscal year ‘21 guidance and several updates to our mid-term outlook. Overall, we’re pleased with our Q4 results, delivering a strong close to a year with unparalleled external pressures. We generated $1.479 billion of total revenue in fiscal year ‘20, which is at the high-end of our guidance and results in an organic decline of 2% year-over-year due to the impact of COVID-19. Our non-GAAP earnings per share for the year were $0.83 also landing us at the high-end of our guidance range. Moving to our segment results. Our Healthcare segment revenue in Q4 declined 10% compared to Q4 in 2019 while fiscal year 2020 revenue was down 4% compared to 2019. The full-year decline was driven almost entirely by our non-strategic HIM and EHR businesses, which were heavily impacted by COVID. The business lines representing our strategic healthcare revenue were down 4% in Q4, but up 3% overall in fiscal year ‘20. This full-year growth was driven by strong performance in our Dragon Medical Cloud business, which generated over $280 million of revenue during the year, up 38% versus 2019. Additionally, our emerging Cloud businesses continue to see growing demand throughout 2020 with particular strength from our PowerScribe One solution. This growth was partially offset by declines in the corresponding on-premise product offerings as we progress through the transition of our installed base to the cloud. While many of our offerings are still in the early stages of this transition, we’re encouraged by the momentum of our Cloud based solutions and the persistent demand for our integrated add-on intelligence as we continue to execute on our platform approach in healthcare. Our ongoing transition to Cloud results in a more ratable recurring business model within the Healthcare segment. In order to illustrate this shift to recurring revenue more clearly, we have provided additional visibility into our Healthcare segment in our prepared remarks document. First, we have broken out our Radiology business into four different revenue types. This breakdown is similar to the visibility we provide for Dragon Medical allowing for further insight into the progress of our transition to Cloud within the Radiology segment. Second, we’re now presenting an additional table in our prepared remarks document that provides further focus on the elements of our Healthcare Cloud revenues, which correlates to our total Healthcare ARR metric. We ended the year with Healthcare ARR of $386 million, up 29% year-over-year above the high-end of our guidance range and we're particularly encouraged by this strong growth. Despite the impacts of COVID-19 in our business, we were able to end the year near the mid-point of our pre-COVID ARR guidance range of $375 million to $400 million. I’d like to commend Rob and the entire sales force for the unwavering commitment and drive truly an impressive outcome in the face of such adversity. And lastly for Healthcare, segment profit in Q4 was 32.2% resulting in full-year segment profit of 32.6%. Moving to the Enterprise business, revenue declined 3% in Q4, but for the full-year, we were up 4% year-over-year, marking the fifth consecutive year of organic growth for the segment. The growth was driven by strength from our Intelligent Engagement offerings, in particular our digital and security and biometrics offerings. Enterprise segment profit in Q4 was 23.2%. In our fiscal year ‘20 Enterprise segment profit was 27.7%. As a reminder, Enterprise revenue and segment margins remain subject to fluctuation from period-to-period due to the timing of license activity and we always encourage investors to analyze our Enterprise segment performance on an annual basis. Turning to the balance sheet, we ended our fiscal year with a cash and marketable securities balance of $372 million, which is above our minimum cash balance target range of $250 million to $350 million. Our cash flow from operations in the quarter was $81 million, up slightly year-over-year. However, our full-year cash flow from operations was $268 million down year-over-year due to COVID impacts on both revenue and billings. We repurchased about $170 million of common stock and retired about $470 million in debt principal value during fiscal year ‘20, all of which took place in the first half of the year. Overall, these results combined with the strong resolve that the company exhibited throughout a very challenging and unprecedented year are a testament to the resiliency of our business. And I'm confident that we’re well positioned with excellent momentum as we enter fiscal year ‘21. As we continue to focus on driving organic revenue growth, Mark discussed the strategic decision we made sell our HIM and EHR business lines. Nuance will retain a small minority equity ownership in the newly formed company deliver health solutions, and we will continue to support our existing customers and uphold our commitments without service disruption. This final step in our multi-year portfolio rationalization effort positions us to fully execute on our strategic goals with a growth oriented healthcare portfolio, and stronger operating margins. To better illustrate the impact we expect this transaction to have on our gross and operating margins, we have provided two charts in the prepared remarks document, which bridge the gap between our fiscal year ‘20 margins and our fiscal year ‘21 margin guidance. We’ll provide a final breakdown of these impacts once the transaction is closed, which we expect to occur in the second quarter of fiscal year ‘21. Let's turn now to our guidance. First, I’d like to note that our Q1 and fiscal year ‘21 guidance contemplates a run rate of the current environment with respect to COVID impacts on our end markets. Additionally, we’re providing guidance on a continuing operations basis due to the pending HIM and EHR sale. I would remind you that since this transaction has not yet closed, the adjustment made for year-over-year continuous operation comparisons are subject to change. Taking this into consideration, we’re providing the following guidance. For fiscal year ’21, we expect total revenue in the range of $1.327 billion to $1.367 billion implying organic growth of 3% to 7% year-over-year. We expect our full-year EPS in the range of $0.71 to $0.77. This guidance range assumes a full-year diluted share count of 313 million shares, which I would remind investors is impacted by our stock price currently trading above the conversion price of our outstanding convertible notes. Additionally, our full-year cash flow from operations is expected to be in the range of $270 million to $310 million and our free cash flow in the range of $215 million to $250 million. We’re also updating our target minimum cash balance range to be between $200 million and $300 million reflecting the reduced cash requirement of our business post the sale transaction. Turning to our segment guidance, we expect Healthcare revenue for fiscal year ‘21 in the range of $767 million to $787 million, implying 7% to 9% growth year-over-year. This growth is in spite of the loss of a non-strategic government contract in our coding business that did not renew after five years creating a difficult compare in Q1, we anticipate that the loss of this term license contract will result in a $40 million headwind in fiscal year ‘21, the majority of which will occur in the first quarter. We expect to end the year with Healthcare ARR in the range of $510 million to $540 million, representing 32% to 40% growth year-over-year. Both our revenue and ARR guidance for Healthcare in fiscal year ‘21 contemplates the expected contributions from our DAX offering, albeit modest. Specifically, we anticipate that DAX ARR will be between $10 million and $20 million in fiscal year ‘21. Additionally, given our go-to-market approach for our provider facing clinical documentation solutions, beginning in fiscal year ‘21, we’ll combine our Dragon Medical Cloud and DAX revenue for reporting purposes within our Healthcare revenue table. For enterprise, our revenue is expected to be in the range of $538 million to $556 million, up 3% year-over-year at the midpoint. As I previously mentioned, our revenue guidance today reflects our visibility into our Healthcare and enterprise markets with respect to COVID impacts, which is informed by our recent experience. Additionally, we’re updating portions of our mid-term outlook to reflect the impacts from the plan sale of HIM and EHR businesses and the top line growth we expect from DAX. With that in mind, we’re raising our mid-term CAGR for total Nuance revenue to be 6% to 11% up from our previous guide of 3% to 6%. We still expect about 100 basis points of operating margin improvement per year in the mid-term, but we now expect to achieve approximately 28% operating margin by 2023, a 100 basis point increase compared to our prior guidance of 27%. This updated operating margin guidance also reflects our updated expectations for R&D as a percentage of revenue, which we now expect to be approximately 14% in the mid-term compared to our previous guidance of 13%. Diving further into our Healthcare segment, we’re raising our mid-term guidance to reflect our incrementally positive outlook on the business. We expect our total Healthcare revenue CAGR to be 8% to 14% compared to our prior guidance of 3% to 5% for total Healthcare and 8% to 10% for strategic healthcare. And finally, we expect our Healthcare ARR CAGR to be between 30% and 40%, which compares to our previously guided ARR growth of 20% to 25%. This Healthcare ARR CAGR assumes that DAX contributes between $100 million to $250 million of ARR by the end of fiscal year ‘23. Additional color on our guidance can be found in our prepared remarks document available on our investor website. Before opening the call to questions, I would like to let you know that we will be attending the Guggenheim Digital Health Virtual Summit on December 8th and 9th and the Barclays Global Technology Media and Telecommunications Conference on December 10th. Both of these conferences will be held virtually, and we hope to see you there. With that, I’d like to turn the call back over to the operator to take your questions.

[Operator:]

Thank you. And at this time, we’ll now begin the question-and-answer session. Your first question today will come from Saket Kalia with Barclays. Please go ahead.

[Saket Kalia:]

Okay, great. Hey, thanks for taking my questions here guys and congrats on the divestiture.

[Mark Benjamin:]

Thanks, Saket. Good to hear from you.

[Saket Kalia:]

Absolutely. Mark, hey maybe for you a lot to go through, but maybe we'll start-off with the point that Dan just ended with, which is the updated mid-term outlook. And specifically the 30% to 40% CAGR and ARR, obviously some big aspirations there as part of that for DAX, can you just dig into anything that you're looking at that gives you confidence there, whether it's pipeline, whether it’s competition, whether it’s pricing or volume, anything because obviously from $10 million to $20 million in ARR this year to triple-digit millions, I think by the end of ‘23. That's quite a

[Mark Benjamin:]

For starters, Saket I’d say at the technology level, we're really pleased with the performance of the core tech. It continues to evolve as we had planned, and in some cases exceed our expectations on the performance side. So I mean, that goes without saying, that's obviously super critical. The market reception continues to be overwhelmingly positive. Rob is with us. He can touch on some of the sales motion, but the interest is undeniable. We continue to have not a demand issue at all as far as getting familiar with the solution. So, we feel very good there, at the specialty level, as well Saket, with some of the early specialties that hit the market, you remember a few of those ortho, ENT, dermo just to name a couple, we're really starting to see the take rate and the performance of the solution being quite impressive. And I think, more importantly drive the right ROI for our end-customers, and we're seeing a combination of different drivers of ROI. And in fact, we're going to publish this white paper next week to highlight some of those drivers of value because -- and depending on our customer, depending on the buyer profile and in some cases depending on the specialty Saket, we're seeing different drivers of value for the solution, which is great. So, we're really excited about coming into this year with that many specialties, and the customers that are in the early stages in the starter packs are beginning to really get some, I think, volume through the system. So, the expansion opportunity of existing customers that, we've mentioned a few on tonight's call, the Providence win is a great, great partnership for us, MD Anderson. So, those new opportunities and the existing ones we've mentioned in the past, we're starting to see the expansion discussions begin with our customer teams and our sales teams. So, we just feel very good about our position on really all the important aspects. So, Rob's got a big target. He's the right guy, and with the right team for the opportunity. So Rob, you have anything there?

[Rob Dahdah:]

I think you said it well, Mark. I think another thing to add is just when you think about why we have confidence, it comes straight from the users, you see the unsolicited overjoyed responses to the users. We know that this is something real and good, and with that as the foundation for whatever we do next. I think that's really kind of, that's the heat, that's the fuel of why we feel so good about where we are, and we're just making progress every day. The interest is fully sustained and growing, and we're just finding ways to make it the most comfortable for the users to do it sooner and more, so we feel really good.

[Saket Kalia:]

That's great. That's super helpful. Dan, so my follow-up for you maybe a little bit more near-term. I think the other big piece of news here is that the divestiture of the HIM Transcription and EHR services business or businesses, can you just dig into some more of the detail on the divestiture in terms of what proceeds if any are there here? What would your plan be for those proceeds from a capital allocation perspective; and from a margin perspective, obviously these deals are nicely margin accretive. But is that margin guide here for ‘21 burdened by any stranded costs, definitely you have a partial year of the businesses as part of the whole. Does that make sense?

[Dan Tempesta:]

Sure, sure. Good question, Saket. Thanks. I think first on the proceeds at this time, we're not disclosing that. But I do want to reiterate the strategic nature of what we're doing here. So first and foremost, by doing this transaction, you could just see, we're really unlocking the growth rate in the Healthcare division. I mean this year guiding a 7% to 9% growth rate, and the past always was a big burden on that growth rate, and that is now behind us. Second, this is a really important transaction for us and our customers who are very focused on a smooth transition and making sure we don't have any service disruptions. And then lastly, from our perspective, this is an important partnership. So, we're maintaining that minority ownership in the new business and we'll really be there to show our commitment and help them along the way as well. On your stranded cost question, yes, we do have stranded costs. We've gotten pretty good at this with auto and with the imaging transactions. Those numbers are baked into the operating margin bridge that we've provided and even with the stranded costs, we’ll obviously take some of those costs out. You can see that it’s still about 100 basis points accretive to the business.

[Saket Kalia:]

Very helpful guys, I’ll get back in queue. Thank you.

[Dan Tempesta:]

Thanks, Saket.

[Operator:]

And your next question will come from Daniel Ives with Wedbush. Please go ahead.

[Daniel Ives:]

Yes, thanks. And congrats again. And maybe Rob, you could hit on this. When you talk about DAX, can you just talk about the go-to-market strategy and just how you're sort of going through with customers? Is it a different type of sales process, maybe just given some examples without naming the customers in terms of how you think this all sort of plays out in terms of going from to obviously much bigger deals?

[Rob Dahdah:]

Yes, thanks Dan. It's Rob. So the sales, couple of things I'll say is the foundation. We have an amazing footprint already in Healthcare, and we have great trust with our customers. So starting there is a really good spot, and that takes a long time to build up. So, we think that's actually to begin with, to have a conversation like we're having around DAX puts us in a really good spot competitively speaking. From there, I think the discussion is based on kind of the first introduction to it. And so we've done, the team has done a really good job in sales and marketing teams at keeping this front center, because as you well know, we launched this literally right into the teeth of the first days of the first wave of pandemic. And so keeping it front and center in a meaningful way, during a difficult time was something that was I think masterfully executed by the marketing team making sure that we had the ability to have digital demonstrations, the ability to do it in again in a meaningful way not just seeing a video but have live demos, remote live demos, and interest continued to grow, where the volume wouldn't allow for everyone to get their own remote live demo at any given moment, we started with the group demos. And so I think keeping in front of the prospects and customers in a meaningful way has been a big and important part of it. Examples are, we might have a C-Suite of a particular institution that's very interested to participate in one demo, and then get a sense of why they want to have it, and then they send their team below them into the next version of a demo. And so and we have, so much available bandwidth as they started doing these things digitally, now we're able to have all these groups come through various times have the discussions, get a feel for it. And then as we go-to-market and start to make sales, it's a constant process where they're familiarizing themselves with it. And then word of mouth takes over. And so, we think we've been really well positioned, the strength of the solution really is the key part, but then being able to do this all digitally and having been nimble enough to do it, I think we're in a good position here.

[Daniel Ives:]

Great, and then maybe add on that for Mark and Dan. So in terms of from an investment profile perspective, I mean what's the best way to think about over the next six, 12 months from a go-to-market perspective, is it just, it's continued blocking, tackling on the typical Healthcare but on DAX and some of the other initiatives, is there just a sense where you could just take more and more assets and more and more resources towards some of these initiatives, especially now selling off HIMs and others, you could really strategically focus on the core.

[Mark Benjamin:]

I mean, I think we're doing just that. I think even with our mid-term guide, we added another point on the R&D investment side of things, Dan. So, I think and listen, you've been with us for longer than the last 30 months. And so you've had a front row seat. So in many ways, we feel unburdened and really can go after all the priority investments and strategies that we've outlined. So, DAX is obviously an exciting one for us. The international expansion of the Healthcare business is exciting for us, the Radiology expansion and Cloud conversions is super exciting for us, the Enterprise mixed platform is super exciting, security and biometrics. So there's really, it reminds me a little bit as I'm answering your question about ultimately, why we did the spin-out of the auto business is that, you have competing priorities for investment, and you of course know what's happening with auto and their percentage of R&D as a percentage of revenues. And we're seeing I think that performance be quite nice as well. So I think what we're practicing is really a bit of the same playbook. And we feel very good about entering this year across all the growth categories not favoring one over another, but all of them feeling that there is appropriate investment levels. And Joe Petro, our CTO, Rob Dahdah, our Head of Sales, they know that the support from Dan and for me is, if you can succeed, and you can accelerate, we're going to pile in more and go faster with you. And I think it continues to be a very clear conversation within Nuance today.

[Daniel Ives:]

Awesome, thanks.

[Operator:]

And your next question will come from Jeff Van Rhee with Craig-Hallum. Please go ahead.

[Jeff Van Rhee:]

Great, thanks guys. I'll add my congratulations, I want to dig a little deeper on the DAX as well, can you talk in a little more detail in terms of, what's the scale of your largest customer there? How many customers, are you having discussions with some of your larger medical systems? What are they telling you? I mean, I realized obviously you guys have established a great track record of being very conservative with the numbers and you're plugging in a pretty steep ramp with DAX. But do you have the large medical systems that are giving you some glimpse into how many seats they envision they could do on DAX over the next three to five years? Just a little more precision on kind of those maybe three data points?

[Mark Benjamin:]

Yes, I'll make a few comments, Jeff, and then perhaps Rob will add some additional color, because he's on the front line every day, but we certainly are having conversations with the nation's largest systems, including the academic systems as well as rural systems in the mid and ambulatory space and surgical center space as well. So, we haven't necessarily, I'd say indexed a certain way that it would be noteworthy, I think we're seeing good interest and good traction, all of the buyers of DAX with this pilot opportunity and the starter kits that we've discussed, all have the ambition of going broadly across more than 10 or 20 clinicians in any given site, and that's certainly not their goal. And obviously, we have great ambition that this will ultimately change the way that physicians practice medicine and patients experience clinical care. So, those conversations continue to be I think certainly on a very, I think ambitious and expansive level. And we're certainly having them across all levels and sizes. Now the white paper we’ll publish, I think will give you, Jeff a little bit more of the color context as far as what does this mean to a physician? What does this mean to a practice? What does this mean to a department and while the white paper will talk about individual cases and true life examples, you'll start to see that a cardiologist can improve patient throughput by 25% or you'll start to see a primary care physician can reduce wait time by 50% for his or her patients. The ROI of this solution is growing in very different and exciting ways and quite honestly, we're learning too. So it really is a, it's educational, but also I think very confirmatory. So Rob?

[Rob Dahdah:]

Yes and of course, Mark is spot on with comments and the additional color I will give as he described, a lot of how we look at these conversations early on, although we have these starter packs, or early smaller groups, if anything they're definitely thinking of how they work this into their broader population. And that actually, as positive is that it sometimes slows us a little bit because they're trying to swallow it all at once. That's why we developed our starter packs. And it's definitely exciting to hear them think that way, we don't have to lead them that way. They start there. And we almost reverse or reverse engineer back to the initial mutation. So we're very excited though.

[Jeff Van Rhee:]

Yes, I think in the prepared remarks, you alluded to some, it seems like you had maybe a couple of specific instances in mind of early customers having come back for follow-on orders. Is there any expansion there?

[Mark Benjamin:]

Certainly, we've had numerous of the customers start to expand the numbers. Again and, Jeff you've done a lot of good work in the channel. So you understand that we're really changing the workflow and the process of practicing medicine for these physicians. So, we're very sensitive to that. So we're just as comfortable starting with 10 or 20 docs, and moving across a department within an IDN or moving to a second facility or third site. What we're also learning, Jeff is that, the early users of the solution are becoming the internal obviously unpaid of course, supporters of the solution within their systems. I mean, we have examples where Rob.

[Rob Dahdah:]

They're the best, they've become the best salespeople, we have. Some of these develop their own DAX. Some of these folks have their own, they develop their own ROIs and they go on their own selling spree. So, it's very beneficial. And it's totally grassroots.

[Jeff Van Rhee:]

Yes, yes. Very helpful. You've certainly with Dragon and I think also now emerging on PowerScribe One, you're becoming much more of a platform sale as opposed to a widget sale. And I think you alluded to a little bit of what you're seeing in the PowerScribe One front where you've got customers coming back for incremental capabilities that have ARPU uplift, can you just talk to and lay out any sort of quantify any of the kind of where you’re on a perceived, where that can go over time as you start layering in? I think you mentioned workflow and image management, a bunch of other things.

[Mark Benjamin:]

Yes, I mean, it's a little early for us to really talk too much about the uptick. I mean, it's early days is really the point. On PowerScribe One Jeff, we're probably certainly we're in the first inning of that, on-prem to Cloud upgrade. And then, once you get that, going you start to layer the follow-up image and other solutions on top of the PowerScribe One solution. So, it's early days, but there's a lot of attraction. And listen, we think there's a 2, 2.5x on the on-prem to Cloud on PS1. So, we think there's a lot more to run as well with the add-on solutions in that category, but I don't know, Dan, if we have much more color than that?

[Dan Tempesta:]

Yes, we're not giving that type of ARPU just yet, I think it's exactly what Mark said, we need to get a little bit further into this. Similar to what we did with Dragon Medical and the ARPU really started to shine and then all the add-ons on top. But I do think for base modeling purposes, we are absolutely seeing that 2 to 2.5 times on the M&S. So that still holds.

[Jeff Van Rhee:]

Okay, that’s helpful. I’ll jump in queue, thanks.

[Dan Tempesta:]

Yes and Jeff, one final thing is that, you saw in our prepared remarks, we're going to disclose more of the detail within the categories, not just in radiology, but give you a cloud category for the group that would include those solutions. So you'll be able to start to get a feel for what the growth rates will ultimately mean.

[Jeff Van Rhee:]

Very helpful. Thanks again guys. Appreciate it.

[Operator:]

And our next question will come from Sanjit Singh with Morgan Stanley. Please go ahead.

[Sanjit Singh:]

Thank you for taking the questions. And I guess I should start-off by thanking you for the early Christmas present. A lot of great new positive surprises in today's release with the mid-term outlook and the sale of the EHR businesses. So that was great to see. Maybe to start-off, just sort of looking at next fiscal year. If we look at what the headwinds, you sort of rightly mentioned that you guys got to the mid-point of your original ARR guidance, sort of pre-COVID. And I wondering if you can sort of lay out what some of the friction points were that we saw, whether it came to DAX rollouts or Dragon Medical One or PowerScribe, what frictions you did encounter because of COVID. And then once we imagine a world hopefully, where we're all vaccinated, what type of tailwinds can be unleashed in and sort of a shorter way of saying it? How much sort of pent-up demand is there for the core portfolio, as we look to maybe a post-COVID environment?

[Dan Tempesta:]

Hey, Sanjit, it’s Dan. Let me start and then maybe Mark can add some color at the end, I'll kind of address what we saw in 2020 for some of those headwinds, and then how that evolved. I think as you recall, back in March, April, May timeframe, the Healthcare systems really struggled, it impacted them in a couple of ways with all the volume of COVID that they were seeing, number one, it really slowed their decision making down and they differed a lot of decisions that they were making around certain purchases. So at that time, we paused on some of our guidance, we really pulled back on the ARR guidance, because we just didn't know exactly how they were going to purchase. Some of the professional services items got deferred. And then of course, we did see some licensing slow down. Lastly, in that HIM and EHR business that actually took the brunt of course of the impact, because that's the heavy transactional and PS parts of the business. So that really hit us, I would say in Q3. What happened in Q4 is that the hospital systems figured out how to deal with COVID a little bit better. And then they turned on some of those decisions. So the volume activity came back, because electives started to ramp-up again. At the end of the year, we saw pretty much the volumes back to the norms, so that's a good thing. But more importantly, Rob Salesforce was really able to make great progress in selling DMO, PowerScribe One and start those good conversations in DAX. So that's kind of what happened in 2020, I'll turn it over to Mark to address the rest.

[Mark Benjamin:]

Yes, so I think as Dan mentioned, I think the host system ultimately had to learn how to facilitate COVID care of course, while ultimately returning back to normal operations, not just for revenue, pressures within Healthcare systems, but, a lot of these elective procedures can only be pushed out for so long. So, as Dan mentioned, our guidance today Sanjit essentially has what we're experiencing today, and what we've experienced for the last several months. Now with the pressures of COVID, Rob's team continues to learn how to operate and drive sales in the business, and they've proven that, so we feel good about that. Yes, certainly, if there's a sudden change to market conditions relative to COVID, there could be an impact on speed of bookings, if you will and timing, as well as we could see something on the top line pressure for the year I’ll call it 100 basis points, perhaps 200 basis points, but nothing we're seeing today. And again, we have eyes on nearly 600,000 physicians every day. And the volumes we measure every day, and the images coming out of our radiology business that we see every day. So like volume wise, we're seeing a system that we serve that's learned how to operate and manage in a COVID environment, we can't guarantee that holds, but at the same time, we know what we know today, and what we've seen historically.

[Sanjit Singh:]

That's great color, I really appreciate the thoughtful response and sort of looking at next year, sort of getting back to DAX, in some of our conversations with your customers and also investors, I think there's this view that the first 50 hospitals, first 20 IDN networks right are going to be a lot tougher than the following 100 or 150. And so what do you think we are sort of establishing those kind of Lighthouse accounts that'll drive those customer references that will make the customer acquisition just go back much faster into calendar ‘22 and ‘23 and beyond. How many more of those kinds of Lighthouse accounts do you think you need to get before you start to really unlock some of that customer velocity around DAX?

[Rob Dahdah:]

Yes, this is Rob. It's a fair point. And I really hope, I really hope it works out what you just described it. As we think about that first tranche, we're still early even in that. But we have, as you've seen from some of our press releases, we have some names, we have some, some really good beginnings of that foundation that you described. And when you think about the dynamics of what we talked about just a little bit earlier on one of the earlier questions or comments, as the physicians begin to use this and realize what it's going to do to change their lives. I think that's when it gets unleashed fully. And you really we're almost a kind of a co-seller in that go forward motion. So yes, I think we're still early, but very promising.

[Sanjit Singh:]

Appreciate the response, Rob. Thank you.

[Rob Dahdah:]

Thanks, Sanjit.

[Operator:]

And our next question will come from Stephanie Davis with SVB Leerink. Please go ahead.

[Stephanie Davis:]

Thank you for taking my question, guys. And congrats on another good quarter, nice time.

[Mark Benjamin:]

Thanks, Stephanie.

[Stephanie Davis:]

I have kind of a broader overview question for Mark. And then I have a few more follow-ups on ARR continuing the trend here. So Mark, taking a step back, and kind of looking at the long road of the portfolio rationalization process, does anything stick out as a potential area where you'd like to invest more or maybe you'd like to pare back a bit now that everything's in place?

[Mark Benjamin:]

Yes. I mean, I think it's a great question, Stephanie. And I think that as you say, the road has been long, and I'm not sure windy, but it's been so to get to this point, I think we're feeling really good about the level of investment we have going on in the company. And the first part of the road we’ve been on was a large effort to take cost out of the company, that directly reinvested back into Nuance to drive, I think many of the things we're talking about today that are just starting to bud and just starting to I think gain traction, whether it's International, whether it's DAX, whether it's mix, whether it's our security and biometric solution and gatekeeper in the Cloud. So I think the hard work that all of our employees in the company really has had for this process. I would say that, if I asked who could use more investment, obviously, some may say, I'll take more, but I think we feel very good about the levels. And again Stephanie, you know the team at this point like, if we see success happening even above the expectations we have and we feel good about what our expectations are, there's nothing holding us back from going faster in that regard. And, but we don't feel that, now's the time to, the margin picture on not just the year, not just the shift of the portfolio mix that improves operating margins a couple hundred basis points and the mid-term operating margins that get up to that kind of 28% range. I mean you layer that on top of the growth rate of the company that mid-term we're calling for a 6% to 11%, top line grower with a Healthcare business growing at 8% to 14%, that feels really good to us, given the investment profile of the company today.

[Stephanie Davis:]

It feels really good versus your prior seats, right?

[Mark Benjamin:]

Yes, so we're happy.

[Stephanie Davis:]

Now, on the ARR side, I have two quick ones. The first is reading from your prior comments. Does this mean you're not baking in an uptick in ARR as hospital spend comes back post-COVID is more of a business is usual for 2021. And the second is just what the puts and takes are to get you to the low-end versus the high-end for the mid-term?

[Mark Benjamin:]

Yes, I mean listen, Rob, in the face of COVID, in the face of obviously a system that, by the way the systems were financially were never, I think a great shining as an example of excess capital to invest, right. So and you know the Healthcare space, as well as anyone. So, you have to walk into a system today with a very high value proposition that shows a return on their dollar.

[Stephanie Davis:]

Thank you.

[Mark Benjamin:]

And of course you need credibility, of course you need trust, of course you need a compelling solution. So, we're super experienced with that. And we know that none of the solutions, if they don't come with that, they're not going to do well. So, I think Rob proved he could get to his ARR number in FY ‘20, essentially at the mid-point of the original year guide, which is incredible. Obviously, we're accelerating this year to a 32% to 40% ARR guide. And obviously, we get some contribution of DAX, but by the way, that's not driving the difference. It's part of the difference. So you're seeing underlying strength in the core business that we've been talking about outside of DAX. And then listen on the mid-term, it's a journey for us. And the ARR range is a wide dollar range, but certainly exciting growth, and nothing we see today, and nothing we've experienced today would lead us to think otherwise.

[Stephanie Davis:]

Helpful, congrats again guys.

[Mark Benjamin:]

Thanks, Stephanie.

[Operator:]

And our next question will come from with Oppenheimer. Please go ahead.

[Unidentified Analyst:]

Thank you for taking my question. And congrats on the strong finish to fiscal ’20 and another strategic divestiture win to dive. Just one quick question for me, with regards to the, I guess the pipeline check heading into year-end, we see some strong growth in the international side this quarter, I was wondering if I could pick your Mark, Dan, or Rob into like, the different geographic regions whether it be U.S., EMEA, APAC emerging markets like what are you seeing, in light of like the secondary lockdowns you’ve seen in Europe, maybe in America. What are you seeing on the ground? And that's it for me. Thanks, guys.

[Rob Dahdah:]

Yes, so this is Rob. I'll take a run at that. Certainly it's back there, it's out there, it's part of the conversation especially, as we think about where we’re with Healthcare, internationally definitely they've announced big lock downs in some of the main countries we operate in, in Europe. To date, though we've been able to maintain our conversations, maintain our progress on deals and flight. And so we have not had a complete stance, though. It's actually as the team has mentioned earlier, the systems have seemed to learn how to operate in the environment. And now does that mean that they are kind of gangbusters flush with cash ready to go explore all new things. No, we pick and choose where we are, and make sure that we're in the right places that have the capacity to have these discussions. But to-date, we feel like, we still have very meaningful conversations. And if we are impacted at all, it'll just be more a matter of timing, rather than a change in the discussion itself. So, we feel like we're in a good spot, globally there.

[Unidentified Analyst:]

Understood, thanks for the color, Rob and connect soon.

[Rob Dahdah:]

Thanks.

[Operator:]

And our next question will come from Tom Roderick with Stifel. Please go ahead.

[Tom Roderick:]

Hey, gentlemen, thank you for taking my questions. Appreciate it. Great to hear from you. Rob, this question might be sort of best suited to you. But I'll let in any of you guys handle it. I'd love to hear what you're seeing on the ground on the pricing side of DAX. So I know it's early. And you probably don't want to reveal on a seat by seat basis. But it is sort of meant to be multiples of a subscription license of Dragon Medical Cloud. So, maybe you can talk about that a little bit. And in the context of that, how are your early customers piloting, trialing using this in conjunction with manual Scribes on an assistance basis that would be really helpful to understand. Thank you.

[Rob Dahdah:]

Yes, so this is Rob. And thanks for pointing that question to me, the team loves when I get all the questions. So overall, pricing has been holding. And it is, as you mentioned a multiple, we've tried to be really thoughtful about how we present this in terms of its value. And that's why we believe it's holding, because it truly represents a value relative to what it will help the physicians, the systems, the patients, if you think about all the different types of ROI, you could associate with DAX. So, so far price is holding? Overall though, I think how it compares depends. So you say how it compares to Scribes, and it has a value either way, there are no Scribes. And it has certainly as dollar for dollar match against Scribes, it's in a very strong position, if that were the pure mechanics of the ROI. So but again, there are multiple factors. It’s not just a comparison to Scribes. And so we feel like we're really strong position because not every system has Scribes, not every physician even if they do and the system has them. And, we don't want to be kind of a one-trick pony there. And so, we think we're really strongly positioned.

[Tom Roderick:]

Excellent, that really helpful. And then, Mark a separate side of the business, you're kind of shifting over to enterprise. So great to see that you're projecting organic growth here in the coming year on that front. I know you've gotten questions from many people, myself included, sort of wondering just how strategic that business remains the long-term vision of the company. And it seems like you're really leaning into that particularly, as you see and project another year of organic growth. So to the extent that I'm sort of correct, and reading that properly, how much can you sort of leverage the technology across the way from DAX, and Ambient listening capabilities on the enterprise side? How strategic is that, how tough is that to repurpose on the enterprise side?

[Mark Benjamin:]

Yes, so hey, Tom. No, I mean listen we're really happy with the enterprise business. And you've been around us for quite some time. And we've continued to, I think take the right investment looks into that business, and they had a great year, just coming out of FY ’20. So, it was a big year, as far as product launches with mix. So that's really a Do It Yourself conversational AI platform for enterprise grade mid-market. So, that's a bit of what that team would decide is something that really changes the game and changes the conversation for them. We made investments, in addition to that, around our security and biometrics portfolio, that's now Cloud based, and we're getting some nice traction, nice wins. So, that that business has a very large voice component to it, but we're also seeing in the markets, that conversational AI, and voice really matter. And, while digital transformation which were obviously a major part of having the voice capabilities is really, really, I think what rounds out the solution. So, we do feel good about, I think you're reading us, right. And we're calling for a 2% to 5% guide with the business this year. It's a nice healthy business, the digital portions or the Intelligent Engagement Portions that include some of the non-voice aspects are growing quite nicely. And we’ll continue to leverage their platform and their solutions across on healthcare. And we do that already today. And right back the other way. So, I'd say we have a very good working combination of solutions, working with both divisions.

[Tom Roderick:]

Excellent, really helpful commentary. I'll jump back in the queue. Thank you, Mark.

[Mark Benjamin:]

All right, Tom. Thanks.

[Operator:]

And our final question today will come from Vikram Kesavabhotla with Guggenheim Securities. Please go ahead.

[Vikram Kesavabhotla:]

Yes, thank you for taking the question. I just had one follow-up first here on the Healthcare ARR guidance for this year of 510 to 540. I think you call that about 10 to 20 of that coming from DAX but any more color in terms of the mix of that between DMO and some of these emerging products across PowerScribe One and your other Cloud products?

[Dan Tempesta:]

Hey Vikram, it’s Dan here. Yes, we think you have it right it is 10 to 20 coming from that ARR. And then it really is going to be a mix coming from the other categories. Of course, you'll start to see that radiology product starting to churn as we start to convert that base. 2020 was early days. We're starting to get a little bit more traction in ‘21. We're pretty excited about that. But the behavior of the Dragon Line will be, obviously we made really good dent in the U.S. But there's still U.S. conversions to take place. We're going after that international market, we're going after the community hospital market. So there'll be contribution there. And then of course, this takes longer, but we're also seeing benefits from the CAPD that sits on the Computer Assisted Documentation and AI that sits on top of that platform. But of course, that won't grow at the same levels. And we're getting the benefits from the radiology side, and now from the CDE One that CDI business line, so it's really a lot of things contributing. And because of that, we're not going to break down the components any longer. And then of course, as DAX starts to ramp-up, that'll make up a larger portion of it as well.

[Vikram Kesavabhotla:]

Okay, great, and then maybe just the follow-up in terms of the DAX target that you put out for 2023 of $100 million to $250 million, just any color in terms of the underlying assumptions there with respect to how pricing is going to trend here over the next few years versus the number of physicians, I think any color there would be helpful as we kind of think about the path to achieving those targets? Thanks.

[Mark Benjamin:]

Yes, I mean, we took a number of different I think filters to that, and how we really modeled that and we looked at our land and expand strategies and the adoption curves that we're experiencing with some of our early customers and how they're ramping, we took a look at all the value propositions that are driving the buying behaviors. We looked at the number of specialties as well and specialties vary not just on a value base as far as patient throughput, but really what the clinician has to serve around documentation and clinical documentation needs. So, there are a number, there's a host of different factors that really have gone into that. And ultimately, we came out with what we knew we had, starting relative towards Rob's pipeline, relative to the take rate. And ultimately, what we're seeing on price obviously, as one of the inputs, and as Rob mentioned, we're feeling very good about all of the inputs, including price. Now, obviously we have a lot of execution ago may happen, and we feel very good on all ends of the market that are experiencing DAX today and the specialties that that are ramping. And certainly over that period of time, the solution evolves to. So, you'll hear us start to talk about the expansion of the solution and the capabilities and the feature functionality that will drive even stronger value propositions to the sale. So, it's a big range to like just to be clear, so we feel, we went to put it out there, I think you know the team here quite well. We like the momentum, we have heading here into ‘21.

[Vikram Kesavabhotla:]

Great, thank you.

[Operator:]

And this will conclude our question-and-answer session, I'd like to turn the conference back over to Mark Benjamin for any closing remarks.

[Mark Benjamin:]

I just want to thank everyone for joining and obviously, I wish everyone a happy holiday next week here in the U.S. and obviously a safe one as well. So thank you.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.