Nuance Communications, Inc.
Q1 2007 Earnings Call Transcript

Published: 5 Feb 2007

[Operator:]

Ladies and gentlemen, thank you very much for standing by. We do appreciate your patience today while the conference call assembled. And good afternoon and welcome to the Nuance Communications First Quarter 2007 Earnings Release. At this point, we have all of your phone lines muted or in a listen-only mode. However, after managements' prepared remarks today, there will be opportunities for your questions and those instructions will be given at that time. (Operator Instructions). And as a reminder, today's call is being recorded. With us today ladies and gentlemen, we have Nuance Communications' Senior Vice President and Chief Financial Officer, Mr. Jamie Arnold, and here with our opening remarks is Chairman and Chief Executive Officer, Mr. Paul Ricci. Goof afternoon, sir, and please go ahead.

[Paul Ricci:]

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. Nuance recorded a strong start to our fiscal year 2007, with revenues, earnings, and cash flows, all reflecting a continuation of favorable trends from our fourth quarter fiscal year 2006. Several factors contributed to our performance this quarter. First, solid performance throughout most of our speech markets as well as continued growth in our PDF suite-enabled revenues to exceed our expectations. In addition, ongoing synergies from both, the Dictaphone and former Nuance's acquisitions, as well as budgetary discipline within our operating unit translated into operating leverage and enhanced earnings. Cash flows this quarter as with last closely mirrored our net income after taxes, as cash usage related to acquisition integrations continued to diminish. Finally, the company's mobile strategy and operations gained additional momentum, with growing license revenues and design wins in our embedded business and some important early agreements in our mobile search efforts. Before discussing revenues, I might remind investors about our organic revenue calculations. We calculate organic revenues during any quarter and year, as the growth we would have achieved had we not acquired those assets we have owned for less than a full year. So, for example, in the past quarter, we calculated organic revenues as if we had not acquired the Dictaphone business. Typically, we eliminate or diminish certain revenues from acquired businesses during the first year, as we rationalized the acquisition within our own business model. This has been true of nearly all our acquisitions including Dictaphone, Philips Speech Division, Speech Work and the former Nuance. So year-over-year growth in acquired business, based upon our first full year of our experience, is in our view the best basis for ongoing comparison. With this in mind, total non-GAAP revenues in the quarter were $133.8 million, including about $1.4 million in Dictaphone revenue, otherwise lost through purchase accounting. Total revenues were up 77% over the same quarter last year. Revenues for our Dictaphone unit were about $44.8 million. Therefore, calculating organic revenues to exclude recently acquired Dictaphone revenues, our organic growth rate was 18% over the same period last year. Total speech revenues were $115.4 million. Excluding Dictaphone, speech revenues were $70.6 million and therefore, grew organically by about 21% over the same quarter last year. Imaging revenues were $18.4 million and grew about 7% over the same period last year. I should note parenthetically that excluded from imaging revenues in the first quarter were about $1 million from one imaging OEM that we've received for many quarters in years, but which for administrative reasons will now fall into the second quarter. Embedded speech revenues were $10 million in the quarter, up 33% from the same quarter last year. While we did not quite match the record revenues of the fourth quarter 2006, revenues in this business were materially above what we'd anticipated. Contributing to this growth, were increased royalties and services from several key manufacturers including Denso, Garmin, Hyundai, Samsung and Toyota. Embedded license revenue, that is to say excluding embedded services, were up 90% from the same period one year ago. We remained quite optimistic at the opportunities and growth in this area as evidence by a number of important competitive design wins in both handsets and automotive that we'll announce later this year. In addition, this market, which comprises devices ranging from cell phones and cars to GPS devices in game, has received tremendous recognition in recent weeks at events such as CES and The Detroit Auto Show, where applications and devices from customers to such as Ford and Garmin showcased Nuance speech technologies. With respect to our new portfolio of mobile offerings, the recent quarter marked a number of significant milestones for the business. In October, at our User Conference, we staged a raise that pitted our speech technology against the world's fastest text messenger. As you may know, our solutions won the competition and resulting media coverage from the likes of CNN and The Associated Press profiled Nuance for millions of users and created new interest among carriers, search firms, and other content providers. And towards the end of the quarter, we participated in the launch of AT&T free 411 service and expanded our robust applications portfolios through the acquisition of mobile voice control, which brings to us an extremely compelling service in relationships with Sprint, RIM, Home, and others. Enterprise or network speech revenues were a new record in the quarter at $41.3 million, up organically 14% sequentially and 12% from the same quarter last year, which was previously our highest quarterly revenue in this segment. These results reflect strong performance internationally, driven by growth among enterprises that support large numbers of consumers over the phone, such as Banc of America, Comcast, Southwest, Wal-Mart and XM Satellite Radio. We continue to strengthen our leadership position in this segment, reaping benefits from our investments in new speech technologies, enhanced services and global channels. Based upon the quality of our pipeline, backlog and channel presence, along with our increased sales investment, we expect to see growth in this segment accelerate for the balance of the year and to achieve full year-over-year organic growth in the range of 22% to 26%. As I referenced earlier, we released the beta version of our Quantum Software to customers and partners. This is our most ambitious product investment in the history of the company with superior accuracy, enhanced features and new application efforts here are expected to expand the available market for speech-enabled solutions. Within Dictaphone, we achieved revenues of $44.8 million. The Dictaphone team performed across both existing and new customer accounts. We continued during the first quarter to expand our healthcare investments and add new sales and services personnel to capitalize on accelerating demand for speech-enabled dictations and transcription solutions. The team signed several multimillion dollar extended to term contracts within the quarter sustaining the rapid growth in our iChart hosted services revenue. In the quarter we also secured significant contracts and design wins with organizations that include Baylor Health, GE Medical and Agfa as well as a number of regional facilities such as Aurora in Wisconsin, Fletcher Allen in Vermont and St. Peter's in New Jersey. The diversity of these customers for both our on-premise and hosted solutions underscores the broad appeal the Dictaphone offerings, and reinforces our growing conviction towards this market opportunity. Within our Dragon product family, we maintain momentum with the launch of Dragon Version 9 in the medical, legal and consumer markets. The Dragon product line produced revenues of $19.4 million in the quarter, up 40% from the same quarter last year, in which sales were $13.9 million. Dragon sales were strong across all channels and within multiple markets as we continue to see the lasting benefits of a well-executed product launch and significant demand within key professional markets. And finally, total imaging revenues were $18.4 million, up 7% from the same period a year ago. Revenues for our PDF product family where our imaging business is increasingly focused were up 70% year-over-year. Our continued growth in PDF solution affirms in our view that Nuance can capitalize on interest and demand for business-focused, channel friendly alternatives for PDF solutions. As mentioned earlier, our earnings and cash flows from operations were also about our expectations. Earning benefits and strengths in gross margins, which is 73% were a couple of points above our internal expectations. This strength owes to continuing improvements in our professional services margins, contributions from our growing maintenance revenues, and notably, early progress we believe towards the medium-term objective of improving gross margins in our Dictaphone business. Within our operating expenses notwithstanding certain large and anticipated marketing and selling expenses, we maintain discipline in expenses elsewhere and were as a result able to deliver higher than expected operating margins. Overall, I am quite pleased at how the organization performed in the quarter, building on the momentum from our strong 2006 and positioning the company for end of the year robust growth. But before I discuss our outlook in greater detail, I want to turn the call over to Jamie.

[Jamie Arnold:]

Thank you, Paul. Good afternoon everyone. As you saw in our press release, Nuance GAAP revenues in the quarter were $132.4 million, up 75% over the same period in fiscal 2006. Our GAAP revenues exclude approximately $1.4 million of revenues that were lost to purchase accounting in conjunction with the Dictaphone acquisition. This lost revenue is primarily across license and services. In addition to using GAAP results, we believe it is useful to measure performance using certain non-GAAP measures. Our non-GAAP measure for revenue includes Dictaphone revenue lost to purchase accounting, our non-GAAP measure of net income or loss excludes acquisition, transaction and integration cost, and as applicable non-cash taxes, interest and stock-based compensation, amortization of intangible assets, and restructuring and other charges. With the lost Dictaphone revenues included in the way we review management performance, total Nuance non-GAAP revenues were $133.8 million for the quarter. Total GAAP Speech revenue was $140 million. Non-GAAP Speech revenue $115.4 million which included $44.8 million for Dictaphone revenue, $41.3 million in network revenue, $10 million in embedded revenue and $19.4 million in Dragon Desktop Dictation revenue. Imaging revenue was $18.4 million. GAAP product revenue was $74.7 million. Non-GAAP product revenue was $75.6 million, up $22.4 million or 42% from $53.2 million a year ago. GAAP professional services revenue included subscription and hosted applications was $28 million. Non-GAAP professional services revenue was $28 million compared to $14.6 million for the same period last year. And GAAP maintenance and support revenue was $29.7 million. Non-GAAP maintenance and support revenue was $30.3 million compared to $7.8 million a year ago. North American revenue accounted for approximately 77% of total revenue in Q1 2007 compared with 66% in the same period a year ago. The increase is largely attributable to Dictaphone-related products, which derived the majority of revenue from North America. On a GAAP basis, Nuance recognized a net loss of $1.4 million or $0.01 per share compared with net loss of $4.9 million or $0.03 per basic share for the comparable period in fiscal 2006. Using a non-GAAP measure, net income was $24 million or $0.13 per diluted share in quarter compared with $11.4 million or $0.07 per share a year ago. Cost of revenue in the quarter was approximately 27% of revenue for a gross margin of 73%, a 4% decline from one year ago and owing to the inclusion of Dictaphone in the revenue mix. Please note that these gross margins exclude acquisition-related amortization. Product gross margins were 86% in the quarter as compared to 91% in the comparable quarter of fiscal 2006. This change owes primarily to inclusion of Dictaphone revenues, which product gross margins are lower than at Nuance. Gross margins for professional services were 30% in the quarter as compared to 29% in the same period of last year. These improvements in gross margins owe to the synergies within network revenues. The maintenance margins were 77% in the quarter as compared to 73% in the same period of last year. These gross margin numbers again exclude acquisition-related amortization and stock-based compensation expense. Within operating expenses, the cost we will discuss below will exclude certain items including non-cash stock-based compensation, amortization of intangibles, and transition and integration costs. Please see the reconciliation on our website. R&D was approximately $14.9 million, or 11% of revenue, versus $11.2 million, or 15% of revenue, a year ago. The increase in absolute dollars can be attributed to additional headcount to our product line. Sales and marketing spending was $39.9 million, or 30% of revenue, as compared to $26.8 million, or 36% of revenue, a year ago. This increase corresponds to a large infusion of additional sales employees from the Dictaphone acquisition, as well as the expansion of sales personnel and marketing programs associated with our product lines. General and administrative expenses were $11.6 million, or 9% of revenue, as compared to $8.9 million or 12% 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. The company generated cash from operations this quarter of approximately $26 million based on strong operating performance, improvement in DSO and better management of cash outflows. DSO, net of deferred revenues, where 40 days versus 45 days last quarter. Depreciation was $2.6 million and capital expenditures were approximately $3.7 million. We exceeded the quarter with unrestricted cash and marketable securities of approximately $130 million. And now, I will turn the call back over to Paul.

[Paul Ricci:]

Thanks Jamie. As reflected in the previous comments, our fiscal quarter demonstrated continued momentum in the operational performance we reported in the previous quarter. Keeping in mind that there is some unfavorable seasonality from the December to the March quarter, we nonetheless have confidence in the organization's ability to sustain our momentum during the second quarter and to capitalize on additional recourses in sales, services and product development. Within our network business, we expect, as I noted earlier to see favorable year-over-year growth as we leverage our investment in Quantum, new applications, mobility and directory assistance. Within Healthcare, we anticipate growth from our expanded sales and services teams, continued success in our iChart hosted solution and benefits from integration of the DNS Medical product family into the Dictaphone unit. Elsewhere in dictation we remain optimistic about the sustained level of Dragon sales, so the launch effect will undoubtedly subside somewhat. I commented previously on the embedded business, but we do believe that our design wins and the underlying market growth will sustain high year-over-year growth rates there. Countering these favorable trends we do remind investors that our first fiscal quarter ending in December historically demonstrates stronger year-end enterprise purchasing that is fully repeated in the March quarter. And we reiterate that the Dragon launch combined with holiday consumer purchases resulted in revenues that will not present in Q2. With all of these factors taken into account, we expect non-GAAP revenues in the second quarter to be in the range of $132 million to $136 million, including the Dictaphone purchase accounting revenues of approximately $1.5 million. We expect GAAP revenues to be in the range of $130.5 million to $134.5 million. Let me turn now to expenses for the second quarter. Beneficially, Q1 expenses associated with the fiscal year end sales quarter over achievement, the annual sales meeting in October and our user conference, conversations will not reoccur in this quarter. But conversely, we had expenses associated with annual salary increases, which were effective January 1. Additionally, we will have increased contractor expenses this quarter, associated with the implementations of some critical mobile initiatives. We've also planned expansion of our enterprise sales team and network services team this quarter. Finally, in response to the unexpected demands upon us for design wins in the embedded business. We've accelerated technical hiring in this area at the level of about $2 million annually. With this in mind, we expected GAAP loss between $0.01 and $0.02 and non-GAAP earnings between $0.11 and $0.12 in the second quarter. That concludes our formal comments and Jamie and I are now happy to take your questions.

[Operator:]

Yeah indeed, well thank very much Mr. Ricci, Mr. Arnold for your time and that overview today, we do appreciate that. (Operator Instructions). And representing Craig Hallum, our first question we go to the line of Jeff Van Rhee. Please go ahead sir.

[Jeff Van Rhee:]

Hey Paul, hey Jamie, great quarter. This looks strong across the board. Paul, you touched on the Quantum, you said that was still embedded. Did I hear you right?

[Paul Ricci:]

Yeah.

[Jeff Van Rhee:]

Can you talk about when that goes GA and kind of your expectations for what that means for that business.

[Paul Ricci:]

Well, I don’t want to announce the GA date because first of all I don’t know it, and secondly we don’t typically pre-announce those dates, but it's relatively soon. But you should think of Quantum as I said previously as a product that will rollout gradually. It has to be integrated with our partner's platforms and then rolled out to enterprises all of which are using our technology in deployments that -- in customer facing deployments and so their migration to those is going to be cautious. But, I think for us more importantly Quantum has demonstrated some important enhancements in our technology and we believe we will broaden the applicability of speech in the call center automation cycle and therefore expands the available market and that’s really by far our organization is focused on right now.

[Jeff Van Rhee:]

And on the embedded side, you mentioned some acceleration of investments due to unexpected demand. Can you give us some color at least broadly where the unexpected demand has come from?

[Paul Ricci:]

We simply had a number of design wins in the mobile space in handsets, in other devices, in automotive, in navigation devices that exceed the level of design wins and therefore model integrations and application integrations that we expected. And as a result, we -- we had to substantially increase staffing to meet those demands.

[Jeff Van Rhee:]

And then on the Dictaphone side, I mean you haven't had it for full cycle yet, but how do you think about seasonality -- seasonality as it relates to that business?

[Paul Ricci:]

I really don't have enough history to speculate about seasonality, Craig -- Jeff. I just the -- I don't want to speculate on it because we don't have enough history.

[Jamie Arnold:]

Yeah.

[Paul Ricci:]

Alright?

[Jeff Van Rhee:]

Okay, great. And then Jamie, first of all, cash flow is great in the quarter. And then, if I look a little deeper, you commented on DSO is down, but it looks like accounts receivable were up about $27 million sequentially, can you just walk me through the change in receivables this quarter?

[Jamie Arnold:]

Well, part of the change in receivable is that -- in balance sheet that we published, it has combined the unearned revenue in that number, I believe Jeff, it would be -- when I referred to the DSO being down, it's because that we look at it net of deferred revenues. Our deferred revenues had gone up. And so by net amount, I think we went from 45 days to 40 days. But in the - the number you are looking at on the balance sheet we published, it has the unearned revenues that came over in purchase accounting. So if you -- in a couple of days, you will see in the Q, it's broken out in separate line items. I think that will explain it when it comes out in 10-Q.

[Jeff Van Rhee:]

Okay, I will follow up on that one later than. Thanks guys, great quarter.

[Operator:]

And thank you Mr. Van Rhee. Next, we go to the line of Richard Davis representing Needham and Company. Please go ahead, sir.

[Richard Davis:]

Okay, thanks very much. With regard to the kind of near-term this year, should we expect any kind of significant new product launches on the kind of productivity document scanning side of the business, as we did last year, or is it going to be more steady as you go through the full year?

[Paul Ricci:]

There is one major launch in the Imaging business in the last quarter of the year.

[Richard Davis:]

Got it. Let me reflect that properly. And then kind of longer term, when Dictaphone kind of rolls in finally and then it's combined with Nuance, is there any reason to believe that this is a business setting in a combined basis, shouldn't be able to grow 15% to 20% a year or 18% to 20% a year. I know that it's perilously close to guidance for 2008 or so, but I was just kind of curious how you guys think about the business?

[Paul Ricci:]

I think that is the right range, Richard, for the growth rate of the healthcare business. I think, 17 to 20 points is probably the right range for looking at that business over time.

[Richard Davis:]

Those were my kind of key questions. Thank you very much.

[Paul Ricci:]

Thank you.

[Operator:]

Next in queue we go to the line of Brent Thill representing Citigroup. Please go ahead, sir.

[Brent Thill:]

Thanks. Good afternoon. I just want to come back to the guidance for '07, 555 to 570, is that still the guidance range that you are giving Street?

[Paul Ricci:]

Yes, we are not -- we aren't changing our full-year guidance.

[Brent Thill:]

Okay. And just a little perspective of the distribution channel, with the arrival of Don Hunt last fall, are there any major changes that Don is implementing this year that would have any distraction in terms of your go-to-market or is it more of just a fine tune from the process that -- processes that were already in place?

[Paul Ricci:]

Well, we recruited Don and brought him here as part of an effort to strengthen our worldwide sales organization, and I -- that will -- that has already and will continue to involve a number of changes. And I don't think it would be accurate to describe them as fine tuning. But I at the same time think that he is doing them in a reasonably measured way so as to -- so as they would not be disruptive or distracting. There is always some chance of that, but I am not -- that's not a risk that I have a great deal of concern about based on the first few months of Don having been here. We've been previously asked about whether we intended to make -- whether Don intended or we intended to make any changes in our compensation plan for the year and I think we've been clear that we didn't expect to make any significant changes in the compensation plan that had already been set prior to his arrival.

[Brent Thill:]

Thank you.

[Operator:]

And thank you very much Mr. Thill. And next, we go to the line of Daniel Ives representing FBR. Please go ahead, sir.

[Daniel Ives:]

Hi, guys, on the Dictaphone side, what the deal sizes look like on average? And maybe can you just talk about them because the deal size is getting larger?

[Paul Ricci:]

There are -- there is a range of deal sizes in the on-premise licenses and services that range from 100,000 to 1 million, it's quite a wide range. There -- the hosted implementations are typically three-year contracts and have ranged from several 100,000 to several million over three years.

[Daniel Ives:]

Okay. And just on the tax rate, where do you see the tax rate for the rest of the year?

[Jamie Arnold:]

On the cash tax rate, I see it in -- around 10% rate. It was a little lower this quarter than we had expected, but it will be in the 8% to 10% rate for the year.

[Daniel Ives:]

Okay. Good quarter. Thanks guys.

[Operator:]

And I am sorry. Did you have any follow-ups, Mr. Ives?

[Daniel Ives:]

No, I am good.

[Operator:]

Very good, sir, thank you. And next in queue, we'll go to the line of Michael Latimore with Raymond James & Associates. Please go ahead, sir.

[Michael Latimore:]

Good afternoon. Great quarter there. Just in terms of the mix of software to service. Last couple of quarters, should we assume that that's kind of roughly what that mix will be over time or do you expect one to grow faster than the other?

[Jamie Arnold:]

I think that the current mix is probably about right, but with one caveat, the fastest growing part of our business is our hosted solutions. And that's the trend that I think could well continue, and so depending on how you think about that. But I think the ratios now are reasonable indicator for the future.

[Michael Latimore:]

Okay. What is hosted as a percent of overall revenues roughly?

[Paul Ricci:]

I don't have that number today for you Mike and I don't want to give you an off-the-cuff number. I think a reasonable -- I don't have it today. I am sorry. I actually want to be careful.

[Michael Latimore:]

And then, how about the operating margin on the Dictaphone entity, can you comment generally as it above or below corporate margin at this point?

[Paul Ricci:]

The operating margin of Dictaphone is comparable, may be slightly below the corporate -- I think comparable with the overall margin. The gross margins are somewhat lower.

[Michael Latimore:]

All right. And then, as you look to the next calendar year, are there any key management positions you'd like to fill or add?

[Paul Ricci:]

You could imagine I wouldn't want to speculate on that.

[Michael Latimore:]

Okay. All right. One more last question on Dictaphone, if you were to combine kind of the radiology -- the radiology product in an IHR, what percent of revenue would those be, sort of, combined as a part of Dictaphone's revenue today?

[Paul Ricci:]

What I can say is that all of our healthcare revenues in Dictaphone today are about 90%, may be just above 90% of our total Dictaphone revenues. So, 10% of the revenues are non-healthcare.

[Michael Latimore:]

All right. Okay. Great, thanks.

[Operator:]

And next we go to the line of Tom Roderick representing Thomas Weisel Partners. Please go ahead.

[Tom Roderick:]

Hi, good afternoon. Thank you. So another nice quarter here for you guys on the embedded side of the business and with full year's worth of strong seasonal results coming from both the handset and the auto manufacturers. Can you give us a sense for how you feel the penetration rates look like coming out of 2006 and then with the benefits from design wins if we look at 2007, where you think that penetration rate can get to within the next 12 to 24 months?

[Paul Ricci:]

Turning first to automotive, I think that the big change over the last year in the automotive segment has been substantial design wins and some early revenues that transcend the luxury segment down more into the mid-range. And I think just peoples' casual experience in car shopping now confirms that there are more models -- below luxury models that have speech available in them. And certainly, our visibility into design wins that will deploy over the next 6, 12, 18, 24 months confirms the acceleration of that. I know that what is a luxury and what is a mid-range car is somewhat subjective, but I think the trend is clear. The percentage of deployments that is of cars that are taking the packages with speech as part and they chose their part of that package, I don't have. So, I would need to be careful about giving you overall penetration rates. But our view was that, half of all models by the end of 2008 would have speech available and I think that that's probably right.

[Tom Roderick:]

Okay, great.

[Paul Ricci:]

Go ahead, I am sorry.

[Tom Roderick:]

Yeah, I was just going to ask about the handset side then as well moving beyond automotive?

[Paul Ricci:]

It would seem that, there were roughly 100 million handsets shipped in '06 with speech of some form in them. And in rough numbers that would appear to be about 10% penetration. Looking at what we see in designs, I think that that penetration is going to grow substantially over the next couple of years. I think a reasonable expectation might be 30% penetration over the next two years. There is a segment of handsets -- of lower-priced handsets particularly sold in economies where -- in developing economies where the penetration is going to be substantially lower for sometime. But I think 30% in two years is probably a reasonable estimate.

[Tom Roderick:]

Okay. And then, just as you look at both the automotive and the handset market, some of the speech solution is moving downstream a little bit or moving into the mid to lower-end of the market, how do you see pricing holding up as you make that shift?

[Paul Ricci:]

There is definitely pricing pressure in all of the embedded markets, more so in my perspective in the handsets and the automotives, where there is a much more complex cooperative design and integration activity with the automotive manufacturer. But there will continue to be pricing pressure, I'd expect. And you and I of course pick up the newspaper and see the enormous margins pressures that the handset manufacturers themselves are facing and it would be unrealistic not to expect that they are going to translate that pressure to their suppliers such as us.

[Tom Roderick:]

That makes sense. Okay. Just one quick question, if you don't mind, on the Dictaphone side. You had indicated that there were a several multimillion extended-term deals signed this quarter. Can you give us a sense for what percentage of deals done on the Dictaphone side are typically multi-year term deals? Thanks.

[Paul Ricci:]

The revenues within Dictaphone that are -- the hosted revenues are as we exit the last quarter are in the range of a third of the light of the non-maintenance revenues of that business. So that may give you some sense about that proportion. I don't because the hosted revenue numbers -- because the hosted revenue sizes are considerably larger than the enterprise sizes, I don't know what the actual number is but certainly the number of deployment on premise today still dominate hostage but the growth in hostage is much greater.

[Tom Roderick:]

Well I get it. Thank you, guys.

[Operator:]

Thank you, sir. (Operator Instructions) And next in queue let's go to John Bright now with Avondale Partners. Please go ahead.

[John Bright:]

Thank you, Paul, Jamie. Talking about accelerated tech hiring, I think it fits the embedded segment Paul is this something signaling to us maybe a change in thought process towards the embedded area or may be the valuation is something that's a bit too high right now that you are looking more to bill versus buy?

[Paul Ricci:]

No, it's really not signaling anything other than the fact that to meet the demands of the customers that we are succeeding with we need substantially greater staff than we have today. We have enjoyed the enormous performance by our group of support and technical people, who have serviced and succeeded in winning a very attractive number of important design wins, but their level of work was not sustainable and the need for ongoing innovation in that area is keen. And you should, I think, read it as I believed in the ongoing promise of that business as well. I think we would be much more reluctant to increase staffing at this level if we didn't fundamentally believe that the embedded business has the kind of continuing growth opportunity that we have seen over the last few quarters.

[John Bright:]

Could you then reiterate your strategy in the embedded space and maybe what you are seeing right now from valuation standpoint?

[Paul Ricci:]

All right, I am not sure what you are referring to from a -- when you referred evaluation standpoint. Our approach to the embedded business has been to work very closely with major manufacturers in each of the sub-segments that we have mentioned including automotive, handsets, navigation devices in some other smaller markets to work with the largest manufacturers. We provide them very high levels of support and application integration. We believe we provide them with the best core technology and we seek to build long-term relationships with them to help them use speech as a cutting-edge innovation in their own design work.

[John Bright:]

Pardon me then on the valuation comment, I was asking for your opinion on what the market looks like in an M&A basis today for some of the private speech rec players out there that maybe been focused on the embedded space?

[Paul Ricci:]

No. I don't want to comment on -- I don't want to speculate about the asset prices of small companies. There's such a variety, I don't think I could say anything intelligent or constructive.

[John Bright:]

All right, thank you.

[Operator:]

And next we go to the line of Jeff Nevins with First Analysis. Please go ahead.

[Jeff Nevins:]

Good afternoon. Kind of a -- changing the gears a little bit to talk about the speech/IVR businesses, kind of an old world question. But, I'm just curious what you guys are seeing and since you're almost to the speech market with the cycle of going from touchtone to speech, have you seen any changes there, or is it just the continuation that’s happening, is there any new technologies out there that are changing that landscape? That's all I had thanks.

[Paul Ricci:]

Hey, well I might start by just saying, while we do have very high market share in that segment we don't, for a moment, think we own it. It's a very -- it remains a competitive segment and one that you have to earn your presence in every day. And I don't think there's anything -- is there's any dramatic discontinuities. We continue to believe that large services companies in the major verticals, telecommunications, financial services, travel, hospitality; all are compelled to adopt speech as one of several automation strategies, in part because they're improved -- they're trying to improve their own economics, in part because they're going through a technological shift, they moved away from proprietary IVR to more IP-based solutions. And in part because they're thinking about the way to improve customer satisfaction in an age in which the demand for access to information by your customers is growing and substantially unaddressable from traditionally staffed call centers.

[Operator:]

We still have your line open Mr. Nevins.

[Jeff Nevins:]

No other questions. I will refer to you owning the market by the speech engine component relative to rest of it is fragmented, but thank you.

[Operator:]

And thank you, sir. Well with that, Mr. Ricci and Mr. Arnold, I'll turn the call back to you. There are no further questions.

[Paul Ricci:]

Okay. Thank you very much for joining us this afternoon. And we look forward to speaking with you again next quarter.

[Operator:]

And ladies and gentlemen, Mr. Ricci is making today's call available for digitized replay for two full weeks starting at 8 pm Eastern Standard Time, February 5th all the way through 11