Nuance Communications, Inc.
Q1 2008 Earnings Call Transcript

Published: 12 Feb 2008

[Operator:]

Welcome to Nuance’s first quarter 2008 conference call. (Operator Instructions) With us today are the Chairman and Chief Executive Officer of Nuance, Mr. Paul Ricci; and the Chief Financial Officer, Mr. Jamie Arnold. At this time, I would like to turn the conference over to Mr. Ricci. Please go ahead, sir.

[Paul Ricci:]

Good afternoon, everyone. Thank you for joining us today. Before we begin, I remind everyone that matters we discuss today 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. Today Nuance reported a strong start to its fiscal 2008 with revenues, earnings and cash flows at record levels and building on the favorable momentum we experienced last year. Among the many factors influencing our performance last quarter, several merit particular mention. First, we enjoyed especially strong revenue growth in our embedded and healthcare markets. In addition, performance in our Asia Pacific and European regions but also quite robust even as compared with our internal expectations. Continuing a trend that has been underway for several quarters, we are seeing across most of our markets an accelerated shift toward on-demand, hosted revenues and other forms of subscription-based revenue streams. Cash flows this quarter were at record levels and again closely mirrored non-GAAP net income after taxes. Finally, the company experienced increased interest and demand in the first quarter for its new mobile services initiatives. In our press release this afternoon, we reported first quarter non-GAAP revenues of $209.1 million, including approximately $14 million of acquisition-related revenues otherwise lost to purchase accounting. Total GAAP revenues were approximately $195 million. Total non-GAAP revenues were up approximately 55% over the same quarter last year. Organic revenue growth in the quarter was about 18.5%. Over the last several months, we’ve received numerous comments from investors about our calculation of organic revenue growth. In response to those comments, we have changed our methodology beginning with the first fiscal quarter of 2008. While the two calculations would yield the same growth over time, this new method has the added benefit that investors can derive it themselves entirely through data in our public filings. Jamie will provide more details on this and organic growth during his discussions. Turning first to our embedded mobile speech solutions, we had an exceptional quarter as revenues reached $43.3 million, up 336% from the same quarter of last year including the contributions from VoiceSignal and Tegic. The growth was fueled by active product cycles and highly visible deployments among our automotive, handset and GPS manufacturers including Ford, TomTom, Motorola, Nokia, RIM, Samsung and another premier GPS provider. We’ve continued our expansion within handsets, moving from basic speech to more robust applications, as evidenced by several significant engagements for new, integrated solutions with mobile carriers and operators. We are encouraged by the early results from the Tegic and VoiceSignal product lines, which enhance our relationships with leading mobile suppliers and whose solutions make mobile device features, content and services more accessible to consumers. Combined revenues from these product lines ran somewhat ahead of our expectations. Our momentum and growing mobile presence is evidence by strong representation at major events such as CES in January and this week at Mobile World Congress in Barcelona, where hundreds of devices have been displayed using Nuance solutions. We remain optimistic about the growth prospects and future opportunities based on the volume of recent design wins, the pace at which Nuance innovations are coming to market and the broad visibility our solutions have received from recent marketing campaigns for consumer applications such as Ford Sync, voice destination entry on next generation navigation devices, and voice search on the Palm Centro. Equally important, the company saw growing interest in our mobile services initiatives this quarter. These initiatives being developed in conjunction primarily with wireless carriers offer consumers’ easy-to-use voice-enabled access to a targeted set of information services. The company is in various stages of negotiations and delivery on these services, both domestic and internationally. While these offerings present an opportunity for substantial recurring transaction, ad-based and subscription revenues, investors should note that through the first half of this year they represent primarily increased expenditures. The services are both technologically and operationally demanding and consequently we’re increasing our investments to ensure our ability to deliver to the carrier standards. Turning to our enterprise network speech businesses, revenues were $67.3 million, up 58% from the same period last year. Demand for our portfolio of customer care solutions remains strong as the team secured an important contracts and expanded relationships across our targeted vertical markets, including telecommunications and financial services. We particularly benefited from robust performance of the Nuance on-demand unit, formerly BeVocal, which has accelerated growth in our self-service on-demand offerings for carriers and enterprises. Revenues for these solutions were again ahead of our expectations, owing to increased traffic during the holiday season. We secured important design wins for new offerings and achieved strong bookings in the quarter from our existing clients as well. This team continues to perform well against initial expectations with revenues approximately doubling over the same period last year. Turning to healthcare, we achieved revenues of $58 million in the first quarter, up 30% from the same period a year ago. The team signed several multimillion dollar extended term contracts within the quarter, sustaining the rapid growth in our iChart hosted services revenue, which is up more than 40% over last year. In fact, more than 70% of our healthcare revenues are now derived from recurring revenues from our SaaS solutions, subscription revenues associated with our on-premise solutions or our healthcare maintenance and support revenues. The Dragon product line produced revenues of $21 million in the quarter, up $1.6 million from the same quarter last year. We continue to advance our strategy to expand the market for Dragon signing a license agreement with MacSpeech to bring the Power Dragon to the Macintosh platform and capitalizing the momentum of Apple. Our expectations for Dragon in the quarter however were moderate as we prepared for a new launch version. Finally, total imaging revenues were $19.3 million, up 5% from the same period a year ago and essentially on plan. The team saw a strong performance from OEM partners as distributed capture environments and sophisticated MFPs drove our custom capture solutions. This was largely offset by a slowdown in PDF-related sales as the channels prepared for the launch of PDF 5. Jamie will comment in more detail about our strong cash flow performance in the quarter, but before turning the call over to him, I do want to comment on expenses in the first fiscal quarter. A number of factors weighed on expenses. As I mentioned previously, Nuance is investing somewhat more heavily than planned in new network-based mobile services initiatives. While we’re enthusiastic about the demand for these initiatives, for the moment the requirement for these initiatives are also outpacing our planned expenditures. Interest expense in the quarter was about $1 million higher than planned for reasons that Jamie will detail. Finally, as you know, we brought in a senior executive to run our European operations in the middle of last year. We are pleased with the results as Europe showed a robust performance this quarter but personnel actions he has taken over the last quarter represented about $1 million in additional expenses. Notwithstanding these issues and even including the fall expenses of our annual user conference and annual sales kickoffs, we maintained discipline in expenses elsewhere to deliver operating margins of 26%. In sum, I’m quite pleased with how the organization performed in the face of a full operating agenda, building on the company’s momentum from a strong 2007 and positioning the company for another year of growth. Before I discuss the forward outlook in greater detail though, I wanted to turn over the call over to Jamie.

[Jamie Arnold:]

Thank you, Paul. Good afternoon, everyone. As you saw in the press release, non-GAAP revenues in the quarter were $195 million, up 46% over the same period in fiscal 2007. Our GAAP revenues exclude approximately $14 million of revenues that were lost to purchase accounting in conjunction with the acquisitions Paul mentioned. On a GAAP basis, Nuance recognized a net loss of $15 million or $0.08 per basic share in the quarter compared with net loss of $1.2 million or $0.01 per basic share for the comparable period in fiscal 2007. 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 revenue lost to purchase accounting. Our non-GAAP measure of net income or loss excludes acquisition transactions and transition and integration costs and as applicable, non-cash taxes, interest and stock-based compensation, restructuring, amortization and impairment of intangible assets and other charges. With these factors in mind, total Nuance non-GAAP revenues were $209 million for the quarter, up 55% over last year. Using non-GAAP measure, net income was $39.2 million or $0.18 per diluted share in the quarter compared with $24.6 million or $0.13 per diluted share a year ago. Non-GAAP speech revenue was $189.8 million, which included $58.2 million for Dictaphone healthcare revenue, $67.3 million in network or enterprise revenue, $43.3 million in embedded revenue and $21 million in Dragon revenue. Imaging revenue was $19.3 million. GAAP product revenue was $97.9 million; non-GAAP product revenue was $180.2 million, up $31.8 million or 41% from $76.7 million a year ago. GAAP professional services revenue including subscription and hosted applications was $62.4 million. Non-GAAP professional services revenue was $66 million, up $37.4 million or 131% compared to $28.5 million for the same period last year. GAAP maintenance and support revenue was $34.7 million, non-GAAP maintenance and support revenue was $34.9 million, up $5.2 million or 18% compared to $29.7 million a year ago. North American revenue accounted for approximately 69% of total revenue compared with 76% in the same period a year ago. The decrease is largely attributable to a strong performance in our European operations as well as strong performance in our Asia Pacific operations where several of our largest mobile and embedded partners are located. Let me turn to organic growth. As Paul mentioned earlier, beginning with this first quarter we have modified the method by which we calculate organic growth. We have made this change principally in response to feedback from investors over the last several months. We were also concerned that the previous method would require too many subjective judgments as we saw more and more bundling of offers from existing and acquired products and services. The new method simply calculates revenue for the quarter one year ago as if we had owned all the assets acquired during the last year at the beginning of that quarter -- in this case, October 1 2006. Investors can approximate this number from our public documents, and non-GAAP revenues if we had owned all the acquisitions for the full quarter ending December 31,2006 were $188.2 million. Similar, we recalculated revenues in the current quarter, Q1 fiscal 2008, as if we had owned the assets for the entire quarter. So in this instance, including the full quarter of Viecore revenues, that non-GAAP revenue is $223.1 million. This gives organic revenue growth of 18.5%. Using the same method, we achieved organic growth in our various markets as follows

[Paul Ricci:]

Thanks, Jamie. As reflected in the earlier comments, our first quarter of 2008 demonstrates continued momentum in our operational performance. This provides confidence in our ability to sustain our momentum during the second quarter. Within our enterprise business we expect, as I noted earlier, to see favorable year-over-year growth as we leverage our investments in our solutions and service offerings. In particular, we expect to benefit from the expanding application suite within our portfolio, including customer analytics, speaker verification, open call steering and on-demand care. Year-over-year growth for our enterprise on-demand revenues will be quite favorable; but sequential on-demand revenues for enterprise are unlikely to grow from the first quarter because of the benefit of carrier holiday traffic in the first quarter. The recent acquisition of Viecore will provide an important contribution in this quarter as we deliver more comprehensive solutions across several industries, including financial services, healthcare and government. Outside of healthcare, we remain cautious about year-over-year comparisons for Dragon as we are quite late in that product cycle. Within our mobile business, revenue should benefit from strong demand across our mobile markets including handsets, smart phones, autos and [inaudible]. As mentioned in earlier calls, we expect to ship on more than 800 million devices this year and are linking our broad mobile platform for the new generation of connected services. We believe that our design wins and the underlying market growth will sustain our strong year-over-year growth rates. Please remember though that holiday seasonality implies that absolute revenues in this sector will be down sequentially from last quarter. Within our PDF and document imaging business we expect to benefit from the launch last week of PDF 5 and our investments in pursuit of large multi-seat licenses for our enterprise productivity applications. Countering these favorable trends, we remind investors that across the business there is some unfavorable seasonality from the December to the March quarter. The December quarter historically has demonstrated stronger year end enterprise purchasing that is not fully repeated in the March quarter. With all these factors taken into account, we expect non-GAAP revenues in the second quarter to be in the range of $210 million to $218 million, including approximately $20.3 million of acquisition-related revenues that will be lost to purchase accounting. We expect GAAP revenues therefore to be in the range of $189.7 million to $197.7 million. Let me turn next to expenses for the second quarter. Beneficially, traditional Q1 expenses associated with the fiscal year end sales quota overachievements, the annual sales meetings in October and our Conversations user conference will not reoccur in this quarter. As well and as Jamie mentioned, we expect meaningful acquisition synergies during this quarter. But conversely, we have expenses associated with annual salary increases which were effective January 1. As Jamie mentioned, we also expect favorability in net interest expense this quarter. With this in mind, we expect a GAAP loss between $0.12 and $0.14 and non-GAAP earnings between $0.17 and $0.19 in the second quarter. With respect to full year fiscal guidance, we are not going to offer revised numbers but in view of the momentum in the business and our expectations about expense levels, we’re comfortable focusing investors on the upper half of both the revenue and earnings guidance previously given. This concludes our formal comments and Jamie and I are now happy to take your questions.

[Operator:]

Our first question comes from Richard Davis - Needham.

[Richard Davis:]

On the healthcare side and the healthcare dictation specifically, what are the gating issues to growing that business? I mean it makes logical sense; are you just overcoming cultural issues or -- its not that it’s not growing, but I’m just trying to figure out what helps drive that business as fast or faster than expected?

[Paul Ricci:]

The business is actually growing reasonably fast, particularly if you focus on the growth of the leading product lines in that business. I do think traditionally that healthcare IT a cautious adopter and I think that we are experiencing that as well. Having said that, and I’ve said this in the past couple of quarters, we continue to believe that as you say the logic, the compelling logic of speech-enabled offerings are strong there and that there is an increase in the growth rates that we are seeing there as a result. We are especially taken by the demand for our iChart offering.

[Richard Davis:]

IBM is pretty good in call center voice recognition, they have a lot of technology, it’s a question sometimes of how much they actually bring to market; how do you see them as a competitor? Are they doing anything different these days or is it pretty much as it has been, which is good competitor but not life-threatening by any stretch?

[Paul Ricci:]

I don’t think there has been any change with respect to IBM in the competitive landscape particularly not in North America, of note.

[Operator:]

Your next question comes from Brent Thill - Citi.

[Brent Thill:]

Paul, you mentioned Asia and Europe were strong. Can you just comment on the US and provide maybe a little background on what you are thinking about the macro picture and how you think about your visibility now walking into Q2, Q3?

[Paul Ricci:]

I think both Asia and Europe were ahead of plan, above plan in the first quarter. North America was essentially as, maybe slightly better, than the planned but not as strong relative to plan as the other two regions. I don’t really have anything, Brent, to say about the macro environment. Certainly we read what everyone else reads, but I don’t think we see direct evidence of that in our revenues or in our pipeline. I don’t think our healthcare business is going to be affected at all. We don’t really see any effect in our mobile business. Most of our enterprise business is outside of the sector that people worry the most about, financial services. With respect to financial services, we’re certainly being cautious in our own forecasting in that sector but we do have ongoing business in that sector, including deals closed in the first fiscal quarter and that we expect to close in this and subsequent quarters. I don’t think therefore our visibility has particularly changed; our visibility is inclining upwards I believe just because of the shifting nature of our revenues, the increase in our hosted revenues as I mentioned throughout the call; the increase in our solutions which typically involved a bundle of services and licenses and therefore a recognized percent of complete method and the growing proportion of long-term revenue streams from our mobile OEM. As a result of the macro environment, I don’t have any implications to share in terms of reduced visibility in that respect. I think generally speaking we feel that our visibility is going up.

[Brent Thill:]

On the debt portion, when do you expect the rates will reset so it would seem that you would get favorable help on the interest costs?

[Jamie Arnold:]

We reset every month. We are tied to LIBOR, one-month LIBOR and we reset monthly so as LIBOR has tracked down in February, we pick up a little bit and we expect to pick up a little more in March.

[Paul Ricci:]

I think, Jamie, the guidance you gave for this quarter, net interest was about $2 million lower than last quarter.

[Jamie Arnold:]

I think that’s correct.

[Paul Ricci:]

Roughly.

[Operator:]

Your next question comes from Jeff Van Rhee - Craig-Hallum.

[Jeff Van Rhee:]

On the data services it sounds like you’ve certainly spent the money here you have invested in infrastructure; it sounds like a lot of enthusiasm around what’s coming on the revenue front. Can you just give us a sense of what’s got you so excited there? I know we’ve got a few leading examples of wins -- Rogers Wireless and a few others -- that have taken some of those data services but could you just tell us what’s got your excitement level seemingly up here?

[Paul Ricci:]

I wish I could say more. But as you would probably imagine, the carriers we’re working with view these activities as being proprietary and they are significant activities in their scope and ambition and it would be a breach of confidentiality for me to talk about them in detail. But I bring them up because they do provide significant opportunity as we look out over the next 12 months. We are investing in them now because carriers are very demanding in terms of their quality of service and their expectations about that. I wish I could say more, but I really can’t.

[Jeff Van Rhee:]

A lot of acquisitions, certainly nothing out of the ordinary there. Would you touch at least on the last handful, the last several -- BeVocal, VoiceSignal, Tegic in particular -- and just in general, have you seen any material variances in those names relative to your initial guidance when you bought them, namely both top and bottom line? I think you have given us a couple of data points, but just a sense of what has exceeded or under performed both revenue or on the accretion front?

[Paul Ricci:]

BeVocal, which is the centerpiece in our enterprise business of our on-demand offerings has been a very robust acquisition for us. It’s worked well; the quality of integration is good, it has worked well technologically, it has worked well culturally. The people there are very strong and have helped expand and drive our vision for on-demand. I think as you probably got a sense of in the comments, the performance of that business in the first fiscal quarter was in excess of our own plan and up essentially double over what it was in the quarter; that’s in the quarter a year before. I think we’re going to continue to see a positive performance against our expectations in that business throughout the year, both because of their performance and because I think of the fundamental interest in the sort of solutions they have to offer and the method for delivering them. Similarly, the Focus acquisition which was about a year ago which is closely coupled with fulfilling on our iChart hosted revenues in healthcare is also performing quite well. I think I’ve given you indications over the last several quarters including this one that hosted revenues, on-demand revenues in healthcare are quite robust and our focus has been an important part of implementing that solution. It’s a little bit early to say too much about either VoiceSignal or Tegic; operationally the integrations are going well. I can say that the two businesses combined outperformed our plans and expectations in the first quarter. I probably gave you some sense about our outlook for them as we look over the next six months or so. Viecore is very, very recent but I am really extremely enthusiastic about Viecore based on the early evidence. I think Viecore is going to help expand and shape the contours of our solution offerings in the network enterprise space. I think they are already having an influence; have a very capable management team so I’m really quite positive about that acquisition.

[Jeff Van Rhee:]

I think it is embedded in Jamie’s new organic calculations, but what were the contributions from BeVocal and Viecore in the quarter?

[Paul Ricci:]

We don’t break out revenues by individual product lines but as Jamie said, you can essentially calculate the organic revenue growth overall by simply taking the numbers from our public fillings which is one of the benefits of this solution.

[Operator:]

Your next question comes from Daniel Ives - Friedman Billings Ramsey.

[Daniel Ives:]

Great quarter, guidance proving the pundits wrong again. On the speech front, Paul, what are you seeing across the board in regards to adoption? You guys are obviously early in this growth cycle; is there sort of one or two common themes that you are seeing across all verticals? Why you’re seeing such demand like you are in the field?

[Paul Ricci:]

Nuance’s business is focusing speech solutions in several relatively distinct markets and we often mention that and mention the diversity of revenues that offers investors. But as a consequence, it’s difficult to draw a single conclusion that spans all of the markets, because I think different causes are in effect in each of the market. As someone said earlier, the productivity logic is so compelling in healthcare that I think that’s what’s really driving adoption there. But in the mobile business, it’s really very different; it has to do with consumer adoption and ease of use and the need for improved interfaces as people began to use mobile devices more and more as their information access point. Enterprise is a different set of factors altogether from those two. So I think it would be difficult; I wish I could, but it is difficult to draw a single overarching conclusion.

[Daniel Ives:]

On the mobile side in regard to next-generation wins and as you start to ink those, what is the pace that we should expect to hear that? Is that more a second half that we are going to hear about more of these or just throughout the year as you get some of these next-generation wins in the handset?

[Paul Ricci:]

Well as you know, Nuance has business with the vast majority of manufacturers in the handset, navigation device and automotive segments. We are, every quarter, signing new agreements and typically those agreements will involve, in some cases, extensions of existing product lines or in some cases the newer products coming out of our embedded units. You may be referring to the mobile services initiatives and the answer to when those will be announced is likely not to be until they are launched, because even those that are signed, the carriers of course don’t want to discuss them until date of launch.

[Operator:]

Your next question comes from Shyam Patil - Raymond James.

[Shyam Patil:]

It has been about a quarter or two since you closed Viecore and [inaudible]. Could you just talk about what kind of acceptance you’re seeing? Has it been somewhat of a successful cross-sell into your traditional Dictaphone base?

[Paul Ricci:]

First of all, I should have mentioned when the earlier question was asked about acquisitions, they are relatively small acquisitions but they have done terrifically well. Our healthcare team has been really quite excited about the complementary aspects of both of those acquisitions and they are being cross-sold and upsold into our existing base and integrated as well, coupled in integrated offerings into new customers as well. I think that it’s very early for those, but the early results from them are really quite terrific.

[Shyam Patil:]

You talked earlier about competition in the network space in the US market; could you just talk about how that is different internationally and if that’s changed much over the past year?

[Paul Ricci:]

Internationally there are some regional participants in network, as you know, and I don’t think there has been a dramatic change in the last year. I would say that the overall environment, the competitive environment in network has been relatively stable over the last 12 months.

[Shyam Patil:]

Cash flow rebounded nicely from last quarter; how should we think about it next quarter? Perhaps how should we think about it flowing through the year?

[Jamie Arnold:]

We’ve often said that our cash flow should approximate non-GAAP net income over any period of time and rather than me trying to guide you quarter by quarter I think over the course of the year you should expect it will approximate -- I don’t want to try to guide you to a number because it’s very hard to control exact timing of receipt of payment. But I think over any extended period of time, you should think of them as being very close.

[Shyam Patil:]

I think you gave this on the call, Jamie, but what was the organic speech growth rate for the quarter?

[Jamie Arnold:]

For network enterprise it was 24%; embedded or mobile it was 26%; Dictaphone healthcare was 16%; and dictation was 8.5%.

[Operator:]

Your next question comes from Tom Roderick - Thomas Weisel Partners.

[Tom Roderick:]

I wanted to dig in here a little bit on Viecore given that it is a little bit more a services intensive business than your historical business line. Can you talk a little bit about the way that Viecore is being packaged into deals? Is this extending the deal size and is it extending the sales cycle at all? Also Jamie, if you could just comment on how we should expect the Viecore model to play through the margin structure, particularly in the gross margin side, that would be helpful.

[Paul Ricci:]

With respect to the way it’s influencing our transactions, we’ve talked over the last year about Nuance’s movement towards providing comprehensive speech solutions that incorporated not only our core technologies but applications and services that surround those technologies. When we announced Viecore, we focused on Viecore’s unique capability and speech-enabled solutions and certain IP they had in deploying those solutions. Viecore really was an effort to expand and accelerate that trend that was already underway. As I alluded to in my favorable comments about them a few moments ago, I think even in the short time we have owned them it is quite clear to us that they are going to have exactly that kind of system. The customer enthusiasm about the offerings with Viecore has been really quite strong so that’s I think the form of that change. With respect to protracting the sales cycle, Viecore is a solution-selling organization and that has been steadily that way we’ve been headed. Solution selling does often have longer sales cycles because you are doing more conceptual selling at an early stage. Happily, of course Viecore has been doing that for some time and our own shift has been in that direction and while we don’t typically provide bookings numbers, Viecore’s bookings at the end of the December quarter were really quite robust and therefore I think we had entered this initiative with them with a very strong pipeline of already booked deals.

[Jamie Arnold:]

The gross margins, obviously a services business will put pressure on the overall services margin. We believe that with the additional licensed revenue growth our margins will stay in the neighborhood of where they are now.

[Paul Ricci:]

The other thing to mention about that is that we’ve already very quickly integrated the Viecore services organization with Nuance’s enterprise-based services organization and that is going to produce additional efficiencies as we look out over the next couple of quarters.

[Tom Roderick:]

One brief follow up if I could. You indicated you are taking a slight tweak to how you calculate organic revenue growth. Can you just refresh our memory as to how you were previously calculating that? When you look at the year-over-year comparison would the new comparison effectively imply that acquisitions like Viecore are growing in line with the core rate of the business or is it just really to take a more simplistic approach and ease the complexity around the bundling of your various product lines together as you sell them?

[Paul Ricci:]

In the past we used to calculate organic growth as if we didn’t own the acquired assets during the quarter being questioned so we excluded them rather than included them. People raised concerns with that, that we might be seeing a slowing of growth and that might be masking it. It is in fact the case that in the first year, particularly first six months after one buys a business, whatever revenue destruction you’re going to see you are going to see in that first six to nine months. So for any given acquisition if you average them, there is some perturbation in the revenue stream on average -- not in any specific one, but on average. It may be true but it would mathematically result in a slightly slower growth rate but it is not going to be material over time. In any case, based on the feedback we’ve gotten, people are more comfortable with this mechanism. With respect to your other question, at times in the past, businesses will be going through a historical period of time are growing faster than more recent acquired businesses and other times more slowly. I will tell you that for this full fiscal year, the growth rates for businesses that will contribute that are acquired that we have owned for less than the full year and the growth rates for businesses that we have owned for more than a full year were roughly comparable. So for the full year, it won’t have a material effect in other direction; of course in any given quarter it can have a significant effect.

[Operator:]

Your next question comes from Scott Sutherland - Wedbush Morgan.

[Analyst for Scott Sutherland:]

A quick question on your mobile and embedded speech business. You’ve had a lot of success obviously with the handsets as well as the acquisitions have allowed you to build those relationships. Can you talk a little bit more -- in particular to Q1 here -- GPS, handset, was there one of those segments that maybe was a real strong grower versus other ones or where they all about the same? Can you add some detail behind that?

[Paul Ricci:]

Handset was a really extraordinary performer in the first quarter. I would be remiss not to point out that the automotive business for Nuance has been a high growth, steady growth business now for quite some time and had a good quarter last quarter and the quarter before and where we believe we continue to see an increasing acceptance of Nuance technology as the preferred solution globally. GPS has, of course as we commented in past quarters, been a very rapid grower from nowhere to a meaningful part of the revenue stream in two years. Its growth rate is beginning to slow; it had been meteoric for some number of quarters. It is beginning to slow but it is still quite good.

[Analyst for Scott Sutherland:]

Do you think handset penetration has increased now to over 10% or do you have any thoughts on penetration on handsets of speech recognition?

[Paul Ricci:]

I don’t have the numbers in front of me, but I believe in the past we’ve indicated that we thought speech penetration in handsets this year would be in the range of 20%.

[Analyst for Scott Sutherland:]

On the finance side with Viecore, I didn’t know that you had obviously some good growth in professional services and then gross margin ticked down; I didn’t know if that was primarily related to the integration of Viecore or if there were other things driving both the upside in revenue and then the gross margin pressure?

[Paul Ricci:]

Certainly the contribution of Viecore did weigh on gross margins, but there have been other factors as well, as Jamie mentioned in his comments, including the growth of our on-demand revenue streams particularly the earlier periods of on-demand revenues tend not to have as high gross margins until we’ve achieved some operating efficiencies and I think it was a combination of all the services growth.

[Operator:]

Your next question comes from Yun Kim - Pacific Growth.

[Yun Kim:]

Paul, given some changes that are going on within your enterprise sales organization, can you give us some update on where we are in terms of enterprise salesforce hiring for the year and whether you plan to accelerate that hiring given the momentum there or do you feel comfortable with your current sales capacity there? Thanks.

[Paul Ricci:]

Our sales organization has been going through a period of considerable change now for 16 months. There have been a lot of additions and some replacements; a fair number of replacements. I think that the preponderance of that is behind us. I don’t doubt that there will be additional wins as time goes on. Certainly the executive management team of sales, I think, is relatively fixed and in place at this point. The targeted hires are in place at this point. There will be some additional hires as we look forward, but relatively small in comparison to what we’ve done in the last six months.

[Operator:]

Your final question comes from John Bright - Avondale Partners.

[John Bright:]

Paul, on the mobile side some discussion we’ve just had, given the macro consumer spending concerns out there can you talk about your confidence that you have in your mobile shipment expectations for ‘08?

[Paul Ricci:]

Remember that when you are looking at our total embedded mobile business it comprises a large number of contracts over a number of subsegments

[John Bright:]

On your mobile services, you mentioned that it has a nice opportunity looking forward, but you also mentioned in the first half you expect to see expenditures increase as well. Order of magnitude, how significant should we expect the increase in expenditures?

[Paul Ricci:]

The increases have happened so I don’t think there will be a significant additional increase in expenditures going into this quarter for that, but trying to help investors understand to what extent growth had occurred in the first quarter, both Jamie and I did mention the contribution of investments in mobile and mobile services as part of that.

[Operator:]

Gentlemen, there are no further questions at this time. I will turn it over to Mr. Ricci or Mr. Arnold for any closing comments or remarks.

[Paul Ricci:]

Jamie and I thank you all again for joining us and we look forward to speaking with you again next quarter.