Nuance Communications, Inc.
Q1 2015 Earnings Call Transcript

Published: 6 Feb 2015

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to Nuance's First Quarter Fiscal 2015 Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator instructions] With us today are the Chairman and Chief Executive Officer of Nuance, Mr. Paul Ricci; CFO, Mr. Tom Beaudoin; EVP of Corporate Strategy and Development, Mr. Bruce Bowden; SVP of Finance and Controller, Dan Tempesta; and Vice President of Investor Relations, Mr. Kevin Faulkner. At this time, I would like to turn the call over to Mr. Faulkner. Please go ahead, sir.

[Kevin Faulkner:]

Thank you. Before we begin, I remind everyone that matters we discuss 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. As noted in our press release, we also issued a set of prepared remarks in advance of this call, which are available on our Web site. Those remarks are intended to serve in place of extended formal comments, and we will not repeat them here. Now, let me turn the call over to Paul Ricci.

[Paul Ricci:]

Thank you and good afternoon. Before taking your questions, I would like to highlight several key points from today's earnings announcement. First, we delivered a strong start to fiscal 2015 achieving revenues at the high-end of our guidance range, EPS above guidance and strong cash flows that grew 22% over 2014 and represented 117% of non-GAAP net income. As we stated previously, we are focused on key growth businesses as we've managed through the revenue headwinds associated with our changing models. We again demonstrated continued progress in our transition towards stronger recurring revenue. Recurring revenue grew 4% year-over-year and now comprises 66% of our total revenue. Deferred revenue grew 28% over the same quarter last year. I'm disappointed though in our recent bookings performance. Net new bookings were down slightly year-over-year owing to a certain large long-term contracts not signed in the quarter as well as the effect of currency fluctuations. We are adjusting full year revenue expectations to account for $45 million full year negative currency effect referenced in the prepared remarks as well as revised expectations for certain businesses in our transition to recurring revenues. We remained committed however to delivering on our previous EPS guidance through several initiatives. First, we intend to complete the remainder of the approved share buyback program. To-date we have used approximately $200 million out of the approved $500 million. We also apply a more aggressive focus on cost initiatives including restraint hiring, consolidation of infrastructure and product platforms and disinvestment in non-core product lines. And last, we expect to benefit from a pipeline of several attractive high margin license deals that we seek to convert over the balance of fiscal year 2015. In summary, we remain firmly committed to continuing the discipline in our operations and refining the focus of the business to deliver long-term value to our shareholders. We are now happy to take your questions.

[Operator:]

[Operator Instructions] First question we will hear from Brent Thill with UBS. Please go ahead.

[Brent Thill:]

Thanks, Paul, good afternoon. I'm just curious just under the recurring revenue you mentioned that this year you expect a shift to the smaller, can you maybe dive into the dynamics and how you are managing the perpetual business and the recurring business and how those dynamics will play out in 2015? Thank you.

[Paul Ricci:]

Well, we have numerous lines of business embedded in our four business units. And there are difference transition dynamics going on within each of those businesses and in some cases within each product line, some of them are relatively more mature. And as a result the rate of migration from perpetual to recurring as we indicated in our last call as we expected to slow somewhat this year and has slowed somewhat this year.

[Brent Thill:]

Okay. And if you look forward just on healthcare, what do you think the biggest inflection point will be this year for that business?

[Paul Ricci:]

Well, we have put a great deal of emphasis as you know from previous calls on our new Clintegrity solutions, which have been growing well for the company over the last couple of years and we have especially strong push on those businesses this year. So I think the early signs of increased investments in sales and marketing some significant technological investments we’ve made over the last couple of years. I think the early signs; I think those are paying off. We received a number of industry accolades recently around those products within that business. Of course, the Dragon product family within healthcare has been a very strong contributor for some time and continues to be and we are attempting to expand that franchise in certain ways. And finally, our radiology diagnostics product line has been a strong revenue growth performer and really quite unique franchise in the radiology market and I think that will be an important driver for the business as well this year.

[Brent Thill:]

Thank you.

[Operator:]

Question from Shyam Patil with Wedbush Securities. Please go ahead.

[Shyam Patil:]

Hi. Paul, could you maybe elaborate a little bit on the – what you saw with net new bookings in the quarter. And then, is there seasonality, I know these metrics jumps around a little bit quarter-to-quarter, but is there seasonality metric that we should think about kind of going forward?

[Paul Ricci:]

If you wouldn't mind be a bit more specific on the first question, what in particular did you wanted to know?

[Shyam Patil:]

You mentioned there were – you talked on weakness in the quarter around net new bookings growth and I was just wondering if you could elaborate on that a little bit?

[Paul Ricci:]

Well, within our bookings pipeline we have sizable deals in enterprise, in healthcare and in mobile that – the precise timing of which is difficult to predict because they are big contracts and negotiations around completing those contracts often gets elongated and sometimes gets pulled forward. And we had anticipated that several of those deals would get done in the first quarter but didn't. But those deals aren't lost they are simply elongated. And on your second question, we do expect for bookings growth to accelerate in the back-half of the year simply because of the timing of some of those deals. And of course, Nuance historically as always had a strong quarter in its fiscal fourth quarter relatively speaking in both bookings and revenues.

[Shyam Patil:]

Okay. And just a follow-up on – in terms of the commitment to buyback, to exhaust the buyback this year, is this something you think is likely to happen on an annual basis given that you are generating much stronger free cash flow than you have in the past and you slowed the pace of M&A? You think a recurring annual buyback similar to the size you want to exercise this year, it's something that's realistic going forward on an annual basis? Thank you.

[Paul Ricci:]

Well, I don't – I can't address additional buybacks which of course require Board authorization. What I can say is that we view our stock is being undervalued and therefore we view the deployment of our cash to purchase stock as an attractive deployment of the shareholders cash. And as a consequence, we have concluded that a relatively greater focus on share buyback with an attendant reduction in acquisitions is the right capital deployment strategy for the business right now.

[Shyam Patil:]

Okay. Thank you.

[Operator:]

We have a question from Daniel Ives with FBR. Please go ahead.

[Daniel Ives:]

Yes. Thanks. Could you talk on mobile in terms of that business let's say over the next 6 to 9 months, I mean how should we sort of think about there, are there the inflection point there in terms of renewals are sort of an up tick in potentially adoption as you look at automotive and on the smartphone side?

[Paul Ricci:]

Well, we think that business is going to be – continued to be led by the enduring strength of the automotive business. Order bookings can be very large and therefore there will be some irregularity in the pattern of bookings quarter-to-quarter. But on an annual basis, we expect to see good performance in automotive. And we also expect to see the realization of revenues from past bookings. So we are feeling strong about that business. With respect to the smartphone segment, there are factors working in both directions we have – as you know we have been challenged by industry consolidation, which is in some cases eliminated customers – many customers that have been royalty bearing customers for us over time. On the other hand, as I think the prepared remarks mentioned the fundamentals of our growth of the mobile cloud is really quite attractive and I think both the users and the transaction growth are cited there. And we are seeing an expansion in the number of devices of that are needing to have connected services and speech and language enabled solutions and these devices include things simply weren't part of the market and I think we are generally categorizing in the Internet of things. And that seems like an attractive option for future growth.

[Daniel Ives:]

And just last one, on healthcare, we look out to next year, walk through the biggest challenge that you guys have as well as the biggest opportunity? Thanks.

[Paul Ricci:]

I think on the challenge side the erosion which we referenced many times that is driven by EMR adoption and Dragon Medical adoption. The erosion of the existing base of the HIM on-demand service remains a continued challenge. Our approach to offset that has been to expand into adjacent market such as the ambulatory and mid-market. And that's making progress, but we will need to make faster progress on that over the course of this year. And I think that's probably the central challenge in the business. I think the opportunities are to further accelerate our Clintegrity solution set especially our CDI services and some related partnership investments we have in conjunction with that. And I think as well as I referenced earlier Dragon is a very strong brand and franchise within healthcare and has extension opportunities and the diagnostic suite, the radiology suite that we have – has expansion opportunities as well as – as well as a very attractive brand in market share. And we have made investments and announced product extensions there that if we can accelerate their adoption this year, we will be further upside to that business.

[Daniel Ives:]

Thanks.

[Operator:]

[Operator Instructions] And we will go next to the line of Greg Dunham with Goldman Sachs. Please go ahead.

[Greg Dunham:]

Hi. Yes. Thanks for taking my question. When we model product – excuse me professional services and hosting revenues that decelerated pretty substantially this quarter anything that call out their that cause that deceleration and how should we think about the seasonality of that business when we model going forward? Thanks.

[Unidentified Company Representative:]

In the total hosting and professional services clearly it's made up of the services we perform on our enterprise business plus the support we provide in healthcare and other groups. And there can be some fluctuation in the professional services and enterprise depending on bookings and those activities. In hosting, Paul just talked about the HIM erosion, which can have an effect on the HIM business, which is a major component of hosting. So we have significant growth in almost all areas of our hosting revenue platforms with a little bit of headwind from our HIM business.

[Greg Dunham:]

Okay. That's helpful. Thanks.

[Operator:]

We have a question from Jennifer Lowe with Morgan Stanley. Please go ahead.

[SanjitSingh:]

This is Sanjit Singh for Jennifer Lowe. Thank you for taking my question. If I look at your full year guidance and the performance on your net e-bookings. I just wanted to get an understanding of where is some of the weaknesses, is it all just due to some deals getting pushed out or from a competitive standpoint are you seeing anything on the competitive environment side that's intensifying. Or is it also a potential force in sales execution issues as well?

[Paul Ricci:]

So there were of course some currency contribution but the – I don't think the bookings issues are reflective of any change to competitive dynamics. And I can't really ascribe them to sales execution. There was a significant pipeline of opportunity in Q1 more of which we thought would close in Q1 well into Q1 than it did. But as I referenced earlier, the legal negotiations around deals of size can be complex particularly complex in the holiday quarter where you might otherwise normally see both customers willingness to negotiate and completely go agreements laid in the quarter and that's really inhibited in the holiday quarter and you have to plan around that. We estimated incorrectly in that respect.

[Sanjit Singh:]

That's helpful. Thank you for that. And regarding the Dragon Natural product set, I think the transcript got up some competition there, I think it's my understanding that there was a refresh of that product late last year. Are you seeing that particular solution set not seeing the adoption you expected on the new product side?

[Paul Ricci:]

Well, it's not achieving the sales we expected. I don't think it's primarily competitive issue. I do think there is some headwind for Windows based applications and I think that headwind has intensified by the deterioration of the conventional channels. So that's a product line where we are going both through a channel evolution and a product and business model evolution. It's a quite distinct product in this category and it has a very loyal installed base. But, we have to work our way through both product transformation and the channel transformation as we look over the balance of this year for that product.

[Sanjit Singh:]

Appreciate it. Thank you.

[Operator:]

At this time, I would like to turn the call back to the speakers for closing comments.

[Paul Ricci:]

Okay. Then we thank you all for joining us today. And we look forward to speaking to you next quarter.

[Operator:]

Ladies and gentlemen, this conference will be available for replay after 4 pm Pacific Time today through Midnight Pacific Time on February 21. You access the AT&T Executive Playback Service at anytime by dialing 1-800-475-6701, entering access code 352003. International participants dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844 access code 352003. That does conclude our conference for today. Thank you for your participation and using AT&A Teleconference. You may now disconnect.