Nuance Communications, Inc.
Q4 2015 Earnings Call Transcript

Published: 16 Nov 2015

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to Nuance's Fourth Quarter and Fiscal Year 2015 Conference Call. At this time, all lines are in a listen-only mode. Later, there will be an opportunity for your questions and instructions will be given at that time [Operator Instructions] As a reminder, this conference is being recorded. With us today from Nuance are Chairman and CEO, Paul Ricci; CFO, Dan Tempesta; EVP of Corporate Strategy and Development, Bruce Bowden; and Vice President of Corporate Marketing and Communications, Richard Mack. At this time, I would like to turn the call over to Mr. Mack. Please go ahead, sir.

[Richard Mack:]

Thank you. Before we begin, I remind everyone our discussion 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 list of risk factors. All reference to income statement results are non-GAAP unless otherwise stated. As noted in our press release, we issued a set of prepared remarks in advance of this call, which are available on our website. Those remarks are intended to serve in place of extended formal comments, and we will not repeat them here. I'll now turn the call over to Paul.

[Paul A. Ricci:]

Good afternoon. Before taking your questions, I would like to highlight several key points from today's earnings announcement. First, today we reported a strong close to our fiscal year. Now five consecutive quarters of year-over-year improvement in non-GAAP operating margin, non-GAAP EPS and operating cash flow. Compared to Q4 of last year, non-GAAP operating margin improved by 430 basis points, non-GAAP EPS improved by $0.08 and operating cash flow grew 58% to a new record level of $151.6 million. In addition, for 12 consecutive quarters now, we have delivered at least 20% year-over-year growth in deferred revenue. This is a clear indicator of sustained growth in our recurring revenue business, which we expect to enhance predictability of future revenue growth. Second, earlier this year we initiated a transformation program to focus our product investments on our best growth opportunities, increase operating efficiencies, reduce cost and further enhance shareholder value through share buybacks. This program is delivering measureable results that are evident in our improved performance this quarter. For example, non-GAAP gross margin improved year-over-year in nearly every revenue category and we saw a year-over-year cost reductions in every operating expense line. To-date we've completed actions that realized more than $75 million in sustainable annualized savings. We're progressing well and remain committed to our goal of the $125 million in annualized expense reductions by the close of fiscal 2016. And third over recent years we've seen a significant shift toward recurring revenues in our business model. Recurring revenue in Q4 of 2015 was approximately 68% of total revenue up from 63% a year ago and up even more sharply from a 58% in fiscal 2013. This shift is occurring across our healthcare and mobile and enterprise businesses and will further increase recurring revenues in FY 2016 as we emphasize our cloud and end-to-end solutions in healthcare our multichannel cloud offerings in enterprise and our connected car services in automotive. I want to note in particular that we are accelerating the adoption of [radible] (ph) and cloud offerings in our Dragon medical and diagnostic businesses within healthcare as referenced in the prepared remarks. We estimate that this acceleration will result in a reduction of revenues from those business lines of more than $30 million as compared with the comparable unit volumes at last year's recurring perpetual mix. At the same time, we will see a corresponding growth in bookings from this acceleration to a recurring model and looking ahead to FY 2017, we will see improved revenue and profits from this shift. And finally, we had another strong booking performance in the fourth quarter delivering net new bookings at the high end of our guidance. If adjusted for currency, net new bookings would have grown 12% in the quarter. The combination of booking growth and the benefits of our transformation program positioned us for continuing improvements in revenue growth, EPS and cash flows and reinforced our confidence in the strategy we've articulated. We anticipate positive organic revenue growth in FY 2016 and further improvements in FY 2017. Overall, I'm very pleased with our performance in fiscal 2015 which resulted from the team work, dedication and purpose of our employees worldwide. We look forward to a strong year and continued momentum in 2016 and we're now happy to take your questions.

[Operator:]

Thank you [Operator Instructions] Our first question will come from Daniel Ives with FBR. Go ahead please.

[Daniel Ives:]

Yes thanks. A solid quarter. Could you just talk about $125 million, I mean you addressed as its going to flow through to 2016, but just maybe talk about the trajectory on a going forward basis and how you are sort of viewing as it runs the model from a cost perspective?

[Paul A. Ricci:]

Dan, do you want to handle that?

[Daniel D. Tempesta:]

Sure. So Daniel, as Paul mentioned earlier as of today, we believe we've achieved $75 million of real sustainable economic benefits from the transformation programs. Coincidentally, if you compared Q1 2015 to Q4 2015’s COGS and operating expenses on an annualized basis, you will see about a $90 million reduction, but there are number of puts and takes into that difference. And in particular the seasonality, so you need to be careful, you can’t consider the entire $90 million as sustainable savings. We're committed to realize the full $125 million and that will come in by the end of fiscal 2016. So your first real measure will be in Q1 2017 versus Q1 2015, you should be able to see the full effect of that $125 million savings.

[Daniel Ives:]

Okay. And Paul could you just talk about on the healthcare piece, going forward, you obviously feel like that business is showing more consistency in the execution, but as you going to 2016 talk about what you think the biggest opportunity there is on healthcare then maybe things that you still need to improve on from either execution or product perspective?

[Paul A. Ricci:]

Well as we exceeded FY 2015, we saw increasing momentum in our Clintegrity solutions where we've put a great deals emphasis over the last year. We expect that momentum to continue into FY 2016. We referenced in the prepared remarks and in my comments just now that we're seeing an ongoing shift, accelerating shift of our Dragon and diagnostic product lines to our cloud and recurring models. We expect that to continue, we think that will enhanced bookings materially in FY 2016. And we continue to maintain focus on the mid market opportunities for our on demand transcription business and expect to see some expansion from that mid market opportunity as we look into 2016.

[Daniel Ives:]

Thanks.

[Operator:]

Thank you. Our next question is from Jeff Van Rhee with Craig-Hallum. Go ahead please.

[Jeff Van Rhee:]

Great, thank you. Real nice progress here guys, it looks good. Paul I guess just at a high-level the bookings guide of 2% to 5% growth, can you just talk to as you look to four key segments, where you expect to see bookings acceleration next year and where you might expect booking deceleration?

[Paul A. Ricci:]

Yes, of course we're referring here to net new bookings and we will see further expansion in our bookings in enterprise, we'll see it some areas of mobility in our mobile operator services and we'll see it in healthcare and particularly healthcare will have a very strong bookings year. We have a relatively difficult year-over-year comparisons in automotive, we expect to very robust year in automotive in 2016, but we're not anticipating as much bookings growth as we saw in 2015, because of course we realized a number of very large bookings in 2015, which we've referenced in previous calls. And it's difficult to predict the timing of additional bookings for automotive in 2016.

[Jeff Van Rhee:]

Okay. That's helpful. And the recurring revenue as a percent of mix went from 64% last year to 66% this year that piece of improvement or mix shift I guess, do you expect that to be linear, should that jump more than a couple of points in 2016? How should we think about the shift?

[Paul A. Ricci:]

Well we're confident that the recurring proportion is going to increase, it's difficult for us to be precise, because its difficult ultimately to know what the customer decisions will be in some of our product line areas where we are in a migration, but a shift that is comparable to last year’s shift wouldn’t be an reasonable expectation.

[Jeff Van Rhee:]

Okay. And then just one last just to clarify Dan, on the cost savings is that you had hit the $75 million mark, maybe it's splitting it a little to precisely, but it was that for that quarter in total or you had taken actions by the end of the quarter that would get you $75 million. How do we think about the cost cuts?

[Daniel D. Tempesta:]

It's cumulative to-date so where we are today.

[Jeff Van Rhee:]

Okay. So if it was $75 million cumulative to- date, then presumably the quarter didn’t feel the full benefit of $75 million in annualized savings, I just want to read it back to you.

[Daniel D. Tempesta:]

I think that's a fair statement the we said yes.

[Jeff Van Rhee:]

Okay, great. Thank you guys.

[Operator:]

Thank you. We’ll go next to Nandan Amladi with Deutsche Bank. Go ahead, please.

[Nandan Amladi:]

Hi, good afternoon. Thanks for taking my question. Paul you referenced this in your opening remarks, but we've seen about eight quarters of 40% plus growth in long-term differed revenue. You said 12 off course, but the eight is more robust growth. Is there any reason why this trend shouldn’t continue particularly as you sign on more recurring revenue deals?

[Paul A. Ricci:]

And the answer is we expect the trend to continue, we aren’t providing a forecast of the growth rate of recurring revenues, but we expect the long-term trend that you've identified to continue.

[Nandan Amladi:]

Great. And a quick one on your capital structure pace of buybacks, you've got about half of the programs still left, the buybacks accelerated in fiscal 2015 relative to fiscal 2014. So how should we think about the pace for fiscal 2016?

[Paul A. Ricci:]

We remain committed to the buyback as part of our overall transformation program, it's difficult for us to give you a prediction about the buyback rate, because off course we don’t yet know what the share price will be and that will have an influence with the rate and timing of our buybacks.

[Operator:]

Okay, thank you. Our next question will come from Sanjit Singh with Morgan Stanley. Go ahead, please.

[Sanjit Singh:]

Thank you and congrats on the nice execution. Wanted to talk about the guidance just for a second. For fiscal year 2016 revenue guidance, how much of factored in terms of inorganic contribution maybe from a growth perspective?

[Paul A. Ricci:]

Your are asking whether the 2016 guidance includes acquisitions?

[Sanjit Singh:]

Yes.

[Paul A. Ricci:]

No. It does not.

[Sanjit Singh:]

Okay, got it. And in terms of the diagnostics business and the medical business, what sort of [inning] (Ph) are we in terms of the transition, are we sort of half way through, whether it's still sort of ways to go in that transition?

[Paul A. Ricci:]

So I think we are certainly in the midst of that transition as we've gone through 2015 and we go into 2016. I think as we exit 2016, we will be preponderantly through that transition and those two product lines.

[Sanjit Singh:]

You said by the end of 2015. Got it. And the last one from me, on the slight moderation on the normalized line run rate this quarter, if we sort of had a normal size quarter, what would that declines sort of looks like to this quarter versus the increase that we saw last quarter?

[Daniel D. Tempesta:]

It would have been modest compared, it still would have been a decline, but it would have been maybe half the decline or even much.

[Sanjit Singh:]

Great, great. Thank you. That's all from me.

[Operator:]

Thank you [Operator Instructions] And next will go to David Hynes with Canaccord. Please go ahead.

[David Hynes:]

Hey thanks guys. Just one from me. Paul maybe on the enterprise business. Where are you in terms of executing against the implementation backlog. I know these can be large complex deployments, but it seems like we've been talking about solid bookings on that side, but organic growth has been de-accelerating. So just help us reconcile kind of the bookings commentary with what we're seeing in revenues and maybe when that could pickup as we look to 2016?

[Paul A. Ricci:]

Okay. Yes, we there is a significant backlog there and you are right in identifying that. Time to implementation in these large enterprise solutions is long. That said, we do anticipate significant improvement in revenue growth in the enterprise as a business in 2016 as a result of the implementation of deals that were booked in 2015.

[David Hynes:]

Okay, got it. That's it. Thanks guys.

[Operator:]

Thank you. Our next question is from Steven Wardell with Leerink Partners. Please go ahead.

[Steven Wardell:]

Hi guys. Congrats on the quarter. Can you tell us about did you see any of your healthcare products boosted by the ICD-10 deadline for hospital CIOs, which was October 1, might your clinical documentation improvement solution have seen kind of a boost by that. And on the other side, did you see any of your healthcare line of the business slowed because of all the attention that was given by hospital CIOs to the ICD-10 deadline for the quarter. and do you expect a durable impact of this, is this over now or might there still be an impact to ICD-10 related lines of business in future quarters?

[Paul A. Ricci:]

Okay. Well, I think first, we think of ICD-10 as being a component of larger trend in healthcare towards focus on improvements in overall document quality and in that respect specifically and more generally, the ICD-10 did help with the opportunities in our Contegrity product solutions line, which I referenced, I think in an earlier question today. We do expect that trend to continue, even though the initial implementation period has arrived. The ongoing focus on the quality of implementation and the quality of documents in healthcare remains strong and we expect the momentum in that business line to continue as we go into 2016 as a result. With respect to the deleterious effect elsewhere, there were occasions during the year, fiscal 2015 where we heard that implementations of other solutions were slowed because of institutional focus on ICD-10, but I wouldn't cite it as a primary factor.

[Steven Wardell:]

Great. Thank you. And it also looks like R&D was lower this quarter. is that part of your cost cuttings?

[Paul A. Ricci:]

Yes, the R&D savings you saw quarter over quarter and throughout the year were a result of our cost reductions, yes.

[Steven Wardell:]

Great. Thank you.

[Operator:]

Thank you. We now have a question from Thomas Roderick with Stifel. Go ahead please.

[Unidentified Analyst:]

Hi its actually Parker laying in for Tom Roderick. I was just wondering, as we consider your expense reduction plan and look out into FY 2016, should we expect the impact we felt more strongly in any particular business segment in terms of profitability or will that be somewhere equally across the business?

[Paul A. Ricci:]

We don't forecast profitability by business segments. So I would want to be careful there, but you should think of the savings being broadly based across the company as they have been so far and remaining savings I think will as well.

[Unidentified Analyst:]

All right. Thank you.

[Operator:]

Thank you gentlemen, we have no further questions. Please go ahead with any closing remarks.

[Paul A. Ricci:]

Okay, well, thank you very much for joining us this quarter. We look forward to speaking to you again next quarter.

[Operator:]

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.