Nuance Communications, Inc. (NUAN)

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Nuance Communications, Inc. (NUAN)

December 06, 2012 9:30 am ET


Kevin Faulkner

Paul A. Ricci - Chairman and Chief Executive Officer

Vlad Sejnoha

Mike Thompson - Senior Vice President and General Manager of Mobile Division

Michael Thompson

Robert Weideman - Senior Vice President and General Manager of Enterprise Division

Janet M. Dillione - Executive Vice President and General Manager of Healthcare Business

Steven G. Chambers - President of Sales & Marketing and Executive Vice President

Thomas L. Beaudoin - Chief Financial Officer and Executive Vice President


John F. Bright - Avondale Partners, LLC, Research Division

Scott Zeller - Needham & Company, LLC, Research Division

Shyam Patil - Raymond James & Associates, Inc., Research Division

Brent Thill - UBS Investment Bank, Research Division

Shaul Eyal - Oppenheimer & Co. Inc., Research Division

Nandan Amladi - Deutsche Bank AG, Research Division

Daniel H. Ives - FBR Capital Markets & Co., Research Division

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division


Kevin Faulkner

Good morning, everybody, and welcome to Nuance's Fiscal '13 Financial Analyst Day. I'm Kevin Faulkner, Vice President of Investor Relations. We appreciate your interest and time to attend today. We're very excited about our growth opportunity and looking forward to telling you about the exciting things that we have going on. But before we do that, there are a couple of administrative announcements that I wanted to make. First of all, you have the agendas in front of you. I won't go over the agendas, but we are planning both to break in between the enterprise and healthcare sessions and also a question-and-answer session with all the speakers at the end.

I wanted to remind you that today's presentations will include forward-looking statements, estimates, expectations, predictions about the future. These statements are subject to risks and uncertainties that could cause actual results to differ materially, and you should refer to Annual Report on 10-K for the fiscal year ended September 30, 2012, for a detailed list of Risk Factors.

In addition, we will present materials today that include non-GAAP financial measures. We have provided an appendix that's a reconciliation of GAAP to non-GAAP, and you should refer to that appendix. It can be found on the webcast page. It can also be found on the Investor Relations page of our website, and it is included in the soft copy of the materials that will be available today.

Without further adieu, let me introduce our Chairman and CEO, Paul Ricci.

Paul A. Ricci

Good morning, everyone, and welcome. We appreciate your taking the time to [Audio Gap] what complex and multidimensional business. And we really appreciate the opportunity and the additional time to try and delve into it more deeply than we can on typical earnings calls. My role this morning is to make some introductory comments. And then I'm going to turn it over to a series of my colleagues, who are going to go through the business in greater depth. After my introductory comments, Vlad Sejnoha is going, who's our Chief Technology Officer, is going to come up and talk in more depth about our technology than we have done in the past.

Our reason for doing that is that we believe that our technology increasingly provides a source of differentiation for us, and we want you to see the ways in which that differentiation is common across our diverse markets.

Following Vlad, each of our business unit general managers will come up and talk about our 3 primary markets: Mobile & Consumer, our enterprise self-service and healthcare. And then finally, Steve Chambers, who's President of our Sales and Marketing organization, is going to come back and bring that all together with giving you a comprehensive view of our go-to-market strategy and how that strategy is knitted across these diverse markets and how it's evolving over the course of this year. Actually he's not the final speaker. And then lastly, Tom Beaudoin, our Chief Financial Officer, will come up and discuss our financials in greater depth. And then we'll be pleased to take your questions.

So there are really 3 things that I wanted to do. First, I want to expand a bit on the comments from the most recent earnings call. And then I want to focus specifically on what factors are going to drive growth in fiscal '13. And then lastly, I want to return to this point that I have been discussing in recent earnings calls about the migration and the evolution towards intelligent systems.

We think that this evolution towards intelligent systems from a speech recognition to incorporate natural language processing, dialogue management, some forms of reasoning, it provides a foundation for enhanced differentiation for us and provides an opportunity for expanded markets for us, so we're going to talk a lot about it today.

I can say that I think, without hyperbole, that fiscal '12 was the best year in Nuance's history. You're familiar with these financial results, and so I'm not going to go through them. Tom will talk about them in more depth, but it was a year of solid earnings -- solid revenue growth, terrific earnings growth and really extraordinary cash flow generation for us. And we did that while making some important investments in the business in technology, some important investments in the business in sales and marketing. We'll talk more about those later. And we did that while making other important operational strides in the business and making some important strategic moves in the business, all of which we're going to outline for you.

I'd like to start by just a few words about our Mobile and Consumer business. It was truly a momentous year in this business. Our Mobile & Consumer business surpassed $500 million in revenue last year. We had growth of almost 30%. When I was up here a year ago, you were all, I think, quite interested and enthusiastic about our position in the market for Apple devices and iOS, but concerned about our ability to address the Android market. Here we are, a year later, we've cemented a series of agreements with Samsung. We have an entrenched position with them for supplying speech recognition, intelligent system solutions on the Galaxy platform, and we've secured relationships with other important Android manufacturers as well, which Mike will talk about more.

Our view is that we do indeed have a privileged position across most of the leading smartphone platforms in the world today. And that we're going to be able to continue to extend that position based on the differentiation of our technology.

Beyond smartphones, we've talked to you in the past about the position we have in the automotive market, a business that we continue to be very enthusiastic about. We talked to you last year about migrating the automotive business to a connected car business. And in fact, we have now deployed several instances of that. We think what was already an unrivaled position of leadership in the automotive market is now one that's incorporated in the connected car and expanding.

We've extended the business to new markets, including the market for connected televisions. We talked to you last year about that. I think we showed you a demonstration, an early demonstration prototype of Dragon TV. We now ship Dragon TV. We've secured a number of Asian manufacturers. And in fact, I think there are units with our speech that are available for the holiday season. And importantly, we completed -- initiated a very comprehensive strategic relationship with Intel, designed to enable a new market opportunity around the hybrid form factor of laptops and tablets in the Intel Ultrabooks series. That's a relationship that's going to incorporate not just Intel, but a number of Intels and important OEMs. And I think, in fact, there is 1 or 2 OEMs this Christmas season shipping the early versions of that software that we've developed for them.

But we think the examples of the television market and the example of the Intel relationship proved the thesis that we have articulated to you in the past, which is that we're going through a paradigm shift. And that paradigm shift is towards more intelligent systems; virtual assistance; interactive systems that incorporate speech, natural language processing; some amount of knowledge domain and reasoning, and that, that paradigm shift is moving -- that was first articulated in the smartphone market is moving to incorporate platforms and products across the mobile consumer and electronics industry. And we think that opens the opportunity for additional markets that you're going to see as -- over the next couple of years.

Evidence of that is that we now have more than 13,000 developers, who are building applications of one form or another in Nuance's mobile cloud. And in fact, as we mentioned in our recent earnings call, the annualized rate of transactions in that cloud right now at the end of the fourth quarter was about 5 billion.

So we've been bullish about the mobile business in the past. We remain very bullish. I know there's been concern about various competitive forces. We believe strongly in our source of technological differentiation. We believe strongly in the foundation of the relationships we've built with big important customers, such as Ford and BMW and Apple, Samsung. It's a business that we think is not going to be so much challenged by competition, but by in fact the evolution of that business, first to a more cloud-based services and by the extensive customer engagements that we're having to do in that business.

I sat through a review earlier this week of just one customer engagement, where we now have more than 100 people in our Research and Development organization assigned to that engagement. And we have numerous engagements like that. It's created tremendous opportunity for us. At the same time, it's creating a burden of considerable hiring, and we've talked to you about that in the past. For us, that's a very good problem to have because, in fact, we think it defines future growth and expansion of markets for us in that business.

Moving to the Enterprise business, I should start by saying that we had a management change in this business in the middle of last year. Robert Weideman, who's been a long time executive at Nuance, was part of our European operations for a number of years and really built Nuance's imaging business and, more importantly, transformed Nuance's imaging business to the OEM business we have today, working with large MFP partners. Robert, who'd had some experience in the enterprise business previously, has taken over as the General Manager there and has been in that position about 6 months, and he'll have an opportunity in a few minutes to tell you the things that he's doing.

I have said in the past, I believe profoundly in this business. I believe that no one can deliver the quality of solutions in a cloud service for self-service automation other than Nuance can. And we've talked about proof points of that such as USAA and US Air and other examples of really truly leading state-of-the-art applications. And indeed, we did see improved revenue growth this year, after a couple of years, a very tough revenue growth. And in the back half of the year, we saw a very strong bookings in our on-demand business and very strong bookings in delivery of our professional services. So I think our core business is looking better. We surpassed 3,000 deployments. Our cloud is delivering 7.5 billion interactions a year right now.

But as well, we have some new market opportunities that are augmenting our core business. Robert will talk to you about voice biometrics. We're excited about that. We're excited about it in a way it intersects our traditional posted customer care business. We're also excited about the intersection between that and our mobility business.

And Robert will also talk to you about Nina, our mobile virtual assistant solution for enterprises. I've talked about that in recent earnings calls. It's generated extraordinary interest and a very robust pipeline, and I'll let Robert speak about that in more depth.

We think all these things put together are going to allow us to expand our on-demand business and enterprise as we go through the second half of this year and expand the growth rate overall for the enterprise business, based on the complement of the new markets and new product opportunities.

Probably no business saw more change than the healthcare business this year, extremely busy and complex agenda this year. We had to assimilate a couple of acquisitions, importantly the Transcend acquisition. We expanded our on-demand business to exceed 5 billion lines annually. We continue to fuel the growth of our Dragon Medical franchise, been an extraordinary franchise for us. We achieved a resurgence in our radiology business, based on new product offerings that we had under development there. We've now surpassed 450,000 physicians using Nuance's products directly. And we've really positioned ourselves very well to leverage the imperatives and the opportunities for meaningful use around electronic medical records, for the transition to ICD-10, and for the imperatives in clinical documentation improvement, which Janet will talk more about in some detail.

I mentioned in the earnings call recently that we expect that growth of that business -- we expect that business, which is, as you can see, 7 years of extraordinary growth, we expect that business to exceed $1 billion in revenue this year. There was some skepticism about that, but in fact, we think the math supports that. We expect comparable growth rate this year to what we saw last year. That growth rate will be led, again, by Dragon Medical. It will be led by radiology. It will be led by some improvement in our on-demand growth rates. It will be supplemented by our Clinical Language Understanding products. On top of that, we will have the benefit of the new acquisitions in the CTI and computer-aided coding space. And we expect to be probably $50 million of contribution from other small acquisitions that are in various stages of flight right now for the company.

We put all that together, and we will have $1 billion health care IT software and services business as we exit fiscal '13.

The growth of that business is going to be founded in no small part on the very hard work that the company has done over the last year to expand its network of partnerships. These partnerships have been very important for us, and Janet will talk more about them, as we cement our opportunity around meaningful use for electronic medical records. And in particular, we've spoken publicly about the extensive aspects of our partnerships with Cerner and with Epic recently. You'll hear more about those. But there are others, and we have partnerships throughout the electronic medical record space. We have technology partnerships such as UPMC and IBM. I think that will be a continuing theme, and perhaps you'll hear some of that in Steve's discussion in our go-to-market strategy at the end of the day as well.

And finally, in health care, we -- on top of what was a very busy year operationally, we had a vision for how we could transform the use of clinical documentation, creating an end-to-end solution from the early physician-created documentation and issues of quality and the need for improvement around that clinical documentation, through the back end of revenue cycle management and computer-aided coding. You're going hear a lot about that today. We think it opens up an important new opportunity -- market opportunity and revenue opportunity for us. We also think it's going to be transformative in a way clinical documentation is done in health care institutions here.

The components that this new opportunity is founded on include the 2 platforms that we acquired in technology and services, with J.A. Thomas and with Quantim, and includes leveraging the fabric of partners that I referred to a few moments ago and includes the technology foundation that we've been building in our own Research and Development activities inside Nuance, as well as the joint research activity that we've had undergoing for a number of years to create state-of-the-art Clinical Language Understanding technology with IBM.

You're going to hear a lot more about this today. Vlad will give you some more details, and Janet is going to talk about this in depth.

If you look across our markets, there really are 2 important common themes you're going to hear today. They're not new to you, but we're going to go into them in more depth. The first is the importance of deep customer relationships. Nuance has and continues to be the most important trusted partner to deliver global solutions at global scale for our technology worldwide. It's difficult to do. It requires you to bring together a large complement of technologies, not just speech recognition, but natural language processing. Other artificial intelligence technology requires you to be able to deliver them in a large number of languages to be able to engage with significant professional services, technology services and, in some instances, research services, and to do it in a disciplined way at significant scale for a number of years.

And we think that the combination of our ability to project our delivery on a global basis, the combination of the depth of our technology makes us really quite differentiated in this area. I've talked in the past and some today about important engagements with Samsung, with Intel, Cerner, Ford, BMW. We have numerous engagements like this, and we believe that Nuance is viewed in a very distinct way by these companies, by our ability to combine this technology and our delivery capabilities to engage them, so that they themselves can have a differentiated solution that incorporates our 4 technologies.

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