Nuance Communications' CEO Discusses F1Q11 Results - Earnings Call Transcript

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Nuance Communications (NUAN)

F1Q11 Earnings Call

February 09, 2011 5:00 pm ET

Executives

Thomas Beaudoin - Chief Financial Officer and Executive Vice President

Kevin Faulkner - Investor Relations

Paul Ricci - Chairman and Chief Executive Officer

Analysts

Richard Davis - Canaccord Genuity

Brent Thill - UBS Investment Bank

Mike Latimore - Northland Securities Inc.

Nandan Amladi - Deutsche Bank AG

Daniel Cummins - ThinkEquity LLC

Neil Herman - Soleil Securities Group, Inc.

Shaul Eyal - Oppenheimer & Co. Inc.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC

Gonzalo Cavenaghi

Daniel Ives - FBR Capital Markets & Co.

Craig Nankervis - First Analysis Securities Corporation

Shyam Patil - Raymond James & Associates

Mark Murphy - Piper Jaffray Companies

John Bright - Avondale Partners, LLC

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Nuance's First Quarter 2011 Conference Call. [Operator Instructions] With us today are the Chairman and Chief Executive Officer of Nuance, Mr. Paul Ricci; CFO, Mr. Tom Beaudoin; 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

Thanks, Cathy. 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 issued, along with our release, a set of prepared remarks in advance of this call. 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

Thanks, Kevin. Before taking your questions, I might underscore a few points from the prepared documents.

First, Nuance is investing for growth. As we guided last quarter, Q1 sales and marketing expenses increased by $7 million compared to Q4. We also accelerated our engineering and services investments targeted at fulfilling recently expanded Mobile strategic partnerships and Enterprise On-Demand contracts. While we continue to invest, expense increases this quarter will be significantly moderated.

Secondly, Q1 was a particularly strong bookings quarter, especially in our Healthcare, On-Demand and Mobile Services offerings, which contribute to revenue over an extended period of time. The estimated three-year value of our On-Demand contracts was $1.174 billion, up 21% from the same quarter last year. Healthcare On-Demand bookings were up 150% from the same quarter last year.

Voicemail to Text bookings were up more than 200% sequentially over fourth quarter bookings, which itself, had been a previous record. We signed a new contract with a Latin American carrier that we estimate will cover 400 million messages over the four-year span of that contract. Our Automotive unit achieved important design wins with OEMs such as Audi, BMW, and Fiat Chrysler. The strength of our Q1 bookings is one factor that boosts our confidence in growth during the second of the year.

In addition, I want to emphasize that market trends remain favorable, and Nuance's competitive position remains strong. Secular growth trends across the industries favors Nuance's solutions due to our leading technology, geographical capabilities and support of the diverse platforms and operating systems. Proliferation of mobile devices and demand for content gives us attractive end markets and increasing market visibility for our solutions and applications.

The push for automation, cost savings and migration to digital information in the Healthcare market is a key driver of our Healthcare growth. We see increasing strength in product and license revenues from our Imaging business. I would also note that we remain on track for another year of strong cash flow growth.

As planned during the first quarter, we retired the final material acquired liability associated with the SpinVox acquisition, which reduced operating cash flows by about $23 million. But for the payment of that liability, operating cash flow would've approximated non-GAAP net income, a point that has been important to investors.

In summary, competitively, we have never been stronger. We've invested for growth as we indicated we would. We expect to see the benefits of those investments throughout this year, enabling us to maintain our original guidance for FY '11. Q2 is off to a solid start, and we remain confident in our direction. We'll now take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Daniel Ives with FBR Capital Markets.

Daniel Ives - FBR Capital Markets & Co.

First, so overall bookings, was that in line, worse or better than your expectations three months ago, if I assume that's the overall number?

Paul Ricci

Our bookings in the first quarter somewhat have overachieved our plan for bookings in the first quarter in aggregate across the company.

Daniel Ives - FBR Capital Markets & Co.

So did more revenue than you guys expected not fall into the quarter, and obviously, like off-balance-sheet or fell into deferred? I mean, is that just from maybe time period address that or just talk about that.

Paul Ricci

Let me let Tom speak to the deferred revenue, and then I'll speak to your question more broadly.

Thomas Beaudoin

Well, you did see -- well, you will see when you see the balance sheet that deferred revenues did go up. That's due to a couple of factors. It is related to some set up and upfront fees related to our Hosting offerings. But I'll remind you that a lot of our hosted offerings are on a time-based or a minute-based billing mechanism, and therefore, a lot of that activity doesn't get on to deferred . But it is a good indicator that we are continuing to do more work in standing up those hosted offerings. And additionally, deferred increased a little bit through the eCopy Billings in our Imaging business, which has some deferred revenue associated with it.

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