NUAN

Nuance Communications, Inc. (NUAN)

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Nuance Communications (NUAN)

Q2 2011 Earnings Call

May 10, 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

Scott Zeller - Needham & Company, LLC

Shyam Patil - Raymond James & Associates, Inc.

Derek Bingham - Goldman Sachs Group Inc.

Ilya Grozovsky - Morgan Joseph TriArtisan LLC

Brent Thill - UBS Investment Bank

Scott Sutherland - Wedbush Securities Inc.

Nandan Amladi - Deutsche Bank AG

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC

Shaul Eyal - Oppenheimer & Co. Inc.

Daniel Ives - FBR Capital Markets & Co.

Bradley Whitt - Gleacher & Company, Inc.

John Bright - Avondale Partners, LLC

Steven Koenig - Longbow Research LLC

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Nuance's Second Quarter 2011 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. With us today are the Chairman and Chief Executive Officer of Nuance, Mr. Paul Ricci; Chief Financial Officer, 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

Thank you. Before we begin, I'll 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

Thank you, Kevin. Before taking your questions, I might underscore a few points from today's documents.

To begin, Nuance delivered 10% organic revenue growth with improved performance across our markets. Revenue growth drove improved operating margin and operating cash flows, and we achieved strong bookings in Healthcare, important design wins in Mobile and improved performance in our Enterprise business.

Nuance's Imaging business continued what promises to be a record year for the business along several dimensions. Additionally, Nuance continues to make investments targeted accelerating growth in fiscal 2012. In particular, we're funding an expanding set of strategic engagements in our Mobile market, where demand for our advanced Cloud-based services continues to grow.

In Healthcare, we are also pursuing strategic initiatives with key partners, which leverage our Voice and Clinical Language Understanding technologies. Finally, we also announced today that we've agreed to acquire Equitrac, which is expected to close late in the fourth quarter. Equitrac expands our ability to provide our customers and our partners with superior cost savings and productivity. Equitrac aligns well with our key vertical markets, especially Healthcare. We've been working to align our distribution channels between Imaging and Healthcare to expand our revenue opportunities in that business. The acquisition of Equitrac complements those efforts. This acquisition will add around $58 million to $60 million to our non-GAAP Imaging revenues in fiscal 2012. Including the acquisition of Equitrac, we expect our Imaging business to achieve double-digit revenue growth in fiscal '12 and to deliver operating margins above the corporate average.

We'll now take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll start with the line of Mr. Daniel Ives with FBR.

Daniel Ives - FBR Capital Markets & Co.

Could you talk about the organic growth in each of the business segments, specifically Healthcare, Mobile, how that performed versus your expectations for the quarter?

Paul Ricci

Well, we said last quarter, we expected Healthcare to improve this quarter over last quarter, and it did. And we expect continued improvement throughout this year. We said last quarter we expected Mobile to continue the kind of growth it experienced recently, and I think it roughly did that. It was down a couple of percentage points, but that's influenced by specific design wins and the magnitude of those design wins. Overall, the Mobile consumer business had, again, a very robust quarter. Were there others you wanted a comment on?

Daniel Ives - FBR Capital Markets & Co.

No, just on those specifically. Talk about cash flow expectations. I mean, would you expect to a similar trajectory you saw this quarter relative to EBITDA for the next few quarters in terms of cash flow?

Paul Ricci

Well, we've, I think, said a couple of things consistently about cash flows. One, we have a lot of confidence in our ability to generate growing cash flows, and we've seen that year-over-year for several years and we projected that we would see robust cash flow growth this year. And I think we're on track to do that and expect the balance of the year to confirm that. Secondly, we said that we expected the GAAP, the difference between non-GAAP net income and cash flows to be smaller this year than it was last year. And in fact, I think you've seen that substantially, dramatically. So in the second quarter, I don't want to make predictions about that level of narrowness, but I think you will see a confirmation of our overall expectation this year that the GAAP will be meaningfully narrowed.

Daniel Ives - FBR Capital Markets & Co.

I mean, you obviously a strong quarter. You didn't raise revenue guidance for the year, kept it the same. Just talk about your philosophy with that in regards to the year guidance. I mean, I know you guys typically don't raise, but just speak about how you're confident to kind of the targets at the end of the year in terms of top line, bottom line.

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