Nuance Communications, Inc. (NUAN)

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Nuance Communications (NUAN)

Q3 2011 Earnings Call

August 09, 2011 5:00 pm ET


Thomas Beaudoin - Chief Financial Officer and Executive Vice President

Kevin Faulkner - Investor Relations

Paul Ricci - Chairman and Chief Executive Officer


Scott Zeller - Needham & Company, LLC

Shyam Patil - Raymond James & Associates, Inc.

Ilya Grozovsky - Morgan Joseph TriArtisan LLC

Jeffrey Rhee - Craig-Hallum Capital Group LLC

Scott Sutherland - Wedbush Securities Inc.

Daniel Cummins - ThinkEquity LLC

Nandan Amladi - Deutsche Bank AG

Shaul Eyal - Oppenheimer & Co. Inc.

John Byun - UBS Investment Bank

Neil Herman - Ticonderoga Securities LLC

Daniel Ives - FBR Capital Markets & Co.

Ian Kell - Northland Securities Inc.

Bradley Whitt - Gleacher & Company, Inc.

Tom Roderick - Stifel, Nicolaus & Co., Inc.

John Bright - Avondale Partners, LLC

Steven Koenig - Longbow Research LLC



Ladies and gentlemen thank you for standing by, and welcome to Nuance's Third 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. 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 releases, 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 Mr. 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 13% organic revenue growth in the quarter, an acceleration from the previous quarter. We delivered improved performance in our Healthcare and Mobile & Consumer markets. Revenue growth drove improved operating margin and operating cash flows. We achieved strong bookings in Healthcare and important design wins in Mobile. Nuance's Imaging business continued what promises to be record year for the business along several dimensions.

In view of the momentum created in Q3, we're raising our Q4 revenue guidance range in addition to updating guidance to reflect recent acquisitions.

Nuance continues to make investments targeted at accelerating growth in fiscal 2012. In particular, we're funding and expanding set of strategic engagements in our mobile market, the 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.

We will now take your questions.

Question-and-Answer Session


And the first question comes from the line of Daniel Ives, FBR.

Daniel Ives - FBR Capital Markets & Co.

First off, with the guidance, could you just try to apples-to-apples it with the acquisition with Equitrac? What is that contributing just so we could kind of x it out to compare everywhere 3 months ago?

Paul Ricci

Well, our guidance in the previous quarter was $3.52 to $3.70 and by non-GAAP revenue implied in the full year guidance, in the third quarter guidance we gave previously. You should think of revenues full quarter, fourth quarter revenues for all 3 acquisitions being roughly in the $20 million range.

Daniel Ives - FBR Capital Markets & Co.

Okay. So you're raising it by about $10 million. Can you just call out the legal expense in Q4 and what -- is that something new?

Paul Ricci

Nuance has ongoing legal expenses, and particularly, we've had increasing expenses related to intellectual property. But we're in the middle of significant litigation that began -- accelerated last quarter and primarily occurred in the fourth quarter. And so there were some extraordinary expenses in the third quarter and more significant in the fourth quarter that we've called out in the prepared remarks document.

Daniel Ives - FBR Capital Markets & Co.

And then just lastly and I'll pass along. Just talking about with design wins on mobile, just anecdotally from a high level, I mean, do you feel that there's some big wins ones coming that could be like game changers in terms of just spreading the gospel like how you're thinking about that in terms of the design wins, what we should be expecting over the next few months?

Paul Ricci

We do think in the next 6 months that you'll see a significantly greater visibility of Nuance's voice services on a number of Mobile devices, and I think the visibility of that will accelerate the awareness of our technology on Mobile devices, much as DragonGo! has done in recent weeks. And I suspect it will create yet additional demand by more Mobile & Consumer manufacturers to incorporate voice capabilities in their devices.


Next, we'll go to the line of Shyam Patil of Raymond James & Associates.

Shyam Patil - Raymond James & Associates, Inc.

Paul, you talked about accelerating growth or you reiterated accelerating growth next year. Can you talk about the level of visibility into that and just what gives you confidence that that's going to play out and the key drivers for that?

Paul Ricci

Well, there are number of things that we've been doing that position us for improved growth as we go into next year. And I think we're seeing the benefits of those in the second half of this year. So in some ways, there was, I think, some concerns about growth in the first half of this year. And I think actions we've taken over the last 12 months have benefits in the second half, and I think those will continue into fiscal '12. They include continuing to increase the size of our sales organizations, making investments alongside important partners in our Mobile business, which I think will continue to drive revenues, expanding our partnerships and technology investments in Healthcare, particularly in the area of Clinical Language Understanding, which opens new product -- sources of product line revenues for us, and I think expands the revenue opportunities of our partnerships as well. And I should also just mentioned that we, of course, have seen a rebound in our Imaging business, which we also think will continue into next year because of the investments we've made there.

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