Nuance Communications, Inc. (NUAN)

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Nuance Communications, Inc. (NUAN)

December 08, 2011 9:30 am ET


Kevin Faulkner -

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

Michael Thompson -

Unknown Executive -

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

Vlad Sejnoha -

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

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

Paul Ricci - Chairman and Chief Executive Officer


Scott Zeller - Needham & Company, LLC, Research Division

Brent Thill - UBS Investment Bank, Research Division

Daniel T. Cummins - ThinkEquity LLC, Research Division

Unknown Analyst

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

Nandan Amladi - Deutsche Bank AG, Research Division


Kevin Faulkner

Good morning, everyone. Welcome to Nuance's FY '12 Financial Analyst Day. I'm Kevin Faulkner, Vice President of Investor Relations. We appreciate your attendance and dedication of time today and also your support over the last year.

Just a couple of preliminary notes that I wanted to go over. I want to remind everybody that today's presentation includes 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 Nuance's annual report on Form 10-K for the fiscal year ended September 30, 2011 for a detailed list of risk factors.

One final point. We have materials today that includes non-GAAP financial measures, and we provided in appendix. You should refer to the GAAP to non-GAAP reconciliation appendix to today's materials for information regarding the use of non-GAAP financial measures. The reconciliation appendix can be found on the Investor Relations page of the website under the heading Financial Analyst Day, and it will also be appended to the soft copy of materials that are available today.

So without further ado, let's get the day started.


Unknown Executive

Ladies and gentlemen, please welcome Chief Executive Officer, Paul Ricci.

Paul Ricci

Good morning, everyone, and thank you very much for coming. We appreciate you taking the time today. We know there's a lot going on in the world and this is a big commitment of time, so we really appreciate you making this time.

We have -- I have a relatively limited mission this morning to do some introduction, and then, my primary purpose is to make sure you have an opportunity to get more visibility into Nuance's management team.

After myself, Vlad Sejnoha, who's our Chief Technology Officer is going to come up and try to give you an integrated view of how our technologies work across all our businesses. I think after Vlad, Mike Thompson, who is the General Manager of our Mobile & Consumer business, will come up and talk about the Mobile business. You know there's a lot going on there right now. Following Mike, Steve Chambers, who both run our Enterprise division and is a President of our Sales and Marketing group, is going to come out and talk about our enterprise business; followed by Janet Dillione, who's the General Manager of our Healthcare business; and then Robert Weideman, who runs our Imaging business, who will talk about that business; and then finally, Tom Beaudoin, who I think most of you already know, is our Chief Financial Officer, will come up and talk about some of our financial performance.

In addition to giving an opportunity to meet our management team in more depth, there are 2 other things that I hope to achieve today. The first is to really convey to you a sense of a market shift that we believe is going on right now, that is redefining the opportunities for the company and we're going to return to that. And finally, to give you some clear understanding of what the specific mechanics and leverage for growth are in fiscal '12 and beyond.

So this is, I think without hyperbole, the most momentous time in this company's trajectory. We've been at this for a decade or so, and I haven't seen a time quite like this, in which there is a deep interest and a pervasive interest in voice and natural language processing of human communications that's spreading across all of our markets. I think you're aware of the heightened visibility and mobility, and that is, in fact, really quite extraordinary. But we're seeing that same heightened awareness and visibility and interest in our other markets. And I think one thing you will really come away from away from today is a better appreciation of how all the activity going on in voice and language processing right now is affecting our respective markets.

I do want to say just a couple of words about our financial performance. It was a very good year for us financially. Tom is going to go through this in much more detail. So I don't want to dwell on it. There are important things that we achieved last year, that we are very pleased with, one of them was the resurgent license growth. We're seeing that license growth driven by the performance of our Mobile business, but also the sale of our Dragon brand, partly in consumer, but in particular, the strength of our Dragon brand in the Healthcare and Medical business, and Janet will return to that.

Our On-Demand revenues continue to go well. The year coming, I think we'll have even stronger growth in On-Demand, and you'll see some of the reasons for that in our cloud-based investments that we're talking about and some of the positioning we're doing. This time this year, we will certainly be a company with total On-Demand revenues across the business of well into the 400s. And it's a formidable business for us now if you look across all of our markets.

In addition to the financial performance, there was a lot of work in Nuance last year in positioning ourselves for some of the changes that in fact we anticipated would happen and are happening, and I think they are serving us well as we look forward over the next couple of years. And I just want to spend a little bit of time on each of them.

First, investments in customer relationships. I'll come back to that point. The second is a new class of innovative solutions that have been under development for several years. We made really quite extraordinary investments and I think progress in these areas last year, and we'll continue with those investments this year. The third were a select set of acquisitions. We're known as an acquisitive company. I think last year's acquisitions are probably a reasonable representation of what our strategy is with respect to acquisitive growth. And finally, some of the departure last year was substantial enhancement of our investments in branding and demand creation, and I'll return to that point.

First about customer relationships. I have discussed in earnings calls over the last year or perhaps more the shifting nature of Nuance's relationships with its largest customers. We have seen a trend that's been going on for a couple of years that really accelerated last year, and I think it's going to accelerate even more, particularly in Mobile, but not only Mobile this year as some of our largest customers are looking for a much more collaborative partnership with us, in which they may co-invest with us, they may do joint research with us, perhaps even share the benefits of some of the products that are being brought to market. So we see this in a whole class of Mobile customers: Apple, HTC, Ford, BMW, others that are not on this list. And I think that as much as I referenced in last month's earnings call, this is going to be the nature, increasingly going to be the nature of our Mobile engagements as we have these deep relationships with carriers, manufacturers in the various submarkets that we address. And I think Mike will give you some greater sense about this in the Mobile business in particular. We view this as very attractive for us because we think that the reason these companies are requesting these kinds of relationships is they have respect for the depth of our technology, but also that our capacity for providing research services, engineering services and design services, very importantly, design services, is unique. And they are looking for a way to leverage those services and accelerating their own time-to-market.

But it's not just the Mobility. We're seeing the same thing happen in Healthcare, where some of our largest customers have become a much more involved relationship with us, and Janet will talk about some of these. We're particularly pleased with the partnership we announced with the University of Pittsburgh Medical Center. UPMC is a very leading institution in Healthcare. They wanted us as a supplier to them as our customer, but in the course of that engagement, we actually defined a very ambitious joint development and research initiative together, including a technical staff at UPMC and Nuance, and in fact, we're even building a small technical team in Pittsburgh in support of that. And 3M is another example of this and one that Janet will talk more about in her talk.

And finally, in this regard, in some ways, our enterprise business is where this kind of engagement really started. Nuance's sweet spot in the Enterprise market is really in serving high-end customers in defining really quite different user experience in their contact center, and we do that through really very extensive engagements. And we've talked previously about US Airways there or others. And I think as you listen to Steve today, you'll get an understanding of how our technology portfolio and services have evolved to facilitate this more. But these customer relationships require a significant amount of upfront investment, and I spoke to you during earnings calls over the last year about making these investments. We did that. We staffed and supported them. That will happen again this year as we're seeing a greater demand for these.

There are a whole class of new solutions that some of which have been announced at Nuance, some of which will be announced over the course of this year. You're going to get a fair amount of discussion about it today, so I'm not going to go into the particulars. What I'd like to do is to just sound a couple of unifying themes.

First, across all of our product and service portfolios, you're going to hear today that investments in natural language processing are the primary -- the center of mass of our investments right now in R&D. We've been investing in natural language processing for quite some time, but you'll get an extent of the magnitude of that today, and including some of the initiatives we have underway, the joint research activities that we defined with IBM and other things.

The second is that for all of our businesses, having mobile-enabled product and services is becoming increasingly important. Of course, that's always been the case in our Mobile business, but as you'll hear in healthcare, imaging and in enterprise, a more mobile-centric strategy for our product investments is an important cornerstone of the foundation we're building.

Nuance has, for a number of years, been migrating towards the delivery of its solutions in cloud services, a theme you will hear today is an acceleration of that effort as we see more and more demand for cloud services. It's -- the defining offer, of course, in Healthcare. It's the defining offer for us in Enterprise. What you're going to, I think, get a better sense today to the extent to which Mobile Services are going to define the next generation of offerings and mobility, and even perhaps some in our Imaging business.

And the final theme across our product investments, that is somewhat of a departure for us over the last year or so is the new set of investments in building platforms for the developer communities. As Nuance's IP portfolio and technology portfolio continue to expand, we began to realize that we were under leveraging the developer community in some of our markets, and in particular, we were very successful in the last year in launching a new developer platform in our Mobile business and in our Healthcare business. And I think you'll see ways in which that's giving us a great deal of leverage. We're actually amazed that the number of transactions that are now being driven in our Mobile business from our development platform and applications that have been built by these developers. And I think Janet will give you a sense to which the -- in which the developer platform that we built in Healthcare is critical to enabling voice and natural language transactions related to the EMR system and integrating forward into the revenue cycle management market as well.

We continue to do acquisitions. We get asked a lot about acquisitions by all of you, and I might just make a couple of comments about acquisitions we did in the last year, try and echo some of the unifying themes that I've told you about before. One acquisition that I really want to highlight is Equitrac, it's been a terrific acquisition for us in the Imaging business. And I will say, Robert, will have an opportunity to explain to you how through the acquisition of Equitrac and the solutions in eCopy, that he's really redefined our Imaging business around a much more network-centric set of offerings that are sold in conjunction with our larger partners in that business. It's really quite an exciting transformation of that business.

Swype, I think, is a company that many of you are aware. A lot of analyst notes were written about. A lot of blogs are written about it. It's a technology that is complementary to our own Mobile technologies and is accelerating our ability to provide a Mobile platform for our partners to do multimodal user interface capabilities. And I think Mike will speak to that somewhat.

Generally speaking, what we're trying to do with acquisitions is, first, enhance our organic growth. We find that by bringing our products into channels of acquisitions that we're -- that we've -- that we're buying or by bringing their products into our channels, we can accelerate growth. The second thing we're doing is looking for complementary technologies that can be closely integrated with our own capabilities to create a stronger offering. Swype is a good example of that. Webmedx is another example of that, and Janet can talk some about that. And the third thing that we're trying to do with acquisitions is accelerate access to particular market or particular channel that we may not participate in. For example, in Healthcare. We've made acquisitions that brought us into the mid-market, where Nuance wasn't primarily targeted. And in Loquendo, we acquired Loquendo really to enhance our access to the European market in the enterprise business.

Those are generally our themes. I think the acquisitions we did last year are very representative of our strategy in this business and probably as good a predictor as any of the kinds of things we've been looking at as we move forward.

As I mentioned, a departure over the last year has been the acceleration of investments in demand creation, advertising around our brands. I think many of you have probably seen the Dragon brand, which have been ubiquitous on television. But our brand investments really go beyond that. I should first say about the Dragon branding that those campaigns have been exceptionally productive for us. Peter Mahoney and his team, who run that business, have really found a scalable formula for success in demand creation, and we're seeing, I think, a very felicitous feedback group [ph] between our own advertising in that segment and the general awareness that now is starting to grow about speech in the marketplace. As a result, the response rate through our advertising are unprecedented, it's been very attractive for us. Last year was a record level of investment. This year is considerably more, and this quarter, as we go into the holiday seasons, is especially intense in that area.

But our investments in branding and demand creation go beyond just our mobile -- our consumer products. We're investing and promoting our development platforms, which I mentioned a few minutes ago. And importantly, we think that our brand is underrepresented in the Healthcare market and we're increasing our investments there to create more visibility around what we think is a very unique set of offerings for that market. So this is going to be a continued source of investment as we look into '12 and '13.

So just in closing the introduction, I'd like to mention a little bit about what we think are the 3 sources -- the 3 things that are going to drive growth the most as we look over this year. The first is this new generation of solutions, which we think will create new product and services revenues. I'll come back to that. The second is the appearance and the demand for virtual assistants. I'm going to dwell on that for a few minutes, and then there'll be much more discussion about it. And the third, just to reiterate what I have said previously, Nuance's investments are increasingly skewed towards offering our capabilities through a cloud architecture, and we believe the appetite and the interest around that from our customers and partners is such that it's going to create significant revenue growth for us this year. I think I mentioned earlier that, that will be one of our fastest revenue lines, perhaps the fastest revenue line of growth this year.

To say a few things about the natural language investments, again, this is the priority investment across all of our technology portfolio. But I want to give you some sense about the way to think about this. The world is really moving from the problem of recognizing what is said to acting on the intent or achieving the outcome of what the user is trying to achieve. And our products, our technologies are designed to take advantage of the appetite for doing that. A group of technologies have come together, that I'll elaborate on in a moment and then Vlad will spend much more time on, but this is an important theme for you to think about as you understand the course of Nuance's technology investments. We're moving from recognition to outcomes. And that's a theme that I think you'll see, not just in our Mobile business, but across our other businesses.

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