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Home » Nuance Communications (NUAN) Q4 2014 Results Earnings Call Transcript

Nuance Communications (NUAN) Q4 2014 Results Earnings Call Transcript

Edited Transcript of Nuance Communications (NUAN) Q4 2014 Earnings Conference Call…

Nuance Communications (NASDAQ:NUAN) hosted a conference call with investors and analysts to discuss Q4 2014 earnings results on November 24, 2014 at 5:00 p.m. ET. The following are the webcast audio and the associated transcript of the event…

Operator: Ladies and gentlemen, thank you for standing by, and welcome to Nuance’s fourth quarter and fiscal 2014 conference call. (Operator instructions)

With us today are Chairman and Chief Executive Officer of Nuance, Mr. Paul Ricci; CFO, Mr. Tom Beaudoin; EVP of Corporate Strategy and Development, Mr. Bruce Bowden; SVP of Finance and Control, Dan Tempesta; 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 – VP, IR

Thank you, Ryan. 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 also issued a set of prepared remarks in advance of this call, which are available on our website. 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 – Chairman and CEO

Good afternoon. Before taking your questions, I’d like to highlight some key points about our results and progress.

First, a few words about each of our businesses.

In healthcare, we’re advancing our innovation in end-to-end clinical documentation solutions. Many of our healthcare customers are seeing the value of our solutions in improved financial, operational, and clinical quality results, and we see continued momentum in particular in our Dragon Medical, Diagnostics, and Clintegrity product lines.

In Mobile, our voice and virtual assistant solutions have extended beyond our traditional market of smartphones and tablets into wearable devices, TVs, and other internet connected devices. Our automotive business continues to deliver robust results while shaping the landscape for the connected car and leveraging intense interest for a safer, smarter in-car environment.

In Enterprise, we continue to align the business around the convergence of multichannel self-service, cloud services, and mobile computing. As a result, we’ve extended our position as a provider into the growing market for intelligent, multichannel solutions that combine speech, virtual assistance, and cognitive computing.

And finally, imaging this year saw a very strong bookings performance that positions it well for significantly improved revenue growth in FY15.

Concerning our financial metrics. We delivered a strong finish to fiscal 2014, achieving Q4 revenue, EPS, and bookings above our guidance ranges. Bookings were very strong throughout the year. Net new bookings growth — a metric we introduced this quarter — was led by our automotive, enterprise on demand, healthcare on demand, diagnostics, Clintegrity, and imaging solutions.

In addition to net new bookings, we saw strength in other component indicators of our business, including growth in recurring revenue, deferred revenue, and operating cash flow. The expense control and productivity measures that we have communicated to you in previous calls helped us to achieve Q4 EPS well above our guidance range. We will sustain our commitment to profitability into FY15, maintaining our margin performance while also ensuring future growth.

Following two years of declines, our 2015 guidance reflects some organic revenue growth and stable operating margins. Our strategic progress, customer wins, and continued focus on operating efficiency across the business supported these results and provides confidence heading into 2015.

We’re now happy to take your questions.

Question-and-Answer Session

Operator: (Operator instructions) Our first question is going to come from the line of Richard Davis with Canaccord.

Richard Davis – Analyst, Canaccord Genuity

I don’t really like the phrase, but financial engineering’s not really what I’m asking about, but when you kind of think about you being a net acquirer of tons of assets, many of which have worked out well. But are there other assets that you would, at least at a high level, consider kind of restructuring? We’ve talked about the whole ScanSoft business and those kind of things, but how should investors kind of think about strategically how you’re structuring the company and/or restructuring it in a broad sense?

Paul Ricci: Well, our primary focus has been to invest and disinvest in those businesses which respectively have growth and less growth available to them. We haven’t focused so much on whether to sell our lower growth assets as we have whether to reduce investments in those assets as we try and focus our investments more narrowly on the product lines and businesses where we think more growth is available. I think as a result, we’ve been able to become more efficient, and you saw that in the fourth quarter.

Operator: Our next question comes from the line of Shyam Patil of Wedbush Securities.

Shyam Patil – Analyst, Wedbush Securities

Paul, maybe to start out with, could you maybe just elaborate on what net new bookings are? And then when you’re talking about the 6% to 8% growth in fiscal 2015, what’s that based off of, and what’s total bookings growth if we look at the $2.44 billion that we were looking at prior to this quarter? And then just generally, what are the key metrics that you think we should be focused on from the outside?

Paul Ricci: Let’s see. You asked a number of questions. With respect to new bookings, we’ve provided the additional metric of new bookings this quarter in response to a lot of investor requests and interest in having what might be a narrower metric that aligns more closely with what future revenue growth is likely to look like. And specifically, net bookings excludes renewals from existing customers.

With respect to the overall performance of bookings, we published that number in the prepared remarks. I don’t have the bookings growth in front of me for FY14.

Kevin Faulkner: The growth level was 27%.

Paul Ricci: 27%. And regarding your question of what indicators you should be looking at, we think net bookings is an important indicator of future growth. We also think you should focus on the recurring revenue percentage that we publish as a way to understand the strength of our revenues.

Deferred revenue and deferred revenue growth is important, because it supports our explanation of the growing on-demand and cloud-based revenues in the company. And of course, cash flows are important as well, and we know that cash flows as a proportion of non-GAAP net income has gone up over the last year and will go up slightly again we’re predicting, in the year ahead.

Operator: And the next question comes from the line of Daniel Ives of FBR Capital Markets.

Unidentified Analyst

Great. Thanks guys. This is actually Jim in for Dan. Maybe if you could just talk a little bit about your ongoing transition to on-demand solutions and just where you are, what inning you might characterize being at this point. And then particularly on the healthcare side, what kind of momentum you see going into FY15 for the on-demand solutions?

Paul Ricci: I didn’t hear the second half of your question. Could you just repeat that again.

Unidentified Analyst

Yes, you could just kind of maybe give us an idea of what momentum is like on the healthcare side of the business with on-demand solutions going into 2015?

Paul Ricci: Well, first, with respect to the question about innings, we get asked that question a lot, and we’ve responded to it in previous calls. And it does of course depend on what time horizon you’re looking at. We think eventually that we’ll see a larger and larger proportion of our revenues go to a recurring form for all the reasons that I think you’re familiar with.

With that said, we’re at 64% recurring revenues and for the foreseeable future, some proportion of our revenues will remain conventional perpetual licenses, because there is a customer preference to purchase licenses that way, and there are other specific aspects of the solutions we’re providing. So I think you should expect to see recurring revenues grow as a percentage, but perhaps not grow as quickly as – increase as quickly as a percentage increase as you’ve seen over the last few years.

With respect to healthcare, I think we would encourage you to look not just at the on demand, but at the recurring revenue streams, which would embrace some of the broader trends going on in healthcare, including the migration of some of our product lines to term revenues, and the increase in revenues, particularly in our Clintegrity solutions. But I think taken as a whole, the recurring revenue portion of on-demand looks robust and should continue to grow as we look through FY15.

Operator: Our next question comes from the line of Brent Thill with UBS.

Brent Thill – Analyst, UBS

Paul, just on the healthcare business, I’m curious if you could just maybe walk through some of the key milestones you’d like to hit into this next year. I know it’s tough to look at the reported revenue. There’s a lot of different tailwinds and certainly a lot of different headwinds you’re thinking through. But I’m just curious if you could just frame it, how you expect this business to shake out through over the next fiscal year.

Paul Ricci: Okay. I think we would expect to see a continuation of the recent trends we’ve had in healthcare, where we have been positioning the business as an end-to-end clinical documentation solution. And in particular, that involves the acceleration of bookings and revenue in some of our newer product lines, particularly the Clintegrity suite. We think that’s important to the business and the future direction of the business. We think the focus on clinical documentation improvement, in particular within that area, is especially important to Nuance where we think we have a very strong leadership position in the solution we brought to market. We expect to see continued strength in our Dragon medical solution.

And as we’ve talked about over the past year, there will be erosion in our larger accounts in our healthcare on demand solution in existing accounts, but we expect to supplement that with the growth into the midmarket in healthcare on demand. So midmarket success is also an important milestone for us.

Operator: Our next question comes from the line of Nandan Amladi with Deutsche Bank.

Nandan Amladi – Analyst, Deutsche Bank

So I wanted to ask about this quarter and what we should think about fiscal 2015. How much of the outperformance do you think came from bookings that converted into revenue in this quarter versus just better license sales and perhaps new design wins? If you had to parse out the outperformance, how would you characterize it?

Tom Beaudoin: Yes, clearly if you look at the financial results, you can see it in both the license revenue, but you can also see it in the margins. We did benefit in Q1 from what many times is the seasonality of strong license revenues at the end of the year, it is sales people trying to get to their quotas and building up pipeline for the year. But on top of that, we did see continuing growth in the recurring natures of the revenues as Paul discussed.

Nandan Amladi – Analyst, Deutsche Bank

And then just further on that question, the gross bookings, there’s a remark in the prepared — script saying that there were some large multiyear contract renewals that came early that may not reoccur in fiscal 2015. What was the collective size of those contracts, just so we can calibrate our fiscal 2015?

Tom Beaudoin: There’s two things I think you should think about when you assess the gross bookings, the renewal section of renews. There’s two things that happened. One is, as we talked about, we have a lot of three- and five-year bookings, and so depending on what year a large number of those renew has an effect on the growth. And then we saw some indications in healthcare and a couple of the other groups where we had some early renewals, which are very difficult to predict. There’s lots of reasons. Our customers can get bought, and then they want to renegotiate. And there’s a number of areas there.

I think the best way to assess it is that’s a little bit why we moved to the net new metric so that you can kind of see the piece that’s driving the new revenue. And then as we’ve talked about, we have very strong renewal rates across our business.

Operator: Our next question comes from the line of John Bright of Avondale Partners.

John Bright – Analyst, Avondale Partners

Thank you. Paul and Tom — first Paul, in our health tech industry conversations we’ve had, a number of the players we talked to have been focused on cost reductions through productivity versus the labor reductions. There’s been more acceptance, it seems, recently of that. It seems they might be accelerating. Is that something you are hearing in these conversations — the conversations that you have? If so, do you agree with what we are hearing?

Paul Ricci: I think if your point is that cost pressures on healthcare provider institutions is increasing, perhaps accelerating, I think that is an accurate statement, yes.

John Bright – Analyst, Avondale Partners

In your prepared text, you talked about computer-assisted coding a bit more than you have in the past. Are we moving the needle on that as far as within the healthcare segment? And are you more optimistic about it today? You called it out in the prepared text, and I’m trying to take your temperature on that.

Paul Ricci: Yes, I think we spoke in the prepared text about our Clintegrity solutions generally, which includes clinical documentation improvement and computer-assisted coding and coding solutions. I think generally, we are optimistic about that entire product suite. We are seeing a great deal of momentum right now in the clinical documentation improvement solutions in particular, as the focus on documentation quality has become important, particularly as we look over the last year and the momentum we’ve seen there. The computer-aided coding is also advancing. It is a complex technology and it will take some time, but it is indeed advancing.

John Bright – Analyst, Avondale Partners

A couple of financial questions. One, do you have any acquisitions built into the FY15 guidance, and/or any changes to your strategic thought regarding acquisitions as you look into FY15?

Paul Ricci: There are no acquisitions built in, and I think you should assume that our view about acquisitions remains similar, which is that our pace of acquisitions has slowed. Our proportion of acquisitions in terms of revenue contributions has slowed, and I think you should expect that to continue to be the case as we look throughout the year. It doesn’t mean we won’t do any acquisitions, but those we do would be at a slower pace and a lower proportion contribution than historical patterns.

John Bright – Analyst, Avondale Partners

For the past couple of quarters, you’ve not been in the market buying back your stock. Any reason why you haven’t been back in the market and is there any indication that you’re thinking about getting into the market?

Tom Beaudoin: I think we just, in assessing our cash flows and the opportunities, that we haven’t been in the market, but I think as we put in the prepared remarks, we would expect to continue our stock repurchase plans in FY15.

Operator: Your next question comes from the line of Greg Dunham from Goldman Sachs.

Greg Dunham – Analyst, Goldman Sachs

Thanks for taking my question. I too had one on Clintegrity. I believe you had stated in the past — I think about a year ago — that business was close to $100 million in revenue. Any update as to how big that business is today? Also, what level of margin is that operating at, particularly on a gross margin basis?

Paul Ricci: We did give an indication of the total size of the business in the past, because it was a relatively new business to us, and we wanted to give investors some indication, but we don’t break out revenues by product line, so I can’t really help you there. And additionally, we don’t provide margins with respect to the business products.

Greg Dunham – Analyst, Goldman Sachs

When you’re talking about net bookings, are you actually going to give us an actual number, or are you guys going to give us a growth rate? Or how should we expect the discloser on that going forward?

Tom Beaudoin: I think we’re going to give you a number on a go forward basis.

Greg Dunham – Analyst, Goldman Sachs

Maybe I missed it in the prepared remarks. Did you give it for Q4, or no?

Tom Beaudoin: No, we didn’t start that. We’re going to start giving that in Q1.

Greg Dunham – Analyst, Goldman Sachs

And then last one from me. The recurring revenue, if I understood you correctly, you expect that percentage to go up, but not at the rate that it’s gone up in the past. And I guess my question is, why wouldn’t it continue to go up at the rate that it has been going up at?

Tom Beaudoin: It’s gone up quite significantly in the last three years. We still have a number of our product lines that are of a kind of perpetual product license business, and that’s the way our customers prefer to buy those products. We still have a large DNS consumer business. We have some products across enterprise and healthcare that align themselves much more because the customers would prefer to kind of own that asset versus a subscription or other term license basis. And that will continue, as Paul said earlier.

Operator: Our next question comes from the line of Jeff Van Rhee with Craig-Hallum.

Jeff Van Rhee – Analyst, Craig-Hallum

Just one follow up on the last question, then a few others. But on the net new bookings, you’re guiding to the 6 to 8 net new bookings growth. Can you give us the range that we just delivered in 2014 so we have a baseline? Are we going to have something to compare that to?

Tom Beaudoin: For last year? We were at kind of the lower end of that range last year. We’ll be seeing net new bookings increasing slightly next year from what we saw in 2014.

Jeff Van Rhee – Analyst, Craig-Hallum

How should we think about the rate of decline in the perpetuals? It looks like the perpetual license side was down roughly 17% this fiscal year. Can you just give us a sense of your comfort with that rate of decline, acceleration, deceleration, any thoughts there?

Tom Beaudoin: As we talk about a lot of that — and this is why we broke it out, because a lot of that business has turned into these longer revenue recurring items. And I think it’s pretty close across the business lines to what we expected across the businesses. Of course, some performed a little better than others, but I think it was pretty close to our expectations.

Jeff Van Rhee – Analyst, Craig-Hallum

I guess I didn’t ask it well. What I was wondering, in that forward guide for FY15, how should we think about the rate of declines on licenses? We were down 17 this year in FY14. Sort of think of it in that similar range going forward for FY15?

Paul Ricci: Well, I think we indicated that we think recurring revenues is going to grow, though perhaps it’s not quite the pace it’s grown in the last three years. And if you review the numbers we’ve published, I think you’ll see that recurring license revenues and on-demand revenues are offsetting the growth in the decline in perpetual licenses. So we may not see as significant a decline in perpetual licenses this year as well.

Jeff Van Rhee – Analyst, Craig-Hallum

And then I guess on the cash flow statement, it looks like there was $117 million spent on acquisitions. Was that payouts on previous acquisitions, or is almost all of that for something done in the quarter? And can you give a rough sense for what revenue that brought to the table?

Paul Ricci: It was a combination of payments on previous acquisitions and a small acquisition in Q4.

Jeff Van Rhee – Analyst, Craig-Hallum

And then last one, on the mobile segment, you touched on automotive being a bright spot. Can you just give a little commentary on the handset space and how that’s evolved in the last three, six months?

Paul Ricci: Well, automotive was the stronger performing business within mobile during the last year, and it continued to be so towards the end of the year. We did see shrinkage in our overall handset revenues throughout the year. I think that shrinkage probably will mitigate somewhat as we look ahead.

Operator: Our next question comes from the line of Tavis McCourt with Raymond James.

Tavis McCourt – Analyst, Raymond James

Thanks for taking my question. First, a follow up on the previous question and the small acquisition in the quarter. Can you tell us which segment that revenue…

Paul Ricci: Yeah, that was our acquisition of Notable Solutions for our imaging business.

Tavis McCourt – Analyst, Raymond James

And in the transcription business, it looked like the number of lines declined about 2% sequentially, and you mentioned in the prepared remarks that was slightly better than you’d anticipated. Can you talk a little bit about what we should be looking out for kind of an organic rate of decline on an annual basis in that business?

Paul Ricci: Well, remember, there are two offsetting trends. One is the erosion factor, which you’re citing, and the other is some growth in that business into adjacent markets, which is the midmarket. So what you’re seeing is the net result of those two.

Tavis McCourt – Analyst, Raymond James

I guess what I’m wondering, is that 2% sequential decline, is that kind of a relatively normal quarter, or is there seasonal factors in the September quarter that would make that better or worse than normal?

Tom Beaudoin: There can be some seasonality, depending on customers and numbers of days, things like that. But again, I think the factor is as Paul described. It’s the net of those two.

Tavis McCourt – Analyst, Raymond James

And then a follow up on gross margin. It looks like for the fiscal year, the professional services/hosting gross margins were down a bit. And it looks like the number of cloud transactions is growing quite rapidly, so I’m wondering, do you feel comfortable enough to believe that the gross margins in that segment have bottomed or at least flatten out as we look into fiscal 2015 as you get more scale?

Tom Beaudoin: There’s a lot of mix issues in that gross margin and across a number of businesses. As you know, that gross margin includes all the revenue from our healthcare on demand business, along with a lot of on-demand businesses in enterprise and healthcare. We continue to achieve efficiencies and productivity across all those lines, in both professional services and in our hosting operations. But there are a couple of headwinds within that, and there can be some seasonality around deals in our professional services business and how that flows around cost.

I will also point out that particularly in our enterprise business, we do have some upfront costs on deals that we’ve won over the last two to three quarters, and standing those up. And not 100% of the cost is allowed to be deferred. So there are some upfront costs that can impart margins in the short term around revenues that we will achieve over the next few quarters.

Tavis McCourt – Analyst, Raymond James

And should we think about any kind of different level of capital spending next year or relatively similar to fiscal 2014.

Tom Beaudoin: We started at about $60 million. A lot of it was on the facilities and hosting ops. It might be up slightly, and those are still the investment areas we’re focused on.

Operator: And our final question will come from the line of Shaul Eyal with Oppenheimer.

Shaul Eyal – Analyst, Oppenheimer

Paul, the Enterprise division continues to report very strong results. I’m eager to understand whether it’s based mostly on Nina’s strong traction or are there additional drivers behind it?

Paul Ricci: We had a very good year in performance and bookings in our on-demand business within enterprise. We had a number of renewals of large customers and we had very attractive net new booking growth in that business. And the new booking was both for our traditional business as well as for our new multichannel business, including the Nina solutions.

Shaul Eyal – Analyst, Oppenheimer

Got it. Okay. Thank you.

Paul Ricci: Okay, then. Want to thank you all for joining us today, and we look forward to speaking to you again next quarter. Good evening.

Operator: Ladies and gentlemen, that does conclude today’s conference. As I mentioned earlier, today’s conference is being recorded and available for replay. If you wish to access the AT&T replay system, the dial in number is 1-800-475-6701, with the access code 340379. It will be available until December 12 at midnight.

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