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Nuance Communications, Inc. (NASDAQ:NUAN)

F3Q09 Earnings Call

August 10, 2009 5:00 pm ET

Executives

Paul A. Ricci – Chairman of the Board & Chief Executive Officer

Thomas L. Beaudoin – Chief Financial Officer & Executive Vice President

Analysts

Daniel Ives – FBR Capital Markets

Analyst for Derek Bingham – Goldman Sachs

Jeff Van Rhee – Craig-Hallum Capital

Richard Davis – Needham & Company

Nandan Amladi – Deutsche Bank

Tom Roderick – Thomas Weisel Partners

Shyam Patil – Raymond James

Bradley Whitt – Broadpoint Amtech

Scott Sutherland – Wedbush Morgan Securities, Inc.

Craig Nankervis – First Analysis Corp.

John Bright – Avondale Partners, LLC.

Mark Murphy – Piper Jaffray

Michael Latimore – Northland Securities

Operator

Welcome to Nuances third quarter 2009 conference call. At this time all participants are in a listen only mode. Later we’ll conduct a question and answer session and instructions will be given at that time. (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 and Chief Financial Officer Mr. Tom Beaudoin. At this time I’d like to turn the call over to Mr. Ricci.

Paul A. Ricci

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 risk 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 an extended formal comments and we will not repeat them here.

Before taking your questions, I might recap a few points from our release and prepared remarks. As our comments suggest, we approach the fourth quarter with a greater sense of stability in our markets than we’ve seen in recent quarters. Europe as we note though remains less predictable. The prepared remarks reflect as well the continuation of two important trends in the business, the first is the increasing interest among healthcare, enterprise and carrier customers for hosted and on demand solutions. The second is the improved operating leverage we derived from expense discipline.

We expect that our results in the fourth quarter will benefit again from both of these trends. In addition, we believe that they serve as a foundation for improved growth in earnings as we look towards next year. We remain investors nonetheless that even with greater stability, there is less predictability in our customers’ buying patterns than in years past. Finally, we want to reiterate our conviction in the fundamental attractiveness of our markets and our position in those markets.

In healthcare, we believe the combination of quality and costs enabled by our solutions are reshaping the delivery of clinical documentation. In mobility, the unsurpassed number of units upon which we ship software provides a platform through which to deliver additional innovation, new mobile services and a disruptive new model for mobile care. Within enterprise markets Nuance has emerged as a trusted provider of speech enabled call center solutions to large enterprises that seek to modernize call center operations and transform their customers’ experience.

We’ll now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Daniel Ives – FBR Capital Markets.

Daniel Ives – FBR Capital Markets

A few questions, first would you say the amount of hosted business this quarter was more than you were expecting going in to the quarter or about the same?

Paul A. Ricci

Well, in our hosted business now it’s of sufficient scale and volume that we’re able to make reasonable predictions quarter-to-quarter and I think there was a slight positive variance in the business perhaps but reasonably consistent with what we expected.

Daniel Ives – FBR Capital Markets

Then can you just talk about just overall op margins and I know you’re not giving guidance for next year but where you see those kind of trending over the next few quarters? Then, just lastly, once you address that are you going to start to give a bookings number? Is that something you’ve thought about just giving the amount of hosted business that’s come off the balance sheet?

Paul A. Ricci

To your first question, we’ve historically suggested to investors our objective was one or two points of non-GAAP operating margin improvement per year and I think arithmetically you can see within the range of our guidance that we’ve provided for the full year ’09 that we’re going to exceed that this year or are likely to exceed that this year. Thos margin improvements clearly will position us well for next year but, I want to caution against investors about extrapolating from that because we will need to make investments commensurate with the market opportunities we see.

There has been a heightened interest in speech throughout this year and we have found it important to continue to make investments in technical resources engineering and research resources as well as sales personnel and I expect that to continue going in to next year. On the second question you had, we do appreciate the point you made about the importance as we move to a more recurring business of providing additional kind of data in bookings and related metrics and we decided to do that beginning next year. We want to do that with some caution in order to make sure we have the processes and systems to supply those numbers externally which is obviously a different level of rigor than what we would need for internal data. We’ve decided to wait until next year to do that.

Daniel Ives – FBR Capital Markets

Should we expect a bookings number next quarter or just going in to your fiscal ’10?

Paul A. Ricci

You can expect a bookings number beginning in fiscal ’10 and it’s reasonable to expect it with the first quarter.

Operator

Your next question comes from Analyst for Derek Bingham – Goldman Sachs.

Analyst for Derek Bingham – Goldman Sachs

A couple of questions, first of all I have your deferred revenue slightly down sequentially in the quarter, your shift towards hosted solutions in my mind should actually benefit deferred revenues. Could you just explain how this works?

Thomas L. Beaudoin

Our hosted business, we sign contracts and we get commitments from our customers but because we don’t get cash until the hosted business is delivered it doesn’t show up on the balance sheet as deferred revenues.

Analyst for Derek Bingham – Goldman Sachs

The other thing is with regard to your relationship with IBM, how has it manifested itself and what product lines and could you give an indication of how profitable it is and which customers are paying for them and in general how is the relationship cooperation going forward?

Paul A. Ricci

With respect to the first element of your question regarding product lines, I think when we announced the first element of our agreement with IBM some months ago now we indicated at that time that the combined technologies would be in the market in the next I think 12 to 24 months, I don’t remember precisely the timing but in that range. That remains what you should expect. I can’t really comment on the specific revenue contributions or profitability contributions related to the IBM agreements.

With respect to the final question of the cooperation I think what I can say is the various announcements we’ve made with IBM probably indicate an intention by both firms to work more cooperatively together and to do so to the benefit of expanding the market for speech enabled solutions. I think that that cooperation is going well and I anticipate that it will continue to do so and we have high expectations of the benefits both to the market and our shareholders from that cooperation.

Analyst for Derek Bingham – Goldman Sachs

One last question, could you say what your headcount was exiting June and where you expect that to be in September?

Thomas L. Beaudoin

Headcount at the end of the quarter was 3,018; that excludes the transcriptionists. Headcount will continue to evolve as Paul talked about as we continue to look at cost savings and we also continue to look at investments.

Operator

Your next question comes from Jeff Van Rhee – Craig-Hallum Capital.

Jeff Van Rhee – Craig-Hallum Capital

Paul, along the lines of the booking and backlog question given the transition in so many ways to a non-demand and more of a recurring model out in to FY ’10 is a ways out and I’m certainly looking forward to those numbers, in the interim understanding you can’t be precise is there anything else you can provide us to at least get us in the ballpark of how many points of growth or some other semblance of how much growth we’ve lost because of this transition from the on premises to on demand model?

Paul A. Ricci

Let me say several things if I could in response to your question. The first is while I’m not in a position to give you specific numbers, I can say that it appears as we see the situation today that bookings throughout the year have grown and I believe that will be true in the fourth quarter as well. In several areas of our business bookings in the third quarter and our anticipation for bookings in the fourth quarter will be really quite robust particularly related to the hosted solutions. Third quarter bookings in our healthcare on demand service were especially strong.

Generally, I can give you positive indications about the bookings trends and we’re seeing the quality of our bookings and pipelines outside of the hosting business also seem to be improving, I think consistent with the comments in the prepared remarks about the stability we’re seeing in the markets and I think it’s reflected in those numbers. The second point I’d like to make is that while we’re very enthusiastic about these large enterprise and healthcare hosted solutions we want everyone to have an appreciation of the passage of time of when those agreements are signed and when they are brought up and begin to contribute revenue.

A good average number to think of in healthcare is six to nine months from the time of signing to the timing of appreciable revenue. In enterprise solution a good average time to think of is in excess of one year. So, for example this has been among perhaps the most active time in our history in on demand solutions in the enterprise but the bulk of those deals will not result in revenue until well along in to fiscal ’10. The last point is in direct response to your question about to what extent has this eroded or displaced on premises growth.

That is a very hard thing for us to quantify. It seems clearer in healthcare, but there is a migration from on premise to on demand and the same is true in enterprise because these are large solutions that involve modernizing current operations so the call center was either going to do an on premise or hosted. In some cases it has been as well a movement from lower levels of technological automation to speech enabled automation so it’s not quite that easy of a substitute.

Jeff Van Rhee – Craig-Hallum Capital

Two remaining questions, on the mobile side in the prepared script there it references a mobile forecast that incorporates new agreements that will deliver meaningful revenues. Can you give us a little more color of the nature without naming how they’re with, the nature of those agreements?

Paul A. Ricci

I can’t really say much more about them other than by circumstance there are several agreements under discussion this quarter that involve revenues and I can’t say much more about them.

Jeff Van Rhee – Craig-Hallum Capital

I guess then lastly the organic numbers look like ballpark maybe down a few points in each of the last several quarters and it looks like in the forward quarter that’s roughly what we’re looking at as well. As you look for organic growth to return in the kind of environment you’re looking at right now, do you think it’s feasible to drive organic growth or does it take meaningful general economic improvement from here to kind of get us back in to that double digit growth or at least in to the upper single digits?

Paul A. Ricci

Well, just with respect to the historical numbers and I think they are referenced in one of the tables in our formal comments, I think organic growth this quarter as we measure it was 1% and it was -2% last quarter and 1% the quarter before. We don’t forecast organic growth but I do believe implied in our numbers for the fourth quarter is a slight improvement in organic growth, implied in our range in the fourth quarter rather there’s a slight improvement. Then more broadly to your question, I would anticipate based on some of the comments we’ve made today and in the prepared documents that organic growth will increase as we go in to next year.

I want to be cautious about that, it remains a difficult environment out there particularly for on premise capital purchases but I do expect that the nature of our recurring revenues will provide the foundation as we mentioned for enhanced organic growth.

Operator

Your next question comes from Richard Davis – Needham & Company.

Richard Davis – Needham & Company

Two questions, one with regard to the healthcare side are you guys included in the definition of meaningful use for electronic health records? And two, do you view Windows 7 a driver of office and is Windows 7 a driver more specifically of your optical character recognition business or is that just not a relevant correlation there? Those are the two questions I had.

Paul A. Ricci

With respect to the meaningful use, all that work in the government is not yet done. What I can say is that it appears that the interest in speech as an enabler for more effective use of EMR systems is benefitting us and will continue to benefit us if indeed as people expect the stimulus fundings do stimulate more EMR purchases. With regard to your Windows 7 question I think that the opportunity for us as has happened in the past revisions of Windows is that it creates an opportunity for upgrade revenues in our various product lines. There are some internal views of additional opportunities associated with Windows 7 but I think they’re too speculative for me to really talk about in any substantial way.

Operator

Your next question comes from Nandan Amladi – Deutsche Bank.

Nandan Amladi – Deutsche Bank

As you scale up on the on demand business, how should we think about your cap ex profile looking forward?

Paul A. Ricci

I think our capital expenses are going to increase but not in any discontinuous way. We’ve been building out our on demand platforms for several years now and we continue to do that. Fortunately, the capital costs of doing that go down proportionately with the improved performance in pricing of hardware but, we will see growth in our capital expenditures associated with that.

Nandan Amladi – Deutsche Bank

One other question if I might, in your 4Q guidance you’ve talked about expecting gains in your product and license revenues. Does this mean that your on demand business is seeing a little less robust growth fourth quarter and is there any indication of seasonality starting to emerge in the subscription business?

Paul A. Ricci

I don’t expect seasonality, well I don’t expect seasonality is not a meaningful contributor in this quarter. We have historically seen some seasonal uptick in the fall quarter, in the December quarter but that’s not a primary factor in our forecast. Really, the language in our document was meant to point out that in the range we’ve predicted there’s a sizeable amount of product and licensing revenue. We wanted to point that out because investors perceive that as having less visibility and less predictability and therefore we wanted to make sure people were aware of it. It also has a direct influence upon our gross margins in the fourth quarter and we wanted to communicate that as well.

Operator

Your next question comes from Tom Roderick – Thomas Weisel Partners.

Tom Roderick – Thomas Weisel Partners

I was hoping you comment a little bit on what you’re seeing in the pricing environment across your mobile solutions. It seems that you’re packaging more and more functionality in some of the transformative deals that you’ve done particularly in the smartphone arena. Can you talk to what the royalty per unit pricing might look like these days and how you see that evolving over the next 12 to 18 months.

Paul A. Ricci

I can’t provide really any specifics on mobile pricing. It is true that the advent of some new phones provides an opportunity for more comprehensive functionality and that does provide the opportunity for us in some cases has already for us to get a larger per unit royalty per device for the complete set of offerings we have. But, at the same time as our comments have tried to communicate, it’s a very tough pricing environment in the mobile device manufacturers because they are under enormous economic pressure and they are turning around and projecting that pressure to all their suppliers and partners including us. So, in general I would just be cautious about the pricing pressures in that particular segment.

Tom Roderick – Thomas Weisel Partners

In looking at the cash flows I know historically you’ve aimed to have us kind of think about cash flow from operations being in relatively the same ballpark as your non-GAAP earnings number. It’s been a little bit of a lag for the past couple of quarters, should we expect a meaningful catch up in cash flows for a variety of timing issues on the balance sheet and working capital items? Should we expect a meaningful catch up in the fourth quarter and in to the first part of next year or should we think about some disconnect that would kind of push the non-GAAP earnings number above that for the foreseeable future?

Paul A. Ricci

As in the past quarters, we’ve tried to focus people on the cumulative cash flows over a year period of time rather than any quarter. So, I don’t want to make predictions about cash flows in the fourth quarter. I think to your broader question our cash flows and non-GAAP net income are intended to closely reflect each other and I do think that we will return to that over a period of time whether it’s in the fourth quarter or the first quarter, I think we will do it as a trend over a period of time.

Operator

Your next question comes from Shyam Patil – Raymond James.

Shyam Patil – Raymond James

Paul, the fiscal 4Q guidance is looking for a good sequential increase driven by the windows based software and mobile that you reference in the script. Can you talk just about what kind of visibility you have in to that and what kind of linearity you’re expecting?

Paul A. Ricci

Well, the visibility as I said is inherently lower in product and licensing revenues than it is in our recurring hosted revenues so I won’t reiterate that point again. But, these are in product areas we have a lot of experience and familiarity with so we believe our range is appropriate given our experience with those particularly forecasted items. We of course have long historical experience with our windows based applications and what the effects of refresh launches are so although the results remain to be seen we’ve been doing that for some time and I think our reasonable estimates given that experience.

The demand creation activities around those and the various launches occur at different times in the quarter so the results will be cumulative as those launches occur. One of the launches obviously was already in the past quarter.

Shyam Patil – Raymond James

Then a couple of clarification question on comments you made during the call, I believe you mentioned about reasonable expectations for margin improvement going forward, I just wanted to clarify were you suggesting that we don’t expect one to two points of margin expansion or that we don’t expect a similar level of outperformance as you’ve shown in the past?

Paul A. Ricci

I don’t want to stroll in to providing guidance for fiscal ’10 today. But, what I do want to caution against is extrapolating the kind of trends we’ve had in the past year or two to the next year. That I think would be too aggressive. I don’t want to go further than that because I will get myself in to having given the very guidance that we’re trying not to really focus on today for fiscal ’10.

Operator

Your next question comes from Bradley Whitt – Broadpoint Amtech.

Bradley Whitt – Broadpoint Amtech

I was wondering Paul if maybe you could give us a little color on Europe? I know it looks, based on some of your commentaries, it’s been pretty weak. Is there anything you’re trying to do to address that specifically I don’t know from a leadership standpoint or go to market strategy or are you just kind of waiting on the economic recovery there?

Paul A. Ricci

Our comments didn’t mean to suggest it was a managerial problem. I believe the team is doing the right things and I believe the company is supporting them as well as we can and where there are issues we’re working to remediate them but it’s a challenging environment in Europe right now. That’s consistent with what I hear from others and I think that’s just the reality of the situation we have to manage through for some period of time.

Bradley Whitt – Broadpoint Amtech

You talked about obviously hosting becoming more and more a larger percentage of the revenue. I’m just curious as to the way those contracts are structured is there any potential for those types of contracts to fluctuate quarter-to-quarter based on transaction volumes or anything that we should be aware of there?

Paul A. Ricci

Well, virtually all of those arrangements have the potential to fluctuate. They are almost all based on some form of transactional metric. As a practical matter, they mostly don’t fluctuate that much most of them are increasing, some number of them are diminishing but they tend to act in a reasonably continuous way save for some peculiar circumstance.

Operator

Your next question comes from Scott Sutherland – Wedbush Morgan Securities, Inc.

Scott Sutherland – Wedbush Morgan Securities, Inc.

A couple of questions here, first over the last few quarters you’ve talked about disruptions with the IBR OEM partners, can you talk about where that’s going right now and how you’re dealing directly with some of that business and enterprise?

Paul A. Ricci

I think I can say safely that it’s stabilized. While it is nowhere near what it was in the [inaudible] days of those partnerships because most of those partners or at least some number of those partners have been significantly disrupted in their own businesses, I think we can say reasonable that it has stabilized and in fact is improving in several instances.

Scott Sutherland – Wedbush Morgan Securities, Inc.

Second question, in your prepared remarks you talked about some of the momentum you’re seeing with mobile care from the SNAPin acquisition, can you talk about how material that’s becoming, maybe how big you think that kind of business could become for you guys?

Paul A. Ricci

Well, I think we gave revenue estimates and I apologize that I simply don’t remember the precise number but, I think we gave revenue estimates at the time of the acquisition of perhaps $25 or $30 million for the full fiscal year ’09 and I believe we’re going to be in the range of estimates we gave. Again, I’m sorry I don’t remember the precise number. We expect that number will grow as we go in to next year and the year after but I don’t want to give precise numbers today.

Operator

Your next question comes from Craig Nankervis – First Analysis Corp.

Craig Nankervis – First Analysis Corp.

Paul, some of the call center infrastructure players have been reporting better results in talking about somewhat better outlooks. Is the on premise deployment on the enterprise business still as challenged as it is for on premise healthcare or is there a relative change in enterprise that you guys might be seeing or not at all at this point?

Paul A. Ricci

No, I think my comments were intended to suggest that that environment, particularly in North America is improving. I think whereas two quarters ago we wouldn’t have said that and even a quarter ago we were uncertain I think our last quarter, our outlook for this quarter suggest to us that there is some return in growth and interest even for on premise.

Craig Nankervis – First Analysis Corp.

Is there any qualitative comment on Viecore? It seemed a quarter ago that the full solution approach was benefitting you, you grew the enterprise business sequentially I believe, is there any additional color there? I guess I’m also interested to know does Viecore become involved in the on demand solution as well?

Paul A. Ricci

Well, what was Viecore is now the center of the operations for all of Nuance’s enterprise professional services. The strategy of providing full solutions there continues and in fact, that approach has been I think for us at the heart of some of the recovery that I talked about in on premise enterprise solutions. They do in fact also do the hosted deployments as you asked.

Craig Nankervis – First Analysis Corp.

Did you give a percent of revenue from hosted overall in the quarter? Do you have that?

Paul A. Ricci

I didn’t. We don’t publish hosted separately, we just publish it as part of the services and support line.

Craig Nankervis – First Analysis Corp.

You talked about heightened interest in speech overall this year as sort of a broad comment. Does that pertain to all parts of your business or is there some area in particular that you guys have seen that causes you to make that comment?

Paul A. Ricci

There’s a reasonable increase in interest in speech across our primary three markets. I think we can say that reasonable across all of them. Clearly, there’s been a lot of interest in mobile, it’s become a de facto choice in healthcare and as I’ve indicated we’ve seen more interest in certain kinds of enterprise deployments in the last six months than we have in quite some time.

Operator

Your next question comes from John Bright – Avondale Partners, LLC.

John Bright – Avondale Partners, LLC.

Where are we in the transition from the on premise to the hold solutions within healthcare as well as within enterprise? Then, when I think about the mobile segment of the business, if I factor in the overall unit decline your increased penetration, OEM pricing and then the add on of mobile care, where are we in that process at this juncture? Then, with the thought towards organic growth looking forward and when that might reaccelerate?

Paul A. Ricci

Well, with respect to healthcare let me begin there, our hosted business I believe that the automated hosted business will substantially displace most of what we think of as third party agencies and manual transcription that is done today. I think that will happen over the next few years. I think there’s some evidence that the rate at which that is happening is increasing. At the same time, some number of large healthcare institutions which are our primary target will opt for a hosted on demand solution rather than reinvesting in their on premise solution.

But, for sure, much like other markets there will be a large number of those institutions that continue to believe that the right investment strategy for them is to manage it on premise in a different model. I can’t tell you where that division will ultimately end up. We structured ourselves so that we can address customer in either way. With respect to the mobile question, mobile care as we’ve indicated previously is an interesting intersection of our mobile business and capabilities with the enterprise care market.

As a greater and greater percentage of people who are calling in are calling in from mobile devices that changes the set of automation strategies available to large enterprises as they think about how to manage their customer care and we believe that the combined set of capabilities we have for helping large enterprises meet their customer care needs allows us to manage that transition with them very effectively. I think that most large enterprises over the next several years will want some active form of mobile strategy in dealing with customer care and we think our technology is going to be an important component of that.

John Bright – Avondale Partners, LLC.

Is it fair to then characterize what you just said with your past comments that we’re in the mid inning now and the transition from on premise to hosted as well as the evolution on the mobile side and that we should expect reacceleration of organic growth in FY ’10?

Paul A. Ricci

I think we’re in the early stages of both even earlier in mobile care than healthcare hosted. I do think that yes, arithmetically as I said in my comments, will provide a foundation for enhanced organic growth as we look to fiscal ’10.

John Bright – Avondale Partners, LLC.

Tom, if I may ask you a question, you were brought on board and a focus of yours has certainly been to wring out some of the cost synergies of the past acquisitions done as well as put in the back office capabilities to go from I think a simulator to integrator for new acquisitions as they come on board. Have you gotten ahead of that curve? And if not, where are we in your ability to get ahead of that curve?

Thomas L. Beaudoin

I think we’ve caught up John and I think our ability to integrate acquisitions has improved. I think you see some of that in the numbers but it depends on the size and the complexity of the particular acquisition.

John Bright – Avondale Partners, LLC.

Do you think you’ll be finished with your efforts by the end of calendar ’09?

Thomas L. Beaudoin

Well, we’re fairly caught up to the ones that we’ve already acquired so by the end of the year, yes absolutely.

Operator

Your next question comes from Mark Murphy – Piper Jaffray.

Mark Murphy – Piper Jaffray

Paul, there’s been a lot of commentary in the media regarding texting while driving and studies that it increases accident risk by 23 times. It now looks like the government is considering a nationwide ban on texting while driving, can you just give us an update on how you’re capitalizing on that trend and any estimate of how material it would be for Nuance if that does become a nationwide ban?

Paul A. Ricci

I can’t give you any meaningful data with respect to the texting point in particular but what I can say is the growing concern among regulatory agencies about the distraction of operating a communication device of any form while driving and the growing appreciation by the automotive industry of that concern and their anticipation of that concern has resulted in broad engagement of our technologies across the automotive industry.

The time from conception to deployment in the automotive industry is quite long and so it takes some time for those advances to take hold in next generation models but consistent with what we’ve said many times in these calls, we consider the automotive market to be one of the great long term markets for Nuance because of the high reception we’ve had with almost all automotive manufacturers around the world and therefore the long term royalties that are going to accrue from those engagements.

Mark Murphy – Piper Jaffray

Then Paul when you have seen the pricing pressure that you referenced from OEM partners in the mobile business, I’m just curious to try to understand the dynamic underneath that. It seems as though the royalty rate is already fairly low when you compare that to the cost of most of these devices and it seems that the voice recognition functionality is providing a very clear point of differentiation for the OEMs. I’m just trying to understand, we certainly realize they’re under a great level of stress but given that that is the case, why do you think they’re pursuing a price reduction with Nuance rather than focusing on maybe more material parts of their supply chain like the hardware pieces of it.

Paul A. Ricci

I can’t speak for the manufacturers, I’d have to let them do that. But, I will say I believe that an integral part of the business model of those companies is very aggressive cost reductions across every component of their build of materials. We agree with you in your characterization of the uniqueness of speech and we think that uniqueness helps us to retain value in many ways but in trying to give a balanced view to investors I think we would be remiss in not point out that these are buyers, the OEMs after all are very large companies with a great deal of purchasing power. These are buyers with considerable purchasing power and they tend to flex it with all of their suppliers including us.

Operator

Your final question comes from Michael Latimore – Northland Securities.

Michael Latimore – Northland Securities

Paul, in the prepared remarks you mentioned some increase resistance to on premise purchasing in large hospitals, is that comment relative to last quarter or is that more of a year-over-year comment?

Paul A. Ricci

I think it’s been a gradual effect over the course of this year. I don’t want to overstate it but we do want to call attention to what is a growing trend and in some extent it has resulted in a migration to on demand.

Michael Latimore – Northland Securities

The gross margin on the hosted professional services segment, I think it was down a little bit sequentially was that tied to the hosted side or the professional services or both?

Paul A. Ricci

If we held the mix constant, gross margins on all of the elements of our service line hosted services and support, all of the gross margins improved and they have been improving and they will continue to improve. But, as you consider mix that’s what’s resulted in the reduction in gross margins from second quarter to third quarter.

Operator

Thank you Mr. Ricci, you’re closing remarks?

Paul A. Ricci

Well thank you all again for joining us and we look forward to speaking to you again next quarter.

Operator

Ladies and gentlemen this conference will be available for replay after 7 pm today through August 24th at Midnight. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code of 107916. International participants may dial 1-320-365-3844. Those numbers again are 1-800-475-6701 or 1-320-365-3844 with the access code of 107916. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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Source: Nuance Communications, Inc. F3Q09 (Qtr End 06/30/09) Earnings Call Transcript
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