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Executives

Paul Ricci - Chairman and Chief Executive Officer

Dan Tempesta - Principal Accounting Officer, Vice President of Finance and Corporate Controller

Analysts

John Bright - Avondale Partners LLC

Ilya Grozovsky - Morgan Joseph & Co., Inc.

Derek Bingham - Goldman Sachs Group Inc.

Bradley Whitt - Broadpoint AmTech, Inc.

Tom Roderick - Thomas Weisel Partners Equity Research

Nandan Amladi - Deutsche Bank AG

Neil Herman - Soleil Securities Group, Inc.

Scott Sutherland - Wedbush Securities Inc.

Brent Thill - UBS Investment Bank

Abhey Lamba - UBS

Mike Latimore - Northland Securities Inc.

Shyam Patil - Raymond James & Associates

Daniel Ives - FBR Capital Markets & Co.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC

Craig Nankervis - First Analysis Securities Corporation

Mark Murphy - Piper Jaffray Companies

Nuance Communications (NUAN) Q2 2010 Earnings Call May 10, 2010 5:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Nuance's Second Quarter 2010 Conference Call. [Operator Instructions] With us today are Chairman and Chief Executive Officer of Nuance, Mr. Paul Ricci; and Senior Vice President, Chief Accounting Officer and Corporate Controller, Mr. Dan Tempesta. At this time, I would like to turn the call over to Mr. Ricci. Please go ahead, sir.

Paul Ricci

Thank you. Before we begin, I would like to note that our CFO, Tom Beaudoin, is suffering from the flu today and couldn't join us. In his place is our Chief Accounting Officer, Dan Tempesta.

Also, 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 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 underscore one point from our release and prepared remarks. The strength of the company's performance in the first quarter was broad-based across geographical markets and our business lines. We returned to double-digit organic growth and total revenue, and also in each of our three reported markets.

As our comments made clear, we anticipate the continuation of growth during this fiscal year, improving trends in Mobile royalty reports; expansion of our On-Demand revenues from new customers, one during the last year; contributions from new Mobile Services, especially Voicemail to Text; and renewed capital purchasing in large enterprises, are all factors enabling this growth. Last quarter, I used these brief comments to reiterate our conviction in the fundamental attractiveness of our markets and our position in these markets. The improved results across our diverse business lines increase our conviction, both about the opportunities and about our position to seize them. We will now take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Dan Ives of FBR.

Daniel Ives - FBR Capital Markets & Co.

First off, on the Enterprise side, can you just talk about your change in behavior from customers that you saw in the quarter, and obviously, strong quarter?

Paul Ricci

Well, there have been, for some time, several factors at work in our Enterprise business, and those factors continue from previous quarters. First, we continue to see a heightened relative interest in our on-demand solutions, as compared to on-premise installations. And I've talked about that in previous quarters. And the analysis of our pipeline and our bookings all confirm that, that trend continues. Second, we've obviously went through a period of a year or more where on-premise capital purchases were highly restrained, and there has been some relaxation of that. And I think that, that overall picture is getting better. And third, we've talked in previous quarters about disruption in our channel partners through transitions they were going through. And I think that, that does continue to be an adverse effect in the business.

Daniel Ives - FBR Capital Markets & Co.

And then just talk about -- I mean, I know you don't guide to it, but just anecdotally, cash flow for the second half. Obviously, the SpinVox, you called that out in the quarter, but just talk how should we think about that for the second half cash flow?

Paul Ricci

Well, the comment that I might offer is that we've talked in previous quarters about the relationship between cash flow and non-GAAP net income. And the difference between those two would reduce, as this year played out. And we continue to expect that to be the case. The decrement between those two should be smaller in the second half than it was in the first half, because of the effect of the purchase accounting on revenues playing through from past acquisitions.

Operator

And now to the line of Nandan Amladi from Deutsche Bank.

Nandan Amladi - Deutsche Bank AG

You said in your prepared remarks that the losses associated with SpinVox were higher than you have previously expected. But when you made the acquisition, you said that it would be earnings neutral or slightly dilutive, if I remember right. Has your view changed at all? And how is the integration going?

Paul Ricci

The integration is going fine. It is a complex integration because it involves a reasonable number of large-scale implementations with telecommunication carriers around the world, and it involves a very active pipeline. And the complexity of managing the business, amidst those integrations and a very active pipeline, has proven to be a little more challenging in the first few months than we anticipated. I think that the organization is doing a fine job of handling that. And I think that considerable progress has been made in the last four or five months since the beginning of the year. So our own estimates of losses go down significantly in Q3, and essentially, it mostly disappear in Q4. It will be slightly more dilutive this year than we anticipated, but I think we're doing a reasonable job of managing that within the context of the overall expenses in the company.

Nandan Amladi - Deutsche Bank AG

Have you seen any change in the average contract duration, particularly in the Enterprise segment, as you start to see more interest in the On-Demand offering?

Paul Ricci

Well, just to clarify your question, the average contract duration of our hosted offerings compared to what?

Nandan Amladi - Deutsche Bank AG

Compared to what it used to be, obviously [ph] (1:04:36).

Paul Ricci

No, I don't think there has been a market change in that. The most common periods of contract duration in that business are three years or five years, and we see some of both.

Operator

And now to the line of Shyam Patil from Raymond James.

Shyam Patil - Raymond James & Associates

Paul, in the prepared remarks, you seem to highlight the impact of the shift to hosted business models on the second half revenue growth. Can you just talk a little bit about that trend? And then, maybe if you can give us a sense as to how much impact that's having on the top line and on the profitability as well?

Paul Ricci

I believe in the prepared remarks, there are two references to our On-Demand trend. One is, a general characterization of that being a consistent trend across the business. And I think, the second one is a reference, in particular, to the Enterprise business and the effects of revenues on the Enterprise business. It will have an effect. It has had an effect this year on revenues in the Enterprise business. I don't have a precise number. But it's a meaningful number this year because of the rapid migration to that, both in existing installations, book to business and in our pipeline. I think one thing that's been noticeable in the last few months has been the accentuation of On-Demand activity within our Enterprise pipeline, in particular. I can't quantify it precisely for you.

Shyam Patil - Raymond James & Associates

You talked about cash flow, as a percent of net income, improving in the back half of this year. And I know you don't specifically guide to a number, but should we think of it as returning to kind of a 90% plus, as a percent of net income, kind of going beyond this year? Is that a reasonable assumption at this point?

Paul Ricci

Well, I think, with respect to the divergence between non-GAAP net income and cash flows, absent other acquisitions and whatever effects those might have, you should expect most of the divergence this year to disappear. The one remaining item that is new this year is the expenses associated with acquisitions, the accounting and banking expenses associated with acquisitions, which will continue to be a delta between the two.

Operator

And now to the line of Jeff Van Rhee from Craig-Hallum.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC

Starting on the Mobile side, I think, maybe in the prepared remarks, there was commentary about some prepays on the Mobile side. Can you talk to the magnitude of that? And then while you're on the Mobile, can you also touch about the evolution of the market space, in terms of the business models? What are the splits, in terms of unit-based royalty revenues versus monthly data service fees, if that's how you view it? And just some quick thoughts on where you see that going.

Paul Ricci

I can't say anything specifically about the prepayments. We typically have some amount of initial payment with a new contract and a new design win, and there were appreciable prepayments in the first and second quarter. And we highlight it, simply because we can't be certain what payments there will be in the third or fourth quarter. As a prepared remarks note, we expect future design wins, but the exact timing of those remains uncertain. With respect to the mixture, for this year, our Mobile revenues will continue to be dominated by license royalties. But particularly with the introduction of the Voicemail to Text revenues, service revenues will begin to rise sharply next year as a proportion of that. And I think a reasonable proportion of our total Mobile revenues next year might be in the neighborhood of 30%.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC

Over to the Healthcare side, can you just comment -- obviously, it was a dynamic quarter with Spheris and a lot of things moving around in that space. So one, as I look at the metrics around the transcription run rate, number of lines transcribed, modest deceleration. Just give your thoughts there about lines transcribed and how you view the industry if we stabilize and starting to potentially see reacceleration? And two, just the competitive landscape there.

Paul Ricci

I don't think that the Spheris matter really changes the competitive landscape substantially. So I don't see any really significant structural change in the competitive landscape. With respect to the deceleration, there are a couple of very large implementations underway which have been protracted, and that has occupied our implementation team substantially. And I think, our own internal estimates assume that both of those large implementations will come online, somewhat more quickly than they are. But that's a minor thing. I don't think there's any fundamental change going on in that business though. I think our expectation is that, that element of that business will continue to grow very robustly over the second half of this year and into next year.

Operator

And now to the line of Abhey Lamba from ISI Group.

Abhey Lamba - UBS

Paul, talking about shift to the hosted model from on-premise, has the pace of business moving to the hosted model been in line with what you guys expected going into the year, or has it accelerated from there? And going into the second half, what are your assumptions? Do you think the pace will continue at what you're seeing, or will it accelerate from here in your assumptions?

Paul Ricci

Well, as I've commented to this question in previous calls, over time, I believe that there is a fundamental shift towards more on-demand and hosted models at play in each of our markets, and of course, more broadly in the software industry. And we're experiencing, in that respect, whatever the companies are experiencing. So I think that's a long-term trend that's destined to continue. And within the more specific business lines we're in, the interest in our on-demand solutions and Enterprise has been greater than we expected at nearly every turn over the last year or 18 months. And I think it may, in fact, be self fueling at this point. We may, in fact, be driving more customers to that, for reasons that we think have to do with the ability to provide them a stronger solution in that manifestation. Mobile Services is a trend we expected to grow, and if anything, has been somewhat slower in the last year and a half than we expected. But I think that, that is changing. And so I would expect, if anything there, acceleration in the next year. And of course, we've been very clear about the movement of the Healthcare business to a more on-demand model and transactional model. And I think that's playing out, more or less, as we expected it to. And I think that will continue to do so robustly throughout the remainder of this year and next year.

Abhey Lamba - UBS

And secondly, with all these increased investments that you're making there, should we expect more operating leverage in fiscal '11? Or do you see the opportunity big enough that it could be a multi-year investment phase?

Paul Ricci

Well, we're certainly going to see benefits from these investments in fiscal '11. So there will be some leverage from our current investments, to be sure. I've mentioned previously that there will be significant Enterprise implementations, On-Demand implementations, coming online next year. And we'll realize real operational leverage from those. The same is true in some of the hosted implementations that I just referenced, in response to an earlier question. And certainly, the magnitude of our Mobile Services business will have operating efficiencies as the revenues there grow, in comparison to the core expenses that we're having to put in place to build up that business. And I think we'll see operating leverage from other investments we're making as well, including sales personnel and marketing expenses. It's a little early for me to give you a view about what that will mean at the end of the day, with respect to our operating margins in 2011, because we're not really talking about guidance in any formal way there. And certainly, we haven't yet reached conclusions about additional investments we want to make that year for future growth. So I want to stay away from what that will ultimately mean, in terms of operating margin. But a number of the investments were made from this year. In fact, we'll have real leverage next year.

Operator

And now to the line of Brent Thill from UBS.

Brent Thill - UBS Investment Bank

Paul, just on the margin side, it looks you're holding them right around 32% first half of the year, and the guidance assume low 30s. Can you just give us a sense of, is your hiring pace now picking up from where you were at last year?

Paul Ricci

For sure, the hiring pace in fiscal '10 has increased materially over fiscal '09. And we had telegraphed that to investors at the beginning of this year. And we have substantially fulfilled on our plans to do that, not perhaps quite at the level we had anticipated, but close to it. And I think that will continue throughout this year.

Brent Thill - UBS Investment Bank

You expect to stay pretty active in the second half hiring as well?

Paul Ricci

We do, yes. And that hiring will be primarily in the areas of sales personnel, even as we go into next year wanting to staff for a rapid ramp-up at the beginning of fiscal '11. And also, in services personnel, you've seen that our backlog is going up and the On-Demand, the hosted contracts also take significant service commitment. And finally, in R&D, where we've been doing, I think, more hiring than we expected even at the beginning of the year, particularly around the opportunities in mobility and the natural language processing in some related areas.

Brent Thill - UBS Investment Bank

You're probably detecting a theme from all of us asking questions about On-Demand business. But I guess the one thing that would be helpful at some point is just trying to understand what the off-balance sheet component of your backlog is, considering more of this is shifting towards On-Demand. I think you're seeing in your longer-term deferred revenue spiking up pretty big this quarter. Correct me if I'm wrong, but just from a perspective, I don't know how you're sizing up this off-balance sheet backlog that we don't actually see, but you're seeing.

Paul Ricci

Yes, we've tried to offer a couple of data points in our prepared remarks for the last few quarters that, while they don't completely illuminate the question you're asking, sheds some light on it. And we may enhance that with other metrics as we go through the next few quarters.

Operator

And now to the line of Craig Nankervis from First Analysis.

Craig Nankervis - First Analysis Securities Corporation

I just -- Paul, on the gross margin front, that moved down somewhat notably sequentially, but it did the same thing last year. Should we just expect sort of pretty reasonable variation in gross margin through the quarters just based on mix? Or is there any other comment related to those that you can provide? It did move around throughout the quarters last year, and maybe we're just going to see a similar thing this year.

Paul Ricci

There will be some variation, depending on the level of licensing revenues in the quarter. But I think that what was in play in this last quarter, in particular, was the introduction of the SpinVox revenues, which, in this early stage, do have a substantially lower gross margin. And that will improve as quarters go on. But I think that was a specific effect that was at play in this quarter. And that will be through next quarter.

Craig Nankervis - First Analysis Securities Corporation

And is there -- do I sense some sort of dichotomy, in terms of the on-premise business in Enterprise and Healthcare? Do I sense from the comments that the Healthcare on-premise business is coming back, maybe somewhat more than what you're seeing in Enterprise, be it via your sales emphasis or a changed environment? Is there somewhat of a divergence of the relative health of the on-premise business for those two units?

Paul Ricci

Well, it is true in Healthcare that both licensed sales and hosted sales have been quite robust. And I think that mixture will continue unabated. In Enterprise, the backlog of services associated with our on-premise business continues to grow. And I think that is a healthy sign. Licenses have lagged somewhat in our on-premise Enterprise business. I think that, that's probably a transitory phenomena. I think that the long-term Licensing business there will resume growth. In fact, we expect some of that over the balance of this year.

Craig Nankervis - First Analysis Securities Corporation

And I guess, lastly, you refer, when speaking of the guidance in a couple of different places, new product upgrade cycles, I guess, towards the end of the fiscal year. Can you just review what the areas these are taking place in?

Paul Ricci

Well, we don't pre-announce product releases. But there are two significant product releases in the fourth quarter, and they do result in significant revenues in the fourth quarter. And there will be some negative channel effect in the third quarter associated with them.

Operator

And now to the line of Tom Roderick of Thomas Weisel Partners.

Tom Roderick - Thomas Weisel Partners Equity Research

Paul, I know you've provided a little bit of commentary around the Mobile segment. As I look at the 10% organic growth number in Mobile/Enterprise, can you just directionally offer us some distinction about which part of that drove a greater proportion of the growth? Are you seeing much of a snapback in Call Center and Enterprise spend, or is it really the Mobile division, particularly in the handset side, that's lifting that?

Paul Ricci

Well, I want to first remind you of our decision to put those two business market areas together. It was driven by a realization that Mobility would begin to affect our Enterprise Solutions, particularly, as we introduced our Mobile Care technologies. And that's been true. So the distinction is it best modeled as time goes on. But having said that, you should assume that Mobility grew materially more robustly in the quarter than the Enterprise business did.

Tom Roderick - Thomas Weisel Partners Equity Research

Turning to the sales and marketing expenses that you're expecting in the back half of the year. You mentioned, just a second ago, a couple of product launches you're expecting in Q4. I'm assuming there's some upfront marketing dollars attached to those in front of that. Should we get those expenses out of the way from the marketing side in Q3 and early Q4, so that you should [ph] (1:22:22) start to get a little bit more leverage in Q4 and into the beginning of next year? And then from the Enterprise side of sales and marketing, how many sales activity added, thus far, this year? And what's your plan for the full year?

Paul Ricci

With respect to the first question, you should anticipate that there is something in the neighborhood of $6 million of additional marketing expenses between the third and fourth quarter associated with those product launches. And I don't have a number for sales headcount. I do apologize for that. I don't have a number.

Tom Roderick - Thomas Weisel Partners Equity Research

Just in terms of these shifts going towards more and more on the hosted side, both Enterprise and in Healthcare, what are the dynamics that we ought to be thinking about your operating margin assumptions as we look into 2011? Longer term, are both the Enterprise and Healthcare divisions reflective of higher margins on the hosted side long term, pretty consistent with traditional levels lower? How do we want to think about that and kind of where can we think about margins picking up in the midterm here?

Paul Ricci

If we're talking about -- gross margins or operating margins?

Tom Roderick - Thomas Weisel Partners Equity Research

Operating.

Paul Ricci

Over time, I believe that the Hosted business are going to increase our operating margins because the sales costs associated with these large on-demand contracts over time is quite favorable. The expense tends to be front loaded as that's how sales people are compensated. But the ability to expand the existing accounts and to sustain the revenue stream with relatively limited ongoing sales expense is considerable. And so I think, it should have a modestly stronger improvement in the operating margin as a result.

Operator

And now, to the line of Derek Bingham from Goldman Sachs.

Derek Bingham - Goldman Sachs Group Inc.

First question is, if you had any updated color on what you're doing overseas in the transcription market? I know that was kind of under-penetrated area for you.

Paul Ricci

Are you asking about health care here?

Derek Bingham - Goldman Sachs Group Inc.

Yes, in health care, in medical transcription, specifically.

Paul Ricci

I don't have anything specific to say. You're aware, of course, we acquired the Philips business, which was primarily a European-based activity a couple of years ago now. And that has done quite well against our plans. We recently announced the hiring of Janet Dillione, who I think has some expectations for expanding that business. But I don't think there's any comment about that I'd give right now.

Derek Bingham - Goldman Sachs Group Inc.

And kind of taking the eScription product over there, is that in the playbook?

Paul Ricci

Yes, it is.

Derek Bingham - Goldman Sachs Group Inc.

But that's not happening yet?

Paul Ricci

Well, there are some early pilots underway actually.

Derek Bingham - Goldman Sachs Group Inc.

And in Voicemail to Text, is the revenue that you currently -- the big engagements that you're working on, are these all carriers? Is there any Enterprise revenue that's going to come out of that in working with some enterprise communications infrastructure providers?

Paul Ricci

The answer is they're both. And both activities are underway. The revenues right now are primarily weighted towards the former. The revenues associated with the latter will grow as we go to the next several quarters. But I think the telecommunication carriers will continue to dominate the revenue stream, as we look out for the balance of this year and next year.

Derek Bingham - Goldman Sachs Group Inc.

Could I also just get an update on the status of your NOL balance? And did SpinVox contribute to that?

Paul Ricci

Well, SpinVox is a U.K.-based company, so there wouldn't be any U.S. NOLs from that. And my recollection is, there really weren't any foreign tax benefits of any consequence to be captured. I don't have a current NOL number, and I apologize for that. Dan, you may know?

Dan Tempesta

We exited the year with about $400 million of NOLs. And we're planning on somewhere in the vicinity of $300 million by the end of the year. That's the gross number, then you net it down for the statutory rate. And as far as -- SpinVox had a number of NOLs. We've likely lost them in the acquisition because you lose them because of a change in control in the U.K.

Operator

We'll move on to Mark Murphy, Piper Jaffray.

Mark Murphy - Piper Jaffray Companies

I'm wondering, what assumption does the Q3 guidance make for organic revenue growth, you comment in line with the midpoint?

Paul Ricci

We don't forecast forward organic growth. I think you can do the calculation. But we don't forecast it by quarter.

Mark Murphy - Piper Jaffray Companies

And in terms of the Mobile and Enterprise business, has the OEM price pressure on royalty rates abated significantly just compared to what you were seeing, say, maybe six or 12 months ago?

Paul Ricci

I think pricing has stabilized somewhat. I think I can say that. It's still a very price-sensitive market. And as I've said in previous quarters, I expect it will remain a price-sensitive market, as a relatively small number of companies have extraordinary purchasing power. But having said all that, I think that prices, they seemed to have stabilized for the moment.

Mark Murphy - Piper Jaffray Companies

And Paul, in these cases where there is pricing pressure, what are the alternative offerings that these companies are looking at?

Paul Ricci

Well, these are big companies with very sophisticated supply chain management operations and very aggressive purchasing departments. And they're good at finding alternatives, however narrow and focused that introduce pricing pressure into the sourcing. And there are many of them. They tend to be smaller than us, but there are many of them and they're effective at using them. I think I've also commented in the past that our strategy with our OEM partners has been to optimize long-term relationships with them, not our royalty prices over a one- or two- or three-quarter period.

Mark Murphy - Piper Jaffray Companies

And then, also for Dan, the growth in the deferred revenue was primarily in the long-term category, although you did have growth in the short term as well. And I'm just wondering, I think it's the biggest increase we've seen in that long-term deferred revenue on a sequential basis. What exactly is the underlying dynamic there?

Dan Tempesta

So I think the color, Mark, has done a nice job laying out the changes. It mentioned three items. It was the -- you have the eCopy billing, so that's a deferred revenue -- that's a ratable revenue recognition model. So as we book, we set it up as deferred revenue, and it comes in over time. Then you also have the deferred setup fees for the NOD and other on-demand activities. And then, there was an increase in maintenance and support as well. It should be noted that there's been offset there too. We continue to execute on the SNAPin contracts, so that had an effect downward in those buckets.

Mark Murphy - Piper Jaffray Companies

Just in the prepared comments, those are referred to as factors driving the increase in deferred revenue. But it sounds like you're clarifying that, that is all specifically related to the long term?

Dan Tempesta

Yes, the majority of that is the long term. The current state is pretty steady-state.

Mark Murphy - Piper Jaffray Companies

And then, a final question there, in the prepared comments, it also says that in the second half of the year, the migration toward on-demand solutions in the Enterprise business will weigh on the growth rate. I don't think that you're mentioning that transition in the Healthcare business. So I'm just wondering, why is that not being mentioned. Should we interpret that as, the transition is kind of over the hump in the Healthcare business in terms of the impact on reported revenue growth?

Paul Ricci

I think what I might say is just slightly different, which is that we have been incorporating these affected into our business for some while. And the Healthcare business is -- the migration in the Healthcare business and the mixture in the Healthcare business is consistent with our expectations. What's been noticeable about our Enterprise business over the last couple of quarters is the relative accentuation, particularly in our pipeline for on-demand deals compared to with what we have might anticipated, even at the beginning of this year. And therefore, we're going to see contracts that are booked in the second half of the year weighted towards on-demand. But the realization of bookings will look good, but the realization of revenues in the third and fourth quarter from those, of course, will be less.

Operator

And now, to the line of Ilya Grozovsky from Morgan Joseph.

Ilya Grozovsky - Morgan Joseph & Co., Inc.

Can you talk a little bit about your strategy with the Dragon E-Mail app? I know you obviously rolled it out with the Blackberry. Sort of how do you see that going forward? Are you going to start charging for that? Are you just seeding the market? What's the process there?

Paul Ricci

Our decision early on was to make our Dragon technology solutions available on certain mobile platforms as part of our overall brand strategy for the Dragon brand. We've had enormous reception and enthusiasm for those applications. And we are going to continue to innovate on those platforms and innovate those solutions for the time being. And we don't have any plans at the moment to change our pricing. We have a number of Dragon applications on a number of different platforms. In some of them we charge for, in others, we don't. But right now, we don't have any expectations to change the mixture.

Ilya Grozovsky - Morgan Joseph & Co., Inc.

So the idea of perhaps, building it into the smartphones going forward directly with the carriers and with cellphone manufacturers, that's not something you see on the horizon?

Paul Ricci

Well, I didn't say that. What I said was that the Dragon applications that we sell that are downloadable on smartphone app stores for the foreseeable future will continue to be available on the app stores. I should note that we announced a product last week, I believe, a T-Mobile phone that incorporated the Dragon dictation technology directly integrated into the phone, as an example of what you just cited.

Operator

And now, to the line of Brad Whitt from Broadpoint.

Bradley Whitt - Broadpoint AmTech, Inc.

Just one quick clarification, Paul. You mentioned earlier on one of the questions something about Mobile. I wasn't sure if you said Mobile would be 30% -- would approach 30% of total revenue? If I could get a clarification on that. And then also, it looks like a lot of these Voicemail to Text contracts, you're hosting that service for the carriers, is that something that you think will continue? Or would you eventually think that the carriers would host the service themselves?

Paul Ricci

On the first question, I think your reference was to my comment that Mobile Services will comprise about a third of Mobile revenues for fiscal '11. So that's a proportion of the Mobile revenues, not a proportion of total revenues. On the second question, I would expect overwhelmingly for us to be hosting the carrier-based Voicemail to Text implementations for the foreseeable future. In part, that is driven by the speed at which we're driving innovation on the underlying technology platform, which is very rapid right now, and I think is most achievable in that arrangement.

Operator

And now, to the line of Scott Sutherland from Wedbush Securities.

Scott Sutherland - Wedbush Securities Inc.

Back on the Mobile side, if you see some of the mobile OS providers kind of get into some speech applications, how do you fit in with that or compete with that? And do they cause any change in the pricing dynamics?

Paul Ricci

Well, there's a lot of activity going on right now in the mobile space. And speech has gotten a lot of attention. For the most part, our view is that, that attention creates natural partners for Nuance both in mobile phone manufacturers and in Internet-based service firms. And I think that is certainly consistent with the activities we have underway, with the current business we have. And it seems consistent with the developments that we see in our own pipeline activities. So I'm reasonably optimistic about that. With respect to pricing, I commented earlier, pricing in the mobile world is always a challenge. But I think at the moment, it seems reasonably stable.

Scott Sutherland - Wedbush Securities Inc.

And the same question, in your footnotes, you talked a little bit about revenue still included in IP collaboration that you're doing here, that's being backed out at $400 million a quarter. It is there any revenue to that? Or is this kind of future revenue, 2011, 2012? And when does this start becoming included in the full results?

Paul Ricci

It's difficult to break that revenue out separately. But I think you should think of it as being more meaningful in fiscal '11.

Operator

And now, to the line of Mike Latimore from Northland Capital.

Mike Latimore - Northland Securities Inc.

Just on the Enterprise on-demand one more time, did that grow year-over-year in the quarter? And do you expect growth in that segment this year, this calendar year?

Paul Ricci

We don't break it out separately, so I can't give you any numbers for the quarter. I think I can say that it is increasing year-over-year.

Mike Latimore - Northland Securities Inc.

In then terms of the mobile market, you had a number of large design wins. What percent penetration of the total mobile units out there do you think will occur in 2010? What percent incremental penetration you think will occur? I think historically, you've been -- you sort of stated 300 basis points or so. Is it more or less than that?

Paul Ricci

I just want to make sure I understand your question and your reference to 300 basis points here. Just ask your question one more time please.

Mike Latimore - Northland Securities Inc.

I'm curious in terms of -- you got a number of design wins, which increased your penetration in the overall mobile units in terms of percent of overall mobile units. Just wondering what the incremental penetration would be this year, from what percent to what percent do you think you will achieve during 2010?

Paul Ricci

I don't have the precise penetration numbers in mobility for fiscal '10 over fiscal '09, but I would be surprised if it weren't significantly higher than 300 basis points of increase. I just don't have it.

Mike Latimore - Northland Securities Inc.

In terms of just hosting as a percent of overall revenue, is there a rough percent you can give for that?

Paul Ricci

No.

Mike Latimore - Northland Securities Inc.

And then, on predictive text, is that a business that's stable, growing, declining?

Paul Ricci

It continues to be a good business for us. And it's taken on some new dimensions with the advent of touch screens and the interest in extending predictive text to user interface that includes touch screens, and some announcements we made at I think at CES or maybe CTIA earlier this year. So there's actually some intensified interest in that product family.

Mike Latimore - Northland Securities Inc.

And just last question, pricing per line transcribed in your Healthcare Transcription business, how's that been trending over the last couple of quarters?

Paul Ricci

I think pricing is reasonably, reasonably stable there over the last couple of quarters, maybe trending down slightly. I think we've commented in earlier calls that we really have been the market-setter in lowering prices, as we've transformed that industry. And that will probably continue to be true. I don't think it will probably decline at quite the pace it has over the past. But it will still continue to decline.

Operator

And now, to the line of Neil Herman from Herman Advisors.

Neil Herman - Soleil Securities Group, Inc.

Could you talk a little bit about any changes you're seeing in the competitive environment vis-a-vis mainly Google and Microsoft? Are they doing anything differently? And then secondly, your Imaging business is a great cash cow business that continues to grow quite nicely. Could you kind of give us a sense as to what you think the long-term drivers are in that business?

Paul Ricci

With respect to the first question, I don't think there's any changes in the competitive environment from our most recent calls. I think we've talked about the competition with respect to both Google and Microsoft. I don't really have anything to add there. And the Imaging business has shown somewhat renewed growth this year, driven in part by the overall improvement of the economy, I suspect, and driven in part by the broader suite of solutions we have in network-based scanning. And it is, as you comment, an attractive business in terms of cash flow generations.

Neil Herman - Soleil Securities Group, Inc.

Then lastly, there was a bidding for a bankrupt company in Nashville. Could you kind of take us through your thought process in terms of when it's attractive to sometimes acquire some of these assets for the contracts and so forth, and kind of your thematic thoughts on that sort of thing, given the changes in that end marketplace that you're driving?

Paul Ricci

Well, you framed the analysis as we did, that it is substantially about the opportunity to acquire a certain number of customer contracts. And the merits of doing that are mixed and significantly influenced by the relative price that the contracts are available and whatever operational risks are associated with that. And those are primarily the two things we look at. And we haven't bought too many distressed businesses. But it was one that seemed appropriate, seemed attractive to us at a certain price and risk. And we participated based on that analysis.

Operator

And now, to the final question today. It comes from John Bright of Avondale.

John Bright - Avondale Partners LLC

Paul, what is your best guess as to when the migration towards on-demand solutions in your Enterprise business will stop being a drag?

Paul Ricci

I think I might phrase it somewhat differently. As we go into fiscal '11, the revenue benefits of contracts we won in 2009 and early in 2010, will have a more material effect. And they will boost revenues in comparison to our current growth rate. I think at the same time, the general improvements we're seeing in capital purchasing will also contribute to our on-premise sales. So I think we'll see some growth over the second half of this year and increased growth during fiscal '11.

John Bright - Avondale Partners LLC

So the concerns that you have, or I think the drag that you're talking about in the second half of this year, that should likely lift in FY '11?

Paul Ricci

Yes, I think, actually, what I would say is that the relative performance of the Enterprise growth in the second half of this year we anticipate will be improved over the first half. And I think it will be further improved in fiscal '11, yes.

John Bright - Avondale Partners LLC

On Mobile Services, earlier on the call, I think you verbally mentioned that some of the Mobile Services had been slower than you expected. Which services are you talking about?

Paul Ricci

I think an earlier caller asked, what was my reflections on the migration to On Demand and hosted services across the business, generally, with respect to expectations. And I was commenting that if we look back a year or 18 months ago, I think my specific response was that the Enterprise was moving more aggressively. And to some extent, Mobile had moved less aggressively. Although as I noted then, we seemed to be at a point at which that speed is picking up. I would say that was true generally in Mobile Services. And as I said earlier, I do think that, that has begun to change. But that point of inflection has been somewhat slower in coming than I expected.

John Bright - Avondale Partners LLC

Any specific mobile service you would call out?

Paul Ricci

No.

John Bright - Avondale Partners LLC

What about -- what's going to be the driver to adoption for the Enterprise on something like Voicemail to Text? What's going to be the thing that pushes the IT person over the edge associated with that? And are you still as optimistic as you had been in the past on that topic?

Paul Ricci

Well, Voicemail to Text, I believe, is going to be a quite ubiquitous service. And it's going to be offered by carriers broadly, because carriers have discovered that the service is economically very attractive for them to offer. And it's going to be offered by the enterprise communication vendors that we referenced earlier, because it fits into an overall unified communication strategy that those vendors are now marketing. And I expect that's what will drive the enterprise portion.

Operator

We have no more questions in queue. Please continue.

Paul Ricci

Okay. Well, thank you again for joining us to discuss our second quarter, and we look forward to talking to you at the end of next quarter.

Operator

All right. Thank you. And ladies and gentlemen, this conference will be available for replay after 7 p.m. Eastern time today through midnight, May 24, 2010. And you may access the AT&T replay system at anytime by dialing 1-800-475-6701 and entering the access code 155416. International participants may dial (320)365-3844. And that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.

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