Nuance Communications' (NUAN) CEO Paul Ricci on Q3 2014 Results - Earnings Call Transcript

| About: Nuance Communications, (NUAN)

Nuance Communications, Inc. (NASDAQ:NUAN)

Q3 2014 Earnings Conference Call

August 11, 2014, 5:00 PM ET

Executives

Kevin Faulkner - VP, IR

Paul Ricci - Chairman & CEO

Tom Beaudoin - CFO

Bruce Bowden - EVP of Corporate Strategy & Development

Analysts

Jennifer Lowe - Morgan Stanley

Richard Davis - Canaccord

Shyam Patil - Wedbush Securities

Daniel Ives - FBR Capital Markets

Brent Thill - UBS

John Bright - Avondale Partners

Nandan Amladi - Deutsche Bank

Jeff Van Rhee - Craig-Hallum

Tom Roderick - Stifel

Greg Dunham - Goldman Sachs

Tavis McCourt - Raymond James

Scott Zeller - Needham & Company

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Nuance's Third Quarter Fiscal 2014 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; CFO, Mr. Tom Beaudoin; EVP of Corporate Strategy and Development, Mr. Bruce Bowden; and Vice President of Investor Relations, Mr. Kevin Faulkner.

At this time, I would like to turn the call over to Mr. Faulkner. Please go ahead, sir.

Kevin Faulkner

Thanks, Rich. 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 separate 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

Good afternoon. Before taking your questions, I’d like to highlight some key points about our results and progress. In the third quarter, we achieved strong bookings, deferred revenue, operating cash flow, and EPS. These positive results were balanced by revenue that was below our expectations.

The transition to recurring revenue models continues to happen faster than we expected. This was evident in bookings where our bookings growth rate for OnDemand contracts exceeded our aggregate bookings growth rate. Bookings strength was led by Healthcare OnDemand, Dragon Medical, Automotive, Enterprise OnDemand and MFP print solutions.

The transition was also evident in our revenue, both recurring revenue and OnDemand revenue grew 12% year-over-year while total revenue declined slightly.

Notably, OnDemand revenue exceeded license revenue for the first time. Year-over-year license revenues fell 6 points as a percent of total revenue from 42% to 36%, while OnDemand revenue gained 5 points from 32% to 37%.

Deferred revenue and cash flow also benefited from the positive characteristics of our growing recurring revenue models. Deferred revenue grew 32% and operating cash flows represented 111% of non-GAAP net income, exceeding our guidelines.

Despite the positive bookings, deferred revenue and cash flow performance, Q3 revenue was somewhat below our expectations. Revenue performance was solid in Dragon Medical, Diagnostics, Automotive, Enterprise OnDemand, but this strength was outweighed by the faster-than-expected transition in our revenue model, lower-than-expected contribution from acquisitions, and underperformance in Imaging.

Although this transition is reducing near-term revenue growth, it is adding sustainability and predictability to our future revenue streams. We are aware of the challenge this shift to recurring revenues poses for near-term revenues, but we remain committed to increase shareholder value during this transition.

The expense controls we announced last quarter helped us to achieve a Q3 EPS at the midpoint of our guidance range despite the revenue shortfall. We will sustain these expense initiatives in Q4 and into FY15 with the objective of delivering improved margins while also ensuring future growth in our key markets.

As a result of all these factors, we are raising our bookings guidance for the year although we are slightly lowering our revenue and earnings forecast.

As a final note, we also announced today that we are exercising the call option on our 2027 convertible debentures. We expect the redemption to be completed in September. Redeeming these notes will reduce our interest expense and reduce potential share dilution.

We’re now happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we will begin with the line of Jennifer Lowe with Morgan Stanley. Please go ahead.

Jennifer Lowe - Morgan Stanley

First question, and this is a pretty minor one. But, Paul, you mentioned the contribution from acquisitions was a little bit less than you had thought. I think on the last call you talked about $15 million to $20 million coming from acquisitions in the back half of the year. Could you just maybe expand on that a little bit? Were there acquisitions that you had expected to close that just didn’t close in the timeframe expected, or were there acquisitions that you completed that just didn’t yield the results that you had expected?

Paul Ricci

We had anticipated with some confidence of completing a number of acquisitions, small acquisitions that haven’t happened, and so the contributions for the back half of the year will be more or like half of that range.

Jennifer Lowe - Morgan Stanley

And then, maybe kind of taking that a step further. If you take out the acquisitions and look at the midpoint of the range, it looks like Q4 will basically be flat year-over-year or a little up slightly from Q4 of last year, but at the same time we’ve seen this very strong in bookings over the last few quarters, and sort of it sounds like that will continue into Q4. As we think about the trajectory on the revenue line, and I know these things can be difficult given all the moving pieces, but as we think about ’15 and obviously we’re not getting guidance for that yet, but as we think about ’15, when should we start to see that growing backlog of business that’s been growing so well start to convert into revenue growth?

Paul Ricci

As we are looking at the conversion, the transition from in-quarter license revenues to OnDemand bookings and revenues associated with those, of course, the revenues are more elongated, and there is an implementation time in most of those business lines, and so some of the hesitation you are seeing in revenue growth from that bookings is a result of the fact that there are implementation cycles. Nonetheless, we do expect to see contributions from that backlog as we go into fiscal ’15.

Jennifer Lowe - Morgan Stanley

And maybe just one last question on that, to the extent that the gating factor is implementation, is that something you have control over, is it a resource issue, or is it just the cadence at which customers are moving?

Paul Ricci

It’s not primarily under our control. If it were, we would probably accelerate resources associated with that. In some cases, the implementation is driven by product cycles of the customer with whom we’ve done the bookings. In the mobile business, for example, you can imagine that bookings occurs for an automotive arrangement that we might not see any revenues for, for some considerable period of time, but even in healthcare, there is a substantial backlog because of the IT implementations necessary in the healthcare providers themselves and we are not really in control of that.

We do, do some things to optimize it and we’ve made some progress on that in the last few quarters, and we’ll continue to work on that, but there is a real limitation to our ability to control that.

Operator

And we will now go to the line of Richard Davis with Canaccord. Please go ahead.

Richard Davis - Canaccord

Just a couple of kind of single strap questions. Has there been any change in the duration of the deals at all or has it all been steady? So that would be the first question. Second question is, is there are any scenario analysis, like if you kind of grew your recurring revenues, your bookings, I guess bookings in the mid-teens and say next year they grew 50 basis point or 500 basis points higher, so they grew 20%, would that actually hurt your margins next year or keep it the same? I’m just trying to think of scenario analysis. Those are kind of the two questions that I had.

Tom Beaudoin

So, Richard, the duration, we have a fairly large mix of durations across all the business units. It hasn’t fundamentally changed. Clearly, the growth in those bookings, as Paul alluded to in the messaging, is growing faster than what we are seeing on our license side.

And with respect to kind of bookings growth to gross margins, there continues to be a mix, and as we continue to drive the mix to these hosted and services type arrangements, they have a much higher and longer value to them, but they do come with lower margins. And I think if you look at the trends over the last few quarters, we’ve been able to keep the margins relatively constant as we continue to go through that product and license and OnDemand recurring revenue mix, and I think we’ve put some numbers in there around, it’s a 6% drop year-over-year.

And so, a little bit of it next year will depend on the continuation of that. That will continue into next year, but we’re also driving a lot of efficiency and productivity, and that’s what has allowed us to kind of keep the gross margins relatively consistent while we go through that shift.

Richard Davis - Canaccord

And when you go down to the operating income line, does that come out more in the wash there, because it would be a little bit different? I just want to make sure I get --.

Tom Beaudoin

In the operating margin, I think, as you can see, we have seen, if you look at it as a percent of revenue, we’ve seen efficiencies in sales and marketing and G&A. We’ve continued to invest in R&D although that is an area that we continue to assess as we look at maximizing our investments against the most critical growth areas, but we’ve seen some slight improvement of operating expenses to revenue, and we would hope as revenue continues to grow and as we look at efficiency and productivity that will also yield some benefit.

Operator

We’ll go to the line of Shyam Patil with Wedbush Securities. Please go ahead.

Shyam Patil - Wedbush Securities

Paul, I think on a previous call, maybe a quarter or two ago, you had talked about fiscal ’15 as being mid-to-upper single-digit revenue growth, is that still in the ballpark? Or do you think that’s potentially subject to change given the mix shift that you’ve seen over the past quarter or so?

Paul Ricci

I don’t have any information today to change previous comments about fiscal ’15, and I don’t want to provide further guidance on fiscal ’15 at this point.

Shyam Patil - Wedbush Securities

Could you talk a little bit about China, as an opportunity? It seems like on the mobile front, you’ve been seeing some momentum there. Maybe that is an opportunity for handsets as well as your other mobile products? And also, just how you think about navigating the IP landscape there as well?

Paul Ricci

China is an opportunity in two respects, and we’ve talked about this before. First, it is an important market to our large global customers, and that’s most of our big customers in the mobile segment whether it’s in smartphones or consumer electronics or automotive, and it’s also, of course, increasingly an opportunity for targeted customers who are based in China, and we’ve made a lot of progress in the last year with respect to both. So, I’m optimistic about that market.

I’m also optimistic about other contributions from other areas of growth outside of the U.S. and in markets where we’re seeing expansion of revenues in our mobile segment that are enabled by the really broad portfolio of global languages that we support in our product offering, which I think is a real source of distinction for us. I don’t really have anything to say about the IP landscape in China. As you know, it’s a complex set of issues, and like most companies, we manage it with a variety of techniques, and I think that’s going fine.

Operator

Thank you. We’ll now go to the line of Daniel Ives with FBR Capital Markets. Please go ahead.

Daniel Ives - FBR Capital Markets

Could you first off talk on the mobile side in terms of pipeline or deals that we could expect over the next three to six months? Maybe just from a high level in terms of what you are seeing out there in the field in terms of a sentiment shift?

Paul Ricci

I want to make sure I understood your question, what did you mean by sentiment shift?

Daniel Ives - FBR Capital Markets

Just in terms of more carriers going to advanced speech, taking it to the next level, where you guys would benefit both from the economics as well as just a secular shift.

Paul Ricci

When we talk about mobile, of course, it has sub-segments, and I should start with automotive because that is the business line that is showing the strongest growth and the best performance this year, and it does seem to be a continuation of trends that we’ve talked about in recent quarters, which are two.

First, an adoption in automotives of speech as really a requirement of the user-end experience within cars, and that’s been very good news for us, and we have enjoyed real robust expansion in our relationships with automotive vendors and their suppliers around the globe.

And the second trend is the movement towards connected solutions, which also is good news for us over time, although it is, of course, causing an elongation of revenues in automotive as well. But I think the trends, generally speaking, in automotive are quite positive.

And in the smartphone business, which is true in other consumer electronic devices as well, of course, the big change is that we are seeing a migration towards more robust virtual systems, and if you look at the materials that we published at this earnings announcement and the previous earnings announcements, I think you see reference to a number of new wins and design wins and deployments in that area, some of which have become public, some of which are not.

So, I think that our strategy of being a provider of those capabilities to emerging brands who are seeking to serve a variety of devices in that market is working out well for us, but it is a longer time to revenue.

Daniel Ives - FBR Capital Markets

In terms of the transition, obviously, we’ve kind of had ups and downs in the transition. Does it feel like the trend, the move to subscription, the model shift, we’re kind of in that seventh to eighth inning? I know you can’t talk much about 2015, but maybe you could just give some comment about where we are in that shift?

Paul Ricci

I think the most factual way that I can answer that question is to make reference to a data point that I think it’s in the prepared remarks, but also was in my opening comments, and that is that we’re now at 65% of recurring revenues, and if you look back at the trend of the percentage for recurring revenues over the last four, six quarters, you’ve seen that growing steadily up. I think that percentage is going to continue to grow.

I can’t say with confidence what it will do any given quarter because we could have in a particular quarter a significant conventional licensing deal or several conventional licensing deals, but I think as we look out over the next year, that percentage will continue to go up. To speak to what inning we’re in, it’s a little difficult to characterize it quite that way, but we are at a relatively high percentage of recurring revenues, so I think it will continue to go up though.

Operator

And we will now go to the line of Brent Thill with UBS. Please go ahead.

Brent Thill - UBS

Paul, just a follow-up on the transition with healthcare to recurring, I’m just curious if you could articulate where you are at as it relates to that core business? If you look at the negative 2% organic growth, obviously it’s been masked by the transition, where would you see you are at on that particular business? And what from your perspective is effectively the biggest drag on that core business today?

Paul Ricci

You are asking about healthcare?

Brent Thill - UBS

That’s right.

Paul Ricci

It was a difficult quarter year-over-year comparison for Dragon Medical. We had a very large licensing quarter a year ago in this quarter, and that has some effect for this quarter, but we are seeing a movement there towards alternative revenue models, and that is having some effect.

There has also been somewhat limited growth in HIM’s revenues in the last couple of quarters. That will improve as we look into next year and as we implement some of our backlog contracts, but that’s also weighed as well.

Brent Thill - UBS

And then, just curious in terms of the guidance for Q4, are you embedding now that the recurring OnDemand is going to shadow over the perpetual? I guess we’ve seen some other companies that have given much more proactive guidance and not assuming a lot of the perpetual and a shift like this to make sure that what number you are giving to the Street is the number that you are going to deliver. Is there any thought about how you think about, how are you giving guidance and what the split of that mix is?

Paul Ricci

I’m not entirely sure I understood your question, but let me --.

Brent Thill - UBS

I guess, let me rephrase it. From a guidance perspective, obviously this quarter you highlighted a shift to OnDemand, I guess why not give a stronger transition to OnDemand and not count the perpetual into the guidance model so that you effectively are ensuring the number you are giving is eliminating some of those other factors?

Paul Ricci

We did seek to give guidance for the fourth quarter that we believe was realizable given the state of the pipeline that we have in front of us. So, we’ve made our best estimates and we’ve tried to be prudent in doing that. We, nonetheless, will have to complete a number of agreements in-quarter that will contribute to that. But as I noted in response to a previous question, the percentage of recurring revenue is going up and has been going up and will continue to go up.

I should also say that to a meaningful extent in the mobile and the enterprise business, we are in fact seeking to accelerate the transition to recurring, so perhaps some of what you are suggesting is embedded in our guidance this quarter.

Operator

Thank you. We’ll now go to the line of John Bright with Avondale Partners. Please go ahead.

John Bright - Avondale Partners

Paul, I’m going to take another slice at this apple on the transition question. If you can help investors, when you look at your healthcare business, your mobile combined with consumer and your enterprise business, and maybe talk to us about how much within each still is operating under perpetual license model.

Paul Ricci

I don’t have the percentage broken out by business line segment, and I don’t think we’re providing that. Is that your question?

John Bright - Avondale Partners

It is, or do you have one overall, so that we can somehow get our arms around the headwind and make our own judgment of when we might see the inflection point?

Tom Beaudoin

I think what we have said is that about 65% is recurring, and I think also kind of from a bookings standpoint, we see approximately a third of those bookings get realized in the quarter. And then, for the first time ever this quarter, the OnDemand revenues actually exceeded the product and license revenues. So, I think there is some metrics there that are pointing towards where we are.

John Bright - Avondale Partners

Let me look at it as a different positive, and Tom, you’ve historically said that your operating cash flow would be 85%, I think, of your - your non-GAAP net income would be 85% of your operating cash flow, you’ve been trending meaningfully above that, which is a strong positive in the cash building up. Is it time to update that metric?

Tom Beaudoin

We did John at the beginning of the year. We were at 85% the previous year. This year, we say it’s more around 95%, and as you know, we have beat that by a little bit this year, I guess, to-date. So we had updated it to kind of 95%.

John Bright - Avondale Partners

Maybe walk us through your expectations and the timing of the call option for convertible notes?

Tom Beaudoin

Sure. So based on the announcement today to the extent any of the holders do not put the option to us, and they have the option to do that as of August 15, then 30 business days out, which will be September 24, we will call any remaining balances left in that convert.

John Bright - Avondale Partners

There is no plans to refinance or to issue additional?

Tom Beaudoin

Not at this point, no.

Operator

All right. We’ll now go to the line of Nandan Amladi with Deutsche Bank. Please go ahead.

Nandan Amladi - Deutsche Bank

Two product questions. So, first one is in the healthcare segment. Paul in your prepared remarks you made reference to delays in ICD-10 and therefore more interest in the CDI solutions. What is the typical pricing for each of these components, just the order of magnitude in your Clintegrity portfolio, and what portion is sold as a term license versus perpetual?

Tom Beaudoin

In our Clintegrity line of products, which include almost every solution and every product in that category, is either a term license or services delivery type solution or solutions, so there is virtually no drop down perpetual licensing in that part of the healthcare business.

Nandan Amladi - Deutsche Bank

Okay. But on the pricing, I’m just trying to get a sense for your deal sizes in that segment, because at the beginning of last year, Clintegrity was expected to contribute about $100 million in organic revenue soon after we made those acquisitions, and are we tracking to that number?

Paul Ricci

Without speaking about that business line in particular, because we don’t breakout revenues by product line, it’s a little bit difficult with the Clintegrity to talk about typical deal sizes because it is scaled to the size of the healthcare provider that we’re selling to, and we are working up and down the spectrum with that solution.

Nandan Amladi - Deutsche Bank

And then, a question on the enterprise side, kind of a similar question in a sense that after you launched Nina, I guess the expectation is that the complexity of those contracts has increased because you are having to do more work, how is the go-live period impacted as a result of that?

Paul Ricci

It’s reasonable to conclude that the implementation time on the Nina solutions has been considerably longer than we expected. It’s a relatively new solution in a space -- in an area where enterprises are struggling for what their approaches is, and therefore the time to sale and the time to implementation has taken longer in Nina than we expected.

Having said that, we’ve had some notable implementations that have gotten public visibility, and I think that as those -- as we start to build some momentum around those, we’ll see that improve.

Operator

Thank you. We’ll next go the line of Jeff Van Rhee with Craig-Hallum. Please go ahead.

Jeff Van Rhee - Craig-Hallum

Paul, just a couple of questions from me. One clarification, I think it was Jennifer’s first question, the revenue contribution from acquisitions, I just want to make sure I heard that right, you had expected $15 million to $20 million in the year and because a number of them didn’t happen, it looks like we’re going to get roughly half of that, is that --?

Paul Ricci

Yes, I think that’s correct.

Van Rhee - Craig-Hallum

And then, as it relates to, I guess, to the other part of the guide lower on the forward quarter, and sort of back to the bookings question, is there any way you can quantify for us the magnitude of the surprise with a little more specificity in the bookings line that led to the incremental maybe $20 million or so in revenue pull-down in the forward quarter? Namely, was there a percent, as you looked at your expectations on bookings for the quarter and you had certain percentages for term, perpetual, et cetera, and it played out differently, can you give us just maybe a little more insight in there, because I think everybody is sort of struggling to dial in that incremental guide down and how this continuing transition, which is consistently accelerating, is still catching by surprise? Any quantification there would be great.

Tom Beaudoin

I can try. So certainly a portion of it is, to your first question, so some of it was just on the acquisition side. A portion of it is we talked about core imaging, they were significantly below our expectations in Q3. There is a number of really positives in that business. We’ve had some strengthening of our sales execution, we had two very large bookings which will contribute to revenue in Q4, and then we have the launch of PDF, that was last quarter, but we should get some effect of that. But we still see it a little bit less than what we had thought maybe at the beginning of last quarter.

And then to your last point, most of the effect, as Paul talked about, is this further shifting and therefore kind of a one-to-one bookings to revenue decline on deals that we are either negotiating a longer type of deal structure or a deal that might get pushed out, so it has a slightly smaller impact on the bookings and it certainly got much shorter visibility.

As Paul said, the bookings that we’ve been driving on the transactional side of our business, the OnDemand, we have a lot of visibility to how that turns into revenue in the next quarter or two. Does that help?

Jeff Van Rhee - Craig-Hallum

And then, I guess just maybe, Paul, if you will, on the clinical information management side, could you touch on competitive landscape, obviously you’ve acquired and put together a much more robust suite, and you are going after it, and that has shaken up the landscape here in the last 18 months or so, maybe a little more, but can you just talk about how that landscape is playing out and how it’s changed?

Paul Ricci

You’re referring to the clinical documentation improvement segment that we’ve --?

Jeff Van Rhee - Craig-Hallum

Yes.

Paul Ricci

There is competition particularly from some of the firms who have traditional coding solutions. But our CDI offering really is quite differentiated, and I think we’re seeing the benefits of that because of its focus on the clinical aspects of documentation, and we feel good about the positioning of that.

We also think that our partnerships with the EMR vendors is an important aspect of our strategy and that’s been going well as well. So I don’t think that there has been any particular, other than the changes in the ICD-10 expectations, I don’t think there has been really a lot of change in that landscape over the last year.

Jeff Van Rhee - Craig-Hallum

And no real -- outside of your positioning, no real shifts from the competition that you would call out?

Paul Ricci

No.

Operator

Now we go to the line of Tom Roderick with Stifel. Please go ahead.

Tom Roderick - Stifel

Going back to mobile, and in particular, automotive is an area you continue to call out as a key area of strength. Can you talk about some of the dynamics of pricing in both mobile versus automotive? I’m sure you don’t want to get down to individual price points, but general trend line, if you can address some of the pricing dynamics in both of those spaces? And then, in particular mobile, as you switch to alternative models trying to capture more subscription and recurring revenue there as opposed to just peer license, wondering how that’s impacting pricing?

Paul Ricci

As we’ve discussed in previous calls, the pricing pressure in the mobile segment has been continuous, particularly in the smartphone segment, but that has been offset by the evolving nature of the solutions and particularly the evolution towards connected solutions, which usually involve the contribution of more value and content from us into the solution, and so therefore, in some instances we’re able to achieve higher prices and those two things have been somewhat offsetting. The effect is -- the pressure on all that is, I think, greater in smartphones than it is in automotive.

Tom Roderick - Stifel

Last question from me. I want to make sure I heard your comments properly regarding the cost structure. Can you just sort of repeat, Paul, what you had said there? It sounded like you are looking to rationalize costs in some areas so as to maintain the margins, but I want to make sure I heard that properly. To the extent that I did, any particular areas you’d call out that you see the most room for improvement in?

Paul Ricci

As we’ve gone through this transition and revenue growth has slowed, we, of course, have focused on how we can sustain shareholder value, and one of the ways to do that is to support our margins. And as I signaled in the previous call, we have been focusing on that more intensely and we’ve done it through reduction in expense growth, we’ve done it through the elimination of some expenses, and by intensifying our focus on which markets we were going to seek to grow in to a smaller number and putting more energy behind those, and I think all those did support our earnings accomplishment this quarter. I think it will be important for us as we go into ’15 and we seek to improve our margins.

Operator

We’ll now go to the line of Greg Dunham with Goldman Sachs. Please go ahead.

Greg Dunham - Goldman Sachs

On the bookings, you’ve raised guidance for the year to roughly mid-20s growth, 24% by my math, at the midpoint. You benefited from a strong start and then in the back half of the year, it’s more in the low teens, how much of that slowdown to the low teens is just the fact that you kind of pull-forward business in the first half or had a stronger first half than expected versus the low teens being the new normal?

Paul Ricci

I want to say a couple of things. First, if you look at the history of the year, we started out with bookings growth that I think was targeted at - bookings guidance that was targeted at 15% growth. We then raised it during the year to 20% growth, and as you’ve inferred correctly, we’ve raised it somewhat higher than that, now, with our most recent guidance.

At the same time, we’ve consistently said over the last several quarters that we did enjoy some large bookings earlier in the year than we anticipated, and so therefore, we should expect to see a slowdown in the overall trend for the year, and I think that’s working out to be approximately right.

Greg Dunham - Goldman Sachs

Then, one follow-up. If I look at the short-term deferred growth, it’s about 9% year-over-year, should we expect that growth to accelerate as this transition goes along or how shall we be modeling that line? Thanks.

Tom Beaudoin

Deferred revenue?

Greg Dunham - Goldman Sachs

Short-term deferred, yes.

Tom Beaudoin

There is some timing issues within that, so I think you have to - I would encourage you to look at both short and long-term, and then to look at it over two or three quarters because there are some larger deals that come in through the year and that impact that. But, I think, based on the metrics that we’ve set, you are going to see growth in that going forward.

Operator

We’ll go to the line of Tavis McCourt with Raymond James. Please go ahead.

Tavis McCourt - Raymond James

Thanks for taking my questions. I have two of them. First, I wanted a little more detail on the Imaging business. You talked a little bit about the weakness this quarter, but really it’s been six consecutive quarters of some pretty steep organic declines, and I guess, from a strategic perspective, are you guys still thinking that as a stable to slightly growing business or is that more of a business that we should think about it being perpetual decline as that has been recently? And then, secondly on costs, if I just kind of simplistically look at your hosting revenues year-over-year roughly $20 million in the quarter and your cost of goods sold in professional services and hosting is up roughly the same $20 million, so obviously not a lot of leverage and you’ve got decent scale, right, you are doing $700 million or so in professional services and hosting, so I’m wondering is there things you are learning as you scale this business that may help you turn around that gross margin trend? And what is the revenue level that you need to start seeing the benefits of scale on the hosting business?

Paul Ricci

With respect to the Imaging question, it has been a somewhat disappointing year, but notwithstanding that, as we look into this quarter and next year, we expect to see an improvement in growth, and that’s driven by the fact that we’ve had good performance in bookings in Imaging, and driven by the new partnerships that we have developed around our MFP print solutions, which, we believe, will contribute additional revenues as we look out over the next few quarters and some strengthening in our position in the MFP scan business.

I think all of those taken together actually suggests that we will look at a materially improved fiscal ’15 for the Imaging business over ’14, and as you know it continues to be a very profitable business for us.

With respect to the margin and hosting question, do you want to --?

Tom Beaudoin

Sure. You partially answered your question because there is a mix issue in there, and a lot of these deployments across particularly mobile and enterprise do come with some upfront costs to deploy these, and as Paul talked earlier, there is a timeframe there. So, it depends on where you are in the cycle and how many of those you are doing in a particular period that affects that, and that, of course, the overall hosting infrastructure costs. We have been achieving some efficiencies and productivities from a scale perspective, from a consolidations perspective, from a better utilization.

And so, as we’ve talked about, we continue to believe that there is productivity and efficiency initiatives in our services and hosted operations across healthcare, mobile and enterprise, but then you get the offsetting mix shift from the licenses, so there’s kind of three factors there.

Tavis McCourt - Raymond James

And should we think, given how fast the hosting business is growing, is the stand-alone gross margin on hosting above or below that consolidated number you guys give us with professional services and hosting together?

Tom Beaudoin

I think it’s probably slightly above. It’s above.

Operator

Thank you. And our last question will come from the line of Scott Zeller with Needham & Company. Please go ahead.

Scott Zeller - Needham & Company

Just looking for a little more color on Dragon Consumer, if you could offer it please?

Paul Ricci

We launched Dragon, the newest version of Dragon in the last few weeks and typically -- and we have a lot of history now on this. In the quarter, prior to the launch of Dragon, we reduced revenues in the channel and we see a slowdown in business for a variety of reasons, and we did see that in the third quarter and that weighed on the overall mobile and consumer growth rates.

We have a launch this quarter and we’ll see some benefits, of course, in this quarter from the contributions of new products in the channel and upgrades that customers will take for that product.

Scott Zeller - Needham & Company

Any differences for this cycle as you look forward versus previous cycles?

Paul Ricci

I don’t think substantially different. We have a lot of history and a lot of data now, and I think we have a reasonable model and I think we’re probably on track for performance within relative parameters of that model.

Scott Zeller - Needham & Company

Thank you.

Paul Ricci

Okay then, I want to thank you for your questions, and we look forward to speaking with you again next quarter.

Operator

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