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Nuance Communications (NASDAQ:NUAN)

F1Q11 Earnings Call

February 09, 2011 5:00 pm ET

Executives

Thomas Beaudoin - Chief Financial Officer and Executive Vice President

Kevin Faulkner - Investor Relations

Paul Ricci - Chairman and Chief Executive Officer

Analysts

Richard Davis - Canaccord Genuity

Brent Thill - UBS Investment Bank

Mike Latimore - Northland Securities Inc.

Nandan Amladi - Deutsche Bank AG

Daniel Cummins - ThinkEquity LLC

Neil Herman - Soleil Securities Group, Inc.

Shaul Eyal - Oppenheimer & Co. Inc.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC

Gonzalo Cavenaghi

Daniel Ives - FBR Capital Markets & Co.

Craig Nankervis - First Analysis Securities Corporation

Shyam Patil - Raymond James & Associates

Mark Murphy - Piper Jaffray Companies

John Bright - Avondale Partners, LLC

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Nuance's First Quarter 2011 Conference Call. [Operator Instructions] With us today are the Chairman and Chief Executive Officer of Nuance, Mr. Paul Ricci; CFO, Mr. Tom Beaudoin; 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, Cathy. 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 issued, along with our release, a set of prepared remarks in advance of this call. 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

Thanks, Kevin. Before taking your questions, I might underscore a few points from the prepared documents.

First, Nuance is investing for growth. As we guided last quarter, Q1 sales and marketing expenses increased by $7 million compared to Q4. We also accelerated our engineering and services investments targeted at fulfilling recently expanded Mobile strategic partnerships and Enterprise On-Demand contracts. While we continue to invest, expense increases this quarter will be significantly moderated.

Secondly, Q1 was a particularly strong bookings quarter, especially in our Healthcare, On-Demand and Mobile Services offerings, which contribute to revenue over an extended period of time. The estimated three-year value of our On-Demand contracts was $1.174 billion, up 21% from the same quarter last year. Healthcare On-Demand bookings were up 150% from the same quarter last year.

Voicemail to Text bookings were up more than 200% sequentially over fourth quarter bookings, which itself, had been a previous record. We signed a new contract with a Latin American carrier that we estimate will cover 400 million messages over the four-year span of that contract. Our Automotive unit achieved important design wins with OEMs such as Audi, BMW, and Fiat Chrysler. The strength of our Q1 bookings is one factor that boosts our confidence in growth during the second of the year.

In addition, I want to emphasize that market trends remain favorable, and Nuance's competitive position remains strong. Secular growth trends across the industries favors Nuance's solutions due to our leading technology, geographical capabilities and support of the diverse platforms and operating systems. Proliferation of mobile devices and demand for content gives us attractive end markets and increasing market visibility for our solutions and applications.

The push for automation, cost savings and migration to digital information in the Healthcare market is a key driver of our Healthcare growth. We see increasing strength in product and license revenues from our Imaging business. I would also note that we remain on track for another year of strong cash flow growth.

As planned during the first quarter, we retired the final material acquired liability associated with the SpinVox acquisition, which reduced operating cash flows by about $23 million. But for the payment of that liability, operating cash flow would've approximated non-GAAP net income, a point that has been important to investors.

In summary, competitively, we have never been stronger. We've invested for growth as we indicated we would. We expect to see the benefits of those investments throughout this year, enabling us to maintain our original guidance for FY '11. Q2 is off to a solid start, and we remain confident in our direction. We'll now take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Daniel Ives with FBR Capital Markets.

Daniel Ives - FBR Capital Markets & Co.

First, so overall bookings, was that in line, worse or better than your expectations three months ago, if I assume that's the overall number?

Paul Ricci

Our bookings in the first quarter somewhat have overachieved our plan for bookings in the first quarter in aggregate across the company.

Daniel Ives - FBR Capital Markets & Co.

So did more revenue than you guys expected not fall into the quarter, and obviously, like off-balance-sheet or fell into deferred? I mean, is that just from maybe time period address that or just talk about that.

Paul Ricci

Let me let Tom speak to the deferred revenue, and then I'll speak to your question more broadly.

Thomas Beaudoin

Well, you did see -- well, you will see when you see the balance sheet that deferred revenues did go up. That's due to a couple of factors. It is related to some set up and upfront fees related to our Hosting offerings. But I'll remind you that a lot of our hosted offerings are on a time-based or a minute-based billing mechanism, and therefore, a lot of that activity doesn't get on to deferred . But it is a good indicator that we are continuing to do more work in standing up those hosted offerings. And additionally, deferred increased a little bit through the eCopy Billings in our Imaging business, which has some deferred revenue associated with it.

Paul Ricci

Speaking more broadly to your question, Daniel, I think the answer to your question is yes. We are, as you can tell from the growth of our aggregate On-Demand metric as compared to our overall growth, we are seeing a continued migration to that, and so in fact, bookings were robust, but less of that revenue due to the nature of the way that revenue rolls out over time fell into the quarter.

Daniel Ives - FBR Capital Markets & Co.

And a lot of that was the Healthcare side?

Paul Ricci

I'm sorry, say that again?

Daniel Cummins - ThinkEquity LLC

And the Healthcare was a good piece of that?

Thomas Beaudoin

The Healthcare was part of that. Healthcare revenues, I should say, seasonally, Dragon Medical -- the December quarter is not a strong quarter, seasonally, for Dragon Medical. It was not in this quarter, and it was not in the previous December quarter. So some of the lower license revenues for Dragon Medical in the first quarter are expected.

Daniel Ives - FBR Capital Markets & Co.

On the Enterprise business, and obviously, it was choppy like over the last year. Just talk about that at least like anecdotally, is it improving? Your thoughts on it.

Paul Ricci

Well, as we've said in previous quarters, and as we suggested in our comments, it's a business going through a transition, and that transition hit the highest level of the transition toward an On-Demand model, and secondarily, towards the models of managed services that we sell directly to large customers. And that has been, as you pointed out, a choppy transition. I think that it continues to be. We do have real success underway in implementing our solutions in a number of large customers that we booked over the last year, and we will begin to see the benefits of those later in this year.

Operator

Next, we have Richard Davis with Canaccord.

Richard Davis - Canaccord Genuity

One thing on the Enterprise side. Just wanted to get a sense this. So it so sounds like with the bookings that you have, you're pretty confident that, that thing will snap back. And then the second more broad question that I have is, although I'm as interested in 90-day report cards as anyone, the question I have that I get from investors sometimes is where do you stand with regard to turning Nuance into a platform upon which people can write vertical apps on the business? So first, the tactical, then strategic question.

Paul Ricci

I think the answer to your first question is yes, consistent with what I have said before. I want to reiterate our long-term, our conviction in the long-term value of that business and the extent to which our solutions in that business are compelling. I spent a couple of hours yesterday with one of our major customers discussing the progress of the implementation of a large solution, the large solution in this case being one that might handle more than 100 million minutes a year, and it's hard to walk away from that discussion with a customer like that without a conviction that we're able to deliver real value, and it’s differentiated, and that we can continue to do that, and that form of our revenue growth will continue to progress. Your second question I think had to do with a platform question?

Richard Davis - Canaccord Genuity

Correct.

Paul Ricci

Well, there are a number of ways, of course, in which Nuance's technology serves as a platform, and we license our Enterprise technology to partners, of course, to deploy their own solutions based on that. And while I've suggested that has been somewhat difficult for us over the last couple of years, because our historical partners have themselves had a reasonably difficult time, we have seen a new set of partners emerging out of that, and those are primarily the larger systems integrators. And I think, they will in fact, turn into an important platform leverage for us as we look out over the next couple of years.

Operator

We have a question from Nandan Amladi with Deutsche Bank.

Nandan Amladi - Deutsche Bank AG

Question on the Healthcare front. There's been some consolidation, and it seemed this began last year, but more recently just over the past three to six months, there's been consolidation in the competitive space for medical transcription. Has that impacted your business at all, in terms of pricing expectations that customers have as well as the automation rates?

Paul Ricci

You're right. There has been some consolidation. And I think that consolidation has been driven in no small part by the disruption that Nuance is introduced into that industry with its technology. I might start there. I think our technology continues to be demonstratively superior and to deliver not just superior cost, but better quality, better turnaround times. And I think it is just perceived as being a superior solution for the largest Healthcare providers. So I think we're going to continue to see consolidation in the traditional transcription firms as a result of that. To your question of price, they are responding with lower prices as you would expect them to do to help mitigate the lost productivity that they have, without having the quality of technology we have. I don't think that's going to be satisfactory, however. As I suggested, there are a number of factors that these large institutions are looking at, and I think the way we sell and market our solutions now goes well beyond the simple price discussion into questions of how to meet those customer's needs over an evolving period of time in which they're implementing new electronic medical records and which other practices and digital requirements are changing. The introduction of Clinical Language Understanding, which we've been talking about and other factors. So I think it's become a much more complex solution as we look forward.

Nandan Amladi - Deutsche Bank AG

How does the structure of your sales teams differ for large hospitals where you're selling larger systems, transcription systems, versus the Dragon Medical and sort of the lower end product that started it more at the electronic medical record stimulus money?

Paul Ricci

Well, I might, in answering your question, just correct what might be a misunderstanding. We do sell our Dragon Medical Solutions, which are packaged, which are available both in versions that are targeted at the mid-market and small market, as well as in large institutions, and so our network-based Dragon Solutions are sold into large institutions as well. And as I think perhaps your question suggests, we serve the largest institutions with our own direct sales organization and the smaller institutions through a variety of partners and channels. And that will continue to be our plan.

Operator

Next, we have Shyam Patil with Raymond James & Associates.

Shyam Patil - Raymond James & Associates

When I look at the revenue, it looks like it was only about $1 million or so light of the midpoint of the guidance. The real variance kind of in the earnings or the EBIT is through the gross margins. And I was just kind of wondering if you guys could talk about what impacted the license of Professional Services gross margins? And how should we think about those two lines going forward?

Paul Ricci

There were a couple of factors in the gross margins in the quarter, and those included Professional Services expenses associated with the implementation of the contracts we have with a couple of strategic partners in the Mobile business, and with lower gross margins on the Dragon professional consumer products that sold to high volumes in the quarter. Those were the primary factors.

Shyam Patil - Raymond James & Associates

How should we think about the gross margins in aggregate or for those two lines specifically for the rest of the year? Should we think about them in terms of the average of how they were last year or should this be the new run rate?

Paul Ricci

I think we believe gross margins will trend up slightly over the balance of the year from where they are.

Shyam Patil - Raymond James & Associates

And then, Tom, I know you talked about this in the prepared remarks. The cash flow's been a big topic of discussion. You've commented in your remarks that you expect it to be in-line with net income throughout the rest of 2011. At this point, is there any reason to think that won't be the case beyond 2011 kind of on a multiyear period?

Thomas Beaudoin

Well, we don't guide that far out. But as we've talked about, there's a couple of minor items that affect the cash flow to non-GAAP income. It's restructuring charges, it's working capital. Those are the primary drivers going forward. So we don't think that there'll be any major changes to that. And we've had two good quarters here in a row of cash flows from operations to non-GAAP net income when you adjust for the SpinVox this quarter. So, we see that going forward.

Shyam Patil - Raymond James & Associates

You guys have built up a pretty solid cash balance over the years. And as M&A opportunities become smaller in size and the cash flow dynamics improve, how do you think about potentially using the cash for a buyback, either to offset dilution or maybe to take advantage of volatility in the stock?

Paul Ricci

Well, it's possible in the future. We haven't made any decisions to do that. At the moment, we're just focused on driving the best cash flows we can, and we continue to look at a wide variety of strategic opportunities. And perhaps, some will come along that are at the right price. They've been more scarce recently. And if none of that turns out to be the case, then we'll have to think about other possibilities.

Operator

Question is from Brent Thill with UBS.

Brent Thill - UBS Investment Bank

Paul, just on the Healthcare business, I recognize there's seasonality that you had 5% organic growth on a pretty easy comp last year. So I guess, your key take away is this is an anomaly in terms of what happened in Q1. You've been running the team in terms of the growth rate organic and the Healthcare business. Your expectation is that, that segment will snap back Q2 to Q4.

Paul Ricci

Yes, I remain quite confident about the full year growth rate of the Healthcare business.

Brent Thill - UBS Investment Bank

I guess, just in the expense guidance, there's been some inconsistency going back to Q3 at the bottom of the range, Q4 a little bit better, Q1 back into the lower end of the range. And I guess, just from a perspective of your guidance, can you just share with us, you're obviously reiterating the full year your conviction level that you're going to get back to the numbers that you're at? What's giving you the confidence in that?

Paul Ricci

Well, I might start by saying that in our history, I think we've exhibited quite disciplined expense controls in the company. And I think that we'll draw upon that history to suggest that we have the confidence so we can continue to do that. The expenses we've made in the first quarter were not unplanned. The significant expenses had to do with substantial marketing investments into our Dragon brand broadly around the globe, and we believe that is going to continue to pay off over the remainder of the year, we will see. But we made that investment with our eyes open, and we had conviction about it then, and we do now. And we also made expenses, as I think, we suggested we would in accelerating some of our Mobile opportunities. In particular, investing in significant Mobile Services revenue streams in the future with important partners that require significant investments now. And those are the two big factors. In order to offset those expenses, we have reigned in other expenses, and I think we will see the benefits of those economizings over the balance of the year.

Operator

And next, we have Jeff Van Rhee with Craig-Hallum.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC

Paul, just a quick couple of questions. Maybe starting on the Mobile side if you would, very dynamic environment. And I'm curious if you’d just kind of give us your vision for who are going to be the sort of the decisive players in terms of adopting or not adopting Speech, and in particular, adopting your Speech. The handset makers, you've got the carriers, you've got some playing on the operating system side, just give us a sense of how you see that environment and how it's changed maybe from a year ago?

Paul Ricci

Well, it's an environment that changes every 90 days. I'm awestruck at what a dynamic environment it is. And that is going to continue to be the case. I think what I can say constructively in answering your question is that the Mobile team has a view about which participants are emerging and which are declining. Probably not constructive for me to go through that here other than to say, it continues to be a view that is quite a heterogeneous market, in which there will be many participants, some new ones emerging, some older ones perhaps declining somewhat, with new form factors emerging of greater importance and new applications and extraordinary speed. Our view is that we're going to be the preferred solution for a wide variety of those, both through the underlying infrastructure of the platform we provide. We've had enormous response in the few weeks since we announced the developer program around our Nuance network Mobile Speech platform and in the applications and solutions we're building, some that we're selling ourselves and some that we're building in conjunction with partners that I alluded to earlier. I talked previously about our enthusiasm for the Automotive business, the Smartphone business, and we're also going to see the growth of services to carriers. I talked about Voicemail to Text, I think that's going to continue to be a very robust business. And we are going to see other opportunities for voice-enabling access to Internet based content as we look out over the next year or so. There's an awful lot of dynamic growth in that business, and it's a business that evolves every quarter.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC

On the Healthcare side, the 5% organic growth, your lines transcribed were up 14% and all the other metrics were even higher although those are maybe bookings related. But certainly, the On-Demand side growing faster than that. Can you just expand and lend a little bit more color as to what's growing maybe below that line, in particular, the licenses, maintenance, legacy services. Could you give us any more color as to what the drags are and what the near-term trends are on those drags?

Paul Ricci

The on-premise systems is going more slowly, and particularly, non-radiology on-premise systems. Radiology is doing quite robustly. But other non-on-premise systems are growing more slowly. And I think that reflects a preference for On-Demand Solutions. But I should say that while Dragon growth was still good in the quarter, it was slower than it had been in the previous couple of quarters, Dragon Medical, because of the seasonality issues that I mentioned.

Operator

And next, we have Derek Bingham with Goldman Sachs.

Gonzalo Cavenaghi

It's Gonzalo here filling in for Derek Bingham. On the Enterprise growth for the business, would you guys be surprised if this business grew 5% or more in fiscal '11?

Paul Ricci

Would I be surprised if it grew?

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC

Yes, 5% this year on the Enterprise business.

Paul Ricci

No, I wouldn't be surprised if it grew 5%. I think that's probably in the range of our expectations for it.

Gonzalo Cavenaghi

And is that kind of changed, I guess, from this last quarter, that view? Just from what you're seeing out there?

Paul Ricci

Is your question, am I changing that view based on last quarter?

Gonzalo Cavenaghi

No, just based on what you kind of saw this quarter, and now you have an updated kind of view one quarter in the year, yes.

Paul Ricci

No, I’m not changing my view.

Gonzalo Cavenaghi

Just to dig in a little bit on the Professional Services gross margin. I think two quarters ago you guys were at $124 million in revenues, and you hit 44% gross margins. Now it’s down to 41%. That 300 bps of difference, is that the one-off expense you mentioned, or is there something else there that we should think about as we model that line going forward?

Paul Ricci

It's primarily investments in two areas; related to the Mobile Services that I discussed previously and investments in fulfilling some of the Enterprise On-Demand contracts, which the revenues will occur in the future.

Gonzalo Cavenaghi

So that 41% is kind of the drop, or I mean, it won't go much lower than that in your view?

Paul Ricci

No, we don't expect that.

Gonzalo Cavenaghi

May be I just missed this, on the press release. The percentage of On-Demand revenue this quarter? A percentage of total?

Thomas Beaudoin

No, you didn't miss it, because we don't give do that.

Gonzalo Cavenaghi

Any color there? I think last year you guys had 27% of total revenues for On-demand?

Paul Ricci

All I can say is that year-over-year growth in On-Demand revenues was quite robust in the quarter.

Operator

We will go next to John Bright with Avondale Partners.

John Bright - Avondale Partners, LLC

Paul, staying on the Enterprise side of the questioning. Your prepared comments do sound a bit more optimistic on the Enterprise, and I might have taken away -- those might have taken away from the Analyst Day. But you really don't think anything has changed there?

Paul Ricci

No. I thought we were optimistic during the Analyst Day, and I remain optimistic about the long-term prospects of that business now.

John Bright - Avondale Partners, LLC

I've asked this question of you before. Where are we in the transition from on-premise to hosting? What inning would you characterize it today?

Paul Ricci

Fifth.

John Bright - Avondale Partners, LLC

Fifth inning? On Healthcare, on seasonality. I don't really understand. Describe why the Healthcare segment is seasonal in the December quarter.

Paul Ricci

Well, there are a couple of factors, but the most important factor is that our fiscal year end is in September, and there is a lot of intensity in closing the year. And therefore, our sales organization is geared towards a seasonally strong September 30 close in the Dragon business. And in addition, there is some buying pattern diminution in Healthcare institutions in the December quarter as well. So it’s a combination of those two things.

John Bright - Avondale Partners, LLC

On the Mobile side, in the prepared remarks, you talked about seeing growing interest in the TV, set-top and tablet markets, and maybe you can elaborate on that.

Paul Ricci

Related to something else I said, which is that we're going to see more advanced Speech-enabled systems accessing content and enabling actions from mobile devices and from the living room. And you're going to see products that are -- come to market this year. But I think we'll make that vision quite vivid. And there's a lot of activity right now among the device manufacturers and some electronics companies who are building these systems to incorporate next-generation Speech and natural language systems that enable this capability that go beyond what people are doing today. I think it's quite exciting.

John Bright - Avondale Partners, LLC

Another question on M&A. Again, coming out of the Analyst Day, I think there was a sense that you felt valuations on some of the targets were continued to be high, so there would be a hiatus in maybe acquisitions on your part, meaningful acquisitions on your part. What are the valuations looking like today and is that sense fair?

Paul Ricci

As I have said previously when this question's come up, we remain interested in both our organic growth agenda and our inquisitive growth agenda. We see opportunities out there to create value for our shareholders through acquisitions, but only if they're done at the right price. We have found it challenging to get those acquisitions done at those prices, and that's certainly resulted in fewer acquisitions or at least acquisitions of relatively small size. At the moment that's a reasonable estimate of where we are. But, at the same time, I would tell you that it's hard to know. Valuations certainly haven't gone down since our Analyst Day. So it's not a -- there's no change in the landscape from the perspective I offered then.

John Bright - Avondale Partners, LLC

I assume by the reiteration of guidance, you're still expecting double-digit organic growth in FY '11? And Tom, there no acquisitions built into guidance, are both of those fair?

Paul Ricci

The answer to the first question's yes.

Thomas Beaudoin

Yeah, of course, we never include the acquisitions in the guidance.

Operator

On to Shaul Eyal with Oppenheimer & Co.

Shaul Eyal - Oppenheimer & Co. Inc.

On the Enterprise front, how were the bookings this quarter and as you look into fiscal '11 down the road? Were they a little lighter than you expected?

Paul Ricci

Bookings in the Enterprise business for the first quarter, I don't have that data.

Thomas Beaudoin

I think we saw a little bit of uptick in some of our license deals. You'll see in the NOD, the Enterprise metric that we published that we didn't sign any new deals this quarter. We still have a strong pipeline there, we just didn't sign any. That metric did go lower this quarter, because we had a large – we started a large implementation at a large customer that we put in the call remarks. And then, I think, we continue to see some strong bookings, and we did see strong bookings in Q1. You'll see that when you look at the PSRs. So the PSRs went up fairly substantially again quarter-over-quarter. We didn't sign any NOD bookings this quarter, but we did see some strong pipeline. And we continue to start to stand up some of those deals. And my indications from the field are that they're starting to see some good pipeline starting to build again on the License side. So I think that's kind of what we saw in Q1 in Enterprise.

Shaul Eyal - Oppenheimer & Co. Inc.

And Paul, a more general question. I think all in all, you still kind of sound quite a beat singer to kind of the sound echoed in your Analyst Day in December. Anything specific, any specific point this quarter that disappointed you?

Paul Ricci

Well, there were little things in each of our businesses this quarter that we could have done that would have made in aggregate difference across the business that would've resulted in a somewhat stronger quarter. But as I suggested in my opening comments, we laid a lot of ground work this quarter for a strong year. I've been extremely pleased at the fundamental work we're doing, in getting ready for the emergence of Mobile Services for the new front that we're opening in Healthcare and Clinical Language Understanding for the success that we're having in fulfilling on significant contracts in the Enterprise business. So I don't have a lot of criticism about the quarter.

Operator

And we'll go next to Mike Latimore with Northland Capital Markets.

Mike Latimore - Northland Securities Inc.

On the Dragon Medical business, so your view is that March quarter is seasonally stronger for that business?

Paul Ricci

Yes.

Mike Latimore - Northland Securities Inc.

And how about in terms of handset OEMs. Were kind of the number of design wins as you expected in the December quarter?

Paul Ricci

Yes.

Mike Latimore - Northland Securities Inc.

And then I think the last few quarters, Healthcare on-premise, if you're factoring out Dragon Medical, was, I think, it was returning to growth. And then that sounds like it was a little bit weaker this quarter. How should we think about the kind of the on-premise business going forward?

Paul Ricci

As I've indicated earlier, the radiology business continues to be very good, on-premise. The other On-premise business, exempting Dragon, is a slower growth business. And I think that will continue to be the case.

Mike Latimore - Northland Securities Inc.

But it is growing year-over-year?

Paul Ricci

Yes.

Mike Latimore - Northland Securities Inc.

And in terms of the sequential trend in Healthcare services, is it fair to say that services were up sequentially?

Paul Ricci

I don't know about services. We don't usually give quite that level of granularity.

Mike Latimore - Northland Securities Inc.

How about your retention rate and sort of the Healthcare On-Demand business? How high is that?

Paul Ricci

The retention rate at On-Demand is very high, extremely high.

Mike Latimore - Northland Securities Inc.

Over 95%?

Paul Ricci

Yes, I'm confident, over 95%.

Mike Latimore - Northland Securities Inc.

And then just on Digital Imaging, I think you've increased the outlook for that growth rate a little bit. Is that related to new deals or just kind of overall end market unit volumes you're seeing?

Paul Ricci

I think it's related to good execution, first, in the year after the integration of the eCopy business. And secondly, an expansion of our channel partners among the large Imaging systems companies.

Operator

We have a question from Mark Murphy with Piper Jaffray.

Mark Murphy - Piper Jaffray Companies

You've shown that the annualized line run rate in the Healthcare On-Demand business is up 14% year-over-year. And then I think, you're showing that you're bookings grew 149% year in that business. And I'm just trying to reconcile those two numbers together. I guess, my thought is, as you implement those Healthcare On-Demand deployment in the future, should we be expecting that, that line run rate is going to converge upward materially kind of toward that 149% bookings growth maybe a year or two down the road?

Paul Ricci

Well, the 149% that you're referring to again is what?

Mark Murphy - Piper Jaffray Companies

I think in the prepared comments, you're citing several new Healthcare On-Demand contracts, achieving 149% bookings growth year-over-year.

Paul Ricci

Well, so we had a very robust quarter in terms of bookings in our Healthcare On-Demand. And the growth of those bookings year-over-year was about 150%. You're not asking me if that means that our 14% growth is going to convert to 150% are you?

Mark Murphy - Piper Jaffray Companies

I guess, what I'm trying to -- I'm trying to understand what the 14% is. I mean, I'm reading that as that is the annualized run rate of lines that is running through your Healthcare On-Demand deployment. Is that correct?

Paul Ricci

That's right. That's the annualized lines that we're processing effectively today.

Mark Murphy - Piper Jaffray Companies

And then if you're bookings in that very same business are growing in triple digits, it would seem to imply that a couple of years down the road, as you deploy those bookings, it would seem to imply that the line run rate ought to accelerate very materially.

Paul Ricci

That would be true if we had 150% growth every quarter. But it was a very strong quarter. We cited that evidence to in fact suggest that the business continues to be robust. I don't think we want to get ahead of ourselves of projecting extraordinary growth rates. We will be quite pleased with the kind of double-digit growth rates we've seen in Healthcare in our On-Demand Healthcare business over the last couple of years consistently.

Mark Murphy - Piper Jaffray Companies

Switching over to the Mobile side, as you consider the Google Android operating system and the Speech recognition technology that is embedded in that, obviously, there are lot of reports showing that Android growth recently is exceeding that of the iPhone. And so I guess, I'm interested to get your perspective on how that has been translating or maybe how it will translate in the future into Nuance's share of voice recognition on Smartphones?

Paul Ricci

As I said earlier, our view of the world is that there's going to be a heterogeneous set of platforms and that the dynamics among those platforms is going to evolve for some time. And that it's dangerous to reach premature conclusions about whose platforms will participate and whose will not. But having said that, I think, we can all agree that the Android platform will be an important one, and that there's a diverse set of OEMs using the Android platform and that we expect that we will participate quite successfully with some number of them, and less successfully than others. And I think that's consistent with what I've said in previous discussions when this has come up. I think our network-based Mobile Speech solution is currently on something more than 40 existing Android models, for example, today. And what we have found is that some number of the Android OEMs are looking for particular differentiation in the kind of solutions we're building that we can help them provide, and I think that will continue to be a good market for us.

Mark Murphy - Piper Jaffray Companies

And then just one follow up to that. What exactly have you observed with respect to the trend in the blended royalty rate that you're seeing per Smartphone maybe over the last few quarters? I guess, I'm wondering if that has increased as carriers have rolled out more of these, kind of the multifunction phones, that are using Nuance in a broader, kind of more powerful way?

Paul Ricci

I think all I can say about per unit pricing in mobile devices, generally, is that there are two trends that work against each other. One trend is that we're offering more and more functionality to our customers, to our partners, and the more functionality we're able to include, the better the pricing we get. And the trend that works in the opposite direction is that those manufacturers, those participants with large volumes, are very aggressive in their sourcing strategies and work to reduce prices in large volumes. And those two work against each other. I've talked about this at length in previous calls, but those are the two trends we face.

Mark Murphy - Piper Jaffray Companies

So as far as how that's been netting out in recent quarters, is that -- do you want to comment on that at all?

Paul Ricci

No, not more than I have.

Operator

We will go next to Neil Herman with Soleil Securities.

Neil Herman - Soleil Securities Group, Inc.

I know some quarters ago you had a customer in the Enterprise business who was having some difficulties, and your Hosting business associated with them started to decline. When do you expect to anniversary that customer? And then secondly, obviously you see opportunities for growth in your business so you ramped up some of your OpEx in the quarter. Could you kind of give us a sense in terms of where you think your operating margin is going to go for the full year and longer term?

Paul Ricci

We've commented previously, and I think we referenced in our prepared remarks that one of the factors in the Enterprise business is that one of our oldest On-Demand customers has receding volumes and has had receding volumes for several quarters now. We have no reason to think that, that trend won't continue for some period of time. So we just view it as part of managing the business now. The second part of your question had to do with margins, I believe. We spoke at the beginning of this year that we continue to believe that there's further leverage to be had in our operating model but that we would exact that leverage more slowly than perhaps our previous year's performance would have indicated and that we were doing that because we were mindful of the specific growth opportunities that were available right now because of the broad acceptance of Speech and some specific market, Healthcare being one, Mobile being the other in particular. I think you saw that play out in the first quarter. Our general view is that you should expect slowing operating margin expansion, but still operating margin expansion, as you look out into the future.

Neil Herman - Soleil Securities Group, Inc.

At some point, the comps, with respect to that customer, become a lot easier, and the customer becomes far less relevant to the overall business. And I was just wondering, how far away we are from that actually occurring?

Paul Ricci

Well, I don't know. It's hard to predict what the volume declines will be. I don't want to overstate it. When we explain reasons we try and offer -- for revenue performance up or down, we try and offer a couple of the more primary reasons. It's one of two or three things that I've talked about over the last few quarters in that business, and it continues to be one of those two or three things. I don't know when it will fall off that way.

Operator

And our final question will come from Craig Nankervis with First Analysis.

Craig Nankervis - First Analysis Securities Corporation

Perhaps on the Healthcare side, I wonder if you could update us or discuss the state of Healthcare business expansion in Europe. My understanding that there is fairly considerable opportunity there. What's the progress there? Will that help much this year or is that more of an FY '12 opportunity? And maybe if you could review the hosted penetration or what's happening with hosted in Europe as well?

Paul Ricci

Well, the answer to your second question is probably the growth there will be more consequential in fiscal '12 than fiscal '11. But the seeds have been sown, and I think our view is that they look quite promising, particularly, in our work we're doing with some important systems integrator partners in the U.K. in serving the national health system there. That seems especially promising, and it is in fact an On-Demand model, if your question suggests it. So we have robust business in Central Europe as well. But I think our most energetic expansion right now is in the U.K.

Operator

Please go ahead with any closing remark.

Paul Ricci

Well, we thank you, again, for joining us for our quarterly call. We look forward to speaking with you again next quarter. Take care.

Operator

And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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