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Nuance Communications (NASDAQ:NUAN)

Q2 2011 Earnings Call

May 10, 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

Scott Zeller - Needham & Company, LLC

Shyam Patil - Raymond James & Associates, Inc.

Derek Bingham - Goldman Sachs Group Inc.

Ilya Grozovsky - Morgan Joseph TriArtisan LLC

Brent Thill - UBS Investment Bank

Scott Sutherland - Wedbush Securities Inc.

Nandan Amladi - Deutsche Bank AG

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC

Shaul Eyal - Oppenheimer & Co. Inc.

Daniel Ives - FBR Capital Markets & Co.

Bradley Whitt - Gleacher & Company, Inc.

John Bright - Avondale Partners, LLC

Steven Koenig - Longbow Research LLC

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Nuance's Second Quarter 2011 Conference Call. [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; Chief Financial Officer, 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

Thank you. Before we begin, I'll 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

Thank you, Kevin. Before taking your questions, I might underscore a few points from today's documents.

To begin, Nuance delivered 10% organic revenue growth with improved performance across our markets. Revenue growth drove improved operating margin and operating cash flows, and we achieved strong bookings in Healthcare, important design wins in Mobile and improved performance in our Enterprise business.

Nuance's Imaging business continued what promises to be a record year for the business along several dimensions. Additionally, Nuance continues to make investments targeted accelerating growth in fiscal 2012. In particular, we're funding an expanding set of strategic engagements in our Mobile market, where demand for our advanced Cloud-based services continues to grow.

In Healthcare, we are also pursuing strategic initiatives with key partners, which leverage our Voice and Clinical Language Understanding technologies. Finally, we also announced today that we've agreed to acquire Equitrac, which is expected to close late in the fourth quarter. Equitrac expands our ability to provide our customers and our partners with superior cost savings and productivity. Equitrac aligns well with our key vertical markets, especially Healthcare. We've been working to align our distribution channels between Imaging and Healthcare to expand our revenue opportunities in that business. The acquisition of Equitrac complements those efforts. This acquisition will add around $58 million to $60 million to our non-GAAP Imaging revenues in fiscal 2012. Including the acquisition of Equitrac, we expect our Imaging business to achieve double-digit revenue growth in fiscal '12 and to deliver operating margins above the corporate average.

We'll now take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll start with the line of Mr. Daniel Ives with FBR.

Daniel Ives - FBR Capital Markets & Co.

Could you talk about the organic growth in each of the business segments, specifically Healthcare, Mobile, how that performed versus your expectations for the quarter?

Paul Ricci

Well, we said last quarter, we expected Healthcare to improve this quarter over last quarter, and it did. And we expect continued improvement throughout this year. We said last quarter we expected Mobile to continue the kind of growth it experienced recently, and I think it roughly did that. It was down a couple of percentage points, but that's influenced by specific design wins and the magnitude of those design wins. Overall, the Mobile consumer business had, again, a very robust quarter. Were there others you wanted a comment on?

Daniel Ives - FBR Capital Markets & Co.

No, just on those specifically. Talk about cash flow expectations. I mean, would you expect to a similar trajectory you saw this quarter relative to EBITDA for the next few quarters in terms of cash flow?

Paul Ricci

Well, we've, I think, said a couple of things consistently about cash flows. One, we have a lot of confidence in our ability to generate growing cash flows, and we've seen that year-over-year for several years and we projected that we would see robust cash flow growth this year. And I think we're on track to do that and expect the balance of the year to confirm that. Secondly, we said that we expected the GAAP, the difference between non-GAAP net income and cash flows to be smaller this year than it was last year. And in fact, I think you've seen that substantially, dramatically. So in the second quarter, I don't want to make predictions about that level of narrowness, but I think you will see a confirmation of our overall expectation this year that the GAAP will be meaningfully narrowed.

Daniel Ives - FBR Capital Markets & Co.

I mean, you obviously a strong quarter. You didn't raise revenue guidance for the year, kept it the same. Just talk about your philosophy with that in regards to the year guidance. I mean, I know you guys typically don't raise, but just speak about how you're confident to kind of the targets at the end of the year in terms of top line, bottom line.

Paul Ricci

Well, with respect to our confidence, we tried to signal in our prepared remarks a confident tone about the momentum of the business as we complete this year. And in particular, the confidence we have that we're going to see the performance this year increase as we move into fiscal '12. And so we've begun for the first time in this set of notes to position the forthcoming fiscal year. With respect to your question on guidance, we did raise the lower bound of the range. So we thought of that as improving guidance by, I think, $10 million on the bottom end of the range. You're right that it's not been our practice to significantly change guidance upwards during the middle of the year, and we've not done that in past years, and it wasn't our inclination to do it this year. But we did raise the lower end of the range on revenue guidance. And I believe actually we raised the lower end of the EPS range by $0.01 as well.

Operator

And we'll now go to the line of Shaul Eyal with Oppenheimer & Co.

Shaul Eyal - Oppenheimer & Co. Inc.

Paul, can you talk to us about competitive trends in the Mobile vertical?

Paul Ricci

Well, the competitive trends, I don't think that there's a significant change in dynamics in the competitive trends. What I will say and what we did reference in our prepared remarks, and which I reiterated in my brief introductory notes just now, is that Nuance is seeing a high level of strategic engagements. And by that, I mean engagements with large firms in the Mobile and Wireless space that are intended to establish a longer-term relationship with the company that go beyond specific product initiatives or even sets of products initiatives. And I consider that to be a favorable turn of events in the competitive environment. But overall, it remains, as you know, a very dynamic space and an intensely competitive space.

Operator

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

Richard Davis - Canaccord Genuity

In any case, quick question in regards to -- if you look at the lines that you've processed on the Healthcare-Dictation side, it was up like 16% year-over-year on a run rate basis, but the revenue growth was less than that depending on if you want to look at organic or total. Is there pricing pressure going on there or what's the dynamic in that situation?

Paul Ricci

Well, we have said, and I think we've reiterated this in our -- we pointed this out in our prepared remarks that the On-Demand revenue stream within Healthcare is the most robust growing stream within that business. And so it is growing faster than the overall Healthcare business. Most of that line count, of course, is in established contracts. And so we're not as likely to see pricing pressure in historical contracts. There is some price competitiveness on new contracts, but I don't think that's a major factor in the overall revenue growth. Some of the change between -- some of the effect is the speed at which new contracts are being implemented. It has been a bit slower bringing volumes online than we expected. Some of it has to do with our On-Demand contracts eroding some of our on-premise business and a couple of other factors.

Richard Davis - Canaccord Genuity

And then kind of a follow-up just in that space, implicit in your kind of thought process on the Healthcare side, when you talk to hospital administrators, they are whining and moaning about meaningful use on the electronic medical records subsidy. Is there any kind of baked in to your numbers that depend on these guys kind of getting the subsidies on time? Or is this business just in and of itself organically attractive enough that if you get these companies, you're getting subsidies that's great, but that's the icing on the cake?

Paul Ricci

I don't think we believe that our revenues are tied specifically to the timing of the meaningful use payment or the incentives or later out that disincentives, but rather to the overall orchestration that the government is affecting, including those incentives and other pressures to drive large healthcare providers towards highly digitized infrastructures. We think that we're benefiting from that. We think that the need to demonstrate meaningful use is drawing tighter integration of our own technologies in electronic medical records systems. So I don't think it's a specific payment timing, but rather the -- but we are benefiting from the incentive structure the government has put in place overall.

Operator

We will now go to the line of Shyam Patil with Raymond James.

Shyam Patil - Raymond James & Associates, Inc.

Paul, the second half guidance, I think implies low double-digit organic growth. And then you talked on the call about accelerating growth into 2012. Should we think about accelerating growth coming off of the back half of your growth projections you've given? And then how should we think about the key drivers for the accelerating growth?

Paul Ricci

Now, I'm not entirely sure I understood your first question. So if you could just ask that first question one more time so I make sure I'm answering the question you asked.

Shyam Patil - Raymond James & Associates, Inc.

Sure. It sounds like the guidance for this year implies accelerating growth in the back half of the year versus the first half of the year, and then in your prepared remarks, you talked about accelerating growth in 2012. So should we think of the accelerating growth in 2012 to come off of the back half of the '11 growth numbers? That's the first question. The second one is, what would be the key drivers to that?

Paul Ricci

I think what we've said earlier in the year, and again have been trying to communicate today, is that we see the organic growth rate of the company -- we've suggested the organic growth of

the company ought to achieve double digits for the full year, and that remains our objective. Our expectation is that we'll see overall organic growth rate for fiscal '12 be better than the overall organic growth rate for fiscal '11. And I think that's as precise as I can be. With respect to what's driving that, the Mobile business, as you know, it continues to demonstrate strong growth. I've said previously and reiterate today that we also believe that the Healthcare business has fundamentally strong double-digit growth available to it. We've been pleased by the strength of the Imaging business, which while I don't think we should count on the kind of performance we saw this quarter every quarter, it appears to us to be offering better growth than we had anticipated a year ago. And I made some comments about that with respect to the complement of the Equitrac acquisition in fiscal '12 as well. And as you probably noticed, the Enterprise business, which didn't grow this quarter, also didn't shrink. And so that, of course, is also helping us as we look at the back half of this year and in fiscal '12.

Shyam Patil - Raymond James & Associates, Inc.

Getting a lot of investor questions around the intellectual property of the company, could you maybe spend a minute just talking about Nuance's IP portfolio? Perhaps help us understand kind of the breadth and depth of IP you guys have across the different segments of speech.

Paul Ricci

I think I can say a bit. Nuance has core technologies, primarily in Voice Recognition and Natural Language Processing; but some other language capabilities as well, predictive text and text interpretation in particular. And those, as you know, span a very wide range of platforms; we believe the widest range of platforms in the industry, and comprehend implementations that range from small embedded devices to Enterprise servers to very large cloud, distributed cloud solutions serving markets that I've talked about before. All of that technology is backed up by about 1,000 research and development personnel that are distributed in various locations around the world and are able to deliver our solutions in a wide range of languages and, of course, [indiscernible] by, I think, about 4,000 patents and patent families.

Operator

And we'll go to the line of Nandan Amladi with Deutsche Bank.

Nandan Amladi - Deutsche Bank AG

Back to your point about the Enterprise, some of the metrics that you report and the revenue line this quarter don't really show much of an acceleration. Do you have reason to believe that the second half of the year is going to be stronger for the Enterprise segment? Is it overall showing more signs? Because in your prepared remarks, you have a comment in there about a QuickStart program that might boost license sales. So are you essentially pursuing your sales efforts both on the license side as well as on the On-Demand side?

Paul Ricci

Well, with respect to your first question, Professional Services backlog, which is always an important indicator of the Enterprise business -- and give me a moment while we wrestle papers here.

Nandan Amladi - Deutsche Bank AG

You were up 25% year-over-year, actually.

Paul Ricci

25% year-over-year? Well, I don't put too much stock in sequential growth because it's influenced by the total labor availability in the quarter and our ability to retire backlog. We're obviously trying to do that. But if you look at the year-over-year growth numbers, they're well into double digits and have been for some time, and we've suggested that those Professional Services backlog hours are indicative of both of significant on-premise appointments that we're doing, as well as our host of deployments. So I think that's an important indicator. We also noted in our prepared remarks, I think there's a table that shows product Licensing revenues, and while we don't call out Enterprise Licensing specifically within that, I think we have, in our prepared remarks, commented that Enterprise Licensing was up attractively in the quarter. And that is a material element of the overall product licensing growth year-over-year as well. What was the other part of your question?

Nandan Amladi - Deutsche Bank AG

I think you addressed both pieces. Well, the second part was the QuickStart and where the emphasis is from your sales perspective. Is it more on the On-Demand side or are you pursuing both avenues with customers?

Paul Ricci

I apologize. I don't know the specific information on that program. I'm aware of it, but I just couldn't comment on it particularly thoughtfully.

Nandan Amladi - Deutsche Bank AG

Last quarter, you talked about Connected Services in the Mobile space doubling bookings sequentially. Can you characterize how that segment has grown this quarter?

Paul Ricci

We did have comments in our -- I don't have a numerical estimate for you. We did have comments, notes in our comments that emphasize, again, that, that is the fastest growing element of our Mobile business right now. So we continue to see strong performance in Mobile Services bookings.

Operator

And we'll now go to the line of John Bright with Avondale Partners.

John Bright - Avondale Partners, LLC

Paul, in the prepared text, you talked about your Enterprise business continue to be challenged, performance by your channel partners. Talk about who the channel partners are that you're referring to. And do you think that we may have turned a corner with Enterprise really coming in flat on organic growth?

Paul Ricci

I apologize, I can't talk specifically about the partners. First of all, it would disclose confidential information, and I can't do that. But I will say that the performance among partners has been a bit brighter than has been in, as I look back, over a series of quarters. And to your second question, let me say I'm guardedly optimistic that the Enterprise business is stabilizing and is on a trajectory for growth over the balance of this year and next year. And the reason I think that is that we have the benefit of some of our On-Demand contracts that have been under implementation for a while. We do seem to have a bit more strength in our channel strategy, and we're seeing some improvements in our direct performance, as I referenced in my comments a moment ago.

John Bright - Avondale Partners, LLC

Let me move to Imaging. It seems to be the bright spot in the quarter, at least on an organic growth basis. Maybe talk about some of the reasons for the pick up. Certainly read what was in the prepared text, anything that you can add in addition to that would be helpful.

Paul Ricci

Well, I think what I would say about the Imaging business is that it has entered a period where our relationships with our large channel partners, Imaging channel partners, and the acceptance of our network software in that business has catalyzed a level of growth that is probably going to continue to be better than what we anticipated a year ago. I mentioned earlier, and I emphasize again, I don't look for this quarter's growth to be indicative of future quarters. But I do think, as I said in my opening comments, that it's a business that can deliver double-digit growth next year, and that's a significant improvement if we look over a sustained period of time on a year-over-year basis.

John Bright - Avondale Partners, LLC

Talk about the strategic fit of the Imaging business and the logic behind the acquisition that you announced today. Because many people think about Nuance as a speech company, but how does the Imaging piece fit in that?

Paul Ricci

Let me start by answering your second question on the logic. We acquired Equitrac, first because we have seen a convergence of our network services in Imaging with Managed Print Services, and that had led to partnership discussions with the company. And as we began to explore those partnership relationships, we realized that there was more revenue and cost synergy available through an acquisition, and so we pursued that. So first and foremost, there's a converged product vision that achieves real economic benefits to the shareholders. Secondly, we've come to appreciate that there is leverage between the focus of the Imaging business, particularly now with the acquisition and some of Nuance's key verticals. In particular, the Healthcare vertical, where as you know, we have considerable distribution muscle. And also Financial Services, which is an important vertical for our Enterprise business. And so we saw a way to leverage our vertical distribution capabilities for the Imaging business, which has not been an opportunity that before the last year we particularly pursued to any extent and now is appearing more and more available to us. You'll notice several details on that in the acquisition press release today and also some healthcare customers listed in the Imaging detail in our general earnings press release today. So that's our second reason. The third reason is that when one looks at the return on assets and the return on capital from the Equitrac acquisition, it's terrific. It's well above Nuance's cost of capital, and so it's simply a smart investment on those terms for our shareholders. And finally, it positions the Imaging business as quite a valuable business in its own right as an independent business. I think you can do your own estimates of the revenue growth of the Imaging business that Nuance has for this year, and add to that the growth for next year and the 60-ish million dollars in revenue from Equitrac. Think about that business growing in double digits and with operating margins above the corporate average, and I think it's quite a valuable business. And we'll see whether the leverage of our vertical distribution can provide additional traction to that or not, and that will probably help us think about its strategic relevance over time.

John Bright - Avondale Partners, LLC

Paul, does this acquisition signal any change in the valuations you're seeing in the overall marketplace? Because I think previously, you had talked about some unrealistic expectations in the marketplace? Was this one-off or are we seeing more of a rightsizing of expectations?

Paul Ricci

Well, we're able to buy this business at what we thought was an attractive revenue and EBITDA multiple. And that, along with the details I just went through with respect to the operational synergies with the company, the return on invested capital threshold and the inherent intrinsic value of the Imaging business are the factors that we tend to look at. There's a lot of businesses out there being bought at very high multiples, and we're unlikely to buy many of those. We were pleased to find this one and to be able to conclude a transaction of what seemed like an attractive multiple to us. And it's one that's been on discussion for quite some time.

Operator

And we will now go to the line of Jeff Van Rhee with Craig-Hallum.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC

Paul, several questions for you; maybe just take them in reverse order. The Equitrac acquisition, what's the historical growth rate there for that business?

Paul Ricci

I don't know, but it will come out in the financial statements when we file them. I don't have that here.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC

On the gross margin line, the maintenance gross margins were down, lower than we've seen in several years. You touched on it briefly in some of the prepared remarks, but how we should we think about gross margins there going forward?

Paul Ricci

I was a bit disappointed in that, and we did offer some details on that in the prepared remarks, which I don't have in front of me. We're working hard here to achieve productivity gains in our cost of goods, both in products and in services. And I remain optimistic that those will show benefits as we look out over the next several quarters.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC

I guess then just lastly, of the metrics, the three-year value of On-Demand contracts, talk about what -- any thoughts on the annual growth? If I remember right, you give us an initial glimpse of what you thought that could grow on the Analyst Day. Just give us an update here of what you're thinking.

Paul Ricci

I just want to make sure I understood your question, Jeff.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC

Well, the three-year value total On-Demand contracts, I think you had said in the Analyst Day, if I remember right, that you were thinking in '11 that could grow roughly 30%. And it looks like at least in the first half, it's in the 20%. I don't have the number open. I think it was 20%, low 20s. Just wanted to get your thoughts if that 30% is still a reasonable benchmark for that to grow year-over-year for fiscal '11 over fiscal '10.

Paul Ricci

I think it is a reasonable benchmark, yes.

Operator

Now to the line of Brad Whitt with Gleacher.

Bradley Whitt - Gleacher & Company, Inc.

Just to follow up on that last question, Paul, is that an apples-to-apples metric, the total three-year contract value? Or does it vary dependent on the duration of the contracts you're signing, or is it pretty much all in 3 years?

Paul Ricci

No, we have contracts that are less than 3 years and contracts that are more than 3 years, but we only use -- we truncate them at 3 years. We only use the estimated three-year values so that you have a similar comparison.

Bradley Whitt - Gleacher & Company, Inc.

And then you mentioned about you're seeing some synergies with the Imaging possibly cross-selling into the Healthcare vertical. Would you be able to do some of that with your direct sales Healthcare sales force or pretty much go through partners? How should we think about the synergies with the distribution side of it?

Paul Ricci

Well, our hope is that we can leverage both our partners, our Imaging partners, as well as our distribution capability in Healthcare including our direct and Healthcare partners.

Bradley Whitt - Gleacher & Company, Inc.

And then I was just curious, you mentioned that Mobile Services is the fastest growing growth segment there in the Mobile consumer. Are you talking about services like Voicemail to Text or are we talking about Professional Services?

Paul Ricci

Well, our Mobile Services refers almost overwhelmingly primarily to hosted Cloud-based Services that are delivered as a software, delivered as a form of service.

Bradley Whitt - Gleacher & Company, Inc.

And that would include things like Voicemail to Text then?

Paul Ricci

Yes.

Bradley Whitt - Gleacher & Company, Inc.

Are you seeing much interest or traction at all in Voicemail to Text for the Enterprise?

Paul Ricci

We are seeing interest, and we are seeing early tractions. Our partners' distribution there have been -- our partners' engagement there have been going on for some time. Their own plans have rolled out a bit more slowly than we anticipated, but they are now moving. And we expect some useful growth from that in the second half of the year.

Operator

And we will move to the line of Scott Sutherland with Wedbush.

Scott Sutherland - Wedbush Securities Inc.

First question, you mentioned more of an On-Demand model these the past few years. Can you talk a little bit about what's going on with the margins for the Professional Services and Hosted Services down a little bit for the second straight quarter? When do you start to see some scale there?

Paul Ricci

Yes, I got asked this question last quarter and, of course, it depends upon which business we're in. There are -- in some of our larger scale businesses such as our Healthcare On-Demand, we're getting scale economies substantially already. In our Mobile Services, of where we have some extremely complex implementations, we have not seen nearly as much scale economy. I think that will begin to change particularly towards the back half of this year, as some of those services scale substantially. But we'll see.

Scott Sutherland - Wedbush Securities Inc.

When you look at that at Equitrac, it looks like in your guidance, half of that is going to be non-GAAP revenue. Is this a big deferred revenue type business model, software model and maybe talk about the product and revenue model process for that?

Paul Ricci

Well, the Equitrac involves both licenses and maintenance. Our expectation, once we've completed the accounting and we move them to our financial statements is that there will be some significant deferred revenue, yes.

Scott Sutherland - Wedbush Securities Inc.

And lastly, can you talk about the stock comp going up this quarter? I think you did give guidance earlier this year on full expectations for the year. And maybe is it going to ease back off or is this a new level for it?

Paul Ricci

I think that the jump in the second quarter related to stock pay bonus payments, and so the answer is yes.

Operator

We will now go to the line of Ilya Grozovsky with Morgan Joseph.

Ilya Grozovsky - Morgan Joseph TriArtisan LLC

Can you guys talk a little bit about what's going on with the car market? Sort of what are you looking for in terms of models? How many models do you think you're going to be in, in '11, and how many models in 2012?

Paul Ricci

I can't answer the question specifically on the number of models, but I can characterize our overall performance. It's been among the strongest performing units within our Mobile business. And I think that is driven by the fact that Nuance's technology has become accepted among almost all of the major automotive manufacturers around the world. And that, as our comments today noted, that includes not only embedded implementations, but also connected services, which I think offers an additional horizon for growth as we look out into fiscal '12 and fiscal '13. We're quite bullish about the automotive market because we think that our differentiation there and our reputation there is quite strong because of our ability to work very closely with the automotive manufacturers, help them with their user interface designs and deliver our solutions under very demanding circumstances and schedules.

Operator

We'll now go to the line of Derek Bingham of Goldman Sachs.

Derek Bingham - Goldman Sachs Group Inc.

The license results, I'm surprised just to the upside and I'm guessing, I don't have the model in front of me, that it's unusual that licenses will be up quarter-to-quarter from December through March. And I think, Paul, you had mentioned some strength in Licensing and Enterprise. Were there any other areas where the Licensing, in particular, surprised you to the upside?

Paul Ricci

We had good performance in Licensing in the Enterprise business. We also had good performance in the Mobile business, and I think as well in the Imaging business.

Derek Bingham - Goldman Sachs Group Inc.

Were there any large deals or lumpiness on the License side that we should be aware of when modeling June?

Paul Ricci

Well, there are always some large deals in Nuance's Licensing revenues, and quarter-to-quarter variability can be driven by those. It's difficult to give you much guidance on what to do about June in particular because, of course, we're managing our pipeline and our guidance that we provided today is driven by our expectation of that pipeline.

Derek Bingham - Goldman Sachs Group Inc.

On Dragon Consumer, could you give us some characterization of how March compared with December either quarter-on-quarter or year-on-year after really strong September and December post the launch?

Paul Ricci

Well, Dragon growth. Dragon sequentially from the December quarter was clearly down as you would expect because the seasonal quarter of December is always Dragon's most robust quarter. And it was an immediate post-launch quarter, too. So there are 2 factors influencing that. And it's noteworthy that our Licensing revenues did as well as they did in the quarter notwithstanding that. The Dragon revenues in the second quarter, however, performed well against our plan.

Derek Bingham - Goldman Sachs Group Inc.

And did that grow on a year-over-year basis?

Paul Ricci

Yes.

Derek Bingham - Goldman Sachs Group Inc.

And then on G&A line, that stepped up sequentially a few million dollars if we calculate it right. Just wanted to make sure that was -- is that kind of -- the $23 million quarterly run rate, is that kind of the new baseline? Or was there anything lumpy in G&A this quarter that won't repeat next quarter?

Paul Ricci

I think we -- I'm not sure if we called out in our prepared remarks, but we did have significant legal expenses in the quarter. And those are somewhat -- they were above expectations, and I think that there will be some appreciable legal expenses for the balance of the year. So it may not be quite this high for the balance of the year, but it probably close to this.

Derek Bingham - Goldman Sachs Group Inc.

And last one for me is tax rate I know sometimes you talk about it eventually going to creep up over time, but it seems like it never actually does. I'm wondering if you can kind of give us your latest thoughts on the go-forward for a tax rate?

Thomas Beaudoin

Sure. So we continue to utilize the net operating losses and some stock based comp. We also have a number of programs that we're also able to use to reduce that [indiscernible] a little of that this quarter. We see the tax rate in that mid-single digits through the balance of this year and into next year.

Derek Bingham - Goldman Sachs Group Inc.

I mean, is there any view on, in the next few years when that actually starts to step up in any meaningful amount, beyond kind of the single-digit

pace or not in the foreseeable future?

Thomas Beaudoin

Well, I think we can speak through FY '12 and that kind of depends on acquisitions and strategies. We have global tech strategies going on right now. Clearly, as we go through some of our NOLs and some of those other deductions that will step up in future years. But I don't think we've given specific guidance on that. We'll probably do that when we get into FY '12.

Operator

And our next question will come from the line of Scott Zeller with Needham and Co.

Scott Zeller - Needham & Company, LLC

On your recent hiring of Bill Nelson, could tell us where most of his time will be focused? Will he have particular emphasis on the Enterprise business or will he be spending time equally across all the businesses?

Paul Ricci

No, he's going to be -- he runs our worldwide field organization, and so he will divide his time appropriately among all our businesses and all our geographies.

Operator

And we'll go to the line of Steve Koenig with Longbow.

Steven Koenig - Longbow Research LLC

My question is about the lifecycle of Mobile contracts. If you can speak, generically, I know you have a wide range of contracts. But do those contracts tend to mostly involve royalty arrangements and/or subscription fees for the services or is there any kind of upfront license stuff in that versus building kind of ratably over time, especially when kind of the lifecycles here on your contract and how those revenues start to flow?

Paul Ricci

Yes. I think one of the most consistent themes that we've sounded in these calls is that the Mobile and Wireless market is as dynamic a business as we participate in. And as such, business models have evolved very rapidly in the many years we've been involved and continue to evolve rapidly over the last year and in months and weeks. And therefore, we have a range of arrangements that reflect that dynamism that include long-term royalty contracts, long-term fixed fee contracts, upfront payments, partial payments with design wins, not typically complete payments, but some partial payments with design wins and transactional and volume-based services contracts. So it would be extremely difficult to speak in any generic sense about that, and we've tried to give some sense of that tapestry as it influences our Mobile revenues and the growth of our Mobile business over time.

Richard Davis - Canaccord Genuity

Do you all have a preference towards one or more of those ways of licensing?

Paul Ricci

We do, but we find that our partners, some of whom have significant buying power of their own, have preferences, too. And so the outcome tends to be a marriage of the interest of both parties.

Steven Koenig - Longbow Research LLC

And I'm assuming your preference is probably skewed towards the ratable sorts of models?

Paul Ricci

That's true.

Operator

And our last question of the day is going to come from the line of Brent Thill with UBS.

Brent Thill - UBS Investment Bank

Paul , just I have a little question on '12 versus '11. You seem very confident that the organic business is going to be better, obviously, '12's a long ways out. Is this confidence stemming from the transition to On-Demand from these larger deals that are coming in that you're getting better visibility on? What are the key building blocks for you to go out and talk about '12 already when we're still fairly early in '11?

Paul Ricci

Well, let me start with your first point. It's only 5 months away so it doesn't quite feel that long a way out. But our fiscal '12 begins October 1. But to the substance of your question, if we just go quickly through the various businesses, I have spoken before that -- today that I do see stabilization and some return to growth in our Enterprise business. And just eliminating that deficit, of course, itself is a significant improvement. I have said previously that our Healthcare business, we believe, is a remarkable business over time, and that the capabilities we have in our On-Demand Solutions, the demand for digitization among healthcare providers that I spoke about in reference to an earlier question, the new capabilities in Clinical Language Understanding and the flow of that capability into revenue streams associated with the EMR implementations and with revenue cycle management in fiscal '12 all will augment Healthcare growth in fiscal '12. So we're quite pleased about that, and we have talked earlier this year, not so much this quarter, about the seeds we planted in Europe and the opportunities in the U.K. and a couple of the large economies in Europe for Healthcare expansion as well. And Mobile, I think you appreciate the opportunities there, just inherent growth in the Mobile industry and the growing acceptance of Voice and Language Solutions as particularly privileged capability in enabling Mobile Solutions. And finally, I've talked earlier about -- and also in Mobile, the fact that we are seeing an increased level of strategic engagements in that industry. And then finally, I've talked about earlier that our Imaging business appears to have growth opportunities available and achievable, and that exceeded what we thought and perhaps when we say we're at the beginning of this fiscal year.

Brent Thill - UBS Investment Bank

And just one quick follow-up to an earlier question about the new Head of Sales. Can you just give us a sense of a sales strategy. It seems like you already have a lot of established relationships, and any time you bring a new Head of Sales in the software industry, there's always a concern of a new footprint that's lain in disruption in the field. And it doesn't sound like there's as big potential impact as there may be at another software company if you're bringing in a new Head of Sales. And can you just give us your sense in terms of where you feel it is strategically aligned. It seems like this is more of a tweak than an overhaul.

Paul Ricci

Well, as you know, until the end of the second quarter, Steve Chambers, who's worked alongside me here for the better part of a decade now, was managing sales along with a number of a number of other operational responsibilities. And Steve performed brilliantly in that role, but it was not his long-term design or my long term design that he do that forever. And we, he and, I had agreed we would look for a Head of Worldwide Sales Field Operations to take over that responsibility at an appropriate time. And we had searched for quite a long time until we found someone we were extremely enthusiastic about. And I note to your point that we are bringing him in at a moment of relative strength in the company. So it really wasn't -- Bill was not brought in to solve particular problems in the business, but to help us realize potential and to allow Steve to turn his attention to some of the other operational and strategic opportunities in the company that he's worked hard at exploiting over the last few years and is working with me on.

Okay then, if that's our last question, we want to thank you, all, again for joining us. And we look forward to talking to you again next quarter.

Operator

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