Nuance Communications' (NUAN) CEO Paul Ricci on Q1 2016 Results - Earnings Call Transcript

| About: Nuance Communications, (NUAN)

Nuance Communications, Inc. (NASDAQ:NUAN)

Q1 2016 Results Earnings Conference Call

February 09, 2016, 05:00 PM ET

Executives

Richard Mack - Vice President of Corporate Marketing and Communications

Paul Ricci - Chairman and Chief Executive Officer

Dan Tempesta - Executive Vice President and Chief Financial Officer

Bruce Bowden - Executive Vice President, Corporate Strategy, Development and Legal

Analysts

Brent Thill - UBS

Jeff Van Rhee - Craig-Hallum

Sanjit Singh - Morgan Stanley

Steve Wardell - Leerink Partners

Shaul Eyal - Oppenheimer

Scott Zeller - Needham & Company

Parker Lane - Stifel

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Nuance's First Quarter Fiscal 2016 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time [Operator Instructions] As a reminder, today's conference is being recorded.

With us today from Nuance are the Chairman and CEO, Paul Ricci; CFO, Dan Tempesta; and EVP of Corporate Strategy and Development, Bruce Bowden; and Vice President of Corporate Marketing and Communications, Richard Mack.

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

Richard Mack

Thank you. Before we begin, I remind everyone our discussion this afternoon includes predictions, estimates, expectations and other forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ. You should refer to our recent SEC filings for a list of risk factors. All references to income statement results are non-GAAP unless otherwise stated. As noted in our press release, we issued a set of prepared remarks in advance of this call, which are available on our website. These remarks are intended to serve in place of extended formal comments, and we will not repeat them here.

I'll now turn the call over to Paul.

Paul Ricci

Good afternoon. Before taking your questions, I would like to highlight several key points from today's earnings announcement. Today we reported a strong first quarter demonstrating continued improvement over the previous fiscal year across our key metrics. With these latest results in Q1 we now have delivered six consecutive quarters of year-over-year improvements in non-GAAP operating margin, non-GAAP EPS and operating cash flow.

Compared to Q1 last year non-GAAP operating margin improved by 660 basis points, non-GAAP EPS improved by $0.11 and operating cash flow grew 48% to $141.1 million up from $95.7 million a year ago. That brings us to our trailing fourth quarter operating cash flow to $533 million which was a strong testament to the strength of our business. In addition our deferred revenue grew $111.6 million up 18% year-over-year as noted in previous we're seeing relative consistency in our deferred revenue growth which is an indicator of the greater future revenue predictability.

Our transformation program continues to deliver results. Within this program we've targeted expense reductions that will contribute $125 million in total annualized cost savings as measured in the first quarter of fiscal 2017. We've already reduced expenditures broadly in cost of goods sold and operating expenses which contributed to our improved year-over-year performance in the first quarter of fiscal 2016.

Actions today under this program have resulted in approximately $100 million in annualized savings which represents substantial progress towards our ultimate goal. The transformation of our business towards recurring revenue models also continued during the quarter with non-GAAP recurring revenue representing 67% of non-GAAP total revenue compared to 66% a year ago. Our latest bookings point towards a continuation of this trend in recurring revenue streams.

I know for example with the migration of Dragon Medical and Diagnostics toward term license bookings is proceeding even more rapidly than we had anticipated. More broadly, strong net new bookings so far this year indicate improving future revenue growth. In our first quarter net new bookings were $308.7 million up 2% compared to $303.8 million in Q1 2015.

If we applied Q1 2015 currency rates to our Q1 2016 net new bookings, we would have achieved approximately 7% net new bookings growth. In the second quarter and fiscal year 2016 we expect a continuation of market trends we experienced in recent periods. We intend to continue to improve our performance, evolve our business towards recurring revenue models, execute upon our transformation program and position the company for increased future revenue growth.

Overall fiscal 2016 is off to a good start in our years progressing as we anticipated. Our performance reinforces our confidence in the strategy we have articulated and we believe we are putting the company on a solid foundation for the future and we're now happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question today comes from the line of Brent Thill of UBS. Please go ahead.

Brent Thill

Thanks. Paul, you've had really strong margin improvement in you noted the sequential pattern on margins. I'm curious now at a high 20% operating margin how much room you believe you have left and I would assume as you've gotten the bookings now at 7% constant currency it seems like that you have this revenue growth that falls through the bookings growth that falls through that that there is maybe another leg to operating margins as that starts to kick in can you just talk a little bit about the tailwinds and maybe the headwinds and how are you thinking about that over the next nine months to the next year?

Paul Ricci

Well, we do think that there continues to be medium term opportunity to improve operating margins. I want to caution a little that we are as we look through the balance of this year making additional investments in growth to try and enhance growth for next year and so that will mitigate some of the operating margin improvements we would otherwise see, but remember that we are on a committed path to achieve $125 million in total savings as we referenced in the past couple of quarters and I think the net effect of all that will continue to allow us to have operating margin improvement as we look into fiscal 2017.

Brent Thill

And just a real quick follow on, on healthcare I think it is a tale of two cities as you point out in the prepared remarks with the net new bookings for Clintegrity doing well, but that being offset by the traditional transcription business, is there a crossover point where you feel that you can start to see that now or that is one of your largest businesses, do you start to see that segment return to better growth?

Paul Ricci

So I think the way you've divided it is a good lead. If you think of our Dragon business, our Diagnostics business and our Clintegrity business they are comfortable sizes to our transcription business and all three of those businesses have fundamental growth factors in them.

Remember that both Diagnostics and Dragon, the as reported revenue growth this year is mitigated by the transition to recurring term models. But as we look into 2017 we're going to see enhanced growth in those segments as the bookings this year drive recurring revenue growth next year. And so I think we will see a greater offset from the transcription erosion.

I should also say that we continue to believe that there's additional transcription market opportunity out there and we are continuing to evolve our sales and marketing approach to see some of the additional uncertain transcription out there.

Brent Thill

Operator

And we do have a question from the line of Jeff Van Rhee from Craig-Hallum. Please go ahead.

Jeff Van Rhee

Yes, great thank you. Paul, just one followup to the last question and then a few others, but along the lines that was described obviously that is the purchases called out with respect to the headwinds, I mean what are drivers there, do you think the year-over-year headwinds there, how do you think about the year in terms of year-over-year headwinds on line?

Paul Ricci

We are expecting stronger bookings in the hand segment, the transcription segment in the second half of the year than we've seen to date. So that will fuel some additional growth and the lines really is a function of our bookings plus our implementation time of new bookings and I think the picture in the second half of the year will be somewhat stronger than it's been in the first quarter.

Jeff Van Rhee

Obviously with the chaos in the public markets and concerns about global macro, can you just give us any comment on the progression through the quarter and thus far in the quarter with respect to those issues?

Paul Ricci

I don't think we have anything to report with respect to macro economics effects upon our business. We thought it was a strong quarter. We are obviously getting a solid forecast for the year, so I don't think we're really forecasting any mitigating macroeconomic affection in our various segments.

Jeff Van Rhee

You called out some areas of strength, but I just – would you be just maybe along the lines of the bookings expand on, you don't guide the bookings on the quarter, you guide for the annual but obviously you had some variances within the quarter. Just can you expand a bit on the variances you did see in the bookings relative to your expectations for the quarter?

Paul Ricci

Well we had a reasonably even performance across our business. We did well in our mobile business in particular, but I don’t have anything notable to say about the bookings other than to remind you that bookings can be lumpy for us because of large bookings we do in certain segments such as yard motor segment. So we try and focus deeper on our annual target rather than our quarterly targets.

Jeff Van Rhee

Yes, okay and last one from me then and with respect to the armed man [ph] and the recovering numbers on a sequential basis I'm assuming that has core relation to some of the effects you've described on the transcription business, but any other factors that would describe, would impact on a sequential basis in terms of a negative drag sequentially September to December?

Paul Ricci

Well, we had a little stronger licensing revenue in the quarter than we anticipated and you did mention the erosion factor in the him transcription business, I think those are the two factors.

Jeff Van Rhee

Okay, great, thanks, great quarter.

Operator

And we do have a question from the line of Sanjit Singh with Morgan Stanley. Please go ahead.

Sanjit Singh

Hi guys, thanks for taking my questions. I had a couple, and I want to start first with the management changes you made in your mobile business wanted to see what drove that change and what are you expecting from Bob in terms of his goals for the year as in what he is going to see, he should be executing on?

Paul Ricci

Well you should think of that change as a change that was orchestrated over the long period of time in conjunction with the prior manager Mike Thompson I'm really Bob is, has an agenda of continuing the strategy that exists in the business and accelerating growth in particularly in the automotive segment and the mobile operator services segment and that's going to be his primary focus.

Sanjit Singh

Okay and then in your presentation you had on the site you talked about BMW not just a question on the BMW was that was in terms of the shipping was that a revenue recognition of that in the quarter and how long was this business, the BMW business booked?

Paul Ricci

We had one or more significant BMW bookings in fiscal year 2015 I don't remember precisely whether it was one or more than one and we have revenue contributions from that in previous quarters as well as this quarter. But what was notable about the first quarter of course was the model, the flagship model was shipped.

Sanjit Singh

Got it and then in terms of sort of hypothetical thinking you had a question on the macro, but from your point of view should you start to see weakness, how should we think about your commitment to the $125 million in cost cut, is any of your cost reduction initiatives, optimization initiatives the 10 on the top line necessarily which you be open to be doing more if should the environment weaken further?

Paul Ricci

Well, let me say this in response to the prior the question and this question. We have of course a very high level of recurring revenue. So the exposure of our business this year to macroeconomic effects other than currency effects which of course we talked about last year and we note had some negative contribution this quarter as well. Other than currency effects the potential for macroeconomic effects upon this year's performance are relatively small because of a high degree of recurring revenues and also because of our large exposure to healthcare which is probably not going to experience healthcare IT which is probably not going to experience that effect in the near term irrespective of the macroeconomic environment. Having said that, our commitment to the $125 million is steadfast and you should expect us to deliver that commitment.

Sanjit Singh

Right, thank you so much for the detail.

Operator

And we do have a question from the line of Steve Wardell with Leerink Partners. Please go ahead.

Steve Wardell

Hey guys, I’m just wondering can you, since healthcare played a role in your quarter, can you tell us what are you hearing from healthcare customers or is there anything sort of new that’s coming from them or any change that’s coming from healthcare customers?

Paul Ricci

Well there is no precipitous change in the quarter. The messaging from healthcare customers is one that has evolved over the last year and in particular, we’ve of course talked about the importance of meaningful use in previous conference calls and in addition to that healthcare providers are very focused on issues having to do with outcomes and quality and those are issues that we address in our newer product lines particularly Clintegrity product line.

Steve Wardell

Great, thank you.

Operator

And we do have a question from the line of Shaul Eyal with Oppenheimer. Please go ahead.

Shaul Eyal

Thank you. Hi good afternoon guys, a good quarter, congrats. Two quick questions on my end. Paul you mentioned that there could be some accelerated investments and how do you think about it, sales and marketing, R&D, any specific segments that we might be seeing an accelerated level of investment?

Paul Ricci

Well, our first priority in terms of investment is continues to be expanding our sales capacity and we have been making those investments already this year and we expect to continued to make those investments. Our second quarter investment is enabling services and professional services and engineering services to fulfill on customer contracts and commitments, the bookings that we have signed. Our third priority is enhanced investments in specific R&D areas where we have product opportunities that we think are going to drive revenue in fiscal 2017.

Shaul Eyal

Got it, thank you for that and with respect to the competitive landscape, may be big picture and I know it's may be a little more complicated given the four segments, but may be just on the healthcare and may be on the mobile front, any change, any newcomer or pretty much a status quo as we have seen over the course of the past few quarters?

Paul Ricci

I don’t think there has been any material change in the competitive landscape from previous quarters to what we’re seeing this quarter.

Shaul Eyal

Got it. Thank you so much. Good luck, congrats.

Operator

And we do have a question from the line of Scott Zeller with Needham & Company. Please go ahead.

Scott Zeller

Thanks, regarding the four business units I think I have once been focusing on the healthcare performance, but when you look at the three remaining Paul, you mentioned that the bookings were good mobile I believe and as you look out for the three other business units this fiscal year, which of them would you – which are you most optimistic about for growth of the three outside of healthcare?

Paul Ricci

So we expect organic growth in all four of our businesses this year and there are particular products and services growth drivers in all four businesses. We’re expecting a stronger – we are expecting some momentum in healthcare bookings as we go through the year. We’ve - in particular we’ve been very enthusiastic about the opportunity for overachievement of bookings in our Clintegrity solutions. We expect strong bookings in our enterprise bookings if we look in the second half of the year as well.

Scott Zeller

Okay. And from the enterprise perspective, what do we, are we seeing OnPrem or where would that strength be?

Paul Ricci

There is some resumption of momentum in our OnPrem business, particularly related to professional services and specifically our Voice Biometrics Solutions. But I think the momentum there will be in our hosted and cloud based solutions.

Scott Zeller

Okay, thank you.

Operator

And our last question comes from the line of Tom Roderick with Stifel. Please go ahead.

Parker Lane

Hi this is Parker Lane in for Tom Roderick. I was wondering how you’re thinking about the pace of acquisitions for the remainder of the year and whether there are any particular areas of your business that you feel would benefit the most from acquired technology assets. Thank you.

Paul Ricci

Well as you know, we’ve had a relatively constrained pace of acquisitions for some while now and I expect that to continue. You should anticipate that we could do small acquisitions that we think might serve a particular market area or as you noted in Augmented Technology I think, we view healthcare as an area that is ripe for opportunity in that respect in particular, but it could be other areas, which it has and will continue to be relatively restrained.

Parker Lane

Thank you.

Paul Ricci

Okay then. I want to thank you all for your questions and for joining us today for our earnings announcement. We look forward to speaking to you again next quarter.

Operator

And ladies and gentlemen, today’s conference will be available for replay after 7:00 PM today you may access the AT&T Teleconference Replay System by dialing 1-800-475-6701 and International participants may dial 3203653844 entering the access code 384849. Again those numbers are 1-800-475-6701 and international participants may dial 3203653844 again entering the access code 384849. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.

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