Nuance Communications (NUAN) Paul A. Ricci on Q3 2016 Results - Earnings Call Transcript

| About: Nuance Communications, (NUAN)

Nuance Communications, Inc. (NASDAQ:NUAN)

Q3 2016 Earnings Call

August 08, 2016 5:00 pm ET

Executives

Richard Mack - Vice President-Corporate Marketing & Communications

Paul A. Ricci - Chairman & Chief Executive Officer

Adam Bruce Bowden - Executive Vice President, Corporate Strategy & Development

Daniel David Tempesta - Chief Financial Officer & Executive Vice President

Analysts

Ian Strgar - UBS Securities LLC

Nandan G. Amladi - Deutsche Bank Securities, Inc.

Tavis C. McCourt - Raymond James & Associates, Inc.

Jeff Van Rhee - Craig-Hallum Capital Group LLC

Sanjit K. Singh - Morgan Stanley & Co. LLC

David E. Hynes - Canaccord Genuity, Inc.

J. Parker Lane - Stifel, Nicolaus & Co., Inc.

Scott Zeller - Needham & Co. LLC

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Nuance's Third 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. Also as a reminder, this teleconference is being recorded.

With us today from Nuance are Chairman and CEO, Paul Ricci; CFO, Dan Tempesta; Executive Vice President 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 - Vice President-Corporate Marketing & Communications

Great, thank you. Before we begin, I remind everyone here our discussion this afternoon includes predictions, estimates, expectations and other forward-looking statements. These statements are subject to risks and uncertainties that could cause material difference in our actual results. Please refer to our recent SEC filings for a discussion of these risks.

All references here to income statement results are non-GAAP unless otherwise stated. And as noted in our press release, we issued a set of prepared remarks in advance of this call, which are available on our website. Those remarks are intended to serve in place of extended formal comments and we will not repeat them here.

I'll now turn the call over to Paul.

Paul A. Ricci - Chairman & Chief Executive Officer

Thank you, Rick. Good afternoon. Before taking your questions, I'd like to highlight several key points from today's earnings announcement. First, we continue to be pleased with our performance through the first three quarters of FY 2016 and we delivered a good third quarter across nearly all of our financial metrics.

As you saw in our materials from today, we again delivered year-over-year improvement in key areas. Non-GAAP operating margin improved by 80 basis points, non-GAAP EPS improved by $0.06, recurring revenue represented 71% of total revenue, up 300 basis points year-over-year. Deferred revenue grew by 13% and cash flow from operations was up 5%. Second, I noted the continued positive effect of our transformation with the benefits most notable in our operating expenses and EPS.

We've made substantial progress in this initiative with cost savings across our segments and while initiating some incremental investments in our highest growth areas. With the results we've seen, we intend to continue this transformation program throughout fiscal year 2017, maintaining our cost discipline and prioritizing resources toward business lines that offer stronger bookings and revenue growth.

Third, in addition to the strength in our overall Q3 and year-to-date financial metrics, I would note the strength and resilience in several of our business lines, our Enterprise business in particular, as mentioned in our prepared remarks has delivered a robust year-to-date performance. Our Clintegrity business line in Healthcare also has demonstrated strong year-over-year gains throughout fiscal year 2016.

Additionally our automotive business line within Mobile continues to post record results. Fourth, we continue to manage the transition of our business toward recurring revenue models as we've seen a strong customer preference for our cloud-based offerings versus traditional license-based solutions.

As noted, non-GAAP recurring revenues represented 71% of non-GAAP total revenue compared to 68% a year ago and recent bookings and pipeline data point to a continuation of this trend. While these new cloud offerings afford substantial medium term benefits for revenue and growth, the transition has accelerated and the resulting near term effect on our revenue is somewhat more significant than we anticipated in the second half of FY 2016. This is perhaps most evident in our Healthcare business where we've seen an overwhelming customer preference for Dragon Medical in the cloud and experience growing demand in bundled arrangements. Notably, we anticipate that our Healthcare business will have substantially completed the transition to recurring revenue model during fiscal year 2017.

Similarly in Mobile, we see that among automakers, mobile operators, and other service providers, there's an accelerating transition to cloud-based revenue models. The recurring revenue model transitions, which weigh our near-term revenue, nonetheless will benefit the company with enhanced bookings and improved revenue growth in FY 2017 and even more so in FY 2018. The year-to-date progress, the success of our transformation program and the strength of our bookings pipeline gives us confidence in the improved outlook for FY 2017, which combines improved bookings and revenue growth with continued strong margin performance, balanced with investments we referenced earlier that we believe will accelerate growth later in fiscal year 2017 and in fiscal year 2018.

We're now happy to take your questions.

Question-and-Answer Session

Operator

Thank you very much. We'll take our first question from Brent Thill with UBS. Please go ahead.

Ian Strgar - UBS Securities LLC

Hey, guys. Thanks for having me on the call. This is Ian Strgar, calling for Brent Thill. I recall you guys discussing wanting to see some a return to positive organic growth some time in fiscal 2016. And we're a few quarters in with flat to slightly down quarters. I was just wondering if you could comment on kind of what you expect for the remainder of the year and through 2017.

Paul A. Ricci - Chairman & Chief Executive Officer

We did indicate that we expected positive organic growth in the back half of fiscal 2016. As we mentioned on this call, we have seen an acceleration towards cloud and term-based arrangements. And while enhancing the opportunity for growth as we look into the second half of 2017, it has reduced growth in the second half of 2016.

Ian Strgar - UBS Securities LLC

Okay.

Paul A. Ricci - Chairman & Chief Executive Officer

We've previously given guidance for fiscal year – we've previously given indications for fiscal year 2017 suggesting that we expected to see an improvement in organic growth by 100 basis points to 200 basis points I believe.

Ian Strgar - UBS Securities LLC

Okay. Understood. And I apologize if I missed this, but I think last quarter you noted you had saved $128 million in annualized savings. Was there a number that you guys could disclose this quarter or kind of given that you already surpassed the $125 million last quarter maybe an updated number for what you guys are thinking through 2017 as you continue those initiatives?

Paul A. Ricci - Chairman & Chief Executive Officer

We didn't update the number this quarter and we weren't planning on updating it for the balance of this year having hit the $125 million we expected. We did indicate in my opening comments and the prepared remarks two things. First, we are making some incremental investments in the back half of this fiscal year, which are targeted at growth opportunities in 2017, which we believe we have the opportunity to fuel. And secondly, we indicated again in the, I think both the prepared remarks and my comments just now, that we intend to continue the transformation initiative that was the umbrella program for the cost savings in 2016, we intend to continue that into 2017.

I think we have tried at the same time to indicate that as we look ahead into 2017, we will achieve real cost savings and productivity savings in the business, but we're going to be looking to increasingly balance those savings with select investments to drive enhanced growth, which we think is available to us in several of our key businesses as we look out into 2017 and 2018.

Ian Strgar - UBS Securities LLC

Got it. And what were those areas just to be totally clear?

Paul A. Ricci - Chairman & Chief Executive Officer

Those areas being the areas for growth opportunity?

Ian Strgar - UBS Securities LLC

Yes.

Paul A. Ricci - Chairman & Chief Executive Officer

Yes. I've mentioned some of them, but in our Mobile business, we're particularly keen of course on the growth opportunities in automotive where we've continued to have record revenue numbers this quarter and to some extent the mobile operator services business. Our Enterprise business has shown robust performance across almost all of its product lines this year and we're making both product and channel investments to try and accelerate growth there next year. And in Healthcare, we're investing in our Dragon product solutions broadly, which we mentioned both in the prepared remarks and in my comment is a product line going through the remainder of its transition to a recurring model, which will also help with growth in 2017, as well as in Healthcare in our Clintegrity solutions, which we've discussed a lot over the course of this year. And finally, in our network multi-functions solutions in Imaging, we are making some investments to enhance new product offerings for next year.

Ian Strgar - UBS Securities LLC

Got it. Thanks a lot, Paul.

Operator

Thank you. Our next question will come from Nandan Amladi with Deutsche Bank. Please go ahead.

Nandan G. Amladi - Deutsche Bank Securities, Inc.

Thanks for taking my question. With the significant buyback program now completed, as you look ahead for the remainder of this year and perhaps heading into fiscal year 2017, can you give us an indication of how you would balance the buyback vis-à-vis the revenue transition? Other companies that have gone through revenue transitions have actually used the buybacks to kind offset the pressure on earnings.

Paul A. Ricci - Chairman & Chief Executive Officer

Well, I should start by observing that we've – if you look over the course of fiscal year 2016, we've delivered significant improvement to our earnings outlook through a combination of over performance on our expense management, as well as share buybacks and other capital structure modifications, some debt pay down earlier in the year. So, I think, we've done a significant amount of that throughout the fiscal year 2016. I don't anticipate further buybacks in the remainder of 2016, and it's really too early to discuss 2017.

Nandan G. Amladi - Deutsche Bank Securities, Inc.

All right (11:34). Thank you. And can you touch on the TouchCommerce acquisition and how that benefits the Enterprise segment, because obviously, one of the major trends in the industry is that traffic is moving away from voice-oriented customer character to (11:51) more online channels?

Paul A. Ricci - Chairman & Chief Executive Officer

So, it is true that as you look at the mix of interactions that major call centers will have with their customers, the proportion that is going towards digital channels is increasing and the TouchCommerce acquisition was intended to target that. Our view is that the – our customers the large enterprises who want to be able to provide an integrated solution to – for their customers that spans customer contact across all the channels, and that really was our objective in acquiring TouchCommerce to integrate it with our existing multi-channel offerings so that we could provide an integrated solution to our customers.

Nandan G. Amladi - Deutsche Bank Securities, Inc.

Thank you.

Operator

Thank you. The next question will come from Tavis McCourt with Raymond James. Please go ahead.

Tavis C. McCourt - Raymond James & Associates, Inc.

Hey. Thanks for taking my question. I've got a few, but I just wanted to clarify your comments on 2017, Paul. In the prepared remarks, you say there'll be overall growth in 2017, your previous guidance was a 100 basis point, 200 basis point improvement in your organic growth trends. So, what are you saying now for 2017 for organic growth?

Paul A. Ricci - Chairman & Chief Executive Officer

Well, I think what I said last time was we're anticipating organic growth improvement of 100 basis points to 200 basis points and that still remains our outlook for 2017.

Tavis C. McCourt - Raymond James & Associates, Inc.

Well, secondly, if I look at the perpetual product and license revenue trend, it was down 26% year-over-year in the June quarter and for the full year, it looks like it'll be down 15% to 20%. How much visibility do you have – may I assume some of – a lot of that's kind of Imaging not going away, some of that's probably in the Enterprise business and doesn't go away entirely. So obviously it's on an accelerated downward slope right now this year, how close do you think we are to seeing some kind of leveling off of that quarterly revenue stream?

Paul A. Ricci - Chairman & Chief Executive Officer

Okay sure, just to be clear I think you're asking whether we expect a leveling off of the licensing revenue stream.

Tavis C. McCourt - Raymond James & Associates, Inc.

Yeah or relative to the 15% to 20% decline, you're likely to see this year, even if it's not a complete flattening out at least an improvement in the deceleration?

Paul A. Ricci - Chairman & Chief Executive Officer

Well, as I mentioned earlier, there has been a significant transition that has accelerated as we've gone into the back half of this year of our Dragon Medical business and Healthcare. And we expect that business to go substantially all to a term and cloud-based offerings as we look ahead over the next two quarters to four quarters. So that will continue. There is a significant part of our Enterprise business serving large enterprise in customer contact centers that's going to remain as a conventional licensing business for quite some time for a variety of reasons that entail customer preference. That is also true in the enterprise sales areas of our Imaging business as well. We would expect to see a continued migration to connected and therefore cloud solutions in Mobile and almost a complete transition in Healthcare as I've referenced a moment ago.

Tavis C. McCourt - Raymond James & Associates, Inc.

And just I wanted to make sure I heard you right in answering a previous question or maybe it's in your prepared remarks on Healthcare, you thought that transition would be largely complete by the end of fiscal 2017, did I hear you right on that?

Paul A. Ricci - Chairman & Chief Executive Officer

Yes.

Tavis C. McCourt - Raymond James & Associates, Inc.

Got it. And then a follow-up on that, on the enterprise or contact center market. Two things, the renewed strength that you've seen this year I know you made some changes in the organization, is the strength going kind of re-pivoting more towards software license sales, through system integrators and call center software companies, or is it still directly to the end customer, but just getting better execution?

Paul A. Ricci - Chairman & Chief Executive Officer

We have seen improved performance in our channels. We have seen improved performance in our direct bookings and we have seen strength in delivery through our on-demand models.

Tavis C. McCourt - Raymond James & Associates, Inc.

Okay. And final question Paul, on the professional services business, I think you throw that into non-recurring revenue, which is appropriate. But as we think about that business, I assume it gets wrapped around solutions that you're selling. So, in your mind, is that $200 million or so run rate, annually although it's not recurring. Do you view that as a sustainable business or do you believe that's a business that's shrinking as well?

Paul A. Ricci - Chairman & Chief Executive Officer

We believe it's sustainable and in fact it's growing. And we think that growth has been in part because of the growing appetite for professional services and solutions in healthcare and in part because of a rebound of professional services bookings that we've seen in our Enterprise business.

Tavis C. McCourt - Raymond James & Associates, Inc.

Okay. Thanks a lot.

Operator

Thank you. Our next question will come from Jeff Van Rhee with Craig-Hallum. Please go ahead.

Jeff Van Rhee - Craig-Hallum Capital Group LLC

Great. Thank you. Paul, as it relates to bookings performance for the quarter as well as the guide, maybe just you can back up to the bookings side, and what was it this quarter obviously it looks like it fell short albeit on a very tough compare due to the auto and then obviously taking it down from that 2% to 5% for the year down to essentially looking for flat. Can you just dive a little deeper into that, how that shortfall broke down in the quarter, sort of how it displayed itself both by segments, timing, any more incremental color?

Paul A. Ricci - Chairman & Chief Executive Officer

So, this quarter was always destined to be a difficult compare because of the large automotive bookings we had in the previous quarter. And automotive bookings of that magnitude while they do occur from time to time are unpredictable, and certainly we had not able to anticipate one in any given quarter. I think more broadly we've seen in our pipeline the development of very large bookings, I think we referenced this in our prepared remarks, bookings that fall in the range of $10 million to $50 million, and it is difficult to predict the timing of those. We had anticipated in particular in Healthcare and in – into our Healthcare business and our Enterprise business, several bookings in that range that would occur in the fourth quarter and we're just not confident as we sit here today that they will be signed in the fourth quarter. We're quite confident about our ultimate ability to bring those bookings in, we're just not confident about bringing them in the fourth quarter.

Jeff Van Rhee - Craig-Hallum Capital Group LLC

And is there any commonality to the deals in terms of the conviction push if you will, in terms of drivers, any other common characteristics that you see underpinning why that collection pushed at the same time?

Paul A. Ricci - Chairman & Chief Executive Officer

No, and I don't think it's an execution issue. I really think that bookings in this range – there's a commonality that we're seeing a greater frequency of large bookings in our pipeline and bookings in that range of price just involve more protracted contract negotiations and approval cycles. When you have an enterprise booking that rounds for $50 million, the approval cycle of the customer making it is significant.

Jeff Van Rhee - Craig-Hallum Capital Group LLC

Okay. And then I guess as we look at 2017, I don't know to what degree you're willing to be specific on the sub businesses, at a minimum, do you expect top-line growth in all four and any other incremental color you can give in terms of your sense of conviction, where you think the growth will be or possibly won't be?

Paul A. Ricci - Chairman & Chief Executive Officer

Well, I don't – it would be a mistake for me to try and give you specific targets by individual businesses at this point. But I can say that the areas of growth I outlined in response to an earlier question, I think are the areas that are going to provide growth as we look into 2017.

Jeff Van Rhee - Craig-Hallum Capital Group LLC

Okay. And then last from me I guess as it relates to the lines transcribed trends, I think you had said last quarter think of it as an upper single-digit piece of decline in terms of lines transcribed, still similar thinking there?

Paul A. Ricci - Chairman & Chief Executive Officer

I think that's right. We checked and validated that again very recently and I think maybe it's trended up slightly, but not substantially.

Jeff Van Rhee - Craig-Hallum Capital Group LLC

Okay. I'm all set thank you.

Operator

Thank you. The next question in queue will come from Sanjit Singh with Morgan Stanley. Please go ahead.

Sanjit K. Singh - Morgan Stanley & Co. LLC

Thank you for taking my questions and another nice performance on cash flow from operations this quarter. I wanted to talk a little bit about Healthcare business again, if I might. That was the area that came in a little bit below our expectations. And I guess what I'm trying to square is on conversations with some of the healthcare providers, they do seem to be spending quite a lot on infrastructure and on technology, particularly around Epic upgrades.

So I'm trying to understand why that's not more of a tailwind for your business, and it could very possibly be the transition to cloud, on Dragon Medical. I was wondering, to sort of level set everything, if you could put context maybe what bookings were for Healthcare this quarter.

Paul A. Ricci - Chairman & Chief Executive Officer

We don't break....

Sanjit K. Singh - Morgan Stanley & Co. LLC

And how that improved (22:44)?

Paul A. Ricci - Chairman & Chief Executive Officer

We don't break bookings down by business unit. So I can't address that. But I can speak to your question more generally. There are two phenomena going on in Healthcare of note. One, we are seeing an accelerated transition in the Dragon Medical solutions. And I've talked about that previously and it's discussed in our documents this quarter and the previous quarter and that clearly is accelerating. Interestingly, while that's occurring, it's moving to bundled solutions that incorporate other technologies. So vendors choosing to acquire additional services from us, at the same time they're acquiring our Dragon cloud solution. And that's led to larger booking sizes, but of course it reduces near-term royalties from what was really a very attractive, very substantial, perpetual license business our Dragon Medical solutions – our Dragon Medical business, over the last several years.

So, we're seeing that transition occur and as we talked about in previous quarters, as we complete that transition, it will be quite attractive to our shareholders, but there is a real pressure on revenues, going through that. That's the first phenomena. The second is that there is a real erosion of transcription lines occurring and an earlier questioner asked me about the rate of that, the rate of that maybe has moved up a bit. But irrespective of that, it is an ongoing erosion, it's going to continue and those are really the two phenomena of greatest note. As I pointed towards 2017, I mentioned that we will see continued bookings growth in our Clintegrity solutions, these are multi-year contracts. So, the revenue contributions in 2016 and 2017 are not as great as the bookings contribution, but it is a growing business for us.

Sanjit K. Singh - Morgan Stanley & Co. LLC

Maybe stated another way, just a follow-up on Healthcare. In terms of the breakeven, in terms of number of years between you selling a perpetual license versus a subscription or a term license, what is that breakeven point today?

Paul A. Ricci - Chairman & Chief Executive Officer

Bruce, I'm going to turn to you on that question.

Adam Bruce Bowden - Executive Vice President, Corporate Strategy & Development

It's approximately three years.

Sanjit K. Singh - Morgan Stanley & Co. LLC

Okay. Three years, great. I appreciate that. And then I guess, lastly on automotive, strong quarter in automotive again this quarter from a revenue perspective. I wanted to get your sense in terms of how should we think about automotive in terms of contribution to bookings and how you feel about your competitive position in automotive over the next one year to two years?

Paul A. Ricci - Chairman & Chief Executive Officer

Well, let me deal with the second question and then come back to the first question. With respect to the competitive positioning, I think Nuance's competitive position in the automotive business that we serve has grown over the last several years. I think we have very high penetration or design wins rather for share of design wins very high on a global basis and interestingly increasingly in China, which we view as a growing opportunity for us.

And I think that the strength of that business over the next couple of years is going to continue. We've talked previously in these calls about the longevity of the length of contracts in that business. So, we signed contracts in fiscal 2016 that begin implementation, begin achieving revenues in fiscal, say, 2018. So, it's a business in which you're building – you're doing design wins now to build future revenue streams that begin in the medium future and carry out well into the long-term.

With respect to the bookings what was your question again?

Sanjit K. Singh - Morgan Stanley & Co. LLC

Yeah. Just in terms of, do you expect automotive to be one of the main contributors or drivers of growth in bookings going forward?

Paul A. Ricci - Chairman & Chief Executive Officer

Automotive will be – should be a bookings contributor next year. It's a business that can – in which bookings can be lumpy because you get some very large bookings for global automotive manufacturers, and it's not easy to predict when those are going to occur. I was asked about that by an earlier questioner as well, and we can have very high conviction we're going to achieve a booking, but relatively less conviction about precisely when they're going to occur.

Sanjit K. Singh - Morgan Stanley & Co. LLC

Understood. Thank you.

Operator

Thank you. Our next question that will come from David Hynes with Canaccord. Please go ahead.

David E. Hynes - Canaccord Genuity, Inc.

Hey. Thanks. Paul, just to keep on the auto topic, trying to get maybe a little bit more granular on what's driving the strength. Is it that you're signing up new OEMs at a faster pace? Is it that you're getting involved in more models within an existing customer, or is it deeper sets of functionality going into the models where you've been in the past, just trying to get a sense of kind of what's driving the strength in that segment?

Paul A. Ricci - Chairman & Chief Executive Officer

Well, I think it is all three of those. We are acquiring new customers particularly now in Asia. We are certainly getting model extensions to our existing success in established customers in – among our existing customers. And at the same time, we are adding additional functionality. We have talked previously about the migration from embedded solutions to hybrid solutions that offer not only our basic services, but other connected services and content as well.

David E. Hynes - Canaccord Genuity, Inc.

Yeah. Got it. And then I'll try and push you on 2017 again. So it sounds like you guys are committed to a resumption of growth. But say hypothetically growth is flat in 2017. Would you expect to see operating margins expand?

Paul A. Ricci - Chairman & Chief Executive Officer

Well, that's a hypothetical I really haven't evaluated. Let me say that we've indicated that as we go into 2017, we're going to continue our strong margin performance, but we're going to moderate our savings against ongoing investments to further fuel growth.

If growth weren't to come, would we make a change in our expense patterns for 2017, the likely answer is yes, but that's a hypothetical and we really haven't evaluated it.

David E. Hynes - Canaccord Genuity, Inc.

Yeah. I think that's a fair answer. Okay. Thanks.

Operator

Thank you. Our next question will come from Tom Roderick with Stifel. Please go ahead.

J. Parker Lane - Stifel, Nicolaus & Co., Inc.

Hi. This is actually Parker Lane in for Tom. Thanks for taking my question. I was just curious if you had an update to the number of net new sales reps you've hired so far to the year and how you're thinking about your total hiring plans as we progress through 2016 and on into 2017? Thanks.

Paul A. Ricci - Chairman & Chief Executive Officer

Apologize, I don't remember the precise number. I do know that we achieved our – in the third quarter we effectively achieved the number of sales reps we wanted to have available in the second half of this year. Dan or Bruce do you recall the specific number?

Daniel David Tempesta - Chief Financial Officer & Executive Vice President

I don't have the specific numbers Paul, but I would agree with your comment that we did achieve our objective.

Paul A. Ricci - Chairman & Chief Executive Officer

I will say that we expect to add additional sales personnel as we go into fiscal 2017.

J. Parker Lane - Stifel, Nicolaus & Co., Inc.

Okay. Thank you.

Operator

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

Scott Zeller - Needham & Co. LLC

Hi, yes. Thank you. Similar to the question that DJ had about auto, if you could offer some more color about Enterprise and what it is that's driving the growth, Paul. I think previously we've talked about multi-channel, but could you give us some more detail?

Paul A. Ricci - Chairman & Chief Executive Officer

Sure. And I think first of all, in our licensing business, we're seeing renewed performance among sales through our global partners. We're seeing strong performance of our voice biometrics product line, which is a business that we think will have significant additional contributions both in bookings and in revenues in fiscal 2017 because of the increasing concern around security issues particularly in the financial services sector and in government, but elsewhere as well. And we've seen a rebound in bookings in our professional services business, which I referenced earlier.

In the multi-channel cloud solutions, it is what we talked about previously, customers looking to provide an integrated experience to their customers that comprehends both the voice and the digital channels. I think our message around that has been attractive, and I think our solutions are compelling, and we're seeing increased reception of that.

Scott Zeller - Needham & Co. LLC

And the last question is, I believe you called out in the prepared remarks confidence in the 63% gross margin target. Can you help us understand the confidence in that number?

Paul A. Ricci - Chairman & Chief Executive Officer

I'm going to let Dan handle that.

Daniel David Tempesta - Chief Financial Officer & Executive Vice President

Sure. We said we would end the year on 63% that was for the full year. So that is still where we see ourselves landing for the year.

Scott Zeller - Needham & Co. LLC

Okay. Well just a follow-up regarding the change in mix, you had mentioned, Paul, earlier that, there's an accelerated move in healthcare in particular, towards cloud and that's pressuring license, I mean, can – but yet.

Paul A. Ricci - Chairman & Chief Executive Officer

So, there are two things going on. There are two things going on in the composition of those margins. One is that, we have had some cost savings, productivity initiatives, that have improved, the absolute performance of the components going into our cost of goods, but at the same time, we're seeing a mix shift towards professional services and cloud-based solutions, both of which have relatively lower gross margins.

Scott Zeller - Needham & Co. LLC

Okay. Thank you.

Daniel David Tempesta - Chief Financial Officer & Executive Vice President

The other thing I would add there is that, we did have the professional service mix this past quarter, but next quarter, we see the mix improving to maintain that 63%.

Scott Zeller - Needham & Co. LLC

Thanks for the clarification.

Operator

Thank you. At this time, I'll turn the conference back over to the presenters for any closing comments.

Paul A. Ricci - Chairman & Chief Executive Officer

All right. Well. I want to thank you all for joining us again and we look forward to speaking to you next quarter. Take care.

Operator

Thank you very much. And ladies and gentlemen, this conference will be available for replay after 7 P.M. Eastern Time, this evening, running through August 22, at midnight. You may access the AT&T Executive Playback Service at any time, by dialing 800-475-6701, using the access code of 398580. International participants may dial 320-365-3844. Once again those phone numbers are 800-475-6701 and 320-365-3844 using the access code of 398580. And that does conclude our conference call for today. We do thank you for your participation and for AT&T Executive TeleConference. You may now disconnect.

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