Nuance Communications, Inc (NASDAQ:NUAN) Q4 2018 Earnings Conference Call November 19, 2018 5:00 PM ET
Richard Mack - Senior Vice President, Corporate Marketing and Communications
Mark Benjamin - Chief Executive Officer
Dan Tempesta - Executive Vice President and Chief Financial Officer
Saket Kalia - Barclays Capital Bank
Joshua Baer - Morgan Stanley
Jeff Van Rhee - Craig-Hallum
Daniel Ives - Wedbush Securities
Tom Roderick - Stifel Nicolaus
Shaul Eyal - Oppenheimer & Co
Ladies and gentlemen, thank you for standing by. And welcome to Nuance's Fourth Quarter and Fiscal 2018 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded.
With us today from Nuance are Chief Executive Officer, Mark Benjamin; Chief Financial Officer, Dan Tempesta; Senior Vice President, Corporate Marketing and Communications, Richard Mack. At this time, I would like to turn the call over to Mr. Mack. Please go ahead.
Great. Thank you, Shan. Good afternoon, everyone. Please note that our discussion includes predictions, estimates, expectations, and other forward-looking statements. These statements are subject to risks and uncertainties that could cause material differences in our actual results. Please refer to our recent SEC filings for a discussion of these risks.
All references to income statement results are non-GAAP unless otherwise stated. And as we noted in our press release, we issued prepared remarks in advance of this call. That material is intended to supplement our comments on the call today and will not be read here. I also want to note, we are taking a bit of different approach today given the amount of ground we have to cover. There is PowerPoint on the webcast and on our investor site to complement the discussion. That deck will remain on the slide after today's call.
In terms of format, Mark will cover the quarter's highlights. Dan will discuss financial for the quarter and year. We'll return to Mark for commentary on Nuance, the portfolio and our strategy going forward. And then Dan will discuss financial details and outlook for 2019 before we take your questions.
I'll now turn the call to Mark.
Thank you Rick, and good afternoon, everyone. We have to jump right in. Nuance again delivered on what we said we would do across financial metrics, governance, capital allocation, culture and an ongoing transformation toward a simpler more rational company with our energies and resources oriented to growth opportunities in cloud and conversational AI.
And as you saw in our press release and prepared remarks, we made several portfolio announcements including the spin-off Auto, the sale of Imaging, and the wind down of SRS and Devices. In the quarter, we delivered on our commitments and achieved very good results across the company. We exceeded the high end of our key metrics of non-GAAP revenue, EPS, cash flow guidance, and overachieved on both gross and operating margins, and delivered net new bookings in line with our expectations. These results are test to the strengths of our business, the loyalty of our customers, and the capabilities of our technologies and employees.
In the quarter, we secured important wins in customer implementations with premier hospitals, manufacturers, and enterprises like Piedmont Healthcare, Halifax Health, HSBC, BMW, Volkswagen, Vodafone UK, and the Centers for Medicare and Medicaid. In addition, the company continued to pivot toward more solutions for conversational AI and the cloud announcing a new healthcare virtual assistant embedded in one of our EHR partners expanding Dragon Medical Cloud in Canada and the UK, unveiling a new AI powered prediction service in enterprise, and introducing new emotion detection services in our automotive platform.
Finally, the company was again recognized by leading analyst firms most recently being named number one in Clinical Documentation by Black Book Research securing the highest rating from Opus Research on intelligent BOTS, and being named the Leader in Voice Biometrics by Javelin Research. I am proud of our results and progress, and I thank the team here at Nuance for their efforts and contributions.
Since joining Nuance, in addition to my focus on improving performance, I also made a commitment to improve our governance. Accordingly, in September, we refreshed our Board bringing new talent, perspectives, and diversity to the team. Of our nine Board members, seven have joined since December 2017 and eight are independent directors including Lloyd Carney, who was named our new Chairman.
Earlier this month, in response to shareholder requests, the Board adopted a bylaw amendment allowing a shareholder or group of shareholders holding at least 20% of our outstanding shares to call a special meeting. And we're making substantial changes to our compensation practices with greater executive accountability, where our variable executive compensation is directly aligned to TSR in the goals of our shareholders. In short, we only do well if you do. Similar to these governance improvements, we've begun to make important changes to our organization. As I've said to many of you in recent months, we're not going to land this plane to begin fixing it.
We've unified all R&D teams under Joe Petro as CTO. Joe has run our healthcare R&D for nearly 10 years and now leads the largest organization at Nuance with more than 2,100 people. This move not only allows us to take full advantage of our deep technical resources, but also helps us find leverage for greater efficiency and to more quickly commercialize our innovations. And to better serve our customers and accelerate progress toward becoming a true SaaS business, we consolidated our hosting operations under Mark Sherwood, our CIO who recently joined Nuance with a 25-year track record in technology and cloud companies.
Mark and the team have prioritized efficiency and scale around our infrastructure and hosting with a sharp lens on the cloud. In addition to these changes, we are redesigning our organization and creating the right operating model for Nuance, simplifying the company in how we work focusing investments on key technologies that will deliver growth in ROI and through a structure that gets us closer to our customers. This is the Nuance of the future, the company that embraces a culture of innovation and growth where we focus on what matters most. And I think you'll agree that a new Nuance is coming into focus with our recent announcements. But before digging into those areas, I'll turn the call over to Dan to walk you through the results. Dan?
Thanks Mark, and good afternoon. As Mark mentioned, we had a strong fourth quarter and met or overachieved all guidance metrics. In Q4, 2018, we delivered non-GAAP revenue of $536.2 million, up 12% organically from a year ago. This was led by strong performance in Dragon Medical Cloud, Enterprise and Automotive and was aided by a favorable comparison to Q4 2017 included Malware. We also benefited from $10 million of source code license deals in our Devices business that were not planned and are not recurring. Even after excluding these deals, the business performed very well.
In the quarter, we delivered non-GAAP diluted EPS of $0.38 above the high end of our guidance and $0.06 above our midpoint. Half of that upside was due to the device deals and the other half reflected overall strong revenue performance and disciplined cost management. For the year, we also delivered strong revenue results with non-GAAP revenue of $2.069 billion, up 4% organically over 2017 driven by Dragon Medical Cloud, Automotive and Enterprise, as well as the strong first half performance in our EHR services business. This growth was partially offset by expected declines in HIM and our other segment.
Net new bookings for the full year grew 5% over the prior year. We landed at the low end of our full year net new bookings guidance due to our decision in the fourth quarter to wind down our SRS business. As you'll recall, SRS is a non-core business providing services to mobile subscribers largely in Brazil, India, and other emerging markets. If we had not initiated the wind-down, we would have added an additional percentage point of growth to our full-year net new bookings. While we are on SRS, I do want to note that we took a non-cash asset write down of $33 million in the quarter related to the wind-down activities.
We provided more information on that in the prepared remarks document. Non-GAAP gross margins in 2018 were 62.3%, up 60 basis points compared to 2017. We benefited from a revenue mix shift as HIM declined and Dragon Medical Cloud grew, offset some by higher EHR services revenue which carry lower margins. Non-GAAP operating margin was 26.1% above our expectations due to the revenue overachievement and favorable expense levels, but down slightly compared to last year reflecting planned investments in security and AI, as well as higher legal expenses related to IP protection.
Finally, we generated cash flow from operations of $444 million and non-GAAP EPS of $1.19, both above our guidance. From May 2018 through the end of the fiscal year, as we shifted our capital allocation strategy, we repurchased 9.7 million shares of common stock representing 3.3 of our shares outstanding at an average price of approximately $14 per share. Today, we have approximately $550 million still available under our existing authorization for future repurchases. In the quarter, we prepaid $150 million of the company's high-yield bonds, reducing annual cash interest by approximately $8 million. As a result, our total debt maturity value is $2.44 billion as of September 30, 2018, down from $2.59 billion at the end of June. This leaves us with a net debt ratio of 3.3x.
And now I'll turn the call back to Mark.
Thank you, Dan. While we are pleased with our recent performance, I'm convinced our best still lies ahead. I arrived at Nuance in April knowing full well its reputation for innovation and the immense value it brings to customers. But I quickly recognize that the business was spread quite thin and while our various lines of business have made solid runs and opportunities, we needed to prioritize our efforts to unlock even more innovation for our customers and real long-term value for the company. Our leadership team embarked on a disciplined review of the business. We look closely at all portfolios, products services and offerings. We assess our markets, customer needs, operations, investment requirements and expected returns.
We use both the growth lens and the margin lens but favorite growth as the greatest source of long-term value creation. As we proceeded key observations rose to the surface, true differentiating strengths and significant opportunities for a more focused Nuance. Nuance is at its core a conversational AI company. We are constantly improving how machines understand and interact with what we say with technology that continuously learns. But what is truly differentiating about Nuance is that we apply conversational AI to highly regulated and demanding business environments like healthcare and banking.
We embed domain-specific solutions into our customers' business applications that they can solve their most mission and time critical issues. One example is clinical documentation by physicians and nurses. This is a crucial part of their everyday work ensuring that they care, the care they provide to patients is accurately documented to improve clinical outcomes, capture the quality of care provided, and ensure appropriate reimbursements. But this can also be a time-consuming, administrative and frustrating task. Our Dragon Medical One platform alleviates those burdens by allowing physicians to verbally capture their patients' clinical stories any time and from any device.
This can save each physician one to two hours a day. This is a huge amount of time they get back which they can use to more deeply engage in the care for their patients and alleviate their burnout. It should come as no surprise that according to Becker's Health 85% of physicians using clinical documentation say that Dragon Medical One is critical to their day. Based on these innate strengths, we identified three principles to guide how we build a simpler more focused company. First, we will direct our investments towards the most attractive B2B markets into the most attractive geographies and toward verticals where we have trusted relationships and a true understanding of our customers' needs and environments.
Second, we are accelerating innovation for conversational AI solutions that automate communications and create personalized experiences for our customers. This technology will be directly built into customer workflows and take advantage of our cloud capabilities. Third, we are committed to discipline resource allocation to our growth, ROI and long-term value. To this end, we are increasing our sales coverage in the most promising areas and investing in R&D to expand our cloud and AI offerings.
So what does this mean for our business? We know that good corporate strategy is not just about what we do but also about what we choose not to do. Thus you can now see the profound change underway at Nuance. First, we will spin-off our automotive segment into a separate publicly traded entity that can create more value for shareholders. We are selling our document selling our document Imaging business to Kofax and we have begun to wind down SRS and Devices business units, We are convinced that these changes will not only redefine the business; they will allow far greater management concentration on our core healthcare and enterprise business.
Before I go on, I'd like to point out that we recognize the significant amount of management effort and one-time costs that will be associated with these two transactions, and we take these very seriously. That said, we are confident that these are critical steps required to unlock value and drive greater performance and returns over the medium and long term.
Now let's turn our attention to automotive. The automotive industry is evolving so quickly with rapid adoption of technology that is transforming the driver and passenger experience with shared mobility, connectivity and driver assistance. Nuance today is the leader in voice and virtual assistance for car infotainment and communication systems and is a driving force for the future of mobility. We are incredibly proud of the business we built, at the same time we recognize the increased excitement around automotive technology companies.
Today, we deliver conversational experiences for virtually every automotive manufacturer. We ship in more than 50 million new cars each year and can be found in more than 200 million cars on the road today, supporting more than 40 languages. In fiscal 2018, we delivered $279 million in revenue, 7% organic growth and 39% segment margin, But as I managed this business this year, I found us contemplating investment trade-offs but the types of investments that this business needs to take full advantage of opportunity and achieve its long-term potential. As part of Nuance, the Auto business competes for resources with other nuance segments and priorities.
After the separation which we expect to happen in our fourth quarter, this new publicly traded auto company will be exclusively focused on its own opportunity, and thus better position to invest in the tools needed to pursue it. There's a lot to come on this front and we look forward to sharing more details in the months ahead. Next, we are selling our document Imaging business to Kofax in a transaction valued at $400 million. The division played an important role in the origins and evolution of Nuance. As we work toward a close in our second quarter, I want to thank Al Monserrat, his leadership team and the 650 employees for their extraordinary efforts and passion for the business.
Turning to SRS and Devices. As we've noted, we are winding these down as both are more consumer facing businesses and removed from our core strength. For SRS, we will see customer content contracts through completion over the next 12 to 24 months and not take new business. And for Devices, we'll manage our remaining royalty contracts and seek opportunities to monetize IP and source code in one-time deals like those you saw this past quarter. In a few moments, Dan will provide additional commentary and the financial impacts of these developments.
In parallel to our strategic portfolio review, we conducted a comprehensive operational assessment to flatten our organization and optimize our operating model. These structural changes will help us be more efficient and bring us closer to the customer. We are targeting $50 million in savings in FY2019 with the majority reinvested in growth areas of our business. We are confident that these changes set us up to compete well into the future specifically leading to improved growth as we move forward. These meaningful changes to our portfolio Imaging, Auto, SRS and Devices, free management attention and resources to reinvest in growth primarily through go to market improvement and research and development. Across the board, our strategic investments will create more value for our customers through domain-specific and deeply embedded conversational AI. And we expect these moves to nearly double our healthcare addressable market.
We are expanding our sales force to extend our reach in under penetrated and new markets. In Enterprise, we are ramping our sales coverage for voice biometrics to capture growing demand for authentication and fraud detection services. With improved healthcare coverage, we are bringing our Dragon Medical Cloud platform to more physicians in North American ambulatory and acute care settings and to international markets. We are also accelerating the adoption of our newest conversational AI technology Computer Assisted Physician Documentation or CAPD for short that brings real-time intelligence to physicians at the point of care.
In line with our strategic push to move our intelligence to the cloud, we are also making substantial R&D investments in next-generation technology such as a more intelligent cloud powered version of our radiology and CDI offering. And I'm excited about our investments in ambient clinical documentation for healthcare. Ambient has potential to dramatically change the practice of medicine by interpreting conversations between providers and patients and creating documentation and supporting physicians with clinical decision making. This innovation combines our most powerful assets. AI powered clinical language understanding, virtual agents with our deep domain experience in clinical strategies and a significant customer base.
I talk with hospital administrators and physicians regularly. And I emerge from those conversations confident that we are their partner of choice for this next-generation technology. We have the trust of a large and loyal customer base, we have the most clinically relevant conversational AI and our assets are seamlessly embedded into their daily workflows. Physicians already interact with our technologies during every patient encounter and we are an integral part of their ecosystem from our back-end EHR integrations to our front-end presence in the patient room.
I can think of no one better than Nuance to push the boundaries on better care delivery through ambient technology. As I said at the beginning, these strategic investments across the company should create more value for customers and ultimately our investors. Further more, we expect these investments to nearly double the size of our addressable market in healthcare. As you can see, we are affecting real change across the business at Nuance. We've talked a lot about business changes and I want you to know that we are applying the same passion and energy to our culture for our associates around the world. Well, you've heard me talk about the investments we're making, the strength of our technology and focus on AI, it all means nothing if we don't have our people behind us.
As part of our transformation, we have made an investment in us, to articulate our company purpose and the unique value that we provide to our customers. It's the inner heartbeat of Nuance defines who we are at our core and influences what we do every day. This work has been well received and we are embedding it into how we work, how we recruit and how we recognize and reward our employees, and differentiating ourselves from our competition and aligning ourselves internally will drive Nuance towards success.
With that I'll turn the floor over to Dan who will provide insight to the financial implications of our strategy as well as guidance for fiscal 2019. Dan?
Thanks Mark. I'm going to start off with a quick overview of our guidance approach with regards to ASC 605 and 606. Then I'll discuss the wind-down of SRS and Devices. I'll provide a little more color on the Imaging and Auto transactions and then move into our consolidated guidance. We are providing new disclosures this year, so I will spend some time going deeper on our various healthcare lines of business transition. We are adopting the new revenue standard ASC 606 effective October 1st, 2018 under the modified retrospective approach and therefore we will present both ASC 606 and 605 actual results during 2019.
All of our guidance today will be provided on a 605 basis. This will be our primary approach to guidance throughout the year, as it relates to 606, we will provide guidance only for revenue and EPS and that will only be on an annual basis. We are including 606 guidance in our prepared remarks document. Those ranges are materially wider since in any given period the mix of term licenses can cause significant volatility. We also provide additional information in the appendix on commissions as well as other opening balance sheet adjustments. Given the lack of comparability to historical financial results under 606 and given that we will report our 2019 earnings results and guidance on a 605 basis, we encourage sell-side analysts to submit 605 estimates for consensus purposes.
With the decision to wind-down SRS and Devices, we expect headwinds related to our consolidated revenue growth. These business units are in the segment we refer to as other and ended 2018 with about $110 million in revenue. We expect 2019 businesses to be about $62 million to $66 million. This reduction creates a 200 basis point headwind to our 2019 growth rate. There is a corresponding segment profit reduction of $12 million to $15 million. All of these effects are built into our 2019 guidance.
Now let's talk about the Imaging sale. To recap, gross consideration is $400 million in cash and net proceeds after fees will be approximately $390 million. The deal is expected to close during our second quarter. Essentially be a tax-free transaction given our beneficial tax attributes with approximately $10 million of tax leakage. In addition, we are aggressively working to minimize stranded costs. Regarding the use of proceeds for the Imaging sale, we plan to lean in a bit on debt repayment and are considering our overall capital allocation strategy in the context of our current and future cash balances, as well as the effect of the Auto spin.
Turning to Auto, we are expecting the spin to occur in Q4, 2019 and we will provide more details and financial information as the year progresses. For clarity, our non-GAAP guidance presumes we own the Imaging and Automotive segments for the entire year, as each transaction closes, we will update our guidance. We have provided additional details on the Imaging business to help you with your 2019 models on a pro forma basis. For simplicity, this information has been provided assuming a March 31st closed date. Our GAAP guidance and our cash flow guidance captures the cost and expenditures associated with divesting the Imaging division and the Auto spin, but we do not remove the revenue of profits of either segment from 2019.
Our non-GAAP guidance excludes these costs. These details are also provided in the appendix. Now let's discuss the consolidated guidance for the company. As we look forward, we would expect investors to evaluate our progress on the growth in our individual lines of business more so than on a consolidated basis. Accordingly, I will discuss segment revenue expectations for 2019. In addition, in healthcare we will provide greater visibility into the migration of certain lines of revenue to more radical streams, and so we are introducing a new metric called Annual Recurring Revenue or ARR specifically related to the Dragon Medical Cloud to help evaluate our progress.
With that said for 2019, we expect consolidated revenues between $2.055 billion and $2.105 billion which amounts to organic growth rate of minus 1% to plus 1%. We expect gross margins of approximately 63%; operating margins between 26% and 26.5% and EPS of between $1.19 and $1.27. Please note that our guidance assumes no share buyback and no debt repayment.
Let's now look at revenue guidance for each individual segment for 2019. As I mentioned before the wind-down activities and our other division have a material drag on the consolidated total. Our healthcare business they have a low single-digit growth rate and I will provide more detail on the drivers of the segment's growth in a moment. Enterprise is a low growth business this year with upside potential over time from the focused investments Mark discussed earlier. And we forecast our Auto business to be in the mid to upper single digit organic growth rate once again.
Collectively, if you exclude Imaging and other, the strategic businesses should enjoy a growth rate of 2% to 4% this year. Within Healthcare, we're providing a detailed breakout of revenue line items within the segment so that investors can properly understand the moving pieces in our migration to Dragon Medical Cloud often referred to as DMO. There are a number of trends that I'll discuss. The first is the exceptional growth in Dragon Medical Cloud and corresponding declines and Dragon Maintenance and Support. We are excited about what's happening in our Dragon Medical Cloud business, and see strong growth in front of us.
Over the past three years, this business has grown from essentially nothing into a substantial SaaS business as we have won a significant volume of new clients, while at the same time converting a portion of existing Dragon Medical license clients from maintenance contracts to cloud contracts. We are approximately one third of the way through our conversion of existing maintenance customers onto DMO, and while the lot of large numbers means that our growth is likely to decelerate, our current Dragon Medical Cloud guidance forecast shows growth of 48% in 2019.
You can also see the effect of the DMO conversion on the Dragon Medical Maintenance and Supports revenue stream. The chart shows that it's been declining for the last two years, and we currently forecast that decline to continue in 2019. The next line is Dragon Medical Product and Licensing which is expected to grow in 2019 as we focus on ambulatory, as well as international markets, both of which are slightly behind the US. acute market in their adoption of cloud solutions. Over time as these market segments catch up in their cloud adoption, we would expect revenue from this line item to begin converting to the DMO line as we transition those users to our cloud platform.
Next is HIM. One thing to note is that the year-over-year decline in our guidance for 2019 is a bit steeper than the 10% to 12% year-over-year decline that we've previously referenced. This is because our 2019 HIM revenues included approximately $9 million from true ups associated with our [Technical Difficulty] 2017. Although part of the HIM decline is due to the ongoing conversion to electronic medical records, another part is because we are actively transitioning some portion of HIM activity to the Dragon Cloud. The radiology and other revenue category represent a significant amount of our total revenue and as you can see are expected to grow once again in 2019. Included in that line is our flagship PowerScribe product which continues to perform well.
Our plans call for that product line to begin to transition from an on-premise offering to a cloud offering over the next 12 to 24 months, which we expect will contribute to future ARR growth. Finally, as we've discussed previously, our professional services business saw sharp increase this past year, but is expected to decline in 2019 since the abnormally high volume of large projects in 2018 is not expected to repeat.
Let's now discuss our cloud conversion economics. There are three ways in which we bring customers to Dragon in the cloud. The first is by converting an HIM customer which as I mentioned is one reason our HIM revenues are declining. The good news is that over a five year [Technical Difficulty] the profit from a DMO client that fully converts from HIM is 2.5x higher than had the client remained on HIM despite being approximately neutral to revenue. This is because our DMO business has substantially higher gross margins than our HIM business.
The second is by converting in on-premise Dragon Medical client that currently is paying us maintenance. Here the revenues are approximately to 2x to 2.5x higher on an annual basis for the life of the customer. This conversion is primarily why our maintenance and support revenues are declining. The third is through greenfield expansion, which includes competitive wins and new accounts. We still see meaningful growth opportunities ahead for our DMO business in north America and plan to aggressively bring it to the international markets in 2019, which should substantially expand our addressable market. We are making investments in sales coverage and go to market programs to accelerate this.
As we sign up clients for DMO, we book the annual value of their contract as ARR before we begin recognizing revenue ratably over the life of their contracts. So let's take a closer look at ARR as it applies to Nuance for our Dragon Medical Cloud business. As we listen to feedback over the last few months, we heard those net new bookings, transcription lines, and an estimated three-year value metrics lacked predictive value for our investors. Therefore, we are replacing those metrics going forward with the new revenue detail in the healthcare business lines along with the new disclosure of ARR, which will initially [Technical Difficulty] Dragon Medical Cloud performance and will expand to other lines over time. Consistent with other SaaS based companies, we expect that investors will focus their attention on ARR, since it is widely recognized as a good leading indicator.
ARR for us represents the annualized value of revenue in Dragon Medical Cloud that we have under contract at any given point in time. By way of reminder some new dollars of ARR we recognize will come from foregoing revenue in another line item. For 2019, we expect ARR for DMO between $245 million and $255 million. Please note that we will only guide ARR an annual basis that will speak qualitatively to our progress for the annual goal each quarter. It's also important to understand how the timing of deal closing affects both ARR and revenues. Consider a deal that represents $1.2 million of annual revenue that gets signed in October 1st, the first day of our fiscal year. We will book $1.2 million in ARR on that date and then after an average of 90 day implementation period, we will begin to recognize recurring revenues at a $100,000 a month going forward.
In the first year of the contract, we will only recognize $900,000 of revenue due to the implementation period but into the subsequent years we'll recognize the full $1.2 million per year. Obviously, the later in the year we sign a deal the less revenue we will recognize in the fiscal year even though it contributes fully to ARR.
Turning to segment margins. This slide provides you are expectations for each of the segments. While we intend to match the timing of our cost savings with our investments, in reality there could be quarters when these don't line up perfectly and thus our segment margins could vary in certain divisions in a given quarter. We are making some strategic investments in the Automotive segment, which should reduce margins. Since this business has been -- since this business has very long design cycles, we are investing in user domain and framework capabilities that we expect will result in long lives design wins in the future.
By 2019 guidance for cash flow from operations is $390 million to $435 million. Included in this is $100 million to $125 million of one-time expenditures, which breaks down into $40 million to $55 million of separation costs related to the Auto and Imaging transactions and $60 million to $70 million of restructuring-related payments, primarily due to our efficiency and reorganization program. We have done our best to estimate these cash flows, but there is lots of moving pieces associated with the strategic transformations and, as a result, there could be some variability to these estimates.
In 2019, we plan to spend approximately $55 million in CapEx and an additional $10 million to $20 million to stand up separate IT systems and facilities for the Automotive division. Therefore, our free cash flow guidance on a consolidated basis for fiscal 2019 is $315 million to $370 million. The appendix slides provide more detail on our estimated cash flows, as well as how we might proceed with our capital allocation framework. In addition, and perhaps most importantly, it provides a pro forma estimate of our cash balances at the end of fiscal 2019.
Before I close, I'd like to say that I've been at Nuance for 10 years now and have been CFO for the last three. I'm convinced that the strategic process we conducted over the last several months has enabled us our opportunities and redesigns our organization to optimize our potential for long-term success. Like, Mark, I'm really excited about Nuance's future and I look forward to updating you on our progress.
With that, let me turn the call over to the operator to begin the Q&A session. Operator?
The first question comes from the line of Saket Kalia of Barclays Capital. Please go ahead. Your line is open.
Hi, guys. Thanks for taking my questions here. Lots to talk about. First question is really for both of you and it's on the Auto business, because that was the biggest surprise to me. Maybe just starting with you, Mark, can you just talk about the decision to spin off the business? It felt like maybe coming at the last quarter, it might have fit part of your framework around the review. So the first question is what ultimately drove the decision around Auto?
And then more tactically for you Dan -- Sorry, why don't you go ahead, Mark, and then I'll ask the follow-up to Dan.
Sounds good, Saket. So as you know and we've talked about, we've been doing a portfolio review and certainly we have several exciting opportunities at Nuance, Auto is certainly one of them. And part of the review was really our ability to grow, our ability to address trends in the market to drive long-term value and really places where we can unlock value. And when we ultimately got to the budgeting and operational reviews, we've really recognized that we were yet again spreading ourselves thin across several different investments.
And Auto, like other parts of the company, was really competing for a sum of dollars that was not endless. So it really caused a pause in our analysis and we really step back with some advisors to really assess the value-creating opportunity we could have with Auto in a separate in a stand-alone entity. And we considered several strategic alternatives, Saket, and ultimately we landed on the spin, the ability to create a stand-alone separate Auto tech company in the market, really that revolves around the vehicle today, the infotainment, the autonomous cars of the future, which really met with a lot of excitement as we did some of our market survey.
So, when we look at the business in really how to really unleash the value, we ultimately landed here. We have a great management team, we have a great business, and we really feel this is the best way to really unlock that value.
That's super helpful. For my follow-up for you, Dan, maybe just a little bit more tactically in the Auto business, can – and understanding that we're still very early, can you just talk about how the process will work in terms of generating proceeds from the spin off? I saw in the press release, it talks around a tax-free dividend. Can you just talk a little bit about the mechanics of how we can sort of unlock the value for Nuance?
Sure. The shares themselves are going to be distributed to the shareholders, so the shares of new co of Auto Co will be distributed to the shareholders of Nuance, so at the end of the transaction, holders will have a share in Nuance and a share of Auto Co. Oftentimes, when you do these types of spin transactions, you may put debt on the books of the Spin Co and return some of that cash back to the parent, that's likely the type of transaction we're looking at here. I don't want to get into the details just yet, we'll provide that throughout the year, but that's probably what we're looking at, Saket.
Your next question comes from the line of Sanjit Singh of Morgan Stanley. Please go ahead. Your line is open.
Hi. This is Josh Baer on for Sanjit. Congrats on completing the review. My questions were on the $50 million of cost savings. I was just hoping you could provide a little more detail, maybe it's a little bit unclear if some of those savings will come from the winding down of the SRS and Devices business versus maybe, like, some of the other strategic alternatives and where that $50 million is coming from?
Sure. This is Dan. It's really coming from a number of internal programs, so we've undertaken a reorganization and restructuring program. So it's coming from -- we're looking at the workforce and how we're organized, we're looking at the facilities around the world, we're looking at -- we're continuing some work, but we're doing some new work as it relates to data centers. So, it's -- and as well as procurement in vendors. So, we've initiated that and that $50 million is coming from there. I do want to make it clear. Those savings are for the most part, being reinvested back into the business, primarily into all of the areas that Mark mentioned earlier. As it relates to SRS, that business is going to wind down in revenue and we -- I did mention it does have lower profits associated with it, but that's really separate from this restructuring program.
Yes. And, Josh, I think the other -- this is Mark. The other way to think about the $50 million is, we're creating the new Nuance of the future where we can reinvest that $50 million back in the growth opportunities, really a couple or a few different ways. One is, you've heard us mentioned more than once our sales force expansion will be something we focus investments around. And two, we're going to focus those sales force investments as well as R&D investments in businesses that we have proven technology in the markets today such as better coverage in acute and expansion into -- or focused effort on ambulatory here in the US in Healthcare are just one example where we have the technology we can expand the sales force and drive investments there as well as really the next-gen technology around conversational AI with virtual assistants and ambient. So there’s a number of things we're focused on around those investments and really areas that we're proven in and we have really very high conviction and confidence rate on success.
Thanks. And if I could just sneak a quick one in on the Auto spin-off. Do you anticipate some challenges in -- like given some of the underlying technology or IP that might be used across verticals?
Yes. So, it's another good question, Josh. So, obviously, we -- a few quarters back, we had talked about some of the work we had done, really just as I arrived at Nuance around really just setting Auto up into its own entity within Nuance. And through that process and now more just more recently, we've really been able to look at the technology that's shared as well as really focused on the Auto business versus our other parts of the company. So relative to the spin, we have a very good plan relative to our technology, relative to our IP and patents, some will go with the spin, others won't, and in areas where there are share technology, the one benefit we have of the spin ourselves is to create cross-licensing and share opportunities around IP. So we're quite optimistic on that relative to the technology.
Your next question comes from the line of Jeff Van Rhee of Craig-Hallum. Please go ahead. Your line is open.
Great. Thank you. I'll try to jump through this fairly quickly, so just I had three I was hoping to sneak in here. Maybe, Mark, just talk about enterprise first, 10% growth last year organic, 2% this year [Technical difficulty] I think the guide embed something near 3%, in the course of your review, obviously, you emphasized several times you're really much more interested in growth all while the same, talk about the growth there and how soon we can see that acceleration? I mean, you certainly didn't keep it for 3%, you see some opportunities, you talked about conversational AI and some other things, but how quickly and how do you think about the ability to grow that over the next three to five years?
Yes. So it's a good question, Jeff. And certainly if you were to look at the year for Enterprise, it had a tough Q2, we spoke about that on the call, that kind of really disrupted the growth pattern that had been consistently mid-single digit growing business. So why we're guiding differently relative to Enterprise for 2019, we're pretty optimistic and confident around what the business is doing today.
As you know, we really have a very high share of the IVR market in the enterprise space, if you will, the upper-end of the market, which we continue to sustain. And certainly as voice transactions, if you will, show the beginning signs of modest declines, there is a transition moving from voice to digital and we have been talking about that for some time. And you also hear us use the terms around intelligent engagement and that's really kind of that omnichannel rapport that we have with voice, digital and engagement. You layer in, Jeff, the early success and the excitement around voice biometrics in that business and then you look at really the market itself, and our customers in the Enterprise space are really looking for one vendor that can really carry them across the spectrum, call it, Voice and IVR in the front-end through the engagement and voice biometrics.
And we feel we're pretty special that way and our customers are actually letting us know that by doing business with us, you saw in the press release we announced Vodafone UK, which essentially is exactly what I'm describing. So conversational AI for us, when you take in our Enterprise assets or NLU capabilities, our embedded base and dialog today, we're pretty excited about the business going forward. It will take a little bit of time, that's why you see kind of this modest 2019 guide on the business. Some of the investments we spoke about are directed toward exactly what I'm describing in Enterprise. So we're very happy with this $500 million business with a very loyal customer base, so we feel we can successfully market new products to.
Okay. Got it. And then on the IP side, you announced some couple of points in the monologue, the one-time licensing events, but also suggested maybe it would -- there could be opportunities for more that historically you certainly have a very deep bench of IP. What's your thinking on monetization of the IP at this point now? Is it changed?
Hey, Jeff. It's Dan. Yes. The IP monetization of the source code deals we did were really legacy technologies in the device handset space. I think we would look for -- if there are legacy opportunities in that space, in particular, we would look to monetize there, not really across the rest of the portfolio though. That's not the best use of our technology in other places, but certainly in devices it is.
Yes. Okay. And then just one last one, I'll let somebody else jump on. On the Healthcare side, you have a slide in the deck where you gave kind of each of the revenue types and I think you walked through the remarks as well, how they transition from old to new dollar wise how maintenance customer transitions to occurring, et cetera. How has that math changed in the last six months or has it?
You broke up right at the end. What was, --
How has that -- you gave the pretty precise math on the three different revenue types in Healthcare, the three main revenue types. And my question was, how has -- have those calculations changed in the last six months? For instance, maintenance customer converting over to cloud, when you -- three -- each of the three types, how has that math changed in the last six months?
Sure, it's a good question, I mean. I think the trends are very helpful. You can see that Dragon Medical just keeps on growing and that has been a nice consistent grower as any subscription base business would be. So that's performed well. Dragon Medical declines accelerated in 2018 as you can see and we expect similar types of declines in 2019, which quite honestly is very favorable on our eyes, because that is -- as that line declines that just adds ARR to our Dragon Medical Cloud. So that's a good trend in our minds. And then we are pretty happy with the Dragon Medical products and licensing increases.
It just means to us that the ambulatory markets and the international markets are taking hold there and that over time should lead to cloud transition. And then, lastly, as it relates to HIM, that's just trending as it always has, no surprises there, a little bit higher than we expected but trending generally as expected.
Your next question comes from the line of Daniel Ives of Wedbush Securities. Please go ahead. Your line is open.
Hi. Thanks. So my question is, first, I mean do you think an Automotive that you maybe have not been able to go after the market in the way that would have benefited you? And now as a stand-alone it will put you in a better competitive position in just getting more flexibility and obviously giving some flexibility unlike the debt side without its own entity? So maybe you could just speak to that first?
Yes. Hey, Daniel, it's Mark. So, I mean, listen, we are the market leader in the Auto space that we serve today. We serve all of the top OEMs today, we serve all of the Tier 1 suppliers today, and I think one of the advantages we have sustained really even outside the tech of that business is really the white label nature of our Auto business. So our position is very strong, which I think the spin off to create its own business, I think, will unlock and optimize the business for additional investments and growth accelerators that perhaps in a remaining Nuance, where it still competing with other priorities and other large businesses around it.
We ultimately felt like this was really a great way -- in many ways have the best of both worlds. So we think this is quite additive to the business and it's our way of really, I think, keeping it with our shareholders to really create that value as well. But again it's a business we're very proud of. It's a business that we feel we've invested, we think stand-alone public business itself will be able to I think optimize more on that basis.
Got you. And what -- I mean I've asked bunch of questions for investors just about how did they get comfort that a company obviously so many moving parts here be able to navigate this successfully with -- of course you're going to have hiccups here and there, but maybe you can you just speak to that. I mean, obviously a complex well thought out yourself and the Board. Maybe you could just talk about the action plans for 60, 90, 120 days and maybe how investors should kind of track this and just have comfort that you know it's going to be a smooth transition? Thanks.
Sure. So it's a good question, by the way the question I often ask myself and my management team and the Board ask me. So I think you're in good company and it's the right approach. But I will also tell you that we're very focused on the day-to-day operation of the business. So we are very focused on executing our plans, meeting our customer commitments and driving growth in the business.
We're driving with a very good partner buyer at Kofax for our Imaging business and we're doing very well as we look to navigate to that close. The spin obviously can be distracting. We have a separate project management office, if you will, focused on that work. We have some very strong advisors helping us from the outside, that's why you see some of those costs as far as that we've referenced in the talk. So we are -- I think, we're very conscious of the potential distraction and keeping it to a minimum, but at the end, we're focused on a simpler Nuance. And this company was created for the past 25 years in many different ways and certainly unwinding some of this will be complex and we have good help, we have great Board support, I've got a great management team focused on all of the important aspects and my confidence is high, we're going to meet those endpoints.
Your next question comes from the line of Tom Roderick of Stifel. Please go ahead. Your line is open.
Hey, gentlemen, thanks for taking my question. So, I'll start by saying thanks for this healthcare revenue detail chart, this is fantastic and something I think a lot of people have been asking for a long time. So great breakdown, very useful. As you go through sort of the HIM's decline here, which have been talking about, it's accelerating just a bit by your expectations for next year. Talk a little bit more about how you can kind of take that installed base, convert the customer, and is there the opportunity to sort of intentionally let that accelerate as you wrap, perhaps, some free or discounted HIM related services to customers that might be transitioning to Dragon Medical on the cloud side? So that's the first part of the question.
And then secondarily, as you look at the various pieces in that revenue breakdown on the Healthcare side, maybe you could give us a sense as to kind of where your staffing new sales heads, how you are sort of investing in the various businesses. If I think about Dragon Medical versus, say, radiology and then HIM's, which is of course declining?
Okay, great. Thanks, Tom. This is Dan. I'll start -- I'll take the first question. Mark will take the second. So, first, great insight. One of the things we have been doing over the last couple of years is bundling our HIM activities with our Dragon Medical Cloud activities in bundling that in one contract. So that allows the hospital and the doctor to do front-end dictation and transcription anyway they want. So, they pay one fixed fee in order to do that and that has been really successful way to move that activity from the back-end to the front-end and get people comfortable and into the cloud. It's been working. We continue to push those bundles and we're well on our way there.
I will say over time, the HIM lines, they'll continue to decline. That revenue will continue to decline. I don't think it will stay at this level that we're seeing in 2019, but over time that will soften a little bit, maybe back closer to the 10% to 12% range, but we are doing what we can to fast accelerate people into the cloud.
Yes, Tom. So, this is Mark. So I think I'll just add, our growth opportunities around sales force expansion and market expansion really are first focused on our current markets, where we're going to focus on the North American ambulatory market with incremental sales heads, think of them as a direct and indirect channel inside sales, a number of different areas of investment for that business will stay on the upper-end of the ambulatory side in the beginning days. We also recognized in the reviews that we had more opportunity in the North American acute market where we get the lion's share of our business and we have great market share.
We also see that there is opportunity even there for us to have better coverage. So, that's another area of sales force investments taking place. Internationally where we largely rely on channels, third-party channels, you'll see us make investments there on the direct side certainly as we gain momentum in certain countries. And then also on the Enterprise side and voice bio, where we really haven't carved out a highly specialized sales force that will go direct-to-market, so you'll see us expand there and again like you get the other moving parts of our business. By the way just to mention the radiology line of the healthcare revenue detail that is an on-prem business today that we mentioned we will work and drive to the cloud over the next 12 to 24 months.
That is part of the investments that we've discussed more on the R&D and technology side in the near term just cloud-enabling that solution and ultimately moving that base to the cloud. As you know, Tom, once we get customers to our cloud solutions, like DMO, ultimately like our radiology or PowerScribe business, we'll be able to layer more solutions on top of that and continue to expand the market for us. So, we're incredibly excited about the expansion of the addressable market in Healthcare and we're going to go after it.
Excellent. That's great detail. Thanks. Dan, let me field my second one at you. If I look at the stated cash flow from ops guidance $390 million to $435 million, which at first blush kind of felt like, OK, maybe that's a little conservative and then of course you go to the reconciliation chart and before all the adjustments were talking at midpoint of $525 million, which is substantially better than I think people are thinking about, this 18% growth. So the temptation here would be once we strip out all the restructuring and separation costs and all the kind of one-time stuff that would be a decent base number to grow our 2020 number off of. Now, I know you're not going to -- it's a long ways away to be talking 2020, but maybe you can help us think about the context of that 525 being sort of a baseline number, 18% growth, how you kind of get there without the adjustments? And then, is that a decent baseline number going forward? Thanks.
Well, I would say this Tom, the Auto separation costs and the Imaging separation costs really should not recur. So, they are associated with these transactions. They are directly related to them and once those transactions are behind us, we don't expect to see those. As it relates to corporate restructuring, that is something that we've had a number of times in the past. But I would say this, we have a really terrific program that we're rolling out and I think going forward we're going to look to not have restructurings every year like we may have had in the past. So to say that we're not going to have anything in that category, I don't know if we're not going to have anything but it should be smaller, I think that's reasonable to assume.
Yes. So the only thing, I'll add, I guess, I think Dan it did it right. We these are one-time in nature and our plan is to ultimately get off these annual restructuring programs. Dan and I are very focused on doing our best to narrow the gap between our GAAP and non-GAAP results and certainly I think you're looking at the appendix properly, this is a very healthy business that throws off really great cash flow. We're excited to simplify the business and really be able to ultimately have very good promising story for years ahead.
Your next question comes from the line of Shaul Eyal of Oppenheimer. Please go ahead. Your line is open.
Thank you. Good afternoon, Mark, Dan and Rich. I want to congratulate you on results, the guidance, and the strategic direction. Also, thanks for the great transparency, we haven't seen that in prior years. I want to start with the Automotive also getting probably, maybe, different direction than what Daniel Ives was asking, also getting some question from investors asking whether the spin off is indicative of either an inability to pursue a different direction or given the potential tax benefit of such a future transaction, does that out way any other direction you could have been considering with respect to Auto?
Yes. So Shaul, well, we appreciate the compliments and we'll continue to earn your credibility and continue to execute. I would say that the Auto business did have some activity well before I joined and there were considerations under way again late last year as far as that business, but I can also tell you that none that got to an endpoint that ultimately met, I think, the stated objective. So me along with the management team and supported by the Board, we looked at the strategic options for the business and we ultimately landed on this one, I think, with all the supports -- support of our advisors helping guide these decisions.
The thought of that business going to a potential strategic buyer, while it can create value that way ultimately -- it does diminish some of the value given the white label nature of that business plays for the entire market. So in some ways you would limit addressable market with the strategic, which of course detracts from value. And I think secondly when we looked at the public markets themselves and kind of this hyper excitement around the Auto space and pure play tech relative to Auto and we looked at other comps in the market, we were ultimately advice that this path was one that ultimately our shareholders would likely benefit the greatest from. It doesn't mean, Shaul, there is not alternatives and there's not other options, because they are always are.
But, at the same time, I felt that was important, the Board felt that was important really to ultimately get to a decision and start to go and that's what we're doing today. It doesn't mean that over time we won't look to strategic for some partnership opportunities in the business as we prepare to be a stand-alone business. So there's a number of things that we will still focused strategically on, because our goal is to really prepare them for life once they leave Nuance and considering we're going to all be shareholders, our interests are totally aligned.
Fair enough. Fair enough. This is understandable, and I appreciate the sincere answer. I would imagine that given the various considerations and meetings with advisors, and also internally, have you considered maybe doing something similar with the Enterprise division or given the different dynamics of that market that was off the table from day one, just curious?
Yes, Shaul, so it's a good question. I can honestly tell you that we went into the portfolio review with no sacred cows, no predisposition of which one of children are our favorite and best athletes and the process ran a very structured approach, if you will, and we had no point in the process did we consider something as well for Enterprise relative to what we've -- the action we've taken with Imaging and now with Auto. So, again, the filters we put the businesses through yielded decisions that we took at the moment and we're quite confident in. So the answer is essentially no.
Your next question comes from the line of Saket Kalia of Barclays Capital. Please go ahead. Your line is open.
Hey. It's Saket Kalia, again. Just had one quick follow-up for you Dan specifically on that normalized free cash flow before the adjustments. Can you just talk about what sort of cash flow margins or cash flow generation annually the Auto business had? And maybe just remind us, does that $515 million to $535 million normalized cash flow include the Auto business?
Okay. Great question. It does. It includes actually both the Auto business and the Imaging business. You refer back to how I discussed the business -- we're including in our non-GAAP operations both trend -- both businesses until they are -- in fact, the transaction are closed. And that is the same for cash flows as well. As far as cash flows that the Auto business generates one thing to keep in mind is, I think it's always good to start with the segment margins of each of the businesses and then if you subtract out a G&A margin, because segment margin is before G&A and then if you apply G&A lens on top of it, you'll get to approximately what -- the operating margins are approximately what the each individual business lines' cash flow generation should be in any given point in the year. So that should kind of get you roughly in the neighborhood of what you're looking for.
There are no further questions at this time. I would like to turn the call over to CEO, Mark Benjamin, for closing remarks.
All right. Well, thank you, everyone, for joining us. We're certainly very excited about moving forward here at Nuance and continuing to implement the plans and initiatives we share with you tonight. I know we've given you a lot of information to absorb and we look forward to continued conversations with each of you in the coming weeks and months. Also please note, we'll be presenting at Barclays in San Francisco on Wednesday, December 5th, and for anyone of you planning to attend the Consumer Electronics Show in Las Vegas in January, please make sure to look us up there as well. So, again, thanks very much for the time today.
This concludes today's conference call. You may now disconnect.