Nuance Announces Fiscal 2006 Second Quarter Results
Organic Growth in Enterprise and Embedded Markets Fuels Results
BURLINGTON, Mass., May 9, 2006 – Nuance Communications, Inc. (Nasdaq: NUAN) today announced financial results for the second quarter ended March 31, 2006.
Nuance reported revenues of $71.7 million in the quarter ended March 31, 2006, a 35 percent increase over revenues of $53.1 million in the quarter ended March 31, 2005. On a GAAP basis, Nuance recognized a net loss of $1.4 million, or $(0.01) per share, in the quarter ended March 31, 2006, compared with a net loss of $1.0 million, or $(0.01) per share, in the quarter ended March 31, 2005.
In addition to using GAAP results in evaluating the business, management also believes it is useful to evaluate results using non-GAAP measures. Using a non-GAAP measure, Nuance reported non-GAAP net income of $10.3 million, or $0.06 per diluted share, for the period ending March 31, 2006, compared to non-GAAP net income of $3.5 million, or $0.03 per diluted share, in the quarter ended March 31, 2005.
These non-GAAP figures exclude non-cash taxes and interest, amortization of intangible assets, non-cash amortization of stock-based compensation, and acquisition-related transition and integration costs and charges. See “GAAP to non-GAAP Reconciliation” below for further information on the Company’s non-GAAP measure.
“Nuance’s second quarter performance resulted from solid growth in our network and embedded speech businesses and through sustained progress in streamlining costs,” said Paul Ricci, chairman and CEO of Nuance. “The combination of strength in our speech markets with continued progress in cost synergies from the Nuance acquisition allowed us to expand operating margins ahead of our expectations this quarter.”
The Company reported particular strength in revenues in the enterprise market, worldwide, where organic growth was 28 percent and overall growth was 67 percent over the same quarter last year. In addition, Nuance reported that embedded revenues were once again at a record level, up more than 45 percent organically from the same quarter last year. Balancing these gains, the Company noted some slowdown in the quarter in the North American dictation market, primarily from effects of the Dictaphone acquisition as prospective customers assessed the effect of the Dictaphone acquisition on the Dragon MT transcription solution, and delays in converting several transactions in the pipeline of the former Nuance business in North America.
Consistent with the Company’s strategy and recent trends, highlights from the quarter include:
- Enterprise Speech – The Company experienced strong growth for its combination of core technologies, applications and services. Nuance once again achieved record professional services revenues in the quarter, and exited the quarter with an increase in its ratio of services-backlog-to-revenues. The Company benefited from new or expanded agreements with leading businesses and service providers, including Amtrak, Apple, Bank of America, Bell Canada, Nestle, USAA, United and XM Radio.
- Directory Assistance and Premium Services – At 3GSM and CTIA, the world’s premier wireless events, the Company introduced Nuance Mobile, a comprehensive initiative to deliver powerful new speech-enabled search and communication applications that improve the mobile phone experience for consumers and business professionals. Nuance Mobile includes the provision of technology, services and applications, as well as a partnering program focused on driving innovation in the market. In addition, Nuance secured a strategic design win to provide next-generation directory assistance services for a major carrier in Asia-Pacific and launched new premium services including an SMS-to-voice application at BT with Tom Baker, star of the popular “Dr. Who” series, and a voice portal for the 2006 FIFA World Cup with a large European carrier.
- Dictation Solutions – Nuance’s Dragon NaturallySpeaking dictation solutions continued to perform well as the Company experienced sustained interest among businesses, healthcare organizations and consumers. In particular, the Company’s dictation solutions performed well in Europe where the Company signed several volume license agreements with large hospitals in France and the United Kingdom.
- Embedded Speech – Revenues from embedded speech were a record in the quarter, up more than 45 percent year-over-year, driven especially by a strong performance within the automotive market. The Company secured strategic design wins with Bosch, Denso, Ford, Nokia, Philips and Volkswagen. Within the mobile phone market, Nuance introduced next-generation solutions for speech-enabled MP3 phones and Dragon Dictation for SMS and email on mobile phones.
- Imaging Solutions – Nuance’s imaging solutions grew ten percent over the previous year as the Company signed contracts with leading companies such as Allstate Insurance, FedEx Kinkos, The Hartford Insurance Company and United Technology Group. In particular, the Company’s PDF Converter solutions contributed significantly to the year-over-year growth as its corporate channels secured several volume license agreements.
- Dictaphone Acquisition – Nuance in the March 2006 quarter announced and subsequently closed the acquisition of Dictaphone Corporation. Dictaphone expands Nuance’s product portfolio, market reach and revenue streams within the large and rapidly growing healthcare vertical. With an unrivaled set of solutions aimed at automating the $10 billion manual transcription processing segment within healthcare, Dictaphone has a customer base of over 4,000 hospital and outpatient facilities and approximately 400,000 physicians.
Nuance to Host Quarterly Conference Call at 4:30 p.m. Today
In conjunction with today’s announcement, Nuance will broadcast its quarterly conference call over the Internet at 4:30 p.m. ET. Those who wish to listen to the live broadcast should visit the Investor Relations section of the Company’s Web site at www.nuance.com at least 15 minutes prior to the event and follow the instructions provided to ensure that the necessary audio applications are downloaded and installed.
The conference call can also be heard via telephone by dialing (800) 288-8961 or (612) 288-0340 five minutes prior to the call and referencing conference code 828105. A replay of the call will be available within 24 hours of the announcement. To access the replay, dial (800) 475-6701 or (320) 365-3844 and refer to access code 828105.
About Nuance Communications, Inc.
Nuance Communications, Inc. (Nasdaq: NUAN) is the leading provider of speech and imaging solutions for businesses and consumers around the world. Its technologies, applications and services make the user experience more compelling by transforming the way people interact with information and how they create, share and use documents. Every day, millions of users and thousands of businesses experience Nuance's proven applications. For more information, please visit www.nuance.com.
Trademark reference: Nuance, the Nuance logo, ScanSoft, Dragon NaturallySpeaking and OmniPage are registered trademarks or trademarks of Nuance Communications, Inc. or its affiliates in the United States and other countries. All other company or product names mentioned may be the trademarks of their respective owners.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
Statements in this document regarding the future demand for, performance of, and opportunities for growth in Nuance’s speech solutions and productivity applications; the growth of the speech industry and the demand for speech solutions; the size of the market for manual transcription within the healthcare industry; the strength of our sales pipeline; the continued strength of existing products, services and relationships as well as the development and introduction of new products, services and relationships; the integration planning efforts; and any other statements about Nuance managements’ future expectations, beliefs, goals, plans or prospects constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements that are not statements of historical fact (including statements containing the words “believes,” “plans,” “anticipates,” “expects,” or “estimates” or similar expressions) should also be considered to be forward-looking statements. There are a number of important factors that could cause actual results or events to differ materially from those indicated by such forward-looking statements, including: fluctuations in demand for Nuance’s existing and future products; economic conditions in the United States and abroad; Nuance’s ability to control and successfully manage its expenses, inventory and cash position; the effects of competition, including pricing pressure; possible defects in Nuance’s products and technologies; the ability of Nuance’s to successfully integrate operations and employees of acquired businesses; the ability to realize anticipated synergies from acquired businesses; and the other factors described in Nuance’s Annual Report on Form 10 K/A for the year ended September 30, 2005 and Nuance’s most recent quarterly report on Form 10-Q filed with the SEC. Nuance disclaims any obligation to update any forward-looking statements as a result of developments occurring after the date of this document.
DISCUSSION OF NON-GAAP FINANCIAL MEASURES
Management utilizes a number of different financial measures, both GAAP and non-GAAP, in analyzing and assessing the overall performance of our business, for making operating decisions and for forecasting and planning for future periods. We consider the use of non-GAAP earnings per share helpful in assessing the organic performance of the continuing operation of our business from a cash perspective. By organic performance we mean performance as if we had not incurred certain costs and expenses associated with acquisitions. By continuing operations we mean the ongoing results of the business excluding certain unplanned costs. While our management uses this non-GAAP financial measure as a tool to enhance their understanding of certain aspects of our financial performance, our management does not consider this measure to be a substitute for, or superior to, the information provided by GAAP earnings per share. Consistent with this approach, we believe that disclosing non-GAAP earnings per share to the readers of our financial statements provides such readers with useful supplemental data that, while not a substitute for GAAP earnings per share, allows for greater transparency in the review of our financial and operational performance. In assessing the overall health of our business during the fiscal second quarter ended March 31, 2006, and, in particular, in evaluating our earnings per share, our management has excluded items in three general categories, each of which are described below.
Acquisition Related Expenses. We excluded certain expense items resulting from acquisitions to allow more accurate comparisons of our financial results to our historical operations, forward looking guidance and the financial results of our peer companies. These items include the following: (i) acquisition-related integration costs; (ii) amortization of intangible assets associated with our acquisitions; and (iii) costs associated with the investigation of the restatement of the financial results of an acquired entity (SpeechWorks International, Inc.). In recent years, we have completed a number of acquisitions, which result in non-continuing operating expenses which would not otherwise have been incurred. For example, we have incurred transition and integration costs such as retention bonuses for Former Nuance employees. In addition, actions taken by an acquired company, prior to an acquisition, could result in expenses being incurred by us, such as expenses incurred as a result of the restatement of the financial results of SpeechWorks International, Inc. We believe that providing non-GAAP information for certain expenses related to material acquisitions allows the users of our financial statements to review both the GAAP expenses in the period, as well as the non-GAAP expenses, thus providing for enhanced understanding of our historic and future financial results and facilitating comparisons to less acquisitive peer companies. Additionally, had we internally developed the products acquired, the amortization of intangible assets would have been expensed historically, and we believe the assessment of our operations excluding these costs is relevant to our assessment of internal operations and comparisons to industry performance.
Non-Cash Expenses. We provide non-GAAP information relative to the following non-cash expenses: (i) stock-based compensation; (ii) certain accrued interest; and (iii) certain accrued income taxes. Because of varying available valuation methodologies, subjective assumptions and the variety of award types, we believe that the exclusion of stock-based compensation allows for more accurate comparisons of our operating results to our peer companies. Further, we believe that excluding stock-based compensation expense allows for a more accurate comparison of our financial results to previous periods during which our equity compensation programs relied more heavily on equity-based awards that were not required to be reflected on our income statement. We believe that excluding non-cash interest expense and non-cash income taxes provides our senior management as well as other users of our financial statements, with a valuable perspective on the cash based performance and health of the business, including our current near-term projected liquidity.
Other Expenses. We exclude certain other expenses that are the result of other, unplanned events to measure our operating performance as well as our current and future liquidity both with and without these expenses. Included in these expenses are items such as: (i) non-acquisition-related restructuring charges and (ii) redundant costs associated with a change in independent accountants. These events are unplanned and arose outside of the ordinary course of our continuing operations. We assess our operating performance with these amounts included, but also excluding these amounts; the amounts relate to costs which are unplanned, and therefore by providing this information we believe our management and the users of our financial statements are better able to understand the financial results of what we consider to be our organic continuing operations.
We believe that providing the non-GAAP information to investors, in addition to the GAAP presentation, allows investors to view our financial results in the way management views the operating results. We further believe that providing this information allows investors to not only better understand our financial performance but more importantly, to evaluate the efficacy of the methodology and information used by management to evaluate and measure such performance.
The non-GAAP financial measure described above, and used in this press release, should not be considered in isolation from, or as a substitute for, a measure of financial performance prepared in accordance with GAAP. Further, investors are cautioned that there are material limitations associated with the use of non-GAAP financial measures as an analytical tool. In particular, many of the adjustments to the Company’s GAAP financial measure reflect the exclusion of items that are recurring and will be reflected in the Company’s financial results for the foreseeable future. In addition, other companies, including other companies in the Company’s industry, may calculate non-GAAP net income (loss) differently than the Company, limiting it’s usefulness as a comparative tool. Management compensates for these limitations by providing specific information regarding the GAAP amounts excluded from the non-GAAP financial measures. In addition, as noted above, the Company’s management evaluates the non-GAAP financial measures together with the most directly comparable GAAP financial information.
Nuance Financial Tables Follow
Nuance Communications, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
Unaudited
Three months ended Six months ended
March 31, March 31,
------------------------------------
2006 2005 2006 2005
-------- -------- -------- --------
Product $ 48,553 $ 37,929 $101,736 $ 84,763
Maintenance 7,770 3,618 15,573 6,403
Professional services 15,405 11,566 29,971 22,525
-------- -------- -------- --------
Total revenue 71,728 53,113 147,280 113,691
Costs and expenses:
Cost of product 4,755 4,468 9,737 9,988
Cost of maintenance 2,070 1,164 4,365 2,054
Cost of professional services 10,921 8,534 21,306 17,271
Cost of revenue from
amortization of intangible
assets 2,476 2,683 4,951 5,508
-------- -------- -------- --------
Total costs of revenue 20,222 16,849 40,359 34,821
Gross Margin 51,506 36,264 106,921 78,870
Research and development 12,902 10,206 25,059 19,400
Selling and marketing 25,351 19,725 53,684 38,487
General and administrative 10,906 6,797 25,553 14,028
Amortization of other intangible
assets 1,984 979 3,984 1,648
Restructuring and other charges (1,300) - (1,300) 659
-------- -------- -------- --------
Total operating expenses 49,843 37,707 106,980 74,222
Income (loss) from operations 1,663 (1,443) (59) 4,648
Other income (expense), net (987) 324 (1,185) (566)
-------- -------- -------- --------
Income (loss) before income taxes 676 (1,119) (1,244) 4,082
Provision (benefit from) for
income taxes 2,056 (117) 4,356 1,943
-------- -------- -------- --------
Income (loss) before cumulative
effect of accounting change (1,380) (1,002) (5,600) 2,139
Cumulative effect of accounting
change - - 672 -
-------- -------- -------- --------
Net income (loss) $ (1,380)$ (1,002) $ (6,272)$ 2,139
======== ======== ======== ========
Net income (loss) per share:
basic & fully diluted $ (0.01)$ (0.01) $ (0.04)$ 0.02
======== ======== ======== ========
Weighted average common shares
outstanding:
Basic 163,407 105,563 159,859 105,264
======== ======== ======== ========
Fully Diluted 163,407 105,563 159,859 112,812
======== ======== ======== ========
Nuance Communications, Inc.
Condensed Consolidated Balance Sheet
(Unaudited, in thousands)
Assets March 31, September 30,
2006 2005
------------- ------------
Current assets:
Cash and cash equivalents $ 70,180 $ 71,687
Marketable securities 1,102 24,127
Accounts receivable, net 104,674 66,488
Acquired unbilled accounts
receivable 49,649 3,052
Prepaid expenses and other current
assets 16,182 9,548
Deferred tax assets 5,522 -
------------ ------------
Total current assets 247,309 174,902
Goodwill 713,574 458,313
Other intangible assets, net 239,086 92,350
Property and equipment, net 29,184 14,333
Other assets 37,967 17,314
------------ ------------
Total assets $ 1,267,120 $ 757,212
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long term debt
and notes payable $ 3,992 $ 27,711
Accounts payable and accrued
expenses 74,154 77,500
Deferred revenue 100,653 24,120
Deferred acquisition payments, net 18,710 16,414
Accrued business combination costs 16,668 17,027
------------ ------------
Total current
liabilities 214,177 162,772
------------ ------------
Long term portion of deferred revenue 12,368 291
Long term debt and notes payable 351,543 35
Deferred tax liability 50,429 4,241
Deferred acquisition payment, net - 16,266
Accrued business combination costs and
other 49,687 54,972
Other liabilities 19,525 3,970
------------ ------------
Total liabilities 697,729 242,547
Stockholders' equity 569,391 514,665
------------ ------------
Total liabilities and stockholders' equity $ 1,267,120 $ 757,212
============ ============
Nuance Communications, Inc.
Reconciliation of Supplemental Financial Information
(in thousands, except per share amounts)
Unaudited
Three months ended Six months ended
March 31, March 31,
----------------- -----------------
2006 2005 2006 2005
-------- -------- -------- --------
GAAP total revenue $ 71,728 $ 53,113 $147,280 $113,691
GAAP net income (loss) $ (1,380)$ (1,002) $ (6,272)$ 2,139
Cost of revenue from amortization
of intangible assets 2,476 2,683 4,951 5,508
Amortization of other intangible
assets 1,984 979 3,984 1,648
Non-cash stock based
compensation (1) 5,230 656 9,642 1,354
Restructuring and other charges (1,300) - (1,300) 659
Non-cash interest expense 840 286 1,700 352
Non-cash taxes 1,350 (68) 2,806 1,024
Acquisition related transition
and integration costs (2) 1,076 - 6,134 -
-------- -------- -------- --------
Non-GAAP net income $ 10,276 $ 3,534 $ 21,645 $ 12,684
======== ======== ======== ========
Non-GAAP net income diluted: $ 0.06 $ 0.03 $ 0.12 $ 0.11
======== ======== ======== ========
Shares used in computing non-GAAP
net income per share:
Weighted average common shares
outstanding:
Basic 163,407 105,563 159,859 105,264
======== ======== ======== ========
Fully Diluted 180,507 113,279 175,781 112,812
======== ======== ======== ========
Three months ended Six months ended
March 31, March 31,
-------------------------------------
(1) Non-cash stock based
compensation 2006 2005 2006 2005
------------------------ -------- -------- -------- --------
Cost of product licenses $ 27 $ 1 $ 48 $ 5
Cost of maintenance 64 1 112 2
Cost of professional services 419 19 709 53
Research and development 1,208 80 2,060 164
Selling and marketing 1,644 150 2,755 361
General and administrative 1,868 405 3,286 769
Cumulative effect of accounting
change - - 672 -
-------- -------- -------- --------
Total $ 5,230 $ 656 $ 9,642 $ 1,354
======== ======== ======== ========
(2) Acquisition related
transition and integration costs
---------------------------------
Cost of maintenance $ - $ - $ 115 $ -
Cost of professional services - - 131 -
Research and development - - 124 -
Selling and marketing - - 394 -
General and administrative 1,076 - 5,370 -
-------- -------- -------- --------
Total $ 1,076 $ - $ 6,134 $ -
======== ======== ======== ========
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