Nuance Announces Second Fiscal Quarter 2008 Results

Nuance Communications, Inc. (NASDAQ: NUAN) today announced financial results for the second fiscal quarter ended March 31, 2008. Nuance reported revenues of $203.3 million in the quarter ended March 31, 2008, a 54 percent increase over revenues of $132.1 million in the quarter ended March 31, 2007. 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, the Company reported non-GAAP revenue of approximately $219.9 million which includes approximately $16.6 million in revenue lost to purchase accounting largely in conjunction with the Company’s acquisitions of Tegic, Viecore and VoiceSignal. Using the non-GAAP measure, revenues grew 63 percent over the same quarter last year. On a GAAP basis, Nuance recognized a net loss of $26.8 million, or $(0.13) per share, in the quarter ended March 31, 2008, compared with a net loss of $1.7 million, or $(0.01) per share, in the quarter ended March 31, 2007. Using a non-GAAP measure, Nuance reported non-GAAP net income of $41.6 million, or $0.18 per diluted share, for the period ending March 31, 2008, compared to non-GAAP net income of $23.4 million, or $0.12 per diluted share, in the quarter ended March 31, 2007. The non-GAAP revenue amount includes revenue lost to purchase accounting largely in conjunction with the Company’s acquisitions of Tegic, Viecore and VoiceSignal. The non-GAAP net income amount excludes 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 measures. "Nuance continued its momentum into its second quarter as we experienced strong demand in our mobile, healthcare and imaging markets and robust performance from our international operations,” said Paul Ricci, chairman and CEO of Nuance. "Interest in our mobile solutions, continued expansion of our on-demand revenues, acceleration of our acquisition synergies and the contributions from the eScription acquisition position us to sustain revenue and earnings growth through the remainder of the fiscal year.” Consistent with the Company’s strategy and recent trends, highlights from the quarter include: Mobile and Embedded Solutions – Nuance’s mobile and embedded solutions revenues were a record $46.7 million. The Company continues to benefit from strong consumer demand, the industry’s most extensive portfolio of embedded solutions and connected services, and new design wins with manufacturers, including LG, Motorola, Nokia, Palm, RIM and Sanyo. Enterprise Speech – Nuance enterprise speech revenues were up year-over-year and sequentially owing to Nuance’s On-Demand and Enterprises Services offerings. Demand for enterprise solutions was robust in the European and Asian markets, offset somewhat by sluggish demand within North America. Important agreements, across the enterprise division, with new and existing customers include AIC, Air France, Deutsche Bank, Nissan Motor and T-Mobile. Healthcare Solutions – Nuance’s healthcare unit also saw year-over-year and sequential revenue growth in the quarter as demand for its dictation, transcription clinical workflow solutions continued to grow. The Company continued to experience acceleration in its healthcare revenues delivered as software-as-a-service, including iChart on-demand transcription and Veriphy critical test result management (CTRM) solutions. Contracts in the quarter with new and existing customers include BannerHealth, Children’s Hospital of Pennsylvania, SunHealth, and University of California San Francisco Medical Center. PDF and Document Imaging – Revenues for Nuance’s PDF and imaging solutions were strong in the second quarter, owing largely to the launch of PDF Converter 5. The Company introduced a new Enterprise Edition of PDF Converter 5 which helped secure several enterprise licenses, including BASF and Deloitte. Operational Achievement – Nuance increased its focus on expense controls and accelerating synergies from recent acquisitions to further improve and leverage non-GAAP operating margins. Cash flows from operations were a record, at approximately $41 million in the second quarter 2008, up 17 percent over the same period last year. 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) 553-5260 or (612) 332-0345 five minutes prior to the call and referencing conference code 922419. 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 922419. About Nuance Communications, Inc Nuance Communications, Inc. (NASDAQ: NUAN) is a 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, Dictaphone, iChart and OmniPage are registered trademarks or trademarks of Nuance Communications, Inc. or its affiliates in the United States and/or other countries. All other trademarks referenced herein are the property of their respective owners. Safe Harbor and Forward-Looking Statements Statements in this document regarding the future demand for, performance of, and opportunities for growth in Nuance’s speech, imaging, healthcare and dictation solutions, opportunities provided by the recent acquisitions 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 and cash position; the effects of competition, including pricing pressure; possible defects in Nuance’s products and technologies; the ability of Nuance 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 for the fiscal year ended September 30, 2007 and Nuance’s quarterly reports on Form 10-Q filed with the Securities and Exchange Commission. Nuance disclaims any obligation to update any forward-looking statements as a result of developments occurring after the date of this document. The unaudited financial results presented in this press release are subject to change based on the completion of the review of our fiscal first quarter 2008 financial statements. The information included in this press release should not be viewed as a substitute for full financial statements. Discussion of Non-GAAP Financial Measures On May 12, 2008, Nuance Communications, Inc. announced its financial results for its second quarter ended March 31, 2008. The press release and the reconciliation contained therein, which have been attached as Exhibit 99.1 and incorporated herein, disclose certain financial measures that may be considered 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 revenue helpful in understanding the performance of our business, as it excludes the purchase accounting impact on acquired deferred revenue and other acquisition-related adjustments to revenue. We also 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 these non-GAAP financial measures as a tool to enhance their understanding of certain aspects of our financial performance, our management does not consider these measures to be a substitute for, or superior to, the information provided by GAAP revenue and earnings per share. Consistent with this approach, we believe that disclosing non-GAAP revenue and 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 revenue and 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 quarters ended March 31, 2007 and 2008, and, in particular, in evaluating our revenue and earnings per share, our management has either included or excluded items in three general categories, each of which are described below. Acquisition Related Revenues and Expenses. We include revenue related to our acquisitions, primarily from Tegic, Viecore and VoiceSignal, that we would otherwise recognize but for the purchase accounting treatment of these transactions to allow for more accurate comparisons to our financial results of our historical operations, forward looking guidance and the financial results of our peer companies. We also 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 transition and integration costs; (ii) amortization of intangible assets associated with our acquisitions; and (iii) costs associated with the investigation of the financial results of acquired entities. 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 and Dictaphone 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 investigation and, if necessary, restatement of the financial results of acquired entities. We believe that providing non-GAAP information for certain revenue and expenses related to material acquisitions allows the users of our financial statements to review both the GAAP revenue and expenses in the period, as well as the non-GAAP revenue and 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 non-acquisition-related restructuring charges. 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 measures 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 our GAAP financial measures reflect the inclusion or exclusion of items that are recurring and will be reflected in our financial results for the foreseeable future. In addition, other companies, including other companies in our industry, may calculate non-GAAP net income (loss) differently than we do, limiting it’s usefulness as a comparative tool. Management compensates for these limitations by providing specific information regarding the GAAP amounts included and excluded from the non-GAAP financial measures. In addition, as noted above, our management evaluates the non-GAAP financial measures together with the most directly comparable GAAP financial information. 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 2008 2007 2008 2007   Product and licensing $ 94,254 $ 70,324 $ 192,190 $ 146,064 Professional services, subscription and hosting 72,203 32,842 134,623 60,807 Maintenance and support   36,845     28,896     71,513     58,612   Total revenue 203,302 132,062 398,326 265,483   Costs and expenses: Cost of product and licensing 10,686 12,075 22,271 22,287 Cost of professional services, subscription and hosting 56,443 22,567 101,267 43,120 Cost of maintenance and support 8,908 6,560 16,353 13,538 Cost of revenue from amortization of intangible assets   7,759     2,956     12,746     5,842   Total costs of revenue 83,796 44,158 152,637 84,787   Gross Margin 119,506 87,904 245,689 180,696   Research and development 30,908 17,575 58,753 34,087 Selling and marketing 56,766 41,861 112,773 85,721 General and administrative 28,074 17,540 53,309 32,925 Amortization of other intangible assets 14,155 5,116 25,654 10,266 Restructuring and other charges   3,326     -     5,478     -   Total operating expenses 133,229 82,092 255,967 162,999   Income (loss) from operations (13,723 ) 5,812 (10,278 ) 17,697   Other income (expense), net   (12,299 )   (6,506 )   (26,543 )   (13,305 )   Income (loss) before income taxes (26,022 ) (694 ) (36,821 ) 4,392   Provision for income taxes   769     1,037     5,394     7,356       Net Loss $ (26,791 ) $ (1,731 ) $ (42,215 ) $ (2,964 )   Net Loss per share: basic & fully diluted $ (0.13 ) $ (0.01 ) $ (0.21 ) $ (0.02 )   Weighted average common shares outstanding: Basic   206,348     171,747     200,280     170,501   Fully Diluted   206,348     171,747     200,280     170,501   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 2008 2007 2008 2007   GAAP total revenue $ 203,302 $ 132,062 $ 398,326 $ 265,483 Purchase accounting adjustment - revenue   16,566     2,545     30,594     4,041   Total Non-GAAP revenue $ 219,868 $ 134,607 $ 428,920 $ 269,524   GAAP net loss $ (26,791 ) $ (1,731 ) $ (42,215 ) $ (2,964 ) Cost of revenue from amortization of intangible assets 7,759 2,956 12,746 5,842 Amortization of other intangible assets 14,155 5,116 25,654 10,266 Non-cash stock based compensation (1) 23,244 12,364 38,419 20,954 Non-cash interest expense 1,726 922 3,031 1,985 Restructuring and other charges 3,326 - 5,478 - Non-cash taxes 235 (182 ) 3,060 4,795 Purchase accounting adjustment - cost of revenue (3) (1,160 ) (280 ) (2,341 ) (597 ) Purchase accounting adjustment - revenue (3) 16,566 2,545 30,594 4,041 Acquisition related transition and integration costs (2)   2,571     1,704     6,028     3,725   Non-GAAP net income $ 41,631   $ 23,414   $ 80,454   $ 48,047     Non-GAAP net income diluted: $ 0.18   $ 0.12   $ 0.36   $ 0.25     Shares used in computing non-GAAP net income per share:   Weighted average common shares outstanding: Basic   206,348     171,747     200,280     170,501   Fully Diluted   226,156     190,745     221,066     188,285     Three months ended Six months ended March, 31     March, 31     (1) Non-cash stock based compensation   2008     2007     2008     2007   Cost of product and licensing $ 10 $ 7 $ 14 $ 12 Cost of maintenance and support 580 279 906 467 Cost of professional services, subscription and hosting 3,416 906 5,021 1,450 Research and development 5,520 1,819 9,104 3,026 Selling and marketing 6,523 4,853 11,563 8,302 General and administrative 7,195 4,500 11,811 7,697 Cumulative effect of accounting change   -     -     -     -   Total $ 23,244   $ 12,364   $ 38,419   $ 20,954     (2) Acquisition related transition and integration costs Cost of product and licensing $ (2 ) $ 5 $ - $ 23 Cost of maintenance and support 40 120 114 425 Cost of professional services, subscription and hosting 164 116 (91 ) 345 Research and development 707 108 1,106 477 Selling and marketing 784 406 1,887 896 General and administrative   878     949     3,012     1,559   Total $ 2,571   $ 1,704   $ 6,028   $ 3,725     (3)Purchase accounting adjustment Revenue $ 16,566 $ 2,545 $ 30,594 $ 4,041 Cost of product and licensing (406 ) (280 ) (401 ) (597 ) Cost of professional services   (754 )   -     (1,940 )   -   Total $ 15,406   $ 2,265   $ 28,253   $ 3,444   Nuance Communications, Inc. Condensed Consolidated Balance Sheet (Unaudited, in thousands)               Assets March 31, 2008 December 31, 2007   Current assets: Cash and cash equivalents $ 354,182 $ 323,708 Marketable Securities 56 631 Accounts receivable, net 217,868 244,605 Inventories, net 7,537 6,971 Prepaid expenses and other current assets   13,332   14,068 Total current assets 592,975 589,983   Goodwill 1,345,477 1,322,496 Other intangible assets, net 73,995 404,655 Land, building and equipment, net 37,715 38,732 Other assets   393,636   73,306 Total assets $ 2,443,797 $ 2,429,172   Liabilities and Stockholders' Equity   Current liabilities: Current portion of long term debt and obligations under capital leases $ 7,037 $ 7,163 Accounts payable and accrued expenses 131,724 139,295 Deferred revenue 114,193 112,156 Other short term liabilities   12,045   61,985 Total current liabilities   265,000   320,599   Deferred revenue, net of current portion 13,936 12,790 Long term debt and obligations under capital leases, net of current portion 897,051 898,574 Other long term liabilities   139,459   82,311 Total liabilities 1,315,446 1,314,274   Stockholders' equity   1,128,352   1,114,898   Total liabilities and stockholders' equity $ 2,443,797 $ 2,429,172