nuance q4 2018
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Nuance q4 2018 cvs health body analysis scale

Nuance q4 2018

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So, us, these are related expect directly once they associated see behind them don't are and with to those to transactions. Enterprise division with enough. It business Okay. Great the actually the Imaging Auto business. CEO, remarks. What's new? Log in Free sign up. Recent NUAN transcripts. Earnings call transcript. Associated NUAN filings. Transcript menu Participants. Call transcript. Due to licensing restrictions, you must log in to view earnings call transcripts. Thank good and you and end the cash sale AI.

This leaves us with a net debt ratio of 3. 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 recognized that the business was spread quite thin and while our various lines of business have made solid runs at 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 assessed our markets, customer needs, operations, investment requirements and expected returns.

We use both the growth lens and margin lens but favored growth as the greatest source of long-term value creation. As we proceeded, key observations rose to the surface; true differentiating strains 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, 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 patient's clinical stories anytime 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 burn out.

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 toward 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 disciplined resource allocation toward growth, ROI and long-term value.

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 that. Thus, you can now see the profound change under way 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 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 assistants for car infotainment and communication systems and is a driving force for the future of mobility. We are incredibly proud of the business we've built, at the same time we recognize the increased excitement around automotive technology companies. Today, we delivered 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 million cars on the road today, supporting more than 40 languages.

But as I managed this business this year, I found us contemplating investment trade-offs about 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. 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 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 strengths. For SRS, we will see customer 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 to be more efficient and bring us closer to the customer. 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 bring management attention and resources to reinvest in growth, primarily through go-to-market improvements 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. 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 emerged 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. Furthermore, 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. While you've heard me talk about the investments we're making, the strength of our technology and focus in 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. It 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 toward success.

With that, I'll turn the floor over to Dan, who will technical difficulty further insights to the financial implications of our strategy as well as guidance for fiscal year Thanks, Mark. I'm going to start with a quick overview of our guidance approach with regards to ASC and , 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 , effective October 1, , under the modified retrospective approach and, therefore, we will present both ASC and actual results during All of our guidance today will be provided on a basis.

This will be our primary approach to guidance throughout the year. As it relates to , we will provide guidance only for revenue and EPS and that will only be on an annual basis. We are including 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 and given that we will report our earnings results and guidance on a basis, we encourage sell-side analysts to submit estimates for consensus purposes.

With the decision to wind down SRS and Devices, we expect headwinds related to our consolidated revenue growth. This reduction creates a basis point headwind to our growth rate. Now, let's talk about the Imaging sale. The deal is expected to close during our second quarter.

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 and we will provide more details and financial information as the year progresses. As each transaction closes, we will update our guidance. We have provided additional details on the Imaging business to help you with your models on a pro forma basis. For simplicity, this information has been provided assuming a March 31st close date. Our GAAP guidance and our cash flow guidance captures the costs and expenditures associated with divesting the Imaging division and the Auto spin, but we do not remove the revenue or profits of either segment from 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 In addition, in Healthcare, we will provide greater visibility into the migration of certain lines of revenue to more ratable 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.

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 As I mentioned before, the wind down activities in our Other division have a material drag on the consolidated total.

Our Healthcare business technical difficulty have a low single-digit growth rate, and I will provide more detail on the drivers of the segments 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. Within Healthcare, we're providing a detailed breakout of revenue line items within the segment, so then 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 in 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 for maintenance contracts to cloud contracts. We are approximately one-third of the way through our conversion of existing maintenance customers on to DMO.

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 The next line is Dragon Medical product and licensing, which is expected to grow in , 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 segment margins -- 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. Although part of the HIM decline is due to the ongoing conversion to electronic medical records and other part is because we are actively transitioning some portion of HIM activity to the Dragon Cloud. The Radiology and Other revenue category represents a significant amount of our total revenue and as you can see is expected to grow once again in 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 a sharp increase this past year, but is expected to decline in since the abnormally high volume of large projects in 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 second is by converting an on-premise Dragon Medical client that currently is paying us maintenance.

Here, the revenues are approximately 2 to 2. 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 , 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 booked the annual value of their contract as ARR before we begin recognizing revenue ratably over the life of their contracts. As we listened to feedback over the last few months, we heard that net new bookings, transcription lines, an estimated three year value lacked metrics 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 our SaaS -- 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. Please note that we will only guide ARR on an annual basis, but 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. Obviously the later in the year we signed 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 our 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 mind 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.

We have done our to best estimate these cash flows, but there are lot of moving pieces associated with the strategic transformations and, as a result, there could be some variability to these estimates.

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 I'm convinced that the strategic process we conducted over the last several months has enabled us technical difficulty opportunities and redesign 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. 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 the 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 recognize that we were yet again spreading ourselves seeing across several different investments.

And Auto, like other parts of the company, were really competing for some 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 markets survey. So, when we look at the business and 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 -- 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? The shares themselves are going to be distributed to the shareholders. So the shares of Nu Co of Auto Co will be distributed to the shareholders of Nuance, so at the end of the transaction holders will have a share of 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. Got it. Very helpful. I'll get back into queue. But thanks very much and congrats on these big decisions. Your next question comes from the line of Sanjit Singh of Morgan Stanley.

This is Josh Baer on for Sanjit. Congrats on completing the review. 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.

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.

And, Josh, I think the other -- this is Mark. One is, you've heard us mentioned more than once our sales force expansion will be something we focus investments around. 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 SaaS ph. 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?

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.

Thank you. I'll try to jump through this fairly quickly, so just I had three I was hoping to sneak in here.

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 '19, 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 '19 guide on the business.

Some of the investments we spoke about are directed toward exactly what I'm describing in Enterprise. 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. 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. 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.