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Aug. 6, 2021, 8:08 a.m. EDT

10-Q: NUANCE COMMUNICATIONS, INC.

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following Management's Discussion and Analysis is intended to help the reader understand the results of operations and financial condition of our business. Management's Discussion and Analysis is provided as a supplement to, and should be read in conjunction with, our condensed consolidated financial statements and the accompanying notes to the condensed consolidated financial statements. CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks, uncertainties and assumptions that, if they never materialize or if they prove incorrect, could cause our consolidated results to differ materially from those expressed or implied by such forward-looking statements. These forward-looking statements include predictions regarding: potential disruption to our business caused by the proposed acquisition of us by Microsoft; our ability to complete the Merger in a timely manner or at all; our future bookings, revenues, cost of revenues, research and development expenses, selling, general and administrative expenses, amortization of intangible assets and gross margin; our strategy relating to our segments; our programs to reduce costs and optimize processes; market trends; technological advancements; the potential of future product releases; our product development plans and the timing, amount and impact of investments in research and development; future acquisitions, divestitures and other strategic transactions, and anticipated benefits from such transactions; international operations and localized versions of our products; the impact of the COVID-19 pandemic; and the conduct, timing and outcome of legal proceedings and litigation matters. You can identify these and other forward-looking statements by the use of words such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "intends," "potential," "continue" or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks described in Item 1A - "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document. OVERVIEW Business Overview We are a pioneer and leader in conversational and cognitive AI innovations that bring intelligence to everyday work and life. Our solutions and technologies can understand, analyze and respond to human language to increase productivity and amplify human intelligence. Our solutions are used by businesses in the healthcare, financial services, telecommunications and travel industries, among others. We see several trends in our markets, including (i) the growing adoption of cloud-based, connected services and highly interactive mobile applications, (ii) deeper integration of virtual assistant capabilities and services, and (iii) the continued expansion of our core technology portfolio including automated speech recognition, natural language Table of Contents understanding, semantic processing, domain-specific reasoning, dialog management capabilities, AI, and voice biometric speaker authentication. We report our business in three segments, Healthcare, Enterprise, and Other. Healthcare. Our healthcare segment provides intelligent systems that support a more natural and insightful approach to clinical documentation, freeing clinicians to spend more time caring for patients and helping care teams and health organizations drive meaningful financial and clinical outcomes. Our principal solutions include dragon medical cloud-based solutions ("Dragon Medical One"), computer assisted physician documentation ("CAPD"), diagnostic imaging solutions, Nuance(R) Dragon Ambient eXperience(TM) ("DAX"), clinical documentation improvement ("CDI") and coding. Enterprise. Our Enterprise segment is a leading provider of AI-powered intelligent customer engagement solutions and services, which enable enterprises and contact centers to enhance and automate customer service and sales engagement. Our principal solutions include interactive voice responses solutions, intelligent engagement solutions and security & biometric solutions. Other. Our Other segment currently consists primarily of voicemail transcription services. Discontinued Operations. On November 17, 2020, we entered into a definitive agreement to sell the Business, comprised of our medical transcription and EHR implementation businesses. On March 1, 2021, we completed the sale of the Business and received proceeds of approximately $29.8 million, subject to certain customary post-closing adjustments. For all periods presented, the Businesses' results of operations have been included within discontinued operations in our condensed consolidated financial statements. Acquisition of Nuance Communications, Inc. by Microsoft Corporation On April 11, 2021, we entered into a Merger Agreement with Microsoft. Subject to the terms and conditions of the Merger Agreement, Microsoft has agreed to acquire Nuance for $56.00 per share in an all-cash transaction. Pursuant to the Merger Agreement, following consummation of the Merger Nuance will be a wholly-owned subsidiary of Microsoft. As a result of the Merger, we will cease to be a publicly traded company. We have agreed to various customary covenants and agreements, including, among others, agreements to conduct our business in the ordinary course during the period between the execution of the Merger Agreement and the effective time of the Merger. We do not believe these restrictions will prevent us from meeting our debt service obligations, ongoing costs of operations, working capital needs, or capital expenditure requirements. If the Merger Agreement is terminated under certain specified circumstances, we will be required to pay Microsoft a termination fee of $515.0 million (including in connection with our entry into an agreement with respect to a Superior Proposal, as defined in the Merger Agreement, if certain conditions are met). The consummation of the Merger remains subject to customary closing conditions, including satisfaction of certain regulatory approvals and other customary closing conditions. The Merger is currently intended to close by December 31, 2021. For additional information related to the Merger Agreement, please refer to the definitive proxy statement previously filed with the SEC and other relevant materials in connection with the transaction that we will file with the SEC and which will contain important information about Nuance and the Merger. Key Metrics In evaluating the financial condition and operating performance of our business, management focuses on revenue, net (loss) income, gross margins, operating margins, cash flow from operations, and changes in deferred revenue. A summary of key financial metrics for the nine months ended June 30, 2021, as compared to the nine months ended June 30, 2020, is as follows: Total revenues were $1,029.3 million for the nine months ended June 30, 2021, as compared to $976.1 million for the nine months ended June 30, 2020; Net loss from continuing operations for the nine months ended June 30, 2021 was $6.6 million, compared to net income from continuing operations of $19.4 million for the nine months ended June 30, 2020; Gross margins for the nine months ended June 30, 2021 were 62.3%, compared to 59.6% for the nine months ended June 30, 2020; Operating margins for the nine months ended June 30, 2021 were 7.4%, compared to 6.1% for nine months ended June 30, 2020; and Table of Contents Operating cash flows from continuing operations increased by $58.1 million to $188.3 million for the nine months ended June 30, 2021, compared to $130.2 million for the nine months ended June 30, 2020. RESULTS OF OPERATIONS Total Revenues The following tables show total revenues by product type and by geographic location, based on the location of our customers, in dollars and percentage change (dollars in millions): Three Months Ended June 30, Dollar Percent 2021 2020 Change Change Hosting and professional services $ 208.2 $ 185.6 $ 22.7 12.2 % Product and licensing 66.3 48.7 17.6 36.1 % Maintenance and support 62.1 64.4 (2.3) (3.5) % Total revenues $ 336.6 $ 298.6 $ 38.0 12.7 % United States $ 271.1 $ 232.3 $ 38.8 16.7 % International 65.5 66.3 (0.8) (1.2) % Total revenues $ 336.6 $ 298.6 $ 38.0 12.7 % Nine Months Ended June 30, Dollar Percent 2021 2020 Change Change Hosting and professional services $ 602.0 $ 541.6 $ 60.4 11.2 % Product and licensing 238.1 243.3 (5.2) (2.1) % Maintenance and support 189.2 191.1 (2.0) (1.0) % Total revenues $ 1,029.3 $ 976.1 $ 53.3 5.5 % United States $ 821.7 $ 775.9 $ 45.8 5.9 % International 207.6 200.2 7.5 3.7 % Total revenues $ 1,029.3 $ 976.1 $ 53.3 5.5 %

The geographic split was 81% of total revenues in the United States and 19% internationally for the three months ended June 30, 2021, as compared to 78% of total revenues in the United States and 22% internationally for the three months ended June 30, 2020.







                                                           Three Months Ended June 30,             Dollar             Percent
                                                             2021                 2020             Change             Change
        Hosting revenue                                $       183.4           $  154.5          $  28.9                  18.7  %
        Professional services revenue                           24.8               31.1             (6.3)                (20.2) %
        Hosting and professional services revenue      $       208.2           $  185.6          $  22.7                  12.2  %
        As a percentage of total revenue                        61.9   %           62.1  %
                                                           Nine Months Ended June 30,             Dollar             Percent
                                                             2021                2020             Change             Change
        Hosting revenue                                $      522.7           $  452.6          $  70.1                  15.5  %
        Professional services revenue                          79.3               89.0             (9.7)                (10.9) %
        Hosting and professional services revenue      $      602.0           $  541.6          $  60.4                  11.2  %
        As a percentage of total revenue                       58.5   %           55.5  %
        


Three Months Ended June 30, 2021 compared to Three Months Ended June 30, 2020 Hosting revenue for the three months ended June 30, 2021 increased by $28.9 million, or 18.7%, primarily due to a $28.2 million increase in Healthcare, driven by the growth in our Dragon Medical Cloud solutions and our continued transition from a license model to a cloud based model. As a percentage of total revenue, hosting revenue increased from 51.7% to 54.5% for the three months ended June 30, 2021.







                                                  Three Months Ended June 30,             Dollar      Percent
                                                 2021                         2020        Change      Change
        Product and licensing revenue      $       66.3                     $ 48.7       $ 17.6        36.1  %
        As a percentage of total revenue           19.7   %                   16.3  %
                                                   Nine Months Ended June 30,            Dollar      Percent
                                                  2021                       2020        Change      Change
         Product and licensing revenue      $      238.1                  $ 243.3       $ (5.2)       (2.1) %
         As a percentage of total revenue           23.1   %                 24.9  %
        


Table of Contents







                                                          Three Months Ended June 30,             Dollar             Percent
                                                             2021                2020             Change             Change
        Maintenance and support revenue                $       62.1           $   64.4          $  (2.3)                 (3.5) %
        As a percentage of total revenue                       18.4   %           21.6  %
                                                    Nine Months Ended June 30,            Dollar      Percent
                                                   2021                       2020        Change      Change
         Maintenance and support revenue     $      189.2                  $ 191.1       $ (2.0)       (1.0) %
         As a percentage of total revenue            18.4   %                 19.6  %
        


Three Months Ended June 30, 2021 compared to Three Months Ended June 30, 2020 Maintenance and support revenue for the three months ended June 30, 2021 decreased by $2.3 million, or 3.5%, primarily due to a $3.0 million decrease in Healthcare, driven by the continued transition from software sold with maintenance and support to cloud-based solutions. As a percentage of total revenue, maintenance and support revenue decreased from 21.6% to 18.4% for the three months ended June 30, 2021.







                                                           Three Months Ended June 30,             Dollar             Percent
                                                             2021                 2020             Change             Change
        Cost of hosting and professional services
        revenue                                        $       111.9           $   96.3          $  15.6                  16.2  %
        As a percentage of professional services and
        hosting revenue                                         53.7   %           51.9  %
                                                           Nine Months Ended June 30,             Dollar             Percent
                                                             2021                2020             Change             Change
        Cost of hosting and professional services
        revenue                                        $      323.5           $  298.0          $  25.5                   8.5  %
        As a percentage of professional services and
        hosting revenue                                        53.7   %           55.0  %
        


Three Months Ended June 30, 2021 compared to Three Months Ended June 30, 2020 Cost of hosting and professional services revenue for the three months ended June 30, 2021 increased by $15.6 million, or 16.2%, primarily driven by increased employee headcount to support the continued growth and expansion of our cloud-based solutions. Gross margin decreased by 1.8 percentage points primarily due to a decrease in professional services related to the voice engagement suite of products.







                                                          Three Months Ended June 30,             Dollar             Percent
                                                            2021                 2020             Change             Change
        Cost of product and licensing revenue         $        5.0            $   10.3          $  (5.3)                (51.4) %
        As a percentage of product and licensing
        revenue                                                7.5    %           21.1  %
                                                          Nine Months Ended June 30,             Dollar             Percent
                                                            2021                2020             Change             Change
        Cost of product and licensing revenue         $       27.9           $   53.3          $ (25.4)                (47.7) %
        As a percentage of product and licensing
        revenue                                               11.7   %           21.9  %
        


Three Months Ended June 30, 2021 compared to Three Months Ended June 30, 2020 Cost of product and licensing revenue for the three months ended June 30, 2021 decreased by $5.3 million, or 51.4%. Gross margin increased by 13.5 percentage points, primarily due to higher licensing revenue on relatively flat licensing costs in Enterprise.







                                                           Three Months Ended June 30,             Dollar              Percent
                                                             2021                 2020             Change              Change
        Cost of maintenance and support revenue        $        7.8            $    7.3          $    0.4                   5.9  %
        As a percentage of maintenance and support
        revenue                                                12.5    %           11.4  %
                                                          Nine Months Ended June 30,              Dollar             Percent
                                                            2021                 2020             Change             Change
        Cost of maintenance and support revenue       $       22.5           $    23.2          $  (0.7)                 (3.0) %
        As a percentage of maintenance and support
        revenue                                               11.9   %            12.1  %
        


Three Months Ended June 30, 2021 compared to Three Months Ended June 30, 2020 Cost of maintenance and support revenue for the three months ended June 30, 2021 increased by $0.4 million, or 5.9%. Gross margins decreased by 1.1 percentage points primarily driven by higher Healthcare maintenance and support costs. Nine Months Ended June 30, 2021 compared to Nine Months Ended June 30, 2020 Cost of maintenance and support revenue for the nine months ended June 30, 2021 decreased by $0.7 million, or 3.0%, primarily due to the continued transition from license transactions with maintenance and support to cloud-based solutions in Healthcare. Gross margins increased by 0.2 percentage points. Research and Development Expense







                                                          Three Months Ended June 30,             Dollar              Percent
                                                             2021                2020             Change              Change
        Research and development expense               $       63.7           $   53.9          $    9.8                  18.1  %
        As a percentage of total revenue                       18.9   %           18.1  %
                                                    Nine Months Ended June 30,            Dollar      Percent
                                                   2021                       2020        Change      Change
         Research and development expense    $      179.7                  $ 164.6       $ 15.0         9.1  %
         As a percentage of total revenue            17.5   %                 16.9  %
        


Three Months Ended June 30, 2021 compared to Three Months Ended June 30, 2020 R&D expense increased by $9.8 million, or 18.1%, primarily due to a higher employee headcount as we continued to invest in our core technologies to power new products and solutions. . . .

Aug 06, 2021

COMTEX_391086647/2041/2021-08-06T08:08:07

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