Nuance Communications, Inc. (Nasdaq: NUAN) today provided an update
to its prior disclosures regarding the global malware incident on
June 27, 2017. The company continues to make progress in
restoring its operations across the business. Since detecting the
issue, the company has been remediating affected systems, enhancing
the security of its networks and restoring functionality to
customers.
Nuance expects the malware incident to have an impact on its
financial results for third fiscal quarter of 2017, primarily owing
to the loss of healthcare transcription revenues in the final week
of the third quarter and the inability to fulfill partner orders
for imaging products during the same period. Based on
preliminary financial data, Nuance expects fiscal third quarter
GAAP revenues to be between $485.0 million and $489.0 million and
non-GAAP revenues to be between $494.0 million and $498.0
million. The company expects fiscal third quarter GAAP
earnings per share to be between $(0.11) and $(0.09) and non-GAAP
earnings per share to be between $0.26 and $0.28.
The company estimates that, had the malware incident not
occurred, third quarter GAAP revenues on a pro forma basis would
have been between $500.0 million and $504.0 million and non-GAAP
revenues on a pro forma basis would have been between $509.0
million and $513.0 million. The company estimates fiscal
third quarter GAAP earnings per share on a pro forma basis would
have been between $(0.07) and $(0.05) and non-GAAP earnings per
share on a pro forma basis would have between $0.29 and $0.31. The
company’s performance in the third quarter, notwithstanding the
malware incident, owed to continued growth in Enterprise
omni-channel offerings, Dragon Medical cloud, voice biometrics
solutions, and the company’s automotive
business. Despite the effects of the malware
incident, net new bookings in the quarter were strong, up
year-over-year, between 20.0% and 25.0% and also owed to
continued growth in Dragon Medical cloud, voice biometrics
solutions, the company’s automotive business, and Enterprise
omni-channel offerings. Cash flows from operations were also
strong at approximately $130.0 million.
While Nuance has made significant progress in remediating
systems related to the malware incident, the company nonetheless
expects a material effect on financial results for its fourth
fiscal quarter of 2017. The impact will be primarily related
to Nuance’s HIM transcription business as the company continues to
reactivate customers during the quarter. Nuance expects to
have service restored to substantially all of its clients on its
flagship HIM transcription platform, eScription LH, within two
weeks, while taking all measures to bring back its clients
efficiently and securely. The eScription RH and Clinic 360
solutions that reside on the cloud-based HIM transcription
platform, Emdat, were restored to their full capability for that
entire customer base on July 3, 2017. The Critical Test
Results application, which is part of Nuance’s Diagnostics
radiology workflow solutions, was reactivated for all clients on
July 16, 2017. As a part of the restoration efforts,
Nuance has hardened its systems with enhanced security and with the
latest anti-malware agents. Nuance is providing cloud-based
options for its client base that were on older transcription
platforms. The PowerScribe and Dragon Medical cloud solutions were
not impacted and remain unaffected by the incident with Dragon
Medical cloud adoption increasing as an alternative for physicians
to capture patient documentation.
These preliminary expectations are subject to revision until the
company reports final third quarter fiscal 2017 results on August
8, 2017. (Please see today’s separate advisory for details.)
The company will host a listen-only conference call today at
9:00 a.m. ET. To access the live broadcast, please visit the
Investor Relations section of Nuance’s website at www.nuance.com.
The call can also be heard by dialing 800-230-1096 or 612-288-0340
at least five minutes prior to the call and referencing code
427608. A replay will be available within 24 hours of the
announcement by dialing 800-475-6701 or 320-365-3844 and using the
access code 427608.
About Nuance Communications, Inc.Nuance
Communications, Inc. is a leading provider of voice and language
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
devices and systems. 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 and the Nuance logo 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.
Definitions of Bookings and Net New
Bookings
Certain supplemental data provided in the announcement are based
upon internal Nuance definitions that are important for the reader
to understand.
Bookings. Bookings represent the estimated gross revenue
value of transactions at the time of contract execution, except for
maintenance and support offerings. For fixed price contracts, the
bookings value represents the gross total contract value. For
contracts where revenue is based on transaction volume, the
bookings value represents the contract price multiplied by the
estimated future transaction volume during the contract term,
whether or not such transaction volumes are guaranteed under a
minimum commitment clause. Actual results could be different than
our initial estimates. The maintenance and support bookings value
represents the amounts billed in the period the customer is
invoiced. Because of the inherent estimates required to determine
bookings and the fact that the actual resultant revenue may differ
from our initial bookings estimates, we consider bookings one
indicator of potential future revenue and not as an arithmetic
measure of backlog.
Net new bookings. Net new bookings represents the
estimated revenue value at the time of contract execution from new
contractual arrangements or the estimated revenue value incremental
to the portion of value that will be renewed under pre-existing
arrangements. Constant currency for net new bookings is calculated
using current period net new bookings denominated in currencies
other than United States dollars converted into United States
dollars using the average exchange rate for those currencies from
the prior year period rather than the actual exchange rate in
effect during the current period.
Safe Harbor and Forward-Looking
StatementsStatements in this document regarding future
performance and our management’s 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 but
not limited to: fluctuations in demand for our existing and future
products; changes to economic conditions in the United States and
internationally; our ability to control and successfully manage our
expenses and cash position; our ability to successfully restore our
existing systems affected by the malware incident; our ability to
prevent or mitigate the effects of future cyberattacks; the
conversion rate of bookings into revenue; the ability to realize
anticipated synergies from acquired businesses; and the other
factors described in our annual report on Form 10-K for the fiscal
year ended September 30, 2016 and our quarterly reports, and other
reports filed with the Securities and Exchange Commission. We
disclaim any obligation to update any forward-looking statements as
a result of developments occurring after the date of this
document.
The information included in this document should not be
considered superior to, or a substitute for, financial statements
prepared in accordance with GAAP.
Discussion of non-GAAP Financial MeasuresWe
utilize a number of different financial measures, both Generally
Accepted Accounting Principles (“GAAP”) and non-GAAP, in analyzing
and assessing the overall performance of the business, for making
operating decisions and for forecasting and planning for future
periods. Our annual financial plan is prepared both on a GAAP and
non-GAAP basis, and the non-GAAP annual financial plan is approved
by our board of directors. Continuous budgeting and forecasting for
revenue and expenses are conducted on a consistent non-GAAP basis
(in addition to GAAP) and actual results on a non-GAAP basis are
assessed against the non-GAAP annual financial plan. The board of
directors and management utilize these non-GAAP measures and
results (in addition to the GAAP results) to determine our
allocation of resources. In addition and as a consequence of the
importance of these measures in managing the business, we use
non-GAAP measures and results in the evaluation process to
establish management’s compensation. For example, our annual bonus
program payments are based upon the achievement of consolidated
non-GAAP revenue and consolidated non-GAAP earnings per share
financial targets. 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 operations of our business.
By organic performance we mean performance as if we had owned an
acquired business in the same period a year ago. By constant
currency organic performance we mean performance excluding the
effect of current foreign currency rate fluctuations. 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 financial
statements. Consistent with this approach, we believe that
disclosing non-GAAP financial measures to the readers of our
financial statements provides such readers with useful supplemental
data that, while not a substitute for GAAP financial statements,
allows for greater transparency in the review of our financial and
operational performance. In assessing the overall health of the
business during the three months ended June 30, 2017, our
management has either included or excluded items in six general
categories, each of which is described below.
Acquisition-related revenue and cost of
revenue.We provide supplementary non-GAAP financial
measures of revenue, which include revenue related to acquisitions,
primarily TouchCommerce, mCarbon and NSI, for the three months
ended June 30, 2017, that we would have recognized but for the
purchase accounting treatment of these transactions. Non-GAAP
revenue also includes revenue that we would have recognized had we
not acquired intellectual property and other assets from the same
customer. Because GAAP accounting requires the elimination of this
revenue, GAAP results alone do not fully capture all of our
economic activities. These non-GAAP adjustments are intended to
reflect the full amount of such revenue. We include non-GAAP
revenue and cost of revenue to allow for more complete comparisons
to the financial results of historical operations, forward-looking
guidance and the financial results of peer companies. We believe
these adjustments are useful to management and investors as a
measure of the ongoing performance of the business because,
although we cannot be certain that customers will renew their
contracts, we have historically experienced high renewal rates on
maintenance and support agreements and other customer contracts.
Additionally, although acquisition-related revenue adjustments are
non-recurring with respect to past acquisitions, we generally will
incur these adjustments in connection with any future
acquisitions.
Acquisition-related costs, net.In recent years,
we have completed a number of acquisitions, which result in
operating expenses, which would not otherwise have been incurred.
We provide supplementary non-GAAP financial measures, which exclude
certain transition, integration and other acquisition-related
expense items resulting from acquisitions, to allow more accurate
comparisons of the financial results to historical operations,
forward looking guidance and the financial results of less
acquisitive peer companies. We consider these types of costs and
adjustments, to a great extent, to be unpredictable and dependent
on a significant number of factors that are outside of our control.
Furthermore, we do not consider these acquisition-related costs and
adjustments to be related to the organic continuing operations of
the acquired businesses and are generally not relevant to assessing
or estimating the long-term performance of the acquired assets. In
addition, the size, complexity and/or volume of past acquisitions,
which often drives the magnitude of acquisition related costs, may
not be indicative of the size, complexity and/or volume of future
acquisitions. By excluding acquisition-related costs and
adjustments from our non-GAAP measures, management is better able
to evaluate our ability to utilize our existing assets and estimate
the long-term value that acquired assets will generate for us. We
believe that providing a supplemental non-GAAP measure, which
excludes these items allows management and investors to consider
the ongoing operations of the business both with, and without, such
expenses.
These acquisition-related costs fall into the following
categories: (i) transition and integration costs; (ii) professional
service fees and expenses; and (iii) acquisition-related
adjustments. Although these expenses are not recurring with respect
to past acquisitions, we generally will incur these expenses in
connection with any future acquisitions. These categories are
further discussed as follows:
(i) Transition and integration costs. Transition and integration
costs include retention payments, transitional employee costs, and
earn-out payments treated as compensation expense, as well as the
costs of integration-related activities, including services
provided by third-parties.
(ii) Professional service fees and expenses. Professional
service fees and expenses include financial advisory, legal,
accounting and other outside services incurred in connection with
acquisition activities, and disputes and regulatory matters related
to acquired entities.
(iii) Acquisition-related adjustments. Acquisition-related
adjustments include adjustments to acquisition-related items that
are required to be marked to fair value each reporting period, such
as contingent consideration, and other items related to
acquisitions for which the measurement period has ended, such as
gains or losses on settlements of pre-acquisition
contingencies.
Amortization of acquired intangible assets.We
exclude the amortization of acquired intangible assets from
non-GAAP expense and income measures. These amounts are
inconsistent in amount and frequency and are significantly impacted
by the timing and size of acquisitions. Providing a supplemental
measure which excludes these charges allows management and
investors to evaluate results “as-if” the acquired intangible
assets had been developed internally rather than acquired and,
therefore, provides a supplemental measure of performance in which
our acquired intellectual property is treated in a comparable
manner to our internally developed intellectual property. Although
we exclude amortization of acquired intangible assets from our
non-GAAP expenses, we believe that it is important for investors to
understand that such intangible assets contribute to revenue
generation. Amortization of intangible assets that relate to past
acquisitions will recur in future periods until such intangible
assets have been fully amortized. Future acquisitions may result in
the amortization of additional intangible assets.
Costs associated with IP collaboration
agreement.In order to gain access to a third party's
extensive speech recognition technology and natural language and
semantic processing technology, we have entered into IP
collaboration agreements, with terms ranging between five and six
years. Depending on the agreement, some or all intellectual
property derived from these collaborations will be jointly owned by
the two parties. For the majority of the developed intellectual
property, we will have sole rights to commercialize such
intellectual property for periods ranging between two to six years,
depending on the agreement. For non-GAAP purposes, we consider
these long-term contracts and the resulting acquisitions of
intellectual property from this third-party over the agreements’
terms to be an investing activity, outside of our normal, organic,
continuing operating activities, and are therefore presenting this
supplemental information to show the results excluding these
expenses. We do not exclude from our non-GAAP results the
corresponding revenue, if any, generated from these collaboration
efforts. Although our bonus program and other performance-based
incentives for executives are based on the non-GAAP results that
exclude these costs, certain engineering senior management are
responsible for execution and results of the collaboration
agreement and have incentives based on those results. Costs
associated with the research and development portion of the
agreements have been excluded from research and development expense
and costs for the marketing exclusivity period are excluded from
sales and marketing expense.
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. These items are further discussed as
follows:
(i) Stock-based compensation. Because of varying valuation
methodologies, subjective assumptions and the variety of award
types, we believe that excluding stock-based compensation allows
for more accurate comparisons of operating results to peer
companies, as well as to times in our history when stock-based
compensation was more or less significant as a portion of overall
compensation than in the current period. We evaluate performance
both with and without these measures because compensation expense
related to stock-based compensation is typically non-cash and the
options and restricted awards granted are influenced by the
Company’s stock price and other factors such as volatility that are
beyond our control. The expense related to stock-based awards is
generally not controllable in the short-term and can vary
significantly based on the timing, size and nature of awards
granted. As such, we do not include such charges in operating
plans. Stock-based compensation will continue in future
periods.
(ii) and (iii) Certain accrued interest and income taxes. We
also exclude certain accrued interest and certain accrued income
taxes because we believe that excluding these non-cash expenses
provides senior management, as well as other users of the financial
statements, with a valuable perspective on the cash-based
performance and health of the business, including the current
near-term projected liquidity. These non-cash expenses will
continue in future periods.
Other Expenses.We exclude certain other
expenses that result from unplanned events in order to measure
operating performance and current and future liquidity both with
and without these expenses. By providing this information, we
believe management and the users of the financial statements are
better able to understand the financial results of what we consider
to be our organic, continuing operations. Included in these
expenses are items such as restructuring charges, asset impairments
and other charges (credits), net. These events are unplanned and
arise outside of the ordinary course of continuing operations.
These items include losses from extinguishing our convertible debt
and adjustments from changes in fair value of share-based
instruments relating to issuing our common stock with security
price guarantees payable in cash. Other items such as consulting
and professional services fees related to assessing strategic
alternatives and our transformation program, implementation of the
new revenue recognition standard (ASC 606), expenses
associated with the malware incident and remediation thereof, and
gains or losses on non-controlling strategic equity interests, are
also excluded.
We believe that providing the non-GAAP information to investors,
in addition to the GAAP presentation, allows investors to view the
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.
Pro Forma Financial MeasuresWe have provided
certain pro forma measures of GAAP and non-GAAP revenue and GAAP
and non-GAAP earnings per share that estimates our expected results
for the third quarter ended June 30, 2017 as if the malware
incident had not occurred. These pro forma amounts rely on
actual preliminary results through the date of the malware incident
and then include our projected performance for the remaining days
of the quarter based on our anticipated run rate and management’s
best estimate of business operations had the malware incident had
not occurred. These pro forma measures are being provided for
the purpose of permitting users of our financial statements to
understand our estimates of the effects of the malware incident on
our continuing operations. These pro forma measures should
not be considered as a substitute for our actual GAAP financial
statements in assessing the overall health of the business during
the three months ended June 30, 2017.
Financial Tables Follow
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Nuance Communications, Inc. |
|
Reconciliation of Supplemental Financial
Information |
|
GAAP and non-GAAP Revenue and Net Income per Share
Guidance |
|
(in thousands, except per share amounts) |
|
Unaudited |
|
|
|
|
|
|
|
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|
|
Three months ended |
|
|
June 30, 2017 |
|
|
Low |
|
High |
|
|
|
|
|
|
GAAP
revenue |
$ |
485,000 |
|
|
$ |
489,000 |
|
|
Acquisition-related adjustment - revenue |
|
9,000 |
|
|
|
9,000 |
|
|
Non-GAAP
revenue |
$ |
494,000 |
|
|
$ |
498,000 |
|
|
|
|
|
|
|
|
|
|
|
|
GAAP net income
per share |
$ |
(0.11 |
) |
|
$ |
(0.09 |
) |
|
Acquisition-related adjustment - revenue |
|
0.03 |
|
|
|
0.03 |
|
|
Acquisition-related costs, net |
|
0.03 |
|
|
|
0.03 |
|
|
Cost of
revenue from amortization of intangible assets |
|
0.05 |
|
|
|
0.05 |
|
|
Amortization of intangible assets |
|
0.10 |
|
|
|
0.10 |
|
|
Non-cash
stock-based compensation |
|
0.15 |
|
|
|
0.15 |
|
|
Non-cash
interest expense |
|
0.05 |
|
|
|
0.05 |
|
|
Adjustment to income tax expense |
|
(0.10 |
) |
|
|
(0.10 |
) |
|
Restructuring and other charges, net |
|
0.05 |
|
|
|
0.05 |
|
|
Other |
|
0.01 |
|
|
|
0.01 |
|
|
Non-GAAP net
income per share |
$ |
0.26 |
|
|
$ |
0.28 |
|
|
|
|
|
|
|
Shares used
in computing GAAP and non-GAAP net income per share: |
|
|
|
|
|
|
|
|
Weighted
average common shares: basic |
|
288,000 |
|
|
|
288,000 |
|
|
Weighted
average common shares: diluted |
|
290,000 |
|
|
|
290,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Reconciliation of Revenue and Earnings per
Share Guidance |
|
Three Months Ended June 30, 2017 |
|
(in thousands, except per share amounts) |
|
Unaudited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Low |
|
High |
|
|
|
As-Reported |
|
Adjustment (1) |
|
Pro Forma |
|
As-Reported |
|
Adjustment (1) |
|
Pro Forma |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP
Revenue |
|
$485,000 |
|
|
$15,000 |
|
$500,000 |
|
|
$489,000 |
|
|
$15,000 |
|
$504,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP
Revenue |
|
$494,000 |
|
|
$15,000 |
|
$509,000 |
|
|
$498,000 |
|
|
$15,000 |
|
$513,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Low |
|
High |
|
|
|
As-Reported |
|
Adjustment (2)(3) |
|
Pro Forma |
|
As-Reported |
|
Adjustment (2)(3) |
|
Pro Forma |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP Earnings
per Share |
|
($0.11) |
|
$0.04 |
|
($0.07) |
|
($0.09) |
|
$0.04 |
|
($0.05) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP
Earnings per Share |
|
$0.26 |
|
$0.03 |
|
$0.29 |
|
$0.28 |
|
$0.03 |
|
$0.31 |
|
|
|
|
|
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|
(1)
Adjustment represents estimated revenues lost due to malware
incident. |
|
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|
(2) Adjustment to GAAP earnings per share represents the
effect related to estimated lost revenues, cost of sales,
compensation-related items and other expenses that would not have
been incurred but for the incident. |
|
(3) Adjustment to Non-GAAP earnings per share represents the
effect related to estimated lost revenues, cost of sales, and
relatedtaxes. |
Contact Information
For Investors
Christine Marchuska
Nuance Communications, Inc.
Tel: 781-565-5000
Email: christine.marchuska@nuance.com
For Media
Richard Mack
Nuance Communications, Inc.
Tel: 781-565-5000
Email: richard.mack@nuance.com
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