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Nuance Announces Third Quarter Fiscal 2010 Results

Healthcare and Mobile Markets Fuel Revenue, EPS and Cash Flow Growth

BURLINGTON, Mass., August 9, 2010 – Nuance Communications, Inc. (NASDAQ: NUAN) today announced financial results for its third quarter of fiscal 2010, ended June 30, 2010.

Nuance reported GAAP revenue of $273.2 million in the third quarter of fiscal 2010, a 13.4% increase over GAAP revenue of $241.0 million in the third quarter of fiscal 2009. Nuance reported non-GAAP revenue of approximately $293.4 million, which includes $20.2 million in revenue lost to accounting treatment in conjunction with acquisitions. Third quarter fiscal 2010 non-GAAP revenue grew approximately 16.8% over non-GAAP revenue of $251.3 million in the same quarter last year.

In the third quarter of fiscal 2010, Nuance recognized a GAAP net loss of ($1.5) million, or ($0.01) per diluted share, compared with GAAP net loss of $(2.8) million, or $(0.01) per diluted share, in the third quarter of fiscal 2009, as adjusted for the retrospective application of FASB ASC 470-20, which Nuance adopted on October 1, 2009. In the third quarter of fiscal 2010, Nuance reported non-GAAP net income of $91.3 million, or $0.30 per diluted share, compared to non-GAAP net income of $73.3 million, or $0.26 per diluted share, in the third quarter of fiscal 2009. Nuance benefited from revenue growth as well as focus on expense controls to improve operating margin, despite increased investments in the business. For the third quarter of fiscal 2010, non-GAAP operating margin rose to 32.9%, compared to 32.6% in the third quarter of fiscal 2009. Nuance reported cash flow from operations of $64.1 million in the third quarter of fiscal 2010, compared to $53.7 million in the third quarter of fiscal 2009.

Please refer to the “Discussion of Non-GAAP Financial Measures” and to the “GAAP to Non-GAAP Reconciliations,” included elsewhere in this release, for more information regarding the company’s use of non-GAAP measures.

“Nuance delivered increased operating cash flow and non-GAAP EPS above our guidance range, driven by strong performance in our healthcare and mobile business lines. Gross margins and operating margins improved year over year, even as we increased investments in R&D, services and sales personnel,” said Paul Ricci, chairman and CEO of Nuance. “Strong bookings in our enterprise and healthcare on-demand products, as well as the recent launch of Dragon NaturallySpeaking 11 position Nuance for sustained growth in Q4 and fiscal 2011.”

Highlights from the quarter include:

Healthcare-Dictation – For Nuance’s healthcare and dictation solutions, third quarter non-GAAP revenue was $125.9 million, up 16.5%, as reported, from the same quarter last year. During the third quarter, new bookings included large eScription, Dragon Medical and radiology contracts. Key healthcare customers included Advocate Illinois Masonic, Appalachian Healthcare, Citrus Valley, Eastern Ohio Health Alliance, Indiana Clinics, Lifespan Healthcare, Mt. Kisco Medical Group, Ochsner Clinical Foundation, Plexus, Providence Alaska, Universal Health Services, and University of Utah. Key non-medical Dragon customers included the FBI and Texas Department of Family and Protective Services.

Mobile-Enterprise – For Nuance’s enterprise and mobile solutions, third quarter non-GAAP revenue was $131.7 million, up 4.9%, as reported, from the same quarter last year. Key customers, new bookings or design wins in the quarter included Air France, Atip, Axis Telecom, Bosch, BT, CHMC, CitiGroup, Denso, Elektrobit, Global Bilgi, Harman Becker, HBAS, HTC, M & Soft, Magneti Marelli, Melco, Modelabs, Morgan Stanley, Nokia, Orange, Pantech, Parrot, Prosodie, PSE&G, Reliance, T-Mobile, Times of India, TLM Com, Toshiba, US Air, USAA, UPS, Vietnam Telecom, Vistcom Europe, Vodafone, and ZTE.

Imaging – For Nuance’s PDF and document imaging solutions, third quarter non-GAAP revenue was $35.8 million, up 102%, as reported, from the same quarter last year, primarily due to contributions from eCopy and X-Solutions. Nuance achieved key third quarter bookings and design wins with Adelshaw Boggard, AON, Auto Cad, Barclays Portugal, Bond Pearce, Canon, DLA Piper, DP Systems, Estes/IKON, HP, IBM, Infineon, Middletons, Pinsent Marons, Softbank, and UNICREDIT.

Conference Call and Prepared Remarks
Nuance is providing a copy of prepared remarks in combination with its press release. These remarks are offered to provide shareholders and analysts with additional time and detail for analyzing results in advance of the Company’s quarterly conference call. The remarks will be available at www.nuance.com/earningsresults in conjunction with the press release.

As previously scheduled, the conference call will begin today, August 9, 2010 at 5:00 pm EDT and will include only brief comments followed by questions and answers. The prepared remarks will not be read on the call. 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) 230-1074 or (612) 234-9959 at least five minutes prior to the call and referencing conference code 165644. 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 165644.

Trademark reference: Nuance, the Nuance logo, Dragon Medical and eScription 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 sustained growth for the remainder of fiscal 2010 and 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, 2009 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 information included in this press release should not be viewed as a substitute for full GAAP financial statements.

Discussion of Non-GAAP Financial Measures
Management utilizes a number of different financial measures, both GAAP and non-GAAP, in analyzing and assessing the overall performance of 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 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 asset in the same period a year ago. 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 the business during the three and nine months ended June 30, 2010 and 2009, and, in particular, in evaluating our revenue and earnings per share, our management has either included or excluded items in six general categories, each of which are described below.

Acquisition-Related Revenue and Cost of Revenue.
The Company provides supplementary non-GAAP financial measures of revenue, which include revenue related to acquisitions, primarily from eCopy and SpinVox for the three and nine months ended June 30, 2010, that would otherwise have been recognized but for the purchase accounting treatment of these transactions. Non-GAAP revenue also includes revenue that the Company would have otherwise recognized had the Company not acquired intellectual property and other assets from the same customer during the same quarter. Because GAAP accounting requires the elimination of this revenue, GAAP results alone do not fully capture all of the Company’s economic activities. These non-GAAP adjustments are intended to reflect the full amount of such revenue. The Company includes 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. The Company believes 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, the Company historically has 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, the Company generally will incur these adjustments in connection with any future acquisitions.

Acquisition-Related Costs, Net.
In recent years, the Company has completed a number of acquisitions, which result in operating expenses which would not otherwise have been incurred. The Company provides 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. The Company considers 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 the control of the Company. Furthermore, the Company does 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 the Company's ability to utilize its existing assets and estimate the long-term value that acquired assets will generate for the Company. The Company believes 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 are included in the following categories: (i) transition and integration costs; (ii) professional service fees; and (iii) acquisition-related adjustments. Although these expenses are not recurring with respect to past acquisitions, the Company 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, earn-out payments treated as compensation expense, as well as the costs of integration-related services provided by third parties.

(ii) Professional service fees. Professional service fees include direct costs of the acquisition, as well as post-acquisition legal and other professional service fees associated with 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.
The Company excludes 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 the Company’s acquired intellectual property is treated in a comparable manner to its internally developed intellectual property. Although the Company excludes amortization of acquired intangible assets from its non-GAAP expenses, the Company believes 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 research organization, Nuance has entered into a six-and-a-half-year agreement to accelerate development of new speech technologies. All intellectual property derived from the collaboration will be jointly owned by the two parties, but Nuance will have sole rights to commercialize this intellectual property during the term of the agreement. For non-GAAP purposes, Nuance considers this long-term contract and the resulting acquisition of intellectual property from this third-party over the agreement’s term to be an investing activity, outside of its normal, organic, continuing operating activities, and is therefore presenting this supplemental information to show the results excluding this expense. Nuance does not exclude from its non-GAAP results the corresponding revenue, if any, generated from the collaboration efforts. Although the Company's 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.

Non-Cash Expenses.
The Company provides 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 available valuation methodologies, subjective assumptions and the variety of award types, the Company believes that the exclusion of stock-based compensation allows for more accurate comparisons of operating results to peer companies, as well as to times in the Company’s history when stock-based compensation was more or less significant as a portion of overall compensation than in the current period. The Company evaluates 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 the Company’s 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, the Company does not include such charges in operating plans. Stock-based compensation will continue in future periods.
(ii and iii) Certain accrued interest and income taxes. The Company also excludes certain accrued interest and certain accrued income taxes because the Company believes 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.
The Company excludes certain other expenses that are the result of unplanned events to measure operating performance and current and future liquidity both with and without these expenses; and therefore, by providing this information, the Company believes management and the users of the financial statements are better able to understand the financial results of what the Company considers to be its 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 arose outside of the ordinary course of continuing operations. These items also include adjustments from changes in fair value of share-based instruments relating to the issuance of our common stock with security price guarantees payable in cash.

The Company believes 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. The Company further believes that providing this information allows investors to not only better understand the Company’s financial performance, but more importantly, to evaluate the efficacy of the methodology and information used by management to evaluate and measure such performance.

Financial Tables Follow

 

 

 

 

 

 

 

 

 

Nuance Communications, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

Unaudited

               

 

   

Three months ended

 

Nine months ended

   

June 30,

 

June 30,

   

2010

 

2009

 

2010

 

2009

               

 

Revenue:

               

Product and licensing

 

$

108,840

   

$

87,387

   

$

335,228

   

$

259,987

 

Professional services and hosting

   

117,875

     

110,966

     

337,798

     

304,162

 

Maintenance and support

 

 

46,488

 

 

 

42,687

 

 

 

136,159

 

 

 

122,870

 

Total revenue

 

 

273,203

 

 

 

241,040

 

 

 

809,185

 

 

 

687,019

 

               

 

Cost of revenue:

               

Product and licensing

   

10,901

     

8,414

     

34,194

     

26,222

 

Professional services and hosting

   

71,353

     

68,321

     

206,349

     

189,584

 

Maintenance and support

   

7,631

     

7,207

     

23,335

     

21,387

 

Amortization of intangible assets

 

 

11,893

 

 

 

10,017

 

 

 

35,095

 

 

 

27,444

 

Total cost of revenue

 

 

101,778

 

 

 

93,959

 

 

 

298,973

 

 

 

264,637

 

               

 

Gross profit

 

 

171,425

 

 

 

147,081

 

 

 

510,212

 

 

 

422,382

 

               

 

Operating expenses:

               

Research and development

   

38,916

     

27,742

     

113,797

     

85,622

 

Sales and marketing

   

67,219

     

50,233

     

196,680

     

160,850

 

General and administrative

   

29,887

     

24,507

     

88,643

     

75,333

 

Amortization of intangible assets

   

21,459

     

19,931

     

65,786

     

56,313

 

Acquisition-related costs, net

   

6,125

     

4,659

     

26,892

     

13,889

 

Restructuring and other charges, net

 

 

3,257

 

 

 

2,893

 

 

 

16,244

 

 

 

5,241

 

Total operating expenses

 

 

166,863

 

 

 

129,965

 

 

 

508,042

 

 

 

397,248

 

               

 

Income from operations

   

4,562

     

17,116

     

2,170

     

25,134

 
               

 

Other expense, net

 

 

(4,261

)

 

 

(13,261

)

 

 

(18,915

)

 

 

(31,704

)

               

 

Income (loss) before income taxes

   

301

     

3,855

     

(16,745

)

   

(6,570

)

               

 

Provision for income taxes

 

 

1,831

 

 

 

6,670

 

 

 

4,459

 

 

 

17,283

 

               

 

Net loss

 

$

(1,530

)

 

$

(2,815

)

 

$

(21,204

)

 

$

(23,853

)

               

 

Net loss per share:

               

Basic and diluted

 

$

(0.01

)

 

$

(0.01

)

 

$

(0.07

)

 

$

(0.10

)

               

 

Weighted average common shares outstanding:

               

Basic and diluted

 

 

291,610

 

 

 

260,750

 

 

 

285,202

 

 

 

249,105

 

               

 

Financial statements for the three and nine months ended June 30, 2009 have been
adjusted for the retrospective application of FASB ASC 470-20.

 

 

 

 

 

 

 

 

 
 

Nuance Communications, Inc.

 

Condensed Consolidated Balance Sheets

 

(in thousands)

 

Unaudited

           

 

           

 

 

ASSETS

 

June 30, 2010

 

September 30, 2009

           

 

 

Current assets:

       
   

Cash and cash equivalents

 

$

492,074

 

$

527,038

   

Restricted cash

   

21,974

   

-

   

Accounts receivable and unbilled receivables, net

   

222,511

   

208,719

   

Inventories, net

   

8,323

   

8,525

   

Prepaid expenses and other current assets

 

 

52,553

 

 

51,545

   

Total current assets

   

797,435

   

795,827

           

 

 

Land, building and equipment, net

   

56,372

   

53,468

 

Goodwill

   

2,041,590

   

1,891,003

 

Intangible assets, net

   

667,879

   

706,805

 

Other assets

 

 

67,628

 

 

52,361

   

Total assets

 

$

3,630,904

 

$

3,499,464

           

 

LIABILITIES AND STOCKHOLDERS' EQUITY

           

 

 

Current liabilities:

       
   

Current portion of long-term debt and capital leases

 

$

8,209

 

$

6,862

   

Contingent and deferred acquisition payments

   

2,093

   

91,431

   

Accounts payable and accrued expenses

   

207,059

   

164,393

   

Deferred and unearned revenue

   

139,096

   

144,395

   

Other short term liabilities

 

 

9,574

 

 

12,144

   

Total current liabilities

   

366,031

   

419,225

           

 

 

Long-term portion of debt and capital leases

   

850,400

   

848,898

 

Long-term deferred revenue

   

67,197

   

33,904

 

Other long term liabilities

 

 

152,095

 

 

154,436

   

Total liabilities

 

 

1,435,723

 

 

1,456,463

           

 

 

Stockholders' equity

 

 

2,195,181

 

 

2,043,001

           

 

   

Total liabilities and stockholders' equity

 

$

3,630,904

 

$

3,499,464

           

 

Financial statements as of September 30, 2009 have been adjusted for the retrospective
application of FASB ASC 470-20.

           

 

           

 

 

 

 

 

 

Nuance Communications, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

Unaudited

   

Nine months ended

   

June 30,

   

2010

 

2009

       

 

Cash flows from operating activities:

       

Net loss

 

$

(21,204

)

 

$

(23,853

)

Adjustments to reconcile net loss to net cash provided by operating activities:

       

Depreciation and amortization

   

116,738

     

97,398

 

Stock-based compensation

   

72,868

     

52,584

 

Non-cash interest expense

   

9,746

     

9,330

 

Non-cash restructuring expense

   

6,833

     

-

 

Gain on foreign currency forward contracts

   

-

     

(8,049

)

Deferred tax provision

   

(2,321

)

   

8,117

 

Other

   

1,671

     

1,624

 

Changes in operating assets and liabilities, net of effects from acquisitions:

       

Accounts receivable

   

(13,023

)

   

47,713

 

Inventories

   

280

     

(2,261

)

Prepaid expenses and other assets

   

(5,149

)

   

(5,746

)

Accounts payable

   

(3,960

)

   

22,744

 

Accrued expenses and other liabilities

   

(7,825

)

   

(9,217

)

Deferred revenue

 

 

30,044

 

 

 

(6,124

)

Net cash provided by operating activities

 

 

184,698

 

 

 

184,260

 

Cash flows from investing activities:

       

Capital expenditures

   

(16,284

)

   

(15,682

)

Payments for acquisitions, net of cash acquired

   

(155,882

)

   

(113,886

)

Proceeds from maturities of marketable securities

   

-

     

56

 

Payments for equity investment

   

(14,970

)

   

(159

)

Payments for acquired technology

   

(14,850

)

   

(65,257

)

Increase in restricted cash

 

 

(22,070

)

 

 

-

 

Net cash used in investing activities

 

 

(224,056

)

 

 

(194,928

)

Cash flows from financing activities:

       

Payments of debt and capital leases

   

(6,376

)

   

(5,261

)

Purchases of treasury stock

   

(575

)

   

(144

)

Payments of other long-term liabilities

   

(7,319

)

   

(6,915

)

Proceeds from settlement of shared-based derivatives

   

6,391

     

-

 

Proceeds from issuance of common stock, net of issuance costs

   

12,350

     

175,111

 

Proceeds from issuance of common stock from employee stock options and purchase plan

   

22,832

     

10,995

 

Cash used to net share settle employee equity awards

 

 

(17,465

)

 

 

(6,186

)

Net cash provided by financing activities

 

 

9,838

 

 

 

167,600

 

Effects of exchange rate changes on cash and cash equivalents

   

(5,444

)

   

115

 

Net increase (decrease) in cash and cash equivalents

   

(34,964

)

   

157,047

 

Cash and cash equivalents at beginning of period

 

 

527,038

 

 

 

261,540

 

Cash and cash equivalents at end of period

 

$

492,074

 

 

$

418,587

 

       

 

Financial statements for the three and nine months ended June 30, 2009 have been
adjusted for the retrospective application of FASB ASC 470-20.

       

 

       

 

 

 

 

 

 

 

 

 

 

 

 

Nuance Communications, Inc.

Supplemental Consolidated Statements of Cash Flows

(in thousands)

Unaudited

                   

 

   

Three Months Ended

   

6/30/10

 

3/31/10

 

12/31/09

 

9/30/09

 

6/30/09

                   

 

Cash flows from operating activities:

                   

Net income (loss)

 

$

(1,530

)

 

$

(15,396

)

 

$

(4,278

)

 

$

4,466

   

$

(2,815

)

Adjustments to reconcile net income (loss) to net cash
provided by operating activities:

           

Depreciation and amortization

   

38,761

     

39,747

     

38,230

     

36,661

     

34,465

 

Stock-based compensation

   

28,094

     

24,708

     

20,066

     

18,823

     

17,582

 

Non-cash interest expense

   

3,222

     

3,245

     

3,279

     

3,162

     

3,015

 

Non-cash restructuring expense

   

-

     

6,833

     

-

     

-

     

-

 

Deferred tax provision

   

(1,210

)

   

(800

)

   

(311

)

   

17,601

     

6,505

 

Other

   

1,005

     

(25

)

   

691

     

342

     

(290

)

Changes in operating assets and liabilities, net of effects from acquisitions:

               

Accounts receivable

   

(4,482

)

   

(2,274

)

   

(6,267

)

   

(14,232

)

   

13,931

 

Inventories

   

(429

)

   

135

     

574

     

893

     

(800

)

Prepaid expenses and other assets

   

(721

)

   

(4,329

)

   

(99

)

   

(6,913

)

   

2,553

 

Accounts payable

   

(1,711

)

   

1,460

     

(3,709

)

   

3,838

     

(2,755

)

Accrued expenses and other liabilities

   

2,532

     

(17,760

)

   

7,403

     

4,210

     

(6,385

)

Deferred revenue

 

 

587

 

 

 

19,984

 

 

 

9,473

 

 

 

5,578

 

 

 

(11,311

)

Net cash provided by operating activities

 

 

64,118

 

 

 

55,528

 

 

 

65,052

 

 

 

74,429

 

 

 

53,695

 

                   

 

Net cash provided by (used in) investing activities

 

 

(34,534

)

 

 

(30,075

)

 

 

(159,447

)

 

 

10,318

 

 

 

(57,570

)

                   

 

Net cash provided by (used in) financing activities

 

 

5,897

 

 

 

10,372

 

 

 

(6,431

)

 

 

21,816

 

 

 

(1,140

)

                   

 

Effects of exchange rate changes on cash and cash equivalents

 

 

(5,211

)

 

 

(923

)

 

 

690

 

 

 

1,888

 

 

 

2,620

 

                   

 

Net increase (decrease) in cash and cash equivalents

   

30,270

     

34,902

     

(100,136

)

   

108,451

     

(2,395

)

Cash and cash equivalents at beginning of period

 

 

461,804

 

 

 

426,902

 

 

 

527,038

 

 

 

418,587

 

 

 

420,982

 

Cash and cash equivalents at end of period

 

$

492,074

 

 

$

461,804

 

 

$

426,902

 

 

$

527,038

 

 

$

418,587

 

                   

 

Financial statements for the three month periods during fiscal
2009 have been adjusted for the retrospective application of
FASB ASC 470-20.

                   

 

                   

 

 

 

 

 

 

 

 

 

 

Nuance Communications, Inc.

Supplemental Financial Information - GAAP to Non-GAAP Reconciliations

(in thousands, except per share amounts)

Unaudited

   

Three months ended

 

Nine months ended

   

June 30,

 

June 30,

   

2010

 

2009

 

2010

 

2009

               

 

GAAP revenue

 

$

273,203

   

$

241,040

   

$

809,185

   

$

687,019

 

Acquisition-related revenue adjustments: product and licensing

   

12,922

     

8,264

     

44,726

     

40,217

 

Acquisition-related revenue adjustments: professional services and hosting

   

6,359

     

1,506

     

9,632

     

3,956

 

Acquisition-related revenue adjustments: maintenance and support

 

 

900

 

 

 

519

 

 

 

7,269

 

 

 

3,370

 

Non-GAAP revenue

 

$

293,384

 

 

$

251,329

 

 

$

870,812

 

 

$

734,562

 

               

 

GAAP cost of revenue

 

$

101,778

   

$

93,959

   

$

298,973

   

$

264,637

 

Cost of revenue from amortization of intangible assets

   

(11,893

)

   

(10,017

)

   

(35,095

)

   

(27,444

)

Cost of revenue adjustments: product and licensing (1,2)

   

2,794

     

(2

)

   

8,920

     

(13

)

Cost of revenue adjustments: professional services and hosting (1,2)

   

(2,181

)

   

(1,953

)

   

(7,086

)

   

(6,321

)

Cost of revenue adjustments: maintenance and support (1,2)

 

 

(165

)

 

 

(93

)

 

 

(582

)

 

 

(425

)

Non-GAAP cost of revenue

 

$

90,333

 

 

$

81,894

 

 

$

265,130

 

 

$

230,434

 

               

 

GAAP gross profit

 

$

171,425

   

$

147,081

   

$

510,212

   

$

422,382

 

Gross profit adjustments (1,2)

 

 

31,626

 

 

 

22,354

 

 

 

95,470

 

 

 

81,746

 

Non-GAAP gross profit

 

$

203,051

 

 

$

169,435

 

 

$

605,682

 

 

$

504,128

 

               

 

GAAP income from operations

 

$

4,562

   

$

17,116

   

$

2,170

   

$

25,134

 

Gross profit adjustments (1,2)

   

31,626

     

22,354

     

95,470

     

81,746

 

Research and development (1)

   

2,282

     

2,013

     

6,731

     

7,640

 

Sales and marketing (1)

   

12,516

     

6,687

     

29,813

     

20,246

 

General and administrative (1)

   

10,512

     

6,346

     

27,544

     

16,804

 

Amortization of intangible assets

   

21,459

     

19,931

     

65,786

     

56,313

 

Costs related to research and development collaborative agreement

   

4,208

     

-

     

12,208

     

-

 

Acquisition-related costs, net

   

6,125

     

4,659

     

26,892

     

13,889

 

Restructuring and other charges, net

 

 

3,257

 

 

 

2,893

 

 

 

16,244

 

 

 

5,241

 

Non-GAAP income from operations

 

$

96,547

 

 

$

81,999

 

 

$

282,858

 

 

$

227,013

 

               

 

GAAP provision for income taxes

 

$

1,831

   

$

6,670

   

$

4,459

   

$

17,283

 

Non-cash taxes

 

 

3,471

 

 

 

(4,170

)

 

 

6,772

 

 

 

(6,125

)

Non-GAAP provision for income taxes

 

$

5,302

 

 

$

2,500

 

 

$

11,231

 

 

$

11,158

 

               

 

GAAP net loss

 

$

(1,530

)

 

$

(2,815

)

 

$

(21,204

)

 

$

(23,853

)

Acquisition-related adjustment - revenue (2)

   

20,181

     

10,289

     

61,627

     

47,543

 

Acquisition-related adjustment - cost of revenue (2)

   

(3,232

)

   

(488

)

   

(10,032

)

   

(1,135

)

Acquisition-related costs, net

   

6,125

     

4,659

     

26,892

     

13,889

 

Cost of revenue from amortization of intangible assets

   

11,893

     

10,017

     

35,095

     

27,444

 

Amortization of intangible assets

   

21,459

     

19,931

     

65,786

     

56,313

 

Non-cash stock-based compensation (1)

   

28,094

     

17,582

     

72,868

     

52,584

 

Non-cash interest expense, net

   

3,222

     

3,231

     

9,746

     

9,724

 

Non-cash income taxes

   

(3,471

)

   

4,170

     

(6,772

)

   

6,125

 

Costs from IP collaboration agreement

   

4,208

     

-

     

12,208

     

-

 

Change in fair value of share-based instruments

   

1,044

     

3,782

     

(3,663

)

   

3,782

 

Restructuring and other charges, net

 

 

3,257

 

 

 

2,893

 

 

 

16,244

 

 

 

5,241

 

Non-GAAP net income

 

$

91,250

 

 

$

73,251

 

 

$

258,795

 

 

$

197,657

 

               

 

Non-GAAP diluted net income per share

 

$

0.30

 

 

$

0.26

 

 

$

0.86

 

 

$

0.74

 

               

 

Diluted weighted average common shares outstanding

 

 

305,427

 

 

 

281,151

 

 

 

300,511

 

 

 

268,699

 

               

 

Financial statements for the three and nine months ended June 30, 2009 have been adjusted for the
retrospective application of FASB ASC 470-20.

               

 

               

 

 

 

 

 

 

 

 

 

 

 

Nuance Communications, Inc.

Supplemental Financial Information - GAAP to Non-GAAP Reconciliations, continued

(in thousands)

Unaudited

                 

 

   

Three months ended

   

Nine months ended

   

June 30,

   

June 30,

   

2010

 

2009

   

2010

 

2009

                 

 

(1) Non-Cash Stock-Based Compensation

                 

Cost of product and licensing

 

$

7

   

$

2

     

$

25

   

$

8

 

Cost of professional services and hosting

   

2,612

     

2,402

       

8,173

     

7,329

 

Cost of maintenance and support

   

165

     

132

       

582

     

557

 

Research and development

   

2,282

     

2,013

       

6,731

     

7,640

 

Sales and marketing

   

12,516

     

6,687

       

29,813

     

20,246

 

General and administrative

 

 

10,512

 

 

 

6,346

 

   

 

27,544

 

 

 

16,804

 

Total

 

$

28,094

 

 

$

17,582

 

   

$

72,868

 

 

$

52,584

 

                 

 

(2) Acquisition-Related Revenue and Cost of Revenue

                 

Revenue

 

$

20,181

   

$

10,289

     

$

61,627

   

$

47,543

 

Cost of product and licensing

   

(2,801

)

   

-

       

(8,945

)

   

5

 

Cost of professional services and hosting

   

(431

)

   

(449

)

     

(1,087

)

   

(1,008

)

Cost of maintenance and support

 

 

-

 

 

 

(39

)

   

 

-

 

 

 

(132

)

Total

 

$

16,949

 

 

$

9,801

 

   

$

51,595

 

 

$

46,408

 

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