Nuance Communications, Inc. yesterday announced financial results for the first quarter ended December 31, 2005.

Nuance reported revenues of $75.6 million in the quarter ended December 31, 2005, a 25 percent increase over revenues of $60.6 million in the quarter ended December 31, 2004. On a GAAP basis, Nuance recognized a net loss of $4.9 million, or $(0.03) per share, in the quarter ended December 31, 2005, compared with net income of $3.1 million, or $0.03 per diluted share, in the quarter ended December 31, 2004. 

In addition to using GAAP results in evaluating the business, management also believes it is useful to evaluate results using non-GAAP measures. Using a non-GAAP measure, Nuance reported non-GAAP net income of $11.4 million, or $0.07 per diluted share, for the period ending December 31, 2005, compared to net income of $9.1 million, or $0.08 per diluted share, in the quarter ended December 31, 2004.

These non-GAAP figures exclude non-cash taxes and interest, amortization of intangible assets, non-cash amortization of stock-based compensation, and acquisition-related transition and integration costs and charges. See "GAAP to non-GAAP Reconciliation" below for further information on the Company's non-GAAP measure.

"Nuance experienced a strong start to fiscal 2006 as we saw solid demand in all of our speech segments and continued growth from our international operations," said Paul Ricci, chairman and CEO of Nuance. "These results demonstrate our ability to grow Nuance's leadership position in the expanding speech market and realize the benefits and synergies of our recent acquisitions without suffering from the integration efforts."

Consistent with the Company's strategy and recent trends, highlights from the quarter include:

-- Network Speech - The Company generated strong revenue from its network speech technologies, applications and services, benefiting from the incorporation of the former Nuance customers, as well as new or expanded agreements with leading businesses and service providers, including Amtrak, Bell Canada, DaimlerChrysler, Jingle Networks, SBC, and Swisscom.

-- Dictation Solutions - The Company saw continued growth in demand for its Dragon Dictation Solutions. Even against the launch quarter comparison of fiscal Q1 2005, North American dictation revenues this quarter were up slightly. Worldwide, this was the second largest quarter in the product family's history. These solutions continued to find growing acceptance in healthcare, as well as within general consumer, professional and legal markets.

-- Embedded Markets - In the first quarter, Nuance again concluded important design wins and agreements with partners and customers worldwide. The Company signed or expanded strategic agreements with leading manufacturers and technology companies including Bentley/VW, Casio, Ford/Nokia, Kyocera, and Motorola.

-- Imaging - Following the launch of Version 15 in August 2005, OmniPage sustained momentum in the quarter. The Company's family of PDF products achieved accelerated growth. These strengths, though, were partially offset by comparatively weaker performance of the PaperPort product family, against a launch quarter last year and as the Company approaches another impending launch in the coming months.

-- Expenses - By the end of the fiscal first quarter the Company had largely realized the planned acquisition-related expense synergies. Additionally, G&A expenses ran materially below plan. These savings were partially offset by higher than expected sales and marketing expenses, resulting from the October 2005 Conversations user conference, corporate name change and above plan commissions associated with strong order bookings in the quarter.


About Nuance Communications, Inc.

Nuance Communications, Inc. is a provider of speech and imaging solutions for businesses and consumers around the world. Its technologies, applications and services make the user experience more compelling by transforming the way people interact with information and how they create, share and use documents. Every day, millions of users and thousands of businesses experience Nuance's proven applications. For more information, please visit www.nuance.com.


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 our business, for making operating decisions and for forecasting and planning for future periods. We consider the use of non-GAAP earnings per share helpful in assessing the organic performance of the continuing operation of our business from a cash flow perspective. By organic performance we mean performance as if we had not incurred certain costs and expenses associated with acquisitions. By continuing operations we mean the ongoing revenue and expenses of the business--excluding certain unplanned costs--which define the longer term cash flows of the business. While our management uses this non-GAAP financial measure as a tool to enhance their understanding of certain aspects of our financial performance, our management does not consider this measure to be a substitute for, or superior to, the information provided by GAAP earnings per share. Consistent with this approach, we believe that disclosing 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 earnings per share, allows for greater transparency in the review of our financial and operational performance. In assessing the overall health of our business during the fiscal first quarter ended December 31, 2005, and, in particular, in evaluating our earnings per share, our management has excluded items in three general categories, each of which are described below.

Acquisition Related Expenses. We excluded certain expense items resulting from acquisitions to allow more accurate comparisons of our financial results to our historical operations, forward looking guidance and the financial results of our peer companies. These items include the following: (i) acquisition-related integration costs; (ii) amortization of intangible assets associated with our acquisitions; and (iii) costs associated with the investigation of the restatement of the financial results of an acquired entity (SpeechWorks International, Inc.). In recent years, we have completed a number of acquisitions, which result in non-continuing operating expenses which would not otherwise have been incurred. For example, we have incurred transition and integration costs such as retention bonuses for Former Nuance employees. In addition, actions taken by an acquired company, prior to an acquisition, could result in expenses being incurred by us, such as expenses incurred as a result of the restatement of the financial results of SpeechWorks International, Inc. We believe that providing non-GAAP information for certain expenses related to material acquisitions allows the users of our financial statements to review both the GAAP expenses in the period, as well as the non-GAAP expenses, thus providing for enhanced understanding of our historic and future financial results and facilitating comparisons to less acquisitive peer companies. Additionally, had we internally developed the products acquired, the amortization of intangible assets would have been expensed historically, and we believe the assessment of our operations excluding these costs is relevant to our assessment of internal operations and comparisons to industry performance.

Non-Cash Expenses. We provide non-GAAP information relative to the following non-cash expenses: (i) stock-based compensation; (ii) certain accrued interest; and (iii) certain accrued income taxes. Because of varying available valuation methodologies, subjective assumptions and the variety of award types, we believe that the exclusion of stock-based compensation allows for more accurate comparisons of our operating results to our peer companies. Further, we believe that excluding stock-based compensation expense allows for a more accurate comparison of our financial results to previous periods during which our equity compensation programs relied more heavily on equity-based awards that were not required to be reflected on our income statement. We believe that excluding non-cash interest expense and non-cash income taxes provides our senior management as well as other users of our financial statements, with a valuable perspective on the cash based performance and health of the business, including our current near-term projected liquidity.

Other Expenses. We exclude certain other expenses that are the result of either unique or unplanned events to measure our operating performance as well as our current and future liquidity both with and without these expenses. Included in these expenses are items such as: (i) non-acquisition-related restructuring charges and (ii) redundant costs associated with a change in independent accountants. We assess our operating performance with these amounts included, but also excluding these amounts; the amounts relate to costs which are either unique or unplanned, and therefore by providing this information we believe our management and the users of our financial statements are better able to understand the financial results of what we consider to be our organic continuing operations.

The non-GAAP financial measure described above, and used in this press release, should not be considered in isolation from, or as a substitute for, a measure of financial performance prepared in accordance with GAAP. Further, investors are cautioned that there are material limitations associated with the use of non-GAAP financial measures as an analytical tool. In particular, many of the adjustments to the Company's GAAP financial measure reflect the exclusion of items that are recurring and will be reflected in the Company's financial results for the foreseeable future. In addition, other companies, including other companies in the Company's industry, may calculate non-GAAP net income (loss) differently than the Company, limiting it's usefulness as a comparative tool. Management compensates for these limitations by providing specific information regarding the GAAP amounts excluded from the non-GAAP financial measures. In addition, as noted above, the Company's management evaluates the non-GAAP financial measures together with the most directly comparable GAAP financial information. -0- *T Nuance Communications, Inc. Condensed Consolidated Statements of Operations (in thousands, except per share amounts) Unaudited Three months ended December 31, ------------------- 2005 2004 -------- -------- Product licenses $ 53,183 $ 46,834 Maintenance 7,803 2,785 Professional services 14,566 10,959 -------- -------- Total revenue 75,552 60,578 Costs and expenses: Cost of product licenses 4,982 5,520 Cost of maintenance 2,295 890 Cost of professional services 10,385 8,737 Cost of revenue from amortization of intangible assets 2,475 2,825 -------- -------- Total costs of revenue 20,137 17,972 Gross Margin 55,415 42,606 Research and development 12,157 9,194 Selling and marketing 28,333 18,762 General and administrative 14,647 7,231 Amortization of other intangible assets 2,000 669 Restructuring and other charges - 659 -------- -------- Total operating expenses 57,137 36,515 Income (loss) from operations (1,722) 6,091 Other income (expense), net (198) (890) -------- -------- Income (loss) before income taxes (1,920) 5,201 Provision for income taxes 2,300 2,060 -------- -------- Income (loss) before income taxes (4,220) 3,141 Cumulative effect of accounting change 672 - -------- -------- Net income (loss) $ (4,892) $ 3,141 ======== ======== Net Income (loss) per share: basic & fully diluted $ (0.03) $ 0.03 ======== ======== Weighted average common shares outstanding: Basic 156,389 104,973 ======== ======== Fully Diluted 156,389 112,430 ======== ======== Nuance Communications, Inc. Condensed Consolidated Balance Sheet (Unaudited, in thousands) December September Assets 31, 2005 30, 2005 --------- --------- Current assets: Cash and cash equivalents $ 67,503 $ 71,687 Marketable Securities 3,711 24,127 Accounts receivable, net 77,174 69,540 Prepaid expenses and other current assets 8,492 9,548 -------- -------- Total current assets 156,880 174,902 Goodwill 458,201 458,313 Other intangible assets, net 87,882 92,350 Property and equipment, net 15,419 14,333 Other assets 17,560 17,314 -------- -------- Total assets $735,942 $757,212 ======== ======== Liabilities and Stockholders' Equity Current liabilities: Short term notes payable $ 28,113 $ 27,711 Accounts payable and accrued expenses 59,693 77,500 Deferred revenue 26,701 24,120 Deferred acquisition payment 2,894 16,414 Accrued business combination costs and other 15,879 17,027 -------- -------- Total current liabilities 133,280 162,772 -------- -------- Long term portion of deferred revenue 234 291 Long term notes payable 24 35 Deferred tax liability 4,832 4,241 Deferred acquisition payment, net 16,497 16,266 Accrued business combination costs and other 56,947 58,942 -------- -------- Total liabilities 211,814 242,547 Stockholders' equity 524,128 514,665 -------- -------- Total liabilities and stockholders' equity $735,942 $757,212 ======== ======== Nuance Communications, Inc. Reconciliation of Supplemental Financial Information (in thousands, except per share amounts) Unaudited Three months ended December 31, ------------------- 2005 2004 -------- -------- GAAP total revenue $ 75,552 $ 60,578 GAAP net income (loss) $ (4,892) $ 3,141 Cost of revenue from amortization of intangible assets 2,475 2,825 Amortization of other intangible assets 2,000 669 Non-cash stock based compensation 4,412 698 Restructuring and other charges - 659 Non-cash interest expense 860 - Non-cash taxes 1,456 1,092 Acquisition related transition and integration costs 5,058 - -------- -------- Non-GAAP net income $ 11,370 $ 9,084 ======== ======== Non-GAAP net income diluted: $ 0.07 $ 0.08 ======== ======== Shares used in computing non-GAAP net income per share: Weighted average common shares outstanding: Basic 156,389 104,973 ======== ======== Fully Diluted 169,524 112,430 ======== ======== *T