Q4 2019 Earnings Call
At this time all participants are in listen only mode. After the speakers presentation. There will be a question answer session ask a question. During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.
I'd now like to have the conference over to your speaker today, Tracey gloomy senior Vice President Investor Relations. Thank you. Please go ahead.
Good afternoon, everyone before we begin I would like to remind everyone that our discussion includes predictions estimates expectations and other forward looking statements.
These statements are subject to risks and uncertainties that could cause material differences in our actual results.
Please refer to our recent FCC filings for a discussion of these risks all references to income statement results are non-GAAP unless otherwise stated.
As noted in our press release, we issued prepared remarks in advance of this call which are available on our IR website that material is intended to supplement our comments on the call today.
I would also like to note that there's a powerpoint presentation also on our IR website that accompanies this call. Please take a moment to access it if you if not already done so it will remain on their site after today's call as well.
In terms of format Mark will cover the corridor and years highlights then Dan will provide financial insights as well as our outlook for 2020.
Following that well open the call to QNX and with that I'd like to turn the call over to Mark. Thanks, Tracy and good afternoon, and thanks for joining US Q4 marked another quarter of solid execution by our global teams and I couldn't be prouder of what they have accomplished we posted strong financial results drove higher growth in our cloud based.
Our continued to make significant progress toward the strategic initiatives, we announced last November .
Today, we are stronger more agile and more unified company than ever before but before I get ahead of myself I want to take the opportunity to thank my team for their hard work and dedication.
Level of commitment and determination they have exhibited over this past year has been amazing.
We work together to execute on our fiscal 2019 goals and critical initiatives, which have sharpened our focus and position us well for fiscal 2020.
Turning to slide four.
As you know we took a number of significant strategic actions over the year to transform nuance into a simpler more growth focused company. We exit 2019 as the undisputed leader in conversational AI for health care and enterprise with a strong market position in fast growing verticals.
Transitioning our solutions to the cloud has been a top priority and this enables us to shift our revenue mix to a more subscription based higher value recurring model.
During the year, we made significant progress migrating incremental dragon medical on Prem customers to the cloud with Dragon medical one or demo and starts to access with the early launch of our new cloud solutions and created a go to market approach that aligned sales compensation to our cloud model.
These efforts resulted in strong annual Dragon medical a are up 257 million up 38% year over year and above our guided range.
Talk more did this in a few minutes, but we expect this momentum to continue as the combination of these new products and improve sales focus drive significant air our growth in 2020 and beyond.
Throughout this year of transformation, we also focused on simplifying the business.
This included the sale of our imaging business the exit of our S. R. S business and most recently the spin off of our auto business into its own separate entity called Serenades effective October one.
Simplifying our organization and operations enables our R&D and go to market teams to be more focused which we expect will also make them more effective. This has also allowed us to focus on the strategic investments, we outlined one year ago.
These involve expanding our go to market presence in Underpenetrated, and new markets, expanding internationally and accelerating our innovation activities, particularly in AI.
One tangible outcome of this focus is the strategic partnership we recently announced with Microsoft as you probably saw a few weeks ago, Microsoft will be working exclusively with us to accelerate the development of our ambien clinical intelligence for AC I technology and actively support our go to market activities.
This will fast track our collective ability to make a difference in health care and has been well received by our customers.
I couldn't be more excited about this and I'm looking forward to doing great things together on this groundbreaking technology.
In addition, simplifying the business provided us with some cash flow in excess of our normal generation capabilities of the business.
In line with our focus on disciplined capital allocation, we used some of this cash to pay down 300 million up debt and we repurchased 127 million of stock during the year.
In total since May of 2018, we paid down 750 million up dead and repurchased 21.2 million shares were 7.2% of outstanding shares.
We continue to be active buyers in a purchase 50 million of stock thus far in Q1 2020.
Turning now to slide five Q4 was an excellent quarter and one in which we delivered once again now what we said we would do let me touch in a few points.
First we executed against the strategic and financial objectives, we laid out last November .
We delivered revenue at the high end of our range and exceeded expectations for margins any P. S.
We delivered strong cash flow inline with expectations and we are clearly gaining momentum as this was our six consecutive quarter of solid financial performance, either meeting or beating expectations.
What's clear is that we have successfully navigated the early part of this on premise to cloud transition.
As we've said driving scale operating margins are crucial to our future and we are focused on capturing recurring revenue growth and maximizing the portion of our revenues that are SAS.
Taking a closer look at the segments, starting with health care on slide six we have invested heavily in the areas that we expect will be growth drivers for years to come.
We've established nuance as a cloud platform and all of our solution areas with the launch this year of power scribe, one for our radiology base C. D E. One for our clinical documentation improvement programs and of course, our Dragon medical one or de ammo.
Our growth is driven not only by offering these cloud based solutions, but also by the addition of our high powered capabilities to each offering.
We have also expanded our sales coverage in existing and new markets, including community hospitals ambulatory clinics in surgery centers, and both federal and international markets.
Looking at some of the specific accomplishments our health care team made during Q4.
First in our computer assisted physician documentation solution set or C.A.P.D., we launched a new pediatric solution.
Also exceeded our own internal plan for our new surgical CPD by adding a significant number of new sites in Q4.
Second we had continued momentum in our Dragon medical cloud delivering year over year revenue growth of 42% in Q4 and 54% in the year.
Additionally, we are seeing success with our early migration to the cloud and power scribe one in C. D E. One which are not reflected in our 2019, a our number but will be included going forward in 2020.
Third within our area marketplace, we signed 15, new agreements with industry, leading AI image developers, our air marketplace Leverages, our partnership with Nvidia and the American College of radiology, bringing AI into the workflow for our customer base, which includes roughly 80% of U.S. radiologists.
It's worth noting that we were the first company to create an area marketplace as we look to build the Onestop app store for AI radiology algorithms.
And finally, our international markets continue to scale.
We had dragon medical wins in Canada, UK, France in Sweden.
Importantly, our international expansion for Dragon Medical cloud is on track with our recent launch in Australia with additional countries that include France, and Germany. This fiscal year that will provide us additional you country coverages for de Novo as well.
Key demo wins include Cleveland Clinic, London, and NHS Harrogate in the UK.
We have an exciting pipeline building overseas and are in the midst of growing our direct sales force by more than 20%.
Moving to enterprise on slide seven over the course of the year, we made excellent progress in expanding our omni channel cloud offerings, including combining virtual in light of engagement with agent AI capabilities that increase first contact resolution race and reduce agent handling time, we also.
We enhanced our support for Apple business chat SMS.
More recently, we have deployed our solutions into Microsoft Azure, which will enable more rapid geographic expansion.
I'm proud of the achievements our enterprise team has made as we have delivered consistent solid results ending 2019 with a record year and 5% organic growth, which is also our fourth consecutive year of growth for this business unit.
Our enterprise segment faced a difficult compare to Q4 2018, but still posted a very strong quarter with 126 million in revenue.
There are three Q4 highlights I'd like to point out here first we expanded our omnichannel cloud platform, enabling organizations of all sizes to easily integrate conversational AI through apiay size and an open framework. This allows large organizations to better customized appointments and gifts.
Smaller organizations access to our technology, that's powered successful conversational AI deployments of much larger companies.
Second we launched nuance gatekeeper, a cloud native biometric solution for authentication in fraud prevention and the newest addition to our omni channel cloud solutions based on our new nuance Lightning engine Gatekeeper uses neural net AI to authenticate individuals within seconds of speaking.
Truly an industry leading capability.
In early customer win is one of north Americas largest transportation networks, which deployed our system to improve their back office processes, improving the safety and security of thousands of employees, while also reducing cost for the customer.
Gatekeeper also addresses market demand for cloud Native contact center solutions, such as those provided by Amazon connect.
Through a cloud to cloud integration gatekeeper and Amazon connect provide organizations the ability to deliver innovative and secure customer care expense experiences entirely in the cloud.
And lastly, we continue to receive third party validations, including most recently being named the undisputed market leader in voice biometrics by Opus Research and awarded Best Day I application in financial services by Forbes at the recent I Onyx event.
Turning to slide eight our automotive division closed its tenure as part of nuance with a record Q4 and full year that sets them up well as they begin fiscal 2020 as severance.
Design wins in the quarter span, China, Europe , the Americas, Japan, and Korea and included our first India based OEM and first intelligent car in Indonesia.
Over these last 12 months the automotive team has stayed focused and executed flawlessly with impressive performance that has resulted in record sales growth for the business and a strong pipeline for the future.
No I speak for all of nuance when I say that we wish the entire severance team all the best.
Moving to slide nine before turning the line that Dan I'll note, we're really pleased with our Q4, an f. why 19 performance, we delivered solid financial performance, while undergoing significant operational change and we've transformed nuance into a simpler more growth oriented company with emphasis on driving growth.
Both in recurring revenue by leveraging the power of our conversational AI capabilities.
We've added more cloud products are hyper focused on air our growth and are continuing to invest in breakthrough innovation to keep our solutions best in industry.
We are leveraging this into a stronger go to market, excluding expanding cloud into new geographies and bringing on new channel partners can accelerate our market penetration into a wider base of customers that momentum and the key initiatives. We have planned for F. Why 20 will provide important levers for growth.
And that's why 20 and beyond.
Dan will speak to our 2020 guide in more detail, but let me just say that and health care. We expect the combination of new cloud offerings and continued migration to demo and our expansion in new markets and geographies to yield a our our growth of approximately 30%.
We're really excited about our AC I initiative, which we think affords us more opportunities for growth, especially with a partner like Microsoft.
Our enterprise business has momentum coming off our fourth consecutive year of organic growth and we forecast another year of solid growth in 2020, including segment margin improvements.
Growth will come from leveraging the new Microsoft Azure partnership to deliver our cloud solutions more broadly in EMEA and APAC and continued penetration of our customer base with Omnichannel cloud solutions, including voice biometrics and virtual agents.
In fiscal 2020, we will continue to ramp our strategic investments that were started in 2019 and largely funded through cost reductions, while maintaining a clear focus on growth and ROI.
Additionally, we will remain very focused on driving shareholder returns through continued disciplined capital allocation.
We've come a long way any year and we're taking the right steps as an organization. We see terrific opportunities ahead, and we're confident that we have a great deal of greenfield to capture and the REIT strategies and excellent team to achieve our strategic goals and deliver value for all of our stakeholders over.
Over the course of the past year I've spoken about our conscious approach to enhancing that nuance culture and I believe our efforts have paid significant dividends. The team is more engaged and collaborative than ever.
We can't wait to dive more deeply into all these areas at our upcoming Investor day in a few weeks and with that I'll turn the call over to Dan.
Thanks, Mark and good afternoon, everyone before we begin our discussion there are a couple of financial presentation points I would like to make first as we walk through our Q4 in fiscal year 2019 results I will do so on an assay six so five basis, which includes the automotive business since that spin off transaction did not occur until after.
For the close of our fiscal year as it then pivot to the discussion to fiscal year 2020 guidance I will provide some bridging data to help you understand how the adoption of the Assi six so six and the removal of the automotive segment affects our projections beginning in Q1 2020, we will report our results only on a six or six basis.
Additionally, when we report our Q1 2020 results in February .
We will also adjust our historical results to be on a continuing operations basis, which means we will reclassify our historical automotive business results into discontinued operations.
Turning to slide 11, we're pleased with our results in Q4 and for fiscal year 2019 overall as you can see we performed within or above our fourth quarter and full year guidance on every metric.
We had excellent revenue results in earnings per share was well above our guidance.
In addition, I'm, particularly pleased with how we did on Dragon medical cloudy our are landing at $257 million above our guided range. As you know this is a forward looking metric that tracks. The new sales made during the year and represents the estimated annual revenue under contract for our Dragon Medical cloud.
Offerings.
We also had strong operating margins for the year coming in at 28% as well as cash flow from operations, which totaled just over $400 million.
That's strong operating cash flow performance provides us the flexibility to both reinvest in our business and make the right capital allocation decisions that drive shareholder value.
This next slide 12 shows you are revenue performance for each of our businesses.
If we focus on the fourth quarter healthcare and automotive had excellent growth.
Our enterprise segment faced a difficult compare in Q4 2018, but still posted a very strong quarter was $126 million in revenue. These strategic businesses collectively grew almost 6% when comparing Q4 19 to Q4 18 in almost 3% for the fiscal year. Please note.
So that we will still have a small portion of other segment revenue related to our legacy voice mail the text devices and Srs businesses, which declined in line with our plans.
As we go deeper on our healthcare revenue results on slide 13.
I'd like to point out a couple of notable items first our Dragon medical cloud results came in higher than our most recent guidance lending the year at $213 million in revenue and on the back of a strong fourth quarter of bookings and conversions.
Second consistent with our guidance, we enjoyed a particularly strong quarter in our dragon medical product from licensing line due to a large federal deal in the U.S., coupled with continued international license strength.
This is one of the business lines that should decline as we transition our business to our cloud based dragon medical products, but as we've discussed the international markets are slow to adopt our cloud solutions and as an interim step our purchasing our dragon medical on premise solution first.
We expect these international markets to more rapidly adopt our cloud solutions beginning in 2020 as Mark mentioned.
Our license growth was offset by expected declines in our low margin H. I am transcription business.
And planned declines in our non strategic low margin each our implementation services business, which is reported in the professional services line.
Turning now to slide 14, 2019 was an excellent year for nuance in the segment margin front.
As you can see we performed exceptionally well in each of our businesses. This outperformance was driven by two primary factors first the healthcare revenue mix moved as planned towards higher gross margin products. The second factor is related to the benefits we enjoyed from our cost savings programs compared with the timing of our and.
Investment initiatives.
As we have pointed out on each of our quarterly calls during 2019, we were successful in taking out costs from the business at a faster paced than we anticipated.
At the same time, our investments were more back end loaded and will continue into 2020.
As a result.
And in line with what we told you during the year. Our 2019 operating margin performance reflects all of the benefits from our cost rationalization plan and only a partial burden of the investments we have planned.
Therefore, the magnitude of our segment and operating margin outperformance during 2019 will moderate in the very near term.
I will say however.
That once this timing related impact works its way through we are committed to returning to a steady cadence of increasing operating margins each year thereafter.
Slide 15, you'll see that we have laid out our revenue and segment margins for 2019 on an assay six so five and six or six basis.
I think of this slide more as a reference tool to help you build your forward looking models as you refer to this page you can see that the impact of six so six is not significant for the company. However at the division level. The effects are more pronounced in healthcare due to two primary reasons.
First healthcare as a number of historical term license offerings, particularly in Dragon radiology and CDIY.
Under six of six the full amount of the term license revenue gets reported at the time of booking as opposed to ratably throughout the term, thereby reclassifying revenue under six or six into periods prior to 2019.
Since these term offerings are simultaneously undergoing a shift to cloud service offerings, which are recognized ratably.
We are not experiencing an equal revenue offset for new term licenses in 2019.
The second driver is due to a reallocation of fair value, which impacts both timing and classification of revenue categories under six so six particularly with the large bundled arrangements executed in the last few years.
With those explanations in mind, the most important point to make on this page is that the cash flow from operations are completely unaffected by the AMC six or six accounting timing and reclassification changes.
For your assistance and to help you update your models for six so five to six so six we have provided reference tables for segment revenue segment margin in the healthcare revenue detail tables located on our website.
Moving to slide 16, let's talk about healthcare are.
As you know we have historically defined a are to be exclusively related to the dragon medical cloud products.
This metric allows us to track the cadence of our business, while we execute our dragon medical on premise to cloud transition.
As you can see our underlying recurring cloud subscription business continues to experience very high growth. Despite the slower overall revenue growth that results from this type of transition.
In 2019, we experienced 38% air our growth and in 2020, we see similar absolute dollar growth, yielding a growth rate of approximately 25%.
Turning to slide 17, as we enter 2020, we are expanding how we think about a are this is because we now have several products. In addition to our traditional dragon medical line that are transitioning to the cloud products like power scribe, one in radiology CD one for clinical documentation.
Specialists in some of our smaller legacy cloud offerings are likely to show meaningful cloud growth in the coming quarters in years, we therefore want to show the most complete measure of healthcare cloud subscription growth as some of these transitions to cloud will come at the expense of on premise license license and maintenance grew revenue growth.
The great section of the bars represent these emerging cloud based subscription products. When you combine all of our health care cloud subscription business lines. Our total ARR is expected to grow approximately 30% in 2020 as it as compared to 40% in 2019.
I will also point out that our current plan is to breakout our dragon medical cloud air are as well as emerging EMR.
For fiscal year 2020, but that in fiscal year 21, and beyond we will collapse. These categories and simply report one consolidated a our figure.
Although our thinking on this may change over time I wanted to provide transparency as to our current plans.
On slide 18, as we look forward to 2020 revenue guidance.
We are expecting zero to 3% revenue growth for our strategic businesses, which now is shown excluding automotive.
Within enterprise, we are guiding a fifth straight year of organic growth as we expand our footprint in market share across the enterprise portfolio of products.
Within healthcare, we expect the trends we experienced in 2019 to repeat.
Very strong growth in our health care cloud offerings offset by declines in both our on premise license offerings in low margin H. I am transcription services.
I will talk more about health care on the next slide.
Finally, we continue to wind down or other segment and will experience accelerated declines due to the sale of our Srs business in the second half of 2019.
On a more granular level and in keeping with our practice from last year on slide 19, we are providing our guidance for the healthcare segment.
We provide guidance ranges for each of our health care lines of business on an annual basis and will only adjust them if needed throughout the course of the year.
You'll notice that if you were to total up all the low ends and all the high ends of the ranges the spread would amount to something greater than our total revenue guidance range.
While there may be variability within each line item collectively we're confident in the total range provided for the entire division.
As you review the numbers note that transitioning our healthcare solutions to the cloud and shifting our revenue mix to higher value subscription models remains a top priority. We are focused on the long term to build a predictable recurring high margin business. Our 2020 healthcare revenue guidance reflects the continued.
In addition of this strategy.
Within our clinical documentation capture business, we expect continued strong growth in Dragon medical cloud.
Due to this cloud migration this growth will be offset in the near term by declines and.
The other three categories.
Maintenance and support will decline as we migrate our on premise install base to the cloud.
Product in licensing revenue should also disk decline at an accelerated rate as we have now enabled our channel to sell Dragon medical cloud in launched a multiple new Dragon medical cloud offerings in certain international markets.
We also had a large federal license deal in 2019 that does not repeat in 2020.
Finally, our legacy transcription services business will continue the normal trajectory of about a 15% annual decline.
For radiology and other we expect continued growth, but it is slightly lower rate compared to previous years due to the two new cloud transitions I talked about earlier.
The emergence of power scribe, one and CD, one will both have a dampening effect on radiology and other revenues, but as we experienced with dragon medical that will be picked up as new era.
Now that we have level set you on the revenue side, let's turn our attention to slide 20 in our gross and operating margins. This waterfall chart shows you the various puts and takes that bridge. The gap from 2019 margins on a six so five basis to 2020 margins on a six so six basis.
As we've discussed the transition to six so six is purely an accounting change and has no impact on our cash flow with that said and based upon our current estimates the transition to NSC six or six creates a headwind to 2020 gross margin of approximately 90 basis points in operating margin of approximately 130 basis.
Points.
Once we start with that adjusted baseline I'd point out a few items.
First is the revenue in business mix improvement, we continue to migrate our business mix towards higher margin solutions, and we expect approximately a 190 basis points of improvement to our gross margin and a corresponding 130 basis point of improvement to our operating margin.
The second point relates to the ramping of our planned investments. This is what I discussed earlier and goes back to what we've been saying over the course of the year.
We achieved a significant improvement on our operating margins in 2019 in part because our cost savings initiative outpaced the ramp up of our investments.
With our investments fully ramping in 2020, we expect these to have a 70 basis point impact to our gross margin in a 280 basis point impact to our operating margin.
And thereafter to level out and then reverse as these investments drive incremental revenue in the out years.
Walking through the balance of this chart you can see that the removal of auto has a 250 basis point impact in our consolidated gross margin in a 120 basis point impact in our consolidated operating margins.
There are of course stranded costs with the spin Avado. However, we launched programs during 2019 to reduce those stranded costs and expect that we will be able to offset substantially all of the impact in 2020.
Taking into account all these dynamics, we are providing gross margin guidance of approximately 60% and operating margin guidance for 2020 with the midpoint of 24%.
We're also providing segment margin guidance on slide 21.
2020, healthcare margins are down year over year, primarily due to the strategic investment dynamics I, just mentioned as well as the reduction in license revenue, resulting from our cloud transition.
Enterprise segment margins are up despite the impact of the strategic investments with a favorable revenue mix shifting toward higher margin solutions in 2020.
Similar to last year, we are providing cash flow expectations, which can be found on slide 22.
This year modeling our business should be meaningfully simpler than it was last year, but just to help understand how all the pieces flow together, we are showing a pro forma cash balance after taking into account the impact of the automotive spin.
You can see that while we ended 2019 with approximately $765 million in cash and marketable securities. We are starting 2020 with approximately $600 million, mainly due to the redemption of our senior notes.
We expect to end 2020 closer to $800 million, which provides us a significant amount of flexibility to make the right strategic moves whether it's in the form of M&A paying down debt or repurchasing stock Mark and I are committed to making their choices that will drive significant shareholder value.
Before leaving cash flow I would also like to point out that our CFO in 2020 is burdened by approximately $30 million of payments all related to our 2019 simplification initiatives. These payments will be pronounced in Q1 2020, and therefore, you should expect our Q1 CFO .
To be less than our normal run rate.
Finally, slide 23 provides a summary of our Q1 in full year 2020 guidance, which is also provided in our prepared remarks document as well as some additional guidance information.
With that I'd like to turn the call back over to the operator to take your questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound or hash key please standby heavily compiled the Q and a roster.
Your first question comes from Saket Kalia with Barclays. Your line is open.
Hey, guys. Thanks for taking my questions here.
Hey, socket, Hey, Mark a lot a lot to get through here. So maybe just maybe to start with you Nice guide on the or our for next year on both Dragon medical and an emerging.
Can you just dig into what the team is going to be doing to really drive customers towards cloud solutions across.
Dragon medical radiology in CVI.
For example on 20 are there anything that you expect to two on pricing or go to market or anything like that that's going to support that healthy, 30% kind of apples to apples growth.
Yeah, Yeah. So we have Rob data here as well, who you've met Saket, who runs a global sales for us So I'll let him.
Respond.
But you know we share the excitement level for sure relative to where our and.
I think the bead continues.
Beating the drum continues relative to air our growth.
In our existing demo franchise, if you will.
I think you see that strength continue, albeit against larger numbers, but still nonetheless, very exciting for us as we as we continue and we wrap the international markets on the ammo.
Which which will show themselves really.
Contributing a are in the second half for the year and probably into 20, a little more pronounced.
In the demo Air our chart here.
And then you see we've created this emerging a are with the new products, which is really the I think the Genesis of your question. So so Rob you want to take some of that from socket, yes sure.
So this is Rob data. So there are obviously as Mark has mentioned, we're really excited because we get to go out until a great story to the market and then we're doing that a couple of different ways.
First off we have really great existing relationships with lot of our customers right now so we're leveraging our fuel teams and the way we're doing that as we build specialists teams to help drive home the messaging the specific messaging around the CD opportunity.
Yeah opportunities and so.
Thats the kind of the first thing we're doing we're also building for air cover specific multi prong marketing programs. So we can reach out and start to establish the dialogue bone before our sales folks get there.
And as you probably heard from marks comments prepared comments the alignment continues with our comp plans. So we have really built in to our incentive comp and recognition plans the ripe opportunity for our sales folks who really want to sell to them. So we think we have really good coverage and.
We're excited to to continue delivering in the market yen socket. This is mark so.
Having been through these transitions, both Rob and I have and you've certainly witnessed other companies getting that sales incentive right, which Rob touched on I mentioned in my in my remarks.
Supercritical and I think having that.
Set for 20 and beyond is really an important step for really all of nuanced not just around these two solutions, but for the future of the business really growing where we wanted to grow and how we wanted to grow so.
Certainly an exciting time.
Absolutely and I agree with you there maybe for my follow up for you down.
Zoom in on the stranded costs and and particularly the comment in the prepared remarks about eliminating the margin impact of the automotive spin.
The end of 2021.
I guess the question is is that sort of implying the core business can really make up for that lost margin I think I think was about 120 basis points from from out on the operating line. It can the core business really make up for that lost margin from auto after the stranded costs are gone and any further detail on the outcome will be very helpful.
Sure. Thanks, Chuck a good question.
Yes, I think you have it right I mean on the chart. We presented in the call remarks, we mentioned it was a 35 million dollar estimated stranded cost amount from automotive.
The chart shows you in the operating section that we we lose 200 basis points for stranded costs, we get them back through the savings initiatives now if you think about the savings initiatives there starting now.
So we're ramping them up and they'll really sort of get get going in the first half of 2020, but then they'll ramp up and they'll continue through the throughout the year and into 2021. So we think as they continue.
We we recover the full amount of the 35 within 2020, but but then we generate incremental savings in 21 as well and the objective is to take care of that margin.
Hit of course, with the auto business, leaving us.
Got it that's very helpful. Sorry, if I could just squeeze in the last one last modeling questions. If I may for you Dan can you talk a little bit about the free cash flow profile here I mean, obviously a lot of changes within the company and six so six kind of creating a little bit of.
A little bit of moving part.
I guess anything you can note in the free cash flow profile on that that midpoint of about 270 million for next year.
Sure.
If you look at page 22 of the slide deck. We did we did highlight that to 70 that you mentioned.
And we also footnoted and I discussed in my my remarks is about $30 million.
What I'll call, one time simplification costs related to the Carveout activities and then the related to restructuring costs and those those are directly related to the auto aspects here. So if you backed that out our free cash flow midpoint would move from 270 back to 300, that's pretty powerful at the same time as you can.
Sit or all the investments that we're making into the business.
So so we're really excited about the free cash flow.
That are that our business continues to throw off but I do think its artificially pressured right now because of those costs and they should come back in the future Yeah, and I would also add.
I realize you're talking free cash flow versus expense, but the expense or earlier, it's really just the timing of when the cash leaves the company. So these were already contemplated costs.
All within the ranges from the 19 work.
And I've referred to it internally here is just the spillover effect of timing of cash out the door, which isn't always easy to control and unfortunately, I think it it doesn't really blur the picture, but it doesn't really give that kind of to your question socket I think the steady state of the eggs.
Listing business for 20 that would likely be incrementally 30 million higher on the free cash flow.
Which is I think will.
We would expect so I think thats the point that.
That dan's driving here.
Got it makes sense makes sense. Thanks, a lot guys.
Thank you bucket.
Your next question comes from Dan Ives with Wedbush Securities. Your line is open.
Yes. Thanks, So so maybe first heard from Mark and Rob.
So Rob maybe you could sort of hit on in in health care, specifically on the cloud side, maybe can you feel like you are starting to see some of the changes that you're making in terms on the salesforce is strategically really starting to benefit you guys in terms of sales cycles meet seems like if I just wanted to get more gradual.
Or from a sales execution, and maybe strategy perspective, going further up hospitals and cloud. Thanks.
Yes, so thanks for the question I.
I think you know we definitely feel really good about the positioning we have now.
We're excited about the investment that companies made in not only increasing the amount of sales folks we have but of course, increasing our geography, so deploying cloud overseas and really key markets. So.
You know that starting that that words getting out not only.
Internally into our teams who.
Some of the traditional groups that grew up in the in the business selling license now are really grasping in understanding how to sell and working with cloud and the market itself is receptive to it. So I think we're feeling really good about that where we have opportunities to two really enhance the experience we built specialists teams.
To work with our existing field team. So we feel really good about that weve expanded into the mid market.
And we're selling there where we didnt really very specifically call in that space before we're we're fully staffed to original plan and going after that so the midmarket is new to us. So we feel I'll say a good about that so overall, yeah, we feel great about our cloud opportunity in and.
Ability from a company side to invest in the sales organization in a way that makes it reachable for us so early on feeling really good about it.
Great and then in terms of.
No.
We're not going I'm going to next sort of one to two years, how should I think about maybe like so theres. Some business is obviously would have more legacy services side, specifically on health care and in some of that business, that's maybe more non strategic.
How should we think about resources or even the focus on some of those businesses Mark and then maybe you talk more about the analyst day, but I'm just trying to think about next year, how to think about some of those non strategic businesses specific been services. Thanks.
Sure sure Hey, Dan So good question, so I think.
Little bit consistent with what we started to talk about through the second half a 19 relative to.
Some of the services aspects of the business.
We deemphasize.
Growing some of those segments that I really don't fit the quote unquote strategic profile some of them actually do lineup well to the strategy.
We refer to as one of them that don't particularly lineup as are our E. HR implementation services. So we'll continue to deemphasize.
Yes, those parts of the business in this 20 guide, we essentially hold that business flat.
After.
This significant curtailing of the revenues in 19, so we we didn't want to create any I think.
So next year, you know challenger headwind.
So we thought holding these business flat and you know in watching the investments and making sure we're investing for all the right strategic growth businesses and not distracting ourselves.
Really away from that and away from the cloud there our services that support the cloud business.
Our customers look for some elements of managed services that we think can carry a pretty good margin profile on them.
But I think prioritization Dan continues to be like the key for us and we'll continue to kind of step away from businesses there are less strategic for us.
Over the even the near term horizon.
Yes, I think you see that and health care schedule as well like where we're coming down in these categories as we transition robs entire salesforce now internationally is cloud focus and.
Air are in HCV focus there's really no.
The benefits of simplifying the this company can really be felt across now our remaining two businesses.
So so yes, that's that's how I'd, probably a respond to kind of the non strategic leased we still have those businesses.
We still have important customers of ours with those services. So we're not.
Running running away from any one but we are obviously prioritizing.
Great Great job again, everyone. Thanks.
Thanks, Dan.
Your next question comes from Sanjit Singh with Morgan Stanley . Your line is open.
Hi, Thank you for taking the questions and congrats at seating for a real strong close to the year and special treat as to your team Dan for.
Three out of Investor presentation that makes it easy to understand.
6.66, so five impacted growth, but I'd like for like based Super helpful. So congrats on all the August .
My question, I guess sort of relates to guide it and what are the things that we've been talking about new ones for quite some time, that's at the underlying growth in healthcare, it's kind of better than what we've seen on but sort of headline overall number.
So I look at what it back off professional services residue from healthcare the last two years.
We see some pretty solid gold I had a 5% in fiscal year 80 that should have been accelerating in terms of 7%. This year in terms of health care product revenue, but are we look to the guide for next year in place.
Implies flat year over year growth.
So six versus existing space, that's I guess my question.
Are you data and also market if you want to chime in.
Is that just an impact of accelerating on on the transition to causes I would've expected more growth is given that dragon medical costs up a larger portion of the overall mix.
Understood help me understand the implied guidance for health care on a product revenue basis, because I I think we understand with professional services will be to keep that lot, but just on the product business I could just help me walk through some of those dynamics.
Sure. This is Dan I'll start and Mark will jump in.
By the way. Thank you very much for the for the complement to the team on the deck. They worked really hard so we appreciate that.
You know Dragon medical cloud is.
It continues to have really good growth as we mentioned, it's an absolute dollars. It's growing similar to what it was last year and that's that's a positive.
The Dragon medical.
Maintenance and support will accelerate its decline this year.
As we really hitting our stride now in the conversions. So we converted a lot in 2019.
That causes a decline next year and MNS and that happens again as we had further strides with conversions in 2020, so it's not surprising that we're seeing that accelerated decline.
And then of course in the in the product and licensing, it's a pretty meaningful decline as well because we had that onetime federal deal that I cited that was that was increasing 2000, nineteens revenue and it won't recur. So when you put all that together plus the 15% transcription decline you do get to that.
Flatter type of business.
It is yielding a that that really strong air our growth that we're really focused on so.
With that said to radiology and other last year had more growth. It was it was a higher growth year than this two to four guide but of course, that's now coming down because we are launching those new cloud offerings and that is going to begin its journey in it shifts to the cloud. So when you put all those factors together, it's a very.
The rational sort of guide in our mind Sangita I listen I I think you're asking the question that I probably spend the most time.
Talking and myself and others about here internally around the growth rate relative to strategic growth drivers and legacy conditions. So.
No.
And I do the back of the envelope mass quite regularly on these businesses.
And certainly we have.
Continued headwinds created from the transition that Dan mentioned not to mention the legacy transcription or him business. So we still see.
Six 700 basis points of headwind.
To the overall health care number and now that were a.
Quote unquote more nimble company.
That obviously drives a greater headwind to overall nuanced growth rate.
But as Dan mentioned, which is really I think the key focus when you look at our health care business do you want to understand the growth profile you need to look at AMR and certainly now that we have the solutions.
Partially in the cloud it's no longer just a deal most story, it's no longer just a demo North America story.
So I think you know certainly 20 shows like you mentioned.
You know a little bit of much of the same.
But I think for those that follow the company.
And understand the moving parts I think the the payoff is quite apparent and you see in the numbers on the health care schedule kind of that in the clinical captured category that those lines really cross this year in 20, so obviously the headwind now abates.
You are higher growth air are in Dragon medical revenue line.
So I think it's I think its promising as we head.
Out of 20 into the following years and sanded, although it's not part of your question.
None of our 2020 guide has our Sci ambitions and the Microsoft partnership.
Built into really any of it.
It doesn't contributed to a our our it doesn't contribute to revenues in 20.
And as we've mentioned, we're launching that product in this first calendar quarter coming.
In the first five specialties.
So I think we're being cautious I think we're still working our way through the advancements of technology relative to Sci, but we continue to believe that to be the game changer within the industry.
And and that I think will bode very well for US also you know in the coming I'd say back half into 21 and beyond as far as the potential for that for that solution.
That's great color I appreciate I appreciate all the detail I guess.
The take away that I take from those comments from both.
You, Indiana that we're just we're continuing to lead into cloud, which is kind of what we want to up all the business.
Go into the follow up question is when it comes to CPB when it comes to radiology and it comes to CD Juan.
Is there anyway to frame out like the how to think through the the unit economic profile of that in terms of the transition on the terms of its impacts on revenue and profit as we move those lines more to a cloud based format similar to what how we talked about Dragon medical cloud.
And its impact on on revenue and profit over time is there anyway to frame that up.
Yeah, I'll keep it at a very high level, especially because it's very very early days with those products rolling out, but I think big picture you should consider when you when you think about radiology and power scribe.
On Prem moving to power scribe one.
The MNS stream will enjoy a similar uplift. So we are now starting to get validation of that said it will enjoy a similar to plus times uplift.
In revenue as did the Dragon medical one sought.
The second part is of course, a fair amount of the power scribe.
Product offerings or term based.
And they are moving to the cloud so they were high high or type revenue, but high margin businesses. So they'll have a slight uplift to getting to the cloud, but not to the same degree as maintenance and support.
Then lastly, when you think about our CDAI business in the past it was really a combination of consulting services and software. So it was a real mix because that's how hospitals by those types of services and what we're converting to in the future is a cloud based.
Software SaaS based offerings.
And so it's hard to predict where the revenue will land on that any if there's any multiple increase or not but what we do know is that we'll see we should see improved margins in that business shift.
Perfect. Thank you Dan.
Yes, I think I think Sandra will also go a little deeper at Investor day on that transition.
You know at the Bu level, certainly relative to the cloud transitions in in radiology and and the other solutions and CD.
Great. Thanks.
Your next question comes from Jeff Van Rhee with Craig Hallum. Your line is open.
Great. Thank some several several from you guys the.
Maybe just said you just touched on briefly there, but I want to take you back to Mark on the two things Microsoft relationship you use release out, but maybe put a little more meat on the bones there.
Because certainly sounds like you're very excited about it and then on the I am also could you flush out a little more about the developments thus far in terms of what you've learned in the field customer interest you know lead up to pipeline just a little more color.
Sure sure sure Jeff Thanks for the question.
Our our conversations with Microsoft have been.
So I think taking place.
Even well before my arrival here at nuance.
On a couple different funds and not unusual.
You know there obviously you know.
Partner of ours and hosting in other places in the business.
But really as our cloud transition and as Sci became you know a.
Quite prominent and relevant.
And investment for us to take which we which we took obviously a little over a year ago in a significant fashion.
Our discussions with Microsoft.
We have very similar philosophies and goals around health care and what we want to solve for what our mission is relative to.
You know the physician and patient.
What the what the industry is suffering what today, so we had I.
I think very similar goals very similar philosophies and and they have.
You know a health care business.
You know under really the moniker of empower M.D. and and we thought we could really kind of benefit from working with each other and accelerate the art of what's possible and.
Certainly they weren't looking to.
Get into the business. We were we were in and we're driving towards where they see guy, but at the same time leveraging their AI capabilities.
Against our Sci capabilities that are really early stages, I really represented opportunity and it was really strategic opportunity.
So we ultimately.
Got to a place you know with that with the most senior team there.
And and we saw it of course together and you know, it's obviously very early but we're super excited to have them I mean, it ultimately gets the world's largest software company behind our ambition.
You know, having I think access to.
Not just their team, but their technology and capabilities is really meaningful to us. So I think it's a it's something that I think is super exciting for for both companies.
It doesn't change our course.
As far as.
Our solutions being hours, our go to market, but it's certainly I think accelerates, what's possible and and certainly we get the benefit of having their support behind us.
And the reaction Jeff from the customer base from the industry relative to nuanced partnering with Microsoft.
In regard Stacy I has only been positive and.
As you as you do it as you know that we're working with.
Large horizontal software players can occasionally be a tricky course or something that isn't.
You know always naturally met with great great excitement and I think.
Working with Microsoft.
It has been.
Everything and more than what we could have hoped for.
Relative to easily I go ahead.
No no go ahead.
I was going to try to answer the second part.
I think growth today see I.
We are at several of our our client sites today in beta.
We will go GA.
In Q1 calendar 2020, with our first five specialties that we've talked about.
And in throughout the course of this fiscal year.
We'll add.
You know a large number of other call it ambulatory specialties.
The two and a 15 or 18 more.
And and obviously that will contribute to two sales in growth and ultimately there are in revenues.
As we go.
Are you at a point now where you have at least some crude semblance of of what you think the ARPU might be on those products.
You know, where we're being a bit cautious.
This early.
We've we've been I think very focused on the value proposition and and ultimately solving.
The problem.
And ultimately what that will yield as far as cost benefit and I think we still see this as a significant multiple multiplier if you will too.
Dragon Medical one.
Solution, which we've talked about publicly is roughly $50 per month per Doc generally speaking.
And we see.
You know a multiplier that's fairly significant on on that number.
We're cautious obviously, where we're not speaking publicly about.
What some of the early adopters.
Our accepting but.
We.
We're feeling very good about I think the value this will create and ultimately the technology and the automation of the solution can really yield.
Got it Green I'll leave it there thank you.
Hi, Jeff, Jeff I think Jeff I think certainly you'll hear more at Investor day around Sci you'll also hear from one of our early site early customers.
Using the solution and I know you've been through the demonstration, but you'll you'll you'll go through it again likely in all likelihood in <unk>.
I think you'll get a little more clarity.
On on that on the 10th of December .
Got it for sure.
Your next question comes from Tom Roderick with Stifel. Your line is open.
Oh, it's actually Parker Lane on for Tom. Thank you for taking my question.
So you guys have talked about.
In the push to international market, there being some structural limitations.
Around Dragon medical wanted and customer adoption in those areas as we think about the shift in radiology with power ascribed one could you talk about first what percentage of that business roughly is in international markets today, and then to whether or not those structural challenges also persist in that business and well causes any elongate.
One of the the transition there thanks.
Yes, Hey, Parker. This is mark maybe we all three of US may take a shot at some of your your question.
So I'll start with easy parts, because that's what I'm good that.
You know.
Zero.
Percentage of our radiology business.
International today.
And and zero percent of zero percent is.
Cloud based international of our radiology business. So ultimately we view that as you know complete greenfield by the way also on the license side.
So depending on the country and and willingness to take a hosted solution versus local solution or even hybrid solution for that matter.
So Rob you want to.
Add anything yeah, I mean as the just the.
The deployment of the cloud as you heard earlier, we're we're looking at opening up to new markets where into right now we've got great traction in the ones that were.
Even in UK for a while now Australia just recently, so overall I mean, where as a percentage is still small just because of north American size.
On the in the time that we've been in that market, but looking forward we have a great.
Ambitions in terms of growth in those spaces and we are deploying teams.
Top of that to help support the growth there yeah, I think park or the other thing is relative to the power scribe base here in the U.S., which is the business today.
Which is.
Hey on Prem business today, all license and maintenance and support.
The early feedback and the early consumption of.
Customers willing to upgrade because it isn't upgrade to the cloud they do benefit from greater functionality.
Lower total cost of ownership.
It has been I think.
Quite exciting for us and.
I think.
While still early.
You see some of the air our growth in the emerging category and 20.
Coming off essentially zero number relative to power scribe things pretty encouraging.
Got it Thats really helpful. Thank you.
All right Parker.
Your next question comes from Shaul aisle with Oppenheimer. Your line is open.
Thank you for taking my question.
Quarter as well as the for Fessel auto spin off this is actually in for shallow.
The interest of Todd I, just have one quick follow up question Mako Dan.
In terms of capital allocation you.
You mentioned that what's going to go down to retain a 6% senior notes as well as share repurchase.
In terms of other investment I guess priorities.
What are you gentlemen, just thinking off like.
That.
The next step to reinvest.
With that excess cash flow.
Sure. Thanks for the question Yeah, I think we're going to we're going to discuss more of this in detail at the Investor day.
So I don't want to get ahead of ourselves.
With any quote unquote strategic.
You know points relative to capital allocation, but I will say that.
You know we've had I think a good discipline here over these last 12 18 months I think we've made great strides to get to a place where we want to be and in a position.
That.
We're very comfortable with.
And we'll we'll give a little more color to how we're thinking about deploying capital.
I think you're seeing our confidence in the in the business with.
There the share repurchases we've made.
Literally in the first.
Several weeks or this fiscal year with 50 million of repurchases already made.
We will remain active in the market and so look for the right buying opportunities as we've always.
Talked about.
I think we from a debt standpoint, where we're comfortable where we're sitting today weve.
I think done.
Really.
I think responsible.
Job too I think getting us to levels.
On a net basis, where.
We feel good so, but we'll talk more about this year and the on the December 10th Investor Day in New York and.
But.
Read this as study as we go.
Thank you Mark again, and we look forward to the Investor day.
Great. Thank you.
There are no further questions at this time I'll now turn the call back over to Mark Benjamin.
Okay, well I just wanted to thank everyone for joining us Tonight.
Yeah, obviously I want to thank my team for a great year.
And we look forward to seeing everyone liven in person on December 10th for an exciting a half day session. So thank you.
This concludes today's conference call you may now disconnect.