ITEM 2.02 Results of Operation and Financial Condition
On May 12, 2008, Nuance Communications, Inc. announced its financial results for
its second quarter ended March 31, 2008. The press release and the
reconciliation contained therein, which have been attached as Exhibit 99.1 and
incorporated herein, disclose certain financial measures that may be considered
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 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 operation of our business from a cash
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 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 our business during the fiscal quarters ended
March 31, 2007 and 2008, and, in particular, in evaluating our revenue and
earnings per share, our management has either included or excluded items in
three general categories, each of which are described below.
Acquisition Related Revenues and Expenses. We include revenue related to our
acquisitions, primarily from Tegic, Viecore and VoiceSignal, that we would
otherwise recognize but for the purchase accounting treatment of these
transactions to allow for more accurate comparisons to our financial results of
our historical operations, forward looking guidance and the financial results of
our peer companies. We also 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
transition and integration costs; (ii) amortization of intangible assets
associated with our acquisitions; and (iii) costs associated with the
investigation of the financial results of acquired entities. 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 and Dictaphone 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 investigation and,
if necessary, restatement of the financial results of acquired entities. We
believe that providing non-GAAP information for certain revenue and expenses
related to material acquisitions allows the users of our financial statements to
review both the GAAP revenue and expenses in the period, as well as the non-GAAP
revenue and 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.
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Other Expenses. We exclude certain other expenses that are the result of other,
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 non-acquisition-related restructuring charges. These
events are unplanned and arose outside of the ordinary course of our continuing
operations. We assess our operating performance with these amounts included, but
also excluding these amounts; the amounts relate to costs which are 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.
We believe that providing the non-GAAP information to investors, in addition to
the GAAP presentation, allows investors to view our financial results in the way
management views the operating results. We further believe that providing this
information allows investors to not only better understand our financial
performance but more importantly, to evaluate the efficacy of the methodology
and information used by management to evaluate and measure such performance.
The non-GAAP financial measures 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 our GAAP financial measures reflect the inclusion or exclusion of
items that are recurring and will be reflected in our financial results for the
foreseeable future. In addition, other companies, including other companies in
our industry, may calculate non-GAAP net income (loss) differently than we do,
limiting it's usefulness as a comparative tool. Management compensates for these
limitations by providing specific information regarding the GAAP amounts
included and excluded from the non-GAAP financial measures. In addition, as
noted above, our management evaluates the non-GAAP financial measures together
with the most directly comparable GAAP financial information.
ITEM 9.01 Financial Statements and Exhibits
(d) Exhibits
99.1 Press Release dated May 12, 2008 by Nuance Communications, Inc.
99.2 Transcript of Conference Call
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