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Nuance Announces Second Quarter Fiscal 2010 Results
Growth in Revenue, Operating Margin and Cash Flow Fueled by Strength in Mobile and Healthcare Markets

BURLINGTON, Mass., May 10, 2010 (BUSINESS WIRE) --Nuance Communications, Inc. (NASDAQ: NUAN) today announced financial results for its second quarter of fiscal 2010, ended March 31, 2010.

Nuance reported GAAP revenue of $273.0 million in the second quarter of fiscal 2010, a 19.2% increase over GAAP revenue of $229.1 million in the second quarter of fiscal 2009. Nuance reported non-GAAP revenue of approximately $292.8 million, which includes $19.8 million in revenue lost to accounting treatment in conjunction with acquisitions. Second quarter fiscal 2010 non-GAAP revenue grew approximately 22.6% over non-GAAP revenue of $238.8 million in the same quarter last year.

In the second quarter of fiscal 2010, Nuance recognized a GAAP net loss of ($15.4) million, or ($0.05) per diluted share, compared with GAAP net income of $5.3 million, or $0.02 per diluted share, in the second quarter of fiscal 2009, as adjusted for the retrospective application of FASB ASC 470-20, which Nuance adopted on October 1, 2009. In the second quarter of fiscal 2010, Nuance reported non-GAAP net income of $83.3 million, or $0.28 per diluted share, compared to non-GAAP net income of $63.4 million, or $0.24 per diluted share, in the second quarter of fiscal 2009. Nuance benefited from accelerated revenue growth as well as focus on expense controls to significantly improve operating margin, despite increased investments in the business. For the second quarter of fiscal 2010, non-GAAP operating margin rose to 32.0%, compared to 31.3% in the second quarter of fiscal 2009. Nuance reported cash flow from operations of $55.5 million in the second quarter of fiscal 2010, compared to $49.8 million in the second 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 double-digit organic revenue growth, driven by strong performance in our mobile and healthcare business lines. 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. "The performance we have achieved through the first half of fiscal 2010, along with our investments in new products and services, positions Nuance for sustained growth in the second half of fiscal 2010."

Highlights from the quarter include:

 

  • Healthcare-Dictation - For Nuance's healthcare and dictation solutions, second quarter non-GAAP revenue was $120.0 million, up 14.1%, as reported, from the same quarter last year. During the second quarter, new bookings included large eScription, Dragon Medical and radiology contracts. Key customers included Banner Health, Boulder Community Hospital, Carolinas HealthCare System, Chesapeake Regional Medical Center, City of Hope, Mercy Doctors Medical Group, Texas Children's Hospital, UC Davis Medical Center, US Air Force and Wellspan Health.
  • Mobile-Enterprise - For Nuance's enterprise and mobile solutions, second quarter non-GAAP revenue was $138.9 million, up 16.2%, as reported, from the same quarter last year. Key customers, new bookings or design wins in the quarter included Apple, AT&T, Bank of America, Bell Canada, BT Business, Centrelink, Citigroup, Disney, Ford, Kaiser Permanente, Kyocera, LGE, Motorola, Nokia, Panasonic, Pantech Curitel, Rogers, Sony Ericsson, State Electricity Board (India), TCL, Telefonica, Toshiba, Toyota, Verizon, Vonage and ZTE.
  • Imaging - For Nuance's PDF and document imaging solutions, second quarter non-GAAP revenue was $33.9 million, up 140%, as reported, from the same quarter last year, primarily due to contributions from eCopy and X-Solutions. Nuance achieved key second quarter bookings and design wins with Brother, IBM, International Monetary Fund, Motorola, and Washington Attorney General's Office.

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, May 10, 2010 at 5:00 pm ET 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 (888) 423-3269 or (612) 332-7515 at least five minutes prior to the call and referencing conference code 155416. 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 155416.

About Nuance Communications, Inc

Nuance Communications, Inc. (NASDAQ: NUAN) is a leading 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.

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 six months ended March 31, 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 six months ended March 31, 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   Six months ended
    March 31,   March 31,
      2010       2009       2010       2009  
                 
Revenue:                
Product and licensing   $ 113,161     $ 87,025     $ 226,388     $ 172,600  
Professional services and hosting     116,228       103,004       219,923       193,196  
Maintenance and support     43,616       39,116       89,671       80,183  
Total revenue     273,005       229,145       535,982       445,979  
                 
Cost of revenue:                
Product and licensing     10,702       9,051       23,293       17,808  
Professional services and hosting     73,000       62,781       134,996       121,263  
Maintenance and support     7,714       7,137       15,704       14,180  
Amortization of intangible assets     12,184       9,409       23,202       17,427  
Total cost of revenue     103,600       88,378       197,195       170,678  
                 
Gross profit     169,405       140,767       338,787       275,301  
                 
Operating expenses:                
Research and development     37,931       27,330       74,881       57,880  
Sales and marketing     63,899       50,143       129,461       110,617  
General and administrative     31,305       25,237       58,756       50,826  
Amortization of intangible assets     22,201       19,034       44,327       36,382  
Acquisition-related costs, net     7,962       3,327       20,767       9,230  
Restructuring and other charges, net     12,372       250       12,987       2,348  
Total operating expenses     175,670       125,321       341,179       267,283  
                 
Income (loss) from operations     (6,265 )     15,446       (2,392 )     8,018  
                 
Other expense, net     (6,843 )     (11,164 )     (14,654 )     (18,443 )
                 
Income (loss) before income taxes     (13,108 )     4,282       (17,046 )     (10,425 )
                 
Provision (benefit) for income taxes     2,288       (998 )     2,628       10,613  
                 
Net income (loss)   $ (15,396 )   $ 5,280     $ (19,674 )   $ (21,038 )
                 
Net loss per share:                
Basic   $ (0.05 )   $ 0.02     $ (0.07 )   $ (0.09 )
Diluted   $ (0.05 )   $ 0.02     $ (0.07 )   $ (0.09 )
                 
Weighted average common shares outstanding:                
Basic and diluted     284,994       250,656       281,988       243,283  
Basic and diluted     284,994       269,187       281,988       243,283  
                 

Financial statements for the three and six months ended March 31, 2009 have been adjusted for the retrospective application of FASB ASC 470-20.

Nuance Communications, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
Unaudited
           
           
ASSETS   March 31, 2010   September 30, 2009
           
Current assets:        
  Cash and cash equivalents   $ 461,804   $ 527,038
  Accounts receivable and unbilled receivables, net     223,296     208,719
  Inventories, net     7,941     8,525
  Prepaid expenses and other current assets     56,896     51,545
  Total current assets     749,937     795,827
           
Land, building and equipment, net     53,286     53,468
Goodwill     2,039,705     1,891,003
Intangible assets, net     706,161     706,805
Other assets     77,503     52,361
  Total assets   $ 3,626,592   $ 3,499,464
           
LIABILITIES AND STOCKHOLDERS' EQUITY        
           
Current liabilities:        
  Current portion of long-term debt and capital leases   $ 8,318   $ 6,862
  Contingent and deferred acquisition payments     12,663     91,431
  Accounts payable and accrued expenses     220,238     164,393
  Deferred and unearned revenue     143,602     144,395
  Other short term liabilities     9,939     12,144
  Total current liabilities     394,760     419,225
           
Long-term portion of debt and capital leases     850,218     848,898
Long-term deferred revenue     63,546     33,904
Other long term liabilities     155,630     154,436
  Total liabilities     1,464,154     1,456,463
           
Stockholders' equity     2,162,438     2,043,001
           
Total liabilities and stockholders' equity   $ 3,626,592   $ 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
    Six months ended
    March 31,
      2010       2009  
         
Cash flows from operating activities:        
Net Loss   $ (19,674 )   $ (21,038 )
Adjustments to reconcile net loss to net cash provided by operating activities:        
Depreciation and amortization     77,977       62,933  
Stock-based compensation     44,774       35,002  
Non-cash interest expense     6,524       6,315  
Non-cash restructuring expense     6,833       -  
Gain on foreign currency forward contracts     -       (8,049 )
Deferred tax provision     (1,111 )     1,612  
Other     666       1,914  
Changes in operating assets and liabilities, net of effects from acquisitions:        
Accounts receivable     (8,541 )     33,782  
Inventories     709       (1,461 )
Prepaid expenses and other assets     (4,428 )     (8,299 )
Accounts payable     (2,249 )     25,499  
Accrued expenses and other liabilities     (10,357 )     (2,832 )
Deferred revenue     29,457       5,187  
Net cash provided by operating activities     120,580       130,565  
Cash flows from investing activities:        
Capital expenditures     (7,850 )     (12,657 )
Payments for acquisitions, net of cash acquired     (159,352 )     (61,712 )
Proceeds from maturities of marketable securities     -       56  
Payments for equity investment     (14,970 )     (159 )
Payments for acquired technology     (7,350 )     (62,886 )
Net cash used in investing activities     (189,522 )     (137,358 )
Cash flows from financing activities:        
Payments of debt and capital leases     (4,064 )     (3,521 )
Purchases of treasury stock     (538 )     (144 )
Payments of other long-term liabilities     (4,818 )     (4,775 )
Proceeds from settlement of shared-based derivatives     3,784       -  
Proceeds from issuance of common stock, net of issuance costs     -       175,111  
Proceeds from issuance of common stock from employee stock options and purchase plan     18,823       7,069  
Cash used to net share settle employee equity awards     (9,246 )     (5,000 )
Net cash provided by financing activities     3,941       168,740  
Effects of exchange rate changes on cash and cash equivalents     (233 )     (2,505 )
Net increase (decrease) in cash and cash equivalents     (65,234 )     159,442  
Cash and cash equivalents at beginning of period     527,038       261,540  
Cash and cash equivalents at end of period   $ 461,804     $ 420,982  
         

Financial statements for the three and six months ended March 31, 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   Six months ended
    March 31,   March 31,
      2010       2009       2010       2009  
                 
GAAP revenue   $ 273,005     $ 229,145     $ 535,982     $ 445,979  
Acquisition-related revenue adjustments: product and licensing     14,813       7,154       31,805       31,953  
Acquisition-related revenue adjustments: professional services and hosting   2,436       1,210       3,273       2,450  
Acquisition-related revenue adjustments: maintenance and support     2,577       1,281       6,369       2,851  
Non-GAAP revenue   $ 292,831     $ 238,790     $ 577,429     $ 483,233  
                 
GAAP cost of revenue   $ 103,600     $ 88,378     $ 197,195     $ 170,678  
Cost of revenue from amortization of intangible assets     (12,184 )     (9,409 )     (23,202 )     (17,427 )
Cost of revenue adjustments: product and licensing (1,2)     2,948       (5 )     6,126       (11 )
Cost of revenue adjustments: professional services and hosting (1,2)     (2,467 )     (2,711 )     (4,905 )     (4,368 )
Cost of revenue adjustments: maintenance and support (1,2)     (202 )     (249 )     (417 )     (335 )
Non-GAAP cost of revenue   $ 91,695     $ 76,004     $ 174,797     $ 148,537  
                 
GAAP gross profit   $ 169,405     $ 140,767     $ 338,787     $ 275,301  
Gross profit adjustments (1,2)     31,731       22,019       63,845       59,395  
Non-GAAP gross profit   $ 201,136     $ 162,786     $ 402,632     $ 334,696  
                 
GAAP income (loss) from operations   $ (6,265 )   $ 15,446     $ (2,392 )   $ 8,018  
Gross profit adjustments (1,2)     31,731       22,019       63,845       59,395  
Research and development (1)     2,419       2,937       4,449       5,627  
Sales and marketing (1)     8,779       6,228       17,297       13,559  
General and administrative (1)     10,386       5,424       17,032       10,458  
Amortization of intangible assets     22,201       19,034       44,327       36,382  
Costs related to research and development collaborative agreement     4,000       -       8,000       -  
Acquisition-related costs, net     7,962       3,327       20,767       9,230  
Restructuring and other charges, net     12,372       250       12,987       2,348  
Non-GAAP income from operations   $ 93,585     $ 74,665     $ 186,312     $ 145,017  
                 
GAAP provision (benefit) for income taxes   $ 2,288     $ (998 )   $ 2,628     $ 10,613  
Non-cash taxes     1,812       4,356       3,301       (1,955 )
Non-GAAP provision for income taxes   $ 4,100     $ 3,358     $ 5,929     $ 8,658  
                 
GAAP net income (loss)   $ (15,396 )   $ 5,280     $ (19,674 )   $ (21,038 )
Acquisition-related adjustment - revenue (2)     19,826       9,645       41,447       37,254  
Acquisition-related adjustment - cost of revenue (2)     (3,403 )     (461 )     (6,800 )     (644 )
Acquisition-related costs, net     7,962       3,327       20,767       9,230  
Cost of revenue from amortization of intangible assets     12,184       9,409       23,202       17,427  
Amortization of intangible assets     22,201       19,034       44,327       36,382  
Non-cash stock-based compensation (1)     24,708       18,015       44,774       35,002  
Non-cash interest expense, net     3,245       3,280       6,524       6,493  
Non-cash income taxes     (1,812 )     (4,356 )     (3,301 )     1,955  
Costs from IP collaboration agreement     4,000       -       8,000       -  
Change in fair value of share-based instruments     (2,636 )     -       (4,708 )     -  
Restructuring and other charges, net     12,372       250       12,987       2,348  
Non-GAAP net income   $ 83,251     $ 63,423     $ 167,545     $ 124,409  
                 
Non-GAAP diluted net income per share   $ 0.28     $ 0.24     $ 0.56     $ 0.48  
                 
Diluted weighted average common shares outstanding     300,196       269,187       297,855       261,884  
                 

Financial statements for the three and six months ended March 31, 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     Six months ended
  March 31,     March 31,
    2010       2009         2010       2009  
                 
(1) Non-Cash Stock-Based Compensation                
Cost of product and licensing $ 9     $ 4       $ 18     $ 6  
Cost of professional services and hosting   2,913       3,147         5,561       4,927  
Cost of maintenance and support   202       275         417       425  
Research and development   2,419       2,937         4,449       5,627  
Sales and marketing   8,779       6,228         17,297       13,559  
General and administrative   10,386       5,424         17,032       10,458  
Total $ 24,708     $ 18,015       $ 44,774     $ 35,002  
                 
(2) Acquisition-Related Revenue and Cost of Revenue                
Revenue $ 19,826     $ 9,645       $ 41,447     $ 37,524  
Cost of product and licensing   (2,957 )     1         (6,144 )     5  
Cost of professional services and hosting   (446 )     (436 )       (656 )     (559 )
Cost of maintenance and support   -       (26 )       -       (90 )
Total $ 16,423     $ 9,184       $ 34,647     $ 36,880  

SOURCE: Nuance Communications, Inc.

For Investors
Nuance Communications, Inc.
Kevin Faulkner, 408-992-6100
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or
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Nuance Communications, Inc.
Richard Mack, 781-565-5000
richard.mack@nuance.com

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