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Nuance Announces Third Quarter Fiscal 2010 Results
Healthcare and Mobile Markets Fuel Revenue, EPS and Cash Flow Growth

BURLINGTON, Mass., Aug 09, 2010 (BUSINESS WIRE) --

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

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

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

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

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

Highlights from the quarter include:

 

  • Healthcare-Dictation - For Nuance's healthcare and dictation solutions, third quarter non-GAAP revenue was $125.9 million, up 16.5%, as reported, from the same quarter last year. During the third quarter, new bookings included large eScription, Dragon Medical and radiology contracts. Key healthcare customers included Advocate Illinois Masonic, Appalachian Healthcare, Citrus Valley, Eastern Ohio Health Alliance, Indiana Clinics, Lifespan Healthcare, Mt. Kisco Medical Group, Ochsner Clinical Foundation, Plexus, Providence Alaska, Universal Health Services, and University of Utah. Key non-medical Dragon customers included the FBI and Texas Department of Family and Protective Services.
  • Mobile-Enterprise - For Nuance's enterprise and mobile solutions, third quarter non-GAAP revenue was $131.7 million, up 4.9%, as reported, from the same quarter last year. Key customers, new bookings or design wins in the quarter included Air France, Atip, Axis Telecom, Bosch, BT, CHMC, CitiGroup, Denso, Elektrobit, Global Bilgi, Harman Becker, HBAS, HTC, M & Soft, Magneti Marelli, Melco, Modelabs, Morgan Stanley, Nokia, Orange, Pantech, Parrot, Prosodie, PSE&G, Reliance, T-Mobile, Times of India, TLM Com, Toshiba, US Air, USAA, UPS, Vietnam Telecom, Vistcom Europe, Vodafone, and ZTE.
  • Imaging - For Nuance's PDF and document imaging solutions, third quarter non-GAAP revenue was $35.8 million, up 102%, as reported, from the same quarter last year, primarily due to contributions from eCopy and X-Solutions. Nuance achieved key third quarter bookings and design wins with Adelshaw Boggard, AON, Auto Cad, Barclays Portugal, Bond Pearce, Canon, DLA Piper, DP Systems, Estes/IKON, HP, IBM, Infineon, Middletons, Pinsent Marons, Softbank, and UNICREDIT.

Financial Analyst Day

Nuance plans to hold a financial analyst day in Boston, MA on the morning of Thursday, December 9, 2010 and via Webcast. Additional details will follow.

Conference Call and Prepared Remarks

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

As previously scheduled, the conference call will begin today, August 9, 2010 at 5:00 pm EDT and will include only brief comments followed by questions and answers. The prepared remarks will not be read on the call. To access the live broadcast, please visit the Investor Relations section of Nuance's Website at www.nuance.com. The call can also be heard by dialing (800) 230-1074 or (612) 234-9959 at least five minutes prior to the call and referencing conference code 165644. A replay will be available within 24 hours of the announcement by dialing (800) 475-6701 or (320) 365-3844 and using the access code 165644.

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 management's future expectations, beliefs, goals, plans or prospects constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements that are not statements of historical fact (including statements containing the words "believes," "plans," "anticipates," "expects," or "estimates" or similar expressions) should also be considered to be forward-looking statements. There are a number of important factors that could cause actual results or events to differ materially from those indicated by such forward-looking statements, including: fluctuations in demand for Nuance's existing and future products; economic conditions in the United States and abroad; Nuance's ability to control and successfully manage its expenses and cash position; the effects of competition, including pricing pressure; possible defects in Nuance's products and technologies; the ability of Nuance to successfully integrate operations and employees of acquired businesses; the ability to realize anticipated synergies from acquired businesses; and the other factors described in Nuance's annual report on Form 10-K for the fiscal year ended September 30, 2009 and Nuance's quarterly reports on Form 10-Q filed with the Securities and Exchange Commission. Nuance disclaims any obligation to update any forward-looking statements as a result of developments occurring after the date of this document.

The information included in this press release should not be viewed as a substitute for full GAAP financial statements.

Discussion of Non-GAAP Financial Measures

Management utilizes a number of different financial measures, both GAAP and non-GAAP, in analyzing and assessing the overall performance of the business, for making operating decisions and for forecasting and planning for future periods. Our annual financial plan is prepared both on a GAAP and non-GAAP basis, and the non-GAAP annual financial plan is approved by our board of directors. Continuous budgeting and forecasting for revenue and expenses are conducted on a consistent non-GAAP basis (in addition to GAAP) and actual results on a non-GAAP basis are assessed against the annual financial plan. The board of directors and management utilize these non-GAAP measures and results (in addition to the GAAP results) to determine our allocation of resources. In addition and as a consequence of the importance of these measures in managing the business, we use non-GAAP measures and results in the evaluation process to establish management's compensation. For example, our annual bonus program payments are based upon the achievement of consolidated non-GAAP revenue and consolidated non-GAAP earnings per share financial targets. We consider the use of non-GAAP revenue helpful in understanding the performance of our business, as it excludes the purchase accounting impact on acquired deferred revenue and other acquisition-related adjustments to revenue. We also consider the use of non-GAAP earnings per share helpful in assessing the organic performance of the continuing operations of our business. By organic performance we mean performance as if we had owned an acquired asset in the same period a year ago. By continuing operations we mean the ongoing results of the business excluding certain unplanned costs. While our management uses these non-GAAP financial measures as a tool to enhance their understanding of certain aspects of our financial performance, our management does not consider these measures to be a substitute for, or superior to, the information provided by GAAP revenue and earnings per share. Consistent with this approach, we believe that disclosing non-GAAP revenue and non-GAAP earnings per share to the readers of our financial statements provides such readers with useful supplemental data that, while not a substitute for GAAP revenue and earnings per share, allows for greater transparency in the review of our financial and operational performance. In assessing the overall health of the business during the three and nine months ended June 30, 2010 and 2009, and, in particular, in evaluating our revenue and earnings per share, our management has either included or excluded items in six general categories, each of which are described below.

Acquisition-Related Revenue and Cost of Revenue.

The Company provides supplementary non-GAAP financial measures of revenue, which include revenue related to acquisitions, primarily from eCopy and SpinVox for the three and nine months ended June 30, 2010, that would otherwise have been recognized but for the purchase accounting treatment of these transactions. Non-GAAP revenue also includes revenue that the Company would have otherwise recognized had the Company not acquired intellectual property and other assets from the same customer during the same quarter. Because GAAP accounting requires the elimination of this revenue, GAAP results alone do not fully capture all of the Company's economic activities. These non-GAAP adjustments are intended to reflect the full amount of such revenue. The Company includes non-GAAP revenue and cost of revenue to allow for more complete comparisons to the financial results of historical operations, forward-looking guidance and the financial results of peer companies. The Company believes these adjustments are useful to management and investors as a measure of the ongoing performance of the business because, although we cannot be certain that customers will renew their contracts, the Company historically has experienced high renewal rates on maintenance and support agreements and other customer contracts. Additionally, although acquisition-related revenue adjustments are non-recurring with respect to past acquisitions, the Company generally will incur these adjustments in connection with any future acquisitions.

Acquisition-Related Costs, Net.

In recent years, the Company has completed a number of acquisitions, which result in operating expenses which would not otherwise have been incurred. The Company provides supplementary non-GAAP financial measures, which exclude certain transition, integration and other acquisition-related expense items resulting from acquisitions, to allow more accurate comparisons of the financial results to historical operations, forward-looking guidance and the financial results of less acquisitive peer companies. The Company considers these types of costs and adjustments, to a great extent, to be unpredictable and dependent on a significant number of factors that are outside of the control of the Company. Furthermore, the Company does not consider these acquisition-related costs and adjustments to be related to the organic continuing operations of the acquired businesses and are generally not relevant to assessing or estimating the long-term performance of the acquired assets. In addition, the size, complexity and/or volume of past acquisitions, which often drives the magnitude of acquisition-related costs, may not be indicative of the size, complexity and/or volume of future acquisitions. By excluding acquisition-related costs and adjustments from our non-GAAP measures, management is better able to evaluate the Company's ability to utilize its existing assets and estimate the long-term value that acquired assets will generate for the Company. The Company believes that providing a supplemental non-GAAP measure which excludes these items allows management and investors to consider the ongoing operations of the business both with, and without, such expenses.

These acquisition-related costs are included in the following categories: (i) transition and integration costs; (ii) professional service fees; and (iii) acquisition-related adjustments. Although these expenses are not recurring with respect to past acquisitions, the Company generally will incur these expenses in connection with any future acquisitions. These categories are further discussed as follows:

(i) Transition and integration costs. Transition and integration costs include retention payments, transitional employee costs, earn-out payments treated as compensation expense, as well as the costs of integration-related services provided by third parties.

(ii) Professional service fees. Professional service fees include direct costs of the acquisition, as well as post-acquisition legal and other professional service fees associated with disputes and regulatory matters related to acquired entities.

(iii) Acquisition-related adjustments. Acquisition-related adjustments include adjustments to acquisition-related items that are required to be marked to fair value each reporting period, such as contingent consideration, and other items related to acquisitions for which the measurement period has ended, such as gains or losses on settlements of pre-acquisition contingencies.

Amortization of Acquired Intangible Assets.

The Company excludes the amortization of acquired intangible assets from non-GAAP expense and income measures. These amounts are inconsistent in amount and frequency and are significantly impacted by the timing and size of acquisitions. Providing a supplemental measure which excludes these charges allows management and investors to evaluate results "as-if" the acquired intangible assets had been developed internally rather than acquired and, therefore, provides a supplemental measure of performance in which the Company's acquired intellectual property is treated in a comparable manner to its internally developed intellectual property. Although the Company excludes amortization of acquired intangible assets from its non-GAAP expenses, the Company believes that it is important for investors to understand that such intangible assets contribute to revenue generation. Amortization of intangible assets that relate to past acquisitions will recur in future periods until such intangible assets have been fully amortized. Future acquisitions may result in the amortization of additional intangible assets.

Costs Associated with IP Collaboration Agreement.

In order to gain access to a third party's extensive speech recognition technology and research organization, Nuance has entered into a six-and-a-half-year agreement to accelerate development of new speech technologies. All intellectual property derived from the collaboration will be jointly owned by the two parties, but Nuance will have sole rights to commercialize this intellectual property during the term of the agreement. For non-GAAP purposes, Nuance considers this long-term contract and the resulting acquisition of intellectual property from this third-party over the agreement's term to be an investing activity, outside of its normal, organic, continuing operating activities, and is therefore presenting this supplemental information to show the results excluding this expense. Nuance does not exclude from its non-GAAP results the corresponding revenue, if any, generated from the collaboration efforts. Although the Company's bonus program and other performance-based incentives for executives are based on the non-GAAP results that exclude these costs, certain engineering senior management are responsible for execution and results of the collaboration agreement and have incentives based on those results.

Non-Cash Expenses.

The Company provides non-GAAP information relative to the following non-cash expenses: (i) stock-based compensation; (ii) certain accrued interest; and (iii) certain accrued income taxes. These items are further discussed as follows:

(i) Stock-based compensation. Because of varying available valuation methodologies, subjective assumptions and the variety of award types, the Company believes that the exclusion of stock-based compensation allows for more accurate comparisons of operating results to peer companies, as well as to times in the Company's history when stock-based compensation was more or less significant as a portion of overall compensation than in the current period. The Company evaluates performance both with and without these measures because compensation expense related to stock-based compensation is typically non-cash and the options and restricted awards granted are influenced by the Company's stock price and other factors such as volatility that are beyond the Company's control. The expense related to stock-based awards is generally not controllable in the short-term and can vary significantly based on the timing, size and nature of awards granted. As such, the Company does not include such charges in operating plans. Stock-based compensation will continue in future periods.

(ii and iii) Certain accrued interest and income taxes. The Company also excludes certain accrued interest and certain accrued income taxes because the Company believes that excluding these non-cash expenses provides senior management, as well as other users of the financial statements, with a valuable perspective on the cash-based performance and health of the business, including the current near-term projected liquidity. These non-cash expenses will continue in future periods.

Other Expenses.

The Company excludes certain other expenses that are the result of unplanned events to measure operating performance and current and future liquidity both with and without these expenses; and therefore, by providing this information, the Company believes management and the users of the financial statements are better able to understand the financial results of what the Company considers to be its organic, continuing operations. Included in these expenses are items such as restructuring charges, asset impairments and other charges (credits), net. These events are unplanned and arose outside of the ordinary course of continuing operations. These items also include adjustments from changes in fair value of share-based instruments relating to the issuance of our common stock with security price guarantees payable in cash.

The Company believes that providing the non-GAAP information to investors, in addition to the GAAP presentation, allows investors to view the financial results in the way management views the operating results. The Company further believes that providing this information allows investors to not only better understand the Company's financial performance, but more importantly, to evaluate the efficacy of the methodology and information used by management to evaluate and measure such performance.

Financial Tables Follow

                 
Nuance Communications, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
Unaudited
                 
    Three months ended   Nine months ended
    June 30,   June 30,
    2010   2009   2010   2009
                 
Revenue:                
Product and licensing   $ 108,840     $ 87,387     $ 335,228     $ 259,987  
Professional services and hosting     117,875       110,966       337,798       304,162  
Maintenance and support     46,488       42,687       136,159       122,870  
Total revenue     273,203       241,040       809,185       687,019  
                 
Cost of revenue:                
Product and licensing     10,901       8,414       34,194       26,222  
Professional services and hosting     71,353       68,321       206,349       189,584  
Maintenance and support     7,631       7,207       23,335       21,387  
Amortization of intangible assets     11,893       10,017       35,095       27,444  
Total cost of revenue     101,778       93,959       298,973       264,637  
                 
Gross profit     171,425       147,081       510,212       422,382  
                 
Operating expenses:                
Research and development     38,916       27,742       113,797       85,622  
Sales and marketing     67,219       50,233       196,680       160,850  
General and administrative     29,887       24,507       88,643       75,333  
Amortization of intangible assets     21,459       19,931       65,786       56,313  
Acquisition-related costs, net     6,125       4,659       26,892       13,889  
Restructuring and other charges, net     3,257       2,893       16,244       5,241  
Total operating expenses     166,863       129,965       508,042       397,248  
                 
Income from operations     4,562       17,116       2,170       25,134  
                 
Other expense, net     (4,261 )     (13,261 )     (18,915 )     (31,704 )
                 
Income (loss) before income taxes     301       3,855       (16,745 )     (6,570 )
                 
Provision for income taxes     1,831       6,670       4,459       17,283  
                 
Net loss   $ (1,530 )   $ (2,815 )   $ (21,204 )   $ (23,853 )
                 
Net loss per share:                
Basic and diluted   $ (0.01 )   $ (0.01 )   $ (0.07 )   $ (0.10 )
                 
Weighted average common shares outstanding:                
Basic and diluted     291,610       260,750       285,202       249,105  
                 

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

 
 
             
  Nuance Communications, Inc.
  Condensed Consolidated Balance Sheets
  (in thousands)
  Unaudited
             
             
  ASSETS   June 30, 2010   September 30, 2009
             
  Current assets:        
    Cash and cash equivalents   $ 492,074   $ 527,038
    Restricted cash     21,974     -
    Accounts receivable and unbilled receivables, net     222,511     208,719
    Inventories, net     8,323     8,525
    Prepaid expenses and other current assets     52,553     51,545
    Total current assets     797,435     795,827
             
  Land, building and equipment, net     56,372     53,468
  Goodwill     2,041,590     1,891,003
  Intangible assets, net     667,879     706,805
  Other assets     67,628     52,361
    Total assets   $ 3,630,904   $ 3,499,464
             
LIABILITIES AND STOCKHOLDERS' EQUITY
             
  Current liabilities:        
    Current portion of long-term debt and capital leases   $ 8,209   $ 6,862
    Contingent and deferred acquisition payments     2,093     91,431
    Accounts payable and accrued expenses     207,059     164,393
    Deferred and unearned revenue     139,096     144,395
    Other short term liabilities     9,574     12,144
    Total current liabilities     366,031     419,225
             
  Long-term portion of debt and capital leases     850,400     848,898
  Long-term deferred revenue     67,197     33,904
  Other long term liabilities     152,095     154,436
    Total liabilities     1,435,723     1,456,463
             
  Stockholders' equity     2,195,181     2,043,001
             
   

Total liabilities and stockholders' equity

  $ 3,630,904   $ 3,499,464
             

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

             
             
         
Nuance Communications, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
Unaudited
    Nine months ended
    June 30,
    2010   2009
         

Cash flows from operating activities:

       
Net loss   $ (21,204 )   $ (23,853 )
Adjustments to reconcile net loss to net cash provided by operating activities:        
Depreciation and amortization     116,738       97,398  
Stock-based compensation     72,868       52,584  
Non-cash interest expense     9,746       9,330  
Non-cash restructuring expense     6,833       -  
Gain on foreign currency forward contracts     -       (8,049 )
Deferred tax provision     (2,321 )     8,117  
Other     1,671       1,624  
Changes in operating assets and liabilities, net of effects from acquisitions:        
Accounts receivable     (13,023 )     47,713  
Inventories     280       (2,261 )
Prepaid expenses and other assets     (5,149 )     (5,746 )
Accounts payable     (3,960 )     22,744  
Accrued expenses and other liabilities     (7,825 )     (9,217 )
Deferred revenue     30,044       (6,124 )
Net cash provided by operating activities     184,698       184,260  
Cash flows from investing activities:        
Capital expenditures     (16,284 )     (15,682 )
Payments for acquisitions, net of cash acquired     (155,882 )     (113,886 )
Proceeds from maturities of marketable securities     -       56  
Payments for equity investment     (14,970 )     (159 )
Payments for acquired technology     (14,850 )     (65,257 )
Increase in restricted cash     (22,070 )     -  
Net cash used in investing activities     (224,056 )     (194,928 )
Cash flows from financing activities:        
Payments of debt and capital leases     (6,376 )     (5,261 )
Purchases of treasury stock     (575 )     (144 )
Payments of other long-term liabilities     (7,319 )     (6,915 )
Proceeds from settlement of shared-based derivatives     6,391       -  
Proceeds from issuance of common stock, net of issuance costs     12,350       175,111  
Proceeds from issuance of common stock from employee stock options and purchase plan     22,832       10,995  
Cash used to net share settle employee equity awards     (17,465 )     (6,186 )
Net cash provided by financing activities     9,838       167,600  
Effects of exchange rate changes on cash and cash equivalents     (5,444 )     115  
Net increase (decrease) in cash and cash equivalents     (34,964 )     157,047  
Cash and cash equivalents at beginning of period     527,038       261,540  
Cash and cash equivalents at end of period   $ 492,074     $ 418,587  
         

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

         
         
                     
Nuance Communications, Inc.
Supplemental Consolidated Statements of Cash Flows
(in thousands)
Unaudited
                     
    Three Months Ended
    6/30/10   3/31/10   12/31/09   9/30/09   6/30/09
                     
Cash flows from operating activities:                    
Net income (loss)   $ (1,530 )   $ (15,396 )   $ (4,278 )   $ 4,466     $ (2,815 )

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

           
Depreciation and amortization     38,761       39,747       38,230       36,661       34,465  
Stock-based compensation     28,094       24,708       20,066       18,823       17,582  
Non-cash interest expense     3,222       3,245       3,279       3,162       3,015  
Non-cash restructuring expense     -       6,833       -       -       -  
Deferred tax provision     (1,210 )     (800 )     (311 )     17,601       6,505  
Other     1,005       (25 )     691       342       (290 )
Changes in operating assets and liabilities, net of effects from acquisitions:                
Accounts receivable     (4,482 )     (2,274 )     (6,267 )     (14,232 )     13,931  
Inventories     (429 )     135       574       893       (800 )
Prepaid expenses and other assets     (721 )     (4,329 )     (99 )     (6,913 )     2,553  
Accounts payable     (1,711 )     1,460       (3,709 )     3,838       (2,755 )
Accrued expenses and other liabilities     2,532       (17,760 )     7,403       4,210       (6,385 )
Deferred revenue     587       19,984       9,473       5,578       (11,311 )
Net cash provided by operating activities     64,118       55,528       65,052       74,429       53,695  
                     
Net cash provided by (used in) investing activities     (34,534 )     (30,075 )     (159,447 )     10,318       (57,570 )
                     
Net cash provided by (used in) financing activities     5,897       10,372       (6,431 )     21,816       (1,140 )
                     
Effects of exchange rate changes on cash and cash equivalents     (5,211 )     (923 )     690       1,888       2,620  
                     
Net increase (decrease) in cash and cash equivalents     30,270       34,902       (100,136 )     108,451       (2,395 )
Cash and cash equivalents at beginning of period     461,804       426,902       527,038       418,587       420,982  
Cash and cash equivalents at end of period   $ 492,074     $ 461,804     $ 426,902     $ 527,038     $ 418,587  
                     

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

                     
                     
                 
Nuance Communications, Inc.
Supplemental Financial Information - GAAP to Non-GAAP Reconciliations
(in thousands, except per share amounts)
Unaudited
    Three months ended   Nine months ended
    June 30,   June 30,
    2010   2009   2010   2009
                 
GAAP revenue   $ 273,203     $ 241,040     $ 809,185     $ 687,019  
Acquisition-related revenue adjustments: product and licensing     12,922       8,264       44,726       40,217  
Acquisition-related revenue adjustments: professional services and hosting     6,359       1,506       9,632       3,956  
Acquisition-related revenue adjustments: maintenance and support     900       519       7,269       3,370  
Non-GAAP revenue   $ 293,384     $ 251,329     $ 870,812     $ 734,562  
                 
GAAP cost of revenue   $ 101,778     $ 93,959     $ 298,973     $ 264,637  
Cost of revenue from amortization of intangible assets     (11,893 )     (10,017 )     (35,095 )     (27,444 )
Cost of revenue adjustments: product and licensing (1,2)     2,794       (2 )     8,920       (13 )
Cost of revenue adjustments: professional services and hosting (1,2)     (2,181 )     (1,953 )     (7,086 )     (6,321 )
Cost of revenue adjustments: maintenance and support (1,2)     (165 )     (93 )     (582 )     (425 )
Non-GAAP cost of revenue   $ 90,333     $ 81,894     $ 265,130     $ 230,434  
                 
GAAP gross profit   $ 171,425     $ 147,081     $ 510,212     $ 422,382  
Gross profit adjustments (1,2)     31,626       22,354       95,470       81,746  
Non-GAAP gross profit   $ 203,051     $ 169,435     $ 605,682     $ 504,128  
                 
GAAP income from operations   $ 4,562     $ 17,116     $ 2,170     $ 25,134  
Gross profit adjustments (1,2)     31,626       22,354       95,470       81,746  
Research and development (1)     2,282       2,013       6,731       7,640  
Sales and marketing (1)     12,516       6,687       29,813       20,246  
General and administrative (1)     10,512       6,346       27,544       16,804  
Amortization of intangible assets     21,459       19,931       65,786       56,313  
Costs related to research and development collaborative agreement     4,208       -       12,208       -  
Acquisition-related costs, net     6,125       4,659       26,892       13,889  
Restructuring and other charges, net     3,257       2,893       16,244       5,241  
Non-GAAP income from operations   $ 96,547     $ 81,999     $ 282,858     $ 227,013  
                 
GAAP provision for income taxes   $ 1,831     $ 6,670     $ 4,459     $ 17,283  
Non-cash taxes     3,471       (4,170 )     6,772       (6,125 )
Non-GAAP provision for income taxes   $ 5,302     $ 2,500     $ 11,231     $ 11,158  
                 
GAAP net loss   $ (1,530 )   $ (2,815 )   $ (21,204 )   $ (23,853 )
Acquisition-related adjustment - revenue (2)     20,181       10,289       61,627       47,543  
Acquisition-related adjustment - cost of revenue (2)     (3,232 )     (488 )     (10,032 )     (1,135 )
Acquisition-related costs, net     6,125       4,659       26,892       13,889  
Cost of revenue from amortization of intangible assets     11,893       10,017       35,095       27,444  
Amortization of intangible assets     21,459       19,931       65,786       56,313  
Non-cash stock-based compensation (1)     28,094       17,582       72,868       52,584  
Non-cash interest expense, net     3,222       3,231       9,746       9,724  
Non-cash income taxes     (3,471 )     4,170       (6,772 )     6,125  
Costs from IP collaboration agreement     4,208       -       12,208       -  
Change in fair value of share-based instruments     1,044       3,782       (3,663 )     3,782  
Restructuring and other charges, net     3,257       2,893       16,244       5,241  
Non-GAAP net income   $ 91,250     $ 73,251     $ 258,795     $ 197,657  
                 
Non-GAAP diluted net income per share   $ 0.30     $ 0.26     $ 0.86     $ 0.74  
                 
Diluted weighted average common shares outstanding     305,427       281,151       300,511       268,699  
                 

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

                 
                 
                   
Nuance Communications, Inc.
Supplemental Financial Information - GAAP to Non-GAAP Reconciliations, continued
(in thousands)
Unaudited
                   
    Three months ended     Nine months ended
    June 30,     June 30,
    2010   2009     2010   2009
                   

(1) Non-Cash Stock-Based Compensation

                 
Cost of product and licensing   $ 7     $ 2       $ 25     $ 8  
Cost of professional services and hosting     2,612       2,402         8,173       7,329  
Cost of maintenance and support     165       132         582       557  
Research and development     2,282       2,013         6,731       7,640  
Sales and marketing     12,516       6,687         29,813       20,246  
General and administrative     10,512       6,346         27,544       16,804  
Total   $ 28,094     $ 17,582       $ 72,868     $ 52,584  
                   

(2) Acquisition-Related Revenue and Cost of Revenue

                 
Revenue   $ 20,181     $ 10,289       $ 61,627     $ 47,543  
Cost of product and licensing     (2,801 )     -         (8,945 )     5  
Cost of professional services and hosting     (431 )     (449 )       (1,087 )     (1,008 )
Cost of maintenance and support     -       (39 )       -       (132 )
Total   $ 16,949     $ 9,801       $ 51,595     $ 46,408  

SOURCE: Nuance Communications, Inc.

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Nuance Communications, Inc.
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