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Nuance Communications Inc (NASDAQ:NUAN)
Q2 2019 Earnings Call
May. 8, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Nuance's Second Quarter of Fiscal Year 2019 Conference Call. (Operator Instructions) Thank you. At this time, I would like to turn the call over to Tracy Krumme, Senior Vice President of Investor Relations at Nuance. Please go ahead.

Tracy Krumme -- Senior Vice President of Investor Relations

Good evening, everyone. Thank you for joining us today on our second quarter fiscal year 2019 conference call. With me on the call today is Chief Executive Officer, Mark Benjamin; Chief Financial Officer, Dan Tempesta; and Rob Dahdah, Executive Vice President and Chief Revenue Officer. As a reminder, this call is being recorded. 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 can cause material differences in our results. Please refer to our recent SEC filings for a discussion of these results. 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 can be found on our IR website. These remarks are intended to supplement our comments on this call today.

And with that, I would now like to turn the call over to Mark. Mark, please go ahead.

Mark Benjamin -- Chief Executive Officer

Thanks, Tracy. Good afternoon, and thank you, everyone, for joining us to discuss our second quarter results. I'm pleased to say that we reported another quarter of doing what we said. We made continued progress on our strategic initiatives and delivered strong Q2 results. We delivered revenue at the high end of our guidance and exceeded our expectations for margins and EPS. We continue to benefit from favorable revenue mix shifts toward our cloud solutions and our disciplined approach to expense management and capital allocation. I feel good about how we're executing toward our strategic plan which we announced last November. The overarching theme is to allow us to focus on growth, invest significantly in key strategic areas, diligently scale operating margins and generate meaningful free cash flow. To that end, here are some of our progress points we've achieved. First, we completed the sale of Imaging on February 1, ahead of our March 31 target day; second, we paid down $300 million of debt in March, as promised, and repurchased 1.2 million shares. This brings our total repurchase to 6.1 million shares or approximately 2.1% of shares outstanding in the first half of the year; third, we made good progress on our auto spin, which I'll detail in a few minutes; fourth, we are focusing our remaining efforts and investments on Healthcare and Enterprise. This is all part of making Nuance a more focused company with a growth profile that should unlock value for all stakeholders; fifth, we continue to successfully wind down activities in our noncore Other segment which includes our SRS and Devices business.

And finally, we exceeded our expectations on our cost savings program. As we transform the company and execute our plan, we have a meaningful opportunity to define our future. I am a firm believer in removing silos in an organization and building a sales culture, where we exceed customer expectations and accelerate growth in key markets. To that end, I recently hired Rob Dahdah in a newly created position of EVP and Chief Revenue Officer. Rob brings 30 years of experience and success in global sales and international markets, with a strong focus on SaaS and subscription-based solutions. He has a track record of developing and executing scalable sales models that include expansion into EMEA, Latin America, APAC and moving down market with SMBs. He brings a strong management system to execute our ambitious sales and growth plans. He joined us from Benefitfocus, a SaaS-based benefits company, where he served as EVP of Global Sales. Earlier, he held sales leadership roles at large public companies including Fleetmatics, SunGard and a nearly 20-year tenure at ADP, where I worked with him personally. Centralizing sales under 1 leader will help integrate our go-to-market strategies and deliver a scalable, consistent and high quality experience for our customers which will be paramount as we accelerate growth. I'm confident he's the right leader to unify our sales organization and I'm delighted he's joining us on the call just 3 weeks into the role.

Without further ado, I'd like to turn the call over to Rob.

Robert Dahdah -- Executive Vice President and Chief Revenue Officer

Thanks, Mark. I'm thrilled to be here and excited about our opportunity. Nuance is the worldwide leader in conversational AI technologies. We have the deepest customer relationships in the industry, a highly skilled sales team and a pipeline of great innovations ready to deploy. As we undergo this transformation, it's an exciting time for the company. I look forward to working with you, Mark, and the whole team to deepen our customer relationships, scale the business to new geographies and leverage our unique strengths to create an exceptional experience for our customers.

Mark Benjamin -- Chief Executive Officer

Thank you, Rob. As we have spoken about in past calls, trend lines within the Healthcare segment are moving in the right direction. We're seeing growth in our higher-margin Dragon Medical cloud solutions and some anticipated declines in our lower margin EHR implementation services and HIM transcription businesses. Our Dragon Medical pipeline remains healthy and this bodes well for recurring revenue that generate strong margins and cash flow. We remain confident in our ARR guidance of $245 million to $255 million. The strength in our Dragon Medical cloud platform is a key driver of growth. We are expanding our Dragon Medical cloud to more physicians in North American ambulatory and acute care settings which opens up new Greenfield opportunities. We are also expanding internationally as these markets are increasing their use of EMR systems and have a need for our solutions. We've seen growing adoption of our Dragon Medical offerings in the U.K., Germany, France and the Nordics, and believe we are entering a robust long-term adoption cycle in these regions. Combined, continued growth of Dragon Medical One, our expansion into international markets and our new CAPD offerings significantly improve our TAM, as we have discussed previously. In radiology, we are also transitioning to the cloud and made great progress in Q2. We recently launched PowerScribe One, our cloud-based radiology solution which adds superior functionality to improve the radiologist experience in clinical and financial outcomes. In addition, we have started the transition of our cloud-based clinical documentation improvement, or CDI business, to the cloud with the launch of CDE One, which is gaining significant momentum as clients look to deploy advanced AI technologies into the revenue cycle workflow. We're excited to transition our on-premise customers to the cloud in the coming period. These 2 solutions are just further examples of the cloud pivot that is under way in Nuance today.

As these solutions gain more traction and become more meaningful contributors to our financial results, we will then include them in our ARR total. I feel good about our strong positioning with customers and partners which was reinforced during the quarter as our team had several opportunities to spend time with healthcare executives and leaders. We attended and presented at numerous industry events and hosted our own Healthcare User Conference & Leadership Summit in Nashville with several hundred providers attending from 44 states and 2 Canadian provinces. I personally witnessed the power of our solutions at HIMSS, the largest healthcare IT event in February. There is no doubt our presence was a milestone for the Healthcare division and for me, it was one of the most impressive innovation displays I've seen in my career. At the event, we introduced our working prototype of ambient clinical intelligence, or ACI, which is our vision of the AI-powered exam room of the future. We hosted over 1,100 people in the ACI experience room and it was received with incredible enthusiasm. Some of the quotes recaptured as attendees exited the ACI experience room were, "I want it now," or "Hands-down, the best thing I've seen. I left the demo with goosebumps," or, and of course, my favorite, "This is a game changer. Exactly what the industry needs to bring back the joy of practicing medicine." Pretty amazing. We're entering live betas this year and expect to roll out ACI more broadly in 2020 with a number of confirmed customer commitments. It serves as a significant innovation milestone for Nuance and for the healthcare industry as a whole. Turning now to Enterprise, the team had another strong quarter. We continue to see excellent demand for our AI-powered omnichannel customer engagement solutions and services which span digital, voice, security and biometrics.

As we have shared previously, 75% of the Fortune 100 companies use our technology or solutions today including leading brands across financial services, telecom and communications, healthcare and more. Our cloud ambitions are not just reserved for healthcare. In the quarter, we announced 2 new enhancements to our intelligent engagement cloud platform. We unveiled Pathfinder, a first of its kind AI innovation that uses chat logs to speed the creation of conversational dialogues. We also launched a new technology bundle for Agent AI, providing contact center agents with automated recommendations and workflows, enabling them to be faster and more productive. We are also bringing our security and biometric solutions to the cloud and we will provide more details as we progress. Moving to Auto, our Auto business delivered a solid quarter as well. We secured new design wins across the globe in North America, Europe, Japan and China, reflecting new lines or models within existing customers such as Toyota, Ford, Chrysler, Volkswagen, Garmin and Bose, which is a new logo. We also saw new vehicle models from some of our existing brands move into production including Daimler's new electric vehicle and the BMW 3 Series. Our business in China continues to grow nicely. We had several wins including a strategic win with Banma, which is a JV between SAIC and Alibaba. We also expanded our partnership with SAIC in China to bring our mobility assistance to its MG brand of cars worldwide, starting with MG Hector, India's first Internet-enabled car. These are important wins for Nuance as we continue to build momentum in China and India, the world's fastest-growing auto markets. We are proud of the business we have built and we look forward to unlocking this value through the spinoff of the business.

We are on track for an October 1 spin. The timing is aligned with our new fiscal year and allows for a clean financial separation. We've made excellent progress on this front. For example, we've hired a CEO and will publicize his appointment within the next few weeks. We've made good headway on hiring other key executives as well. The search for the CFO and CHRO are under way and we've begun assembling our Board with commitments from several directors already. We've selected and begun implementation of our ERP systems. We've defined the majority of the human capital splits and we've largely completed the allocation of technical asset activities. Overall, we are pleased with the momentum we're building toward this spin and look forward to providing you with further updates as we get closer. Before I turn the call the line to Dan, last week marked my 1-year anniversary with Nuance. As I reflect upon my time here, I am incredibly proud of the hard work and heavy lifting that the team has done. We've made a lot of progress from the thoughtful, comprehensive portfolio reviews to the implementation of our strategic initiatives. We have redesigned our internal structure, creating tighter alignment across our teams. We focused on culture, leading with purpose and introduced a number of new corporate giving and social responsibility programs. Nuance was recently recognized as a top place to work in Canada and was recognized for diversity with a perfect score on the Corporate Quality Index by the Human Rights Campaign. It's vitally important that we create a culture at Nuance that is driven by purpose and focused on delivering business-led solutions for our customers. These, in turn, will power innovation, drive growth in our company and create incremental value. We have come a long way in a year and are taking the right steps as an organization. We have more work to do but I have full confidence that we have the right strategies and team to deliver value for all stakeholders.

With that, I'll turn it to Dan.

Dan Tempesta -- Chief Financial Officer

Thanks, Mark, and good afternoon, everyone. Like Mark, I'm pleased with our strong second quarter performance and where we stand halfway through our fiscal year. Our revenue for the second quarter exceeded the midpoint of our guidance by $5 million due to notable strength in our Enterprise omnichannel cloud offerings. Our Healthcare and Automotive segments also performed well and were in line with our expectations. Specifically, within Healthcare, the trends we experienced over the last few quarters occurred once again during Q2. First, Dragon Medical cloud continued its quarterly sequential revenue growth. Second, Dragon Medical maintenance and support declined in line with our expectations as we transition our legacy Dragon Medical licenses business to our cloud-based Dragon Medical One platform. Third, our HIM transcription business continued to decline as anticipated, although this quarter, the pace was faster than our long-term guidance of 10% to 15%. This was primarily related to a difficult compare of Q2 2018 due to the release of customer credits that were never incurred related to our 2017 malware incident. And finally, as Mark mentioned, we continue to experience volatility in our low-margin EHR implementation services, resulting in lower-than-expected revenue in that business. Turning to margins for the company, Non-GAAP gross margin was 61.6%, up 360 basis points year-over-year, and came in slightly better than we expected. This was due to the Enterprise overperformance and the positive mix shift within our Healthcare business. Non-GAAP operating margin was 27.3%, up 310 basis points year-over-year and was better than expected, due in part to the gross margin benefits just discussed, coupled with favorable operating expense management. While we are pleased with our operating expense discipline, we will continue to ramp investments during the third quarter.

As a result, while operating margins will remain robust, I caution against extrapolating any margin expansion too aggressively into future periods. The net effect of these items, combined with our capital allocation actions during the quarter led to strong EPS results. We came in at $0.29, which was above the high end of our guidance range of $0.24 to $0.27. Finally, our balance sheet continues to improve. As Mark highlighted, we repurchased $300 million of our 5 3/8 bonds, shortly after the close of the Imaging sale. We have made real progress in our leverage profile, ending the quarter with net debt leverage ratio of 2.7 times, down from 3.0 times at year-end. I'm happy to say this represents our lowest ratio since fiscal year 2012. During Q2, we generated cash flow from continuing operation of $112 million and ended the quarter with $633 million in cash and marketable securities. This balance is after the $300 million debt pay down and after $91 million in share repurchases in the first half of the year. Our ability to generate strong cash flows gives us exceptional flexibility to both reinvest in our business and return value to our shareholders. One last point on capital allocation as we look ahead to the automotive spin, we continue to believe that the stand-alone Auto business will be levered. This will enable us to bring cash back to Nuance upon completion of the transaction with an expectation that we will keep Nuance net leverage-neutral. Our objective is for both companies to have effective capital structures immediately following the spin.

Now turning to guidance, for revenue, we are maintaining the $1.868 billion midpoint of our full year guidance but tightening each end of the range by $5 million for an updated range of $1.852 billion to $1.884 billion. Although the midpoint has not changed, we have increased the anticipated contribution of our Enterprise segment by $12 million, given the strength in the first half. This is offset by lowering our Healthcare services revenue by $12 million, which is almost entirely driven by our EHR implementation service business. We are maintaining our Dragon Medical cloud ARR range of $245 million to $255 million. We are holding our gross margin guidance at 62% and increasing operating margin guidance by 50 basis points to 26.75%. This increase is due to our continued favorable expense management, while accelerating our growth-related investments. These margin changes flow through to EPS, and we are raising our guidance for 2019 EPS by $0.03 to a range of $1.13 to $1.21. In addition, our 2019 free cash flow guidance remains unchanged at $305 million to $360 million and we are maintaining our projected cash and marketable securities balance for the end of the year in the range of $750 million to $805 million. In closing, this continues to be a year of strategic change through focused execution. And Mark and I are very pleased with the performance we've achieved thus far. During the next few weeks, we will be at the Bank of America healthcare conference in Las Vegas on May 16 and the Craig-Hallum Institutional Investors Conference on May 29 in Minneapolis. We look forward to seeing you there.

Operator, please open the line for questions.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from the line of Saket Kalia of Barclays.

Saket Kalia -- Barclays -- Analyst

Hi guys, thanks for taking my questions here. And welcome, Rob.

Robert Dahdah -- Executive Vice President and Chief Revenue Officer

Thanks.

Saket Kalia -- Barclays -- Analyst

Maybe just for you, Mark, just to start off, really nice to see the EHR business sort of provide that margin tailwind for the full year guide, can you just talk a little bit about how much of that is normalization in that business after a very robust 2018 versus maybe more of a deliberate strategy of deemphasizing that EHR services business?

Mark Benjamin -- Chief Executive Officer

Sure. Well, I appreciate the question. And it's certainly something, Saket, we've been paying attention to, in fact, so much so where we went back and looked at '18. And when you look at the growth rate of the Healthcare business in '18, the largest single dollar contributed to that growth really came out of the EHR business. It's certainly like a banner year for that business. And obviously, it creates tough compares. And you also know that, that business is essentially a lower, if not 0 margin business. It is all people-related and it's all dependent upon a large EMR cycle of go lives. So we're really dependent on another company's installs of the EMR. So -- and we've historically looked at that business as really a way to stay close to the customers. But in the end, those customers are ours as well and they're using us for our high-value Dragon Medical cloud offerings, among others. So certainly it's a tough compare. And we've really been focused on the key drivers of growth of the business that come with the margin profiles and the sustainable recurring revenue lines all throughout the strategic review. And while we haven't necessarily deemphasized the business or have made any decisions about reducing any of the pipeline that may exist, it certainly has not been as robust as the previous year. And it's something we're really looking closely at as far as how much I think energy and resource we want to put into this really nonstrategic business of ours. And it's similar to the mix that you've seen us take in our strategy. We're going to focus on incurring revenues, cloud revenues, subscription revenues that are consistent, sustainable, durable and where we really have differentiation. So I think it's a combination of the two, Saket, and I think we have the back half of the year. If you remember in the first quarter, we raised DMO and Dragon license revenues by a combined $15 million for the year, while taking Professional Services, driven by EHR revenues, down by the same amount in the first quarter. This quarter, you'll see us come back and take EHR revenues down by an additional $12 million. The back half of the year, we have line of sight to some of the revenues in the pipeline and we'll continue to I think execute on the year. You've witnessed we're holding our guidance for the business overall and I think coming into 2020 we'll consider strategic alternatives to EHR.

Saket Kalia -- Barclays -- Analyst

Got it, that's really helpful. Maybe just staying with that cloud theme there, for you, Dan, looks like the radiology business actually saw accelerating year-over-year growth off of what looked like a pretty similar comparable to what we saw last quarter. And so the question is can you just talk about how much of that acceleration is coming from that flywheel effect that we've seen revenue as that transitions to cloud versus maybe how much of that is coming from a healthier perpetual license quarter, for example?

Dan Tempesta -- Chief Financial Officer

Sure. That's a good question. Saket, I think you're referring to the radiology and other growth that we had, 4% in the first quarter, I see 8% in the second quarter. The cloud tech offerings haven't really taken off. As Mark mentioned, we just start rolling our PowerScribe One and we're also just rolling out CDE One, which is our CDI cloud offering. So those are really early stages. They're going to have an impact in 2020, but it will be a modest impact this year, that growth that you're seeing in radiology and other is just good fundamentals from our radiology business and our CDI business.

Saket Kalia -- Barclays -- Analyst

Very helpful. Thanks for taking my questions guys.

Mark Benjamin -- Chief Executive Officer

Thanks, Saket.

Operator

Your next question comes from the line of Dan Ives from Wedbush Securities. Your line is open.

Dan Ives -- Wedbush Securities -- Analyst

Yes, thanks again and solid quarter. So Rob, my question for you, and obviously, Mark, what's the thing that you see, or let's call it in the first 3 to 6 months you think there's some pretty good low-hanging fruit. Obviously, you've got a lot of success at Benefitfocus.

Robert Dahdah -- Executive Vice President and Chief Revenue Officer

Yes, thanks. Thanks for the question. Obviously, I see a lot of opportunity not just in execution but in strategy. And there are a number of places that the company's already built momentum. I think you're all very familiar with the work that's been done, the hard work that's been done to get the transformation under way. So I think I'm showing up just at the right time to be able to help accelerate some of those, some silos that have already been broken down. We'll continue to leverage the strength that we have across the entire business and I think early on, you'll start to see some best practice implementation, some talent sharing within the organization, some opportunity to bring process to bear. And then we'll start to scale the business along with that, the implementation of that kind of infrastructure. So it's really exciting for me early on to see what kind of opportunity we have and I'm looking forward to getting to work.

Mark Benjamin -- Chief Executive Officer

Yes. Dan, this is Mark. So obviously, I'm excited to have Rob here having had the benefit of working with him at ADP. And I think as you know, like the management system that comes with a successful leader like Rob, and not dissimilar to other roles that we've hired or promoted from within here around the centralizing of our technology and R&D leader and our infrastructure and leader, I've been excited about adding this role to Nuance, quite honestly, since I joined. We have a very large and very capable sales force across multiple disciplines and markets. I think having someone like Rob, who's done this at scale, his international experience, his SMB experience, developing high transaction volume-based sales organizations, very high enterprise, large ticket sales force. So I think someone like Rob is going to help, I think, bring all these together for us, not just for the sake of scale, but really for me and you and everyone, for the sake of acceleration of growth. So we're super thrilled to have him here. But feel free to ask him very hard questions because he was hoping for a few.

Operator

Your next question comes from the line of Sanjit Singh of Morgan Stanley. Your line is open.

Sanjit Singh -- Morgan Stanley -- Analyst

Thank you for taking the questions. Really looking to see the margin trajectory thus far this year, I'd be able to start with a high-level question for you, Mark, around ambient clinical intelligence. I'm certainly hearing a lot of the sayings sort of positive feedback that you expressed in your script. And so I was wondering maybe if you could sort of frame out the opportunity for us. I know it's not probably going to be a revenue contributor near term, but essentially, how big can this opportunity be for Nuance whether you're thinking in terms of revenue or percentage of the Healthcare business over time, any way to sort of frame out that opportunity for us?

Mark Benjamin -- Chief Executive Officer

Sure, Sanjit. Thanks for the question. And I'm thrilled with your question and you made Dan nervous because you're asking me the question. But I would say that the market reaction to ACI really words don't do it justice. I tried desperately in the script. So I'm glad you're hearing something quite similar. And it really is -- I think it has the ability to change the healthcare industry relative to the physician-patient interaction as well as the revenue cycle system that exists today which, as you know, is massively inefficient. So the technology that we have coming to market, it will start to hit some of the early specialties in 2020 and we have a roadmap of sorts that will continue the rollout of ACI which essentially starts with the virtual assistant that then transforms the exam room significantly with more technology with ACI. But I would expect it to be a multiyear rollout strategy, early contributor -- contributions in 2020, although I wouldn't say it would necessarily shape and change the shape of our curve, but we do anticipate it will have that powerful of an impact as the rollout gains momentum. We certainly think of it as a multiplier of our existing TAM, so this is not something we're looking for 3% to 5% incremental pricing power and similar type of TAM expansion. We view this as really having significant multiplying effect to the opportunity domestically and internationally as well. So we're investing in the product very aggressively. It's one of our strategic investments that's been budgeted. And there's a lot of great promise in the market. We have some very large healthcare network and IDNs alike asking for early pilot programs, early beta. So it's exactly what you want to have happen -- occur with a new solution among, I think, a very loyal customer base that we have.

Sanjit Singh -- Morgan Stanley -- Analyst

And just a follow-up, Mark. Would it be fair to characterize in terms of the applicability of ACI? Would that appeal to the vast majority of the physician or your hospital customer base?

Mark Benjamin -- Chief Executive Officer

I'd say largely yes. Certainly, as you get to -- if you were to take specialties and take the top 20 specialties, there's not one necessarily that doesn't, I think, get the full benefits of the mature solution. And that's not just within the primary care or exam room, that includes the surgical room or the emergency department, the ambulatory or outpatient locations or facilities that are popular today. So -- and even down to the single practice, 1 doc, 2 doc-type practice. So it's -- we -- the industry, along with Nuance, believes that this is a real game changer.

Sanjit Singh -- Morgan Stanley -- Analyst

Understood. And maybe I'll take up the invitation to ask Robert a question, if I might. So maybe to start, Robert, I think the view historically, prior to Mark joining as CEO, was that Nuance was a pretty heterogeneous operating company. You had a speech recognition company that was operating in very distinct vertical markets. And Mike's done an outstanding job of helping to simplify the business. But from your perspective, what are going to be sort of the cohesive unifying initiatives that can bring about a common sales framework or go-to-market strategy across the business? What are some of the low-hanging fruits and what are your longer-term initiatives on that end?

Robert Dahdah -- Executive Vice President and Chief Revenue Officer

Well, first, thanks for the question. Thanks for including me in the questions, and thanks for making it extra hard, like Mark asked. Just kidding so it's obviously still early, but there are some concepts that I think would work regardless of the actual -- the very specific industry. Certainly, we had deep domain expertise in a number of areas and that is something that's very important to our success in those areas. But we also have deep functional expertise that can scale across the business and that's not necessarily specific to an industry. And so I'm going to initially tap into whatever skill sets we have relative to the larger sales cycles that we have under way that we benefited from over time also, looking at developing a plan to expand into different markets. And so we can leverage some of that existing account, we can bring in a new account but we can deploy systems across that, that are, again, not industry-specific, but that are best practices that can apply in enterprise sales, in mid-market sales and those are things that I have a lot of experience with and hopefully I'll be able to bring value with that, especially not only domestically but internationally. So I think there's a number of an area that we can look at the organization as a whole and get benefit. We can deploy systems; we can leverage tools that are available in the market so we can be a more agile organization. And that will enable us to scale as well. So I definitely think there's opportunity that is not specific to industry that we can put to work pretty quickly.

Sanjit Singh -- Morgan Stanley -- Analyst

Got it. Appreciate. Thank you very much.

Robert Dahdah -- Executive Vice President and Chief Revenue Officer

Thanks.

Operator

Your next question comes from the line of Jeff Van Rhee of Craig-Hallum Capital. Your line is open.

Jeff Van Rhee -- Craig-Hallum Capital Group -- Analyst

Great, thanks. Hi guys. Realized numbers looks great. A couple for me. First, on the PowerScribe on the transition or cloud transition, can you just take a minute and recap from a rev rec standpoint, obviously, the Dragon transition has been a big success and you've got some nice uplift and we're well on into that now. But what does the PowerScribe revenue impact look like when a term/prem customer goes to the cloud? And how does that play through the P&L?

Dan Tempesta -- Chief Financial Officer

Sure. So if a -- in our PowerScribe base today, we have both on-premise and term. So when a PowerScribe on-premise customer moves, you're going to see, they're likely on maintenance and support, and so you're going to see some uplift from maintenance and support going to that cloud probably similar to what you saw in Dragon. When they're term-based, they're sort of paying as you go, maybe paying per report is really how they price that for the most part over, say, a 5-year subscription period. And that's also going to have some uplift. You're going to get a higher uplift from the perpetual than you are from the term, but you're going to get uplift on both. And I would tell you that the majority of the base is on the perpetual side. So we think there should real good economics when you make that shift.

Mark Benjamin -- Chief Executive Officer

Yeah, Jeff, this is Mark. So addition of that, and I think you're aware of this, our position within our power share -- PowerScribe, rather, base is 80% of radiologists today that are 100% on-prem. So -- and as Dan said, essentially it comes on a per image or per report basis. And as we roll PowerScribe One to that base and upgrade the base to the cloud solution, we do expect there to be a pricing power, a pricing multiple of the per image charge as we go forward, so very early, nothing in the numbers yet. Again, it's not contributing to ARR. We'll likely think about 2020 as that transition begins to take some speed and ramp with our sales force, but it's certainly one of the more exciting opportunities that we have in radiology today.

Jeff Van Rhee -- Craig-Hallum Capital Group -- Analyst

Yes, perfect. Yes. Yes, for sure. And then just back to the ambient clinical intelligence. Obviously, seems have the potential, like you said, to be a game changer. So just you're talking early specialties in 2020. I may have missed it earlier but can you fill in the gaps from here to there? What does the process look like beta, et cetera? Just what do the trials look like? How big are the group pieces? Just some details would be good.

Mark Benjamin -- Chief Executive Officer

Yes. So part of the early process is data collection. So we start with a virtual assistant, we use virtual scribes and we really start to build it by specialty. And certainly, it will take some of the early specialties that have a smaller medical catalog, if you will, first perhaps jumping into primary care that has a very broad catalog and care universe, if you will. So you'll see us start with a handful of early specialties, ENT, ortho, we'll select a few of our early adopters to begin that walk. And the nice part about these AI-enabled machines and solutions is they get smarter the more that we use them. So we look to partner with some scale operations that accelerate us. So again, I think it will be a multiyear walk with us and I don't want to get ahead of ourselves just yet because we have other great trends happening in the business. The ACI base, just for what it's worth, will be driven from the Dragon Medical cloud and the Dragon family, if you will. So it really becomes an extension of existing services and solutions. So it's not the start over, if you will, it's really a very nice upgrade with what we view to be massive benefit. But again, early days. We showed it at HIMS, Jeff, and again, I try to do justice on my remarks, but it really -- it's one of those cases where it is a bit of a lightning in a bottle that we're able to catch you know we just have to go execute. The team here has been working on ACI well before my arrival so I give a lot of credit to the team that started really on this initiative probably 3 years ago and the progress of they've made, I'd say, in the last 18 months has brought us to this point to be able to talk about it.

Jeff Van Rhee -- Craig-Hallum Capital Group -- Analyst

Yes. Great. Last one for me, the HIMSS, the legacy lines transcribe business, obviously, down more than expected this quarter. I think Dan gave the reasoning behind that but as you go forward, how do you think about that now in terms of the pace of decline and in particular, where's the floor? I know there were some thoughts that you were getting something attached with Dragon, and just a little update there would be helpful.

Mark Benjamin -- Chief Executive Officer

Sure. You're right, we did have a tough compare last -- I mentioned in the opening remarks. Last year, we had about a $6 million set of credits that came through for some true ups related to malware. So that threw off the compare. But if you sort of exclude that, we're year-over-year, down, call it 17%. We guided for the year to be down around 17% but adjusted for those credits, you should think of it as a 15% decline. So with that said, I really do think of a -- there can be some volatility in the decline but in the near future, for the next several years, think of 10% to 15%. As far as the floor, this isn't a business that goes to 0. I think in several years, the decline in speed will slow a little bit. So you could probably think of it as low hundreds sort of a business that you get to.

Jeff Van Rhee -- Craig-Hallum Capital Group -- Analyst

Got it. Great, thank you.

Operator

You're next question comes from the line of Tom Roderick of Stifel. Your line is open.

Jeffrey Lane -- Stifel, Nicolaus & Company, Incorporated, Research Division-Associate

Hi, it's actually Parker Lane in for Tom. So you called a couple of -- you called some solid traction in Northern Europe and Western Europe with the Dragon Medical cloud offering. So just wondering if you could discuss some of the unique challenges of that particular market? What sort of incremental go-to-market investments you have to make and how the competitive environment really differs from that in North America there?

Mark Benjamin -- Chief Executive Officer

Sure, Parker. Yes, thanks for the question. I mean certainly, the European market is a number of years behind the U.S. markets relative to EMR adoption. And that's really much the tailwind will start to become part of as of the adoption rates increase and as the need for EMR solutions grows, really country by country, regardless of medical system and peer systems that exists over there, it certainly will become an important part of how they digitize their healthcare system. And we're seeing that already. So I think the other part of our build and investment is really to stand up our cloud solutions throughout the countries we will operate in. And it's very country by country specific relative to very heightened and strict data privacy laws, regulations. Certainly, relative to healthcare. So we're the U.S.'s one body and one governed body regarding HIPAA, when you get to Europe, obviously, you're looking across many countries that govern their own privacy and health information privacy differently. So that's some of the complexity. It's not something that we shy away from.

We think it's an opportunity for someone with our experience and skill. We have an existing sales force within Europe, one that Rob is focused on growing. And Parker, as we've said in the past, we do have good momentum certainly on a year-over-year basis as far as growing Dragon Medical. It's still a license business outside of the U.K., which we're happy to see the market with. And as Dragon Medical cloud gets stood up country by country, think France, think Germany, the U.K. is already up, the Nordics. You will begin to see the contribution to ARR and DMO going forward. But that's really just the beginning for us. We have other geographies more than just the countries I mentioned internationally. We're standing Dragon Medical cloud up in Australia right now as we speak, partnering with Cerner on some opportunities. So again, this is really, as we said in the script, we believe this is part of really a long-term adoption cycle that's very early days. And by the way, we think it's a contributor of the existing TAM that we benefit from in the U.S. So we do like the aspects of that opportunity for growth.

Operator

(Operator Instructions) Your next question comes from the line of Saket Kalia of Barclays. Your line is open.

Saket Kalia -- Barclays -- Analyst

Hey! guys, sorry to get back into the queue here. I wanted to make sure this question was asked, maybe to you, Mark. Can you just talk about any preliminary feedback after 3M's acquisition of M*Modal? I know that they've been investing more in the healthcare segment there. They've got some services that compete in the CDI part of the business. The number certainly wouldn't indicate any sort of competitive pressure but I want to make sure the question is asked, do you see them becoming a big competitor for us or is that perhaps a disruption opportunity for Nuance?

Mark Benjamin -- Chief Executive Officer

It's a great question and certainly, we watch all of our competitors very closely and certainly 3M and M-Modal, very much. I would say from a competitive and general market dynamic, we really have not seen a shift from our sales pipeline and sales success and our win rates. We continue to be truly pleased with the performance. Is there the potential where they're now a part of a much larger company, that could represent I think both sides of the coin that you suggest. It could be distraction, it could create some, I think, market confusion where there are overlapping products of those 2 companies. We like the fact that we have our services and transcription business currently part of Nuance, and a lot of our customer feedback, at least on the competitive front, is now that those are separated. Typically, we sell these in the bundled approach and now I think competitively, we like our position even more from that view. But we'll watch very closely. And I think our market position, I think the investments we're making this year are timed right relative to all competitive pressures and competing priorities. And I think this will just continue to bolster our position in our markets.

Saket Kalia -- Barclays -- Analyst

Very helpful, thanks.

Operator

There are no further questions at this time. I will turn the call back over to Mr. Mark Benjamin, CEO, for closing remarks.

Mark Benjamin -- Chief Executive Officer

Okay. I just want to thank everyone for joining us this evening, and we look forward to seeing you at events in the coming weeks and months. But thanks very much.

Operator

That concludes our call this evening. You may now disconnect your lines.

Duration: 50 minutes

Call participants:

Tracy Krumme -- Senior Vice President of Investor Relations

Mark Benjamin -- Chief Executive Officer

Robert Dahdah -- Executive Vice President and Chief Revenue Officer

Dan Tempesta -- Chief Financial Officer

Saket Kalia -- Barclays -- Analyst

Dan Ives -- Wedbush Securities -- Analyst

Sanjit Singh -- Morgan Stanley -- Analyst

Jeff Van Rhee -- Craig-Hallum Capital Group -- Analyst

Jeffrey Lane -- Stifel, Nicolaus & Company, Incorporated, Research Division-Associate

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