Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Nuance Communications Inc (NUAN) Q4 2019 Earnings Call Transcript

By Motley Fool Transcribers - Nov 20, 2019 at 10:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

NUAN earnings call for the period ending September 30, 2019.

Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Nuance Communications Inc ( NUAN -0.74% )
Q4 2019 Earnings Call
Nov 20, 2019, 5:00 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Ladies and gentlemen, thank you for standing by, and welcome to the Nuance Q4 2019 Results Conference Call. At this time, all participants are in a listen-only mode. (Operator Instructions) I would now like to hand the conference over to your speaker today, Tracy Krumme, Senior Vice President, Investor Relations. Thank you. Please go ahead.

Tracy Krumme -- Senior Vice President, Investor Relations

Good afternoon, everyone. Before we begin, I would like to remind everyone that our discussion includes predictions, estimates, expectations and other forward-looking statements. These statements are subject to risks and uncertainties that could cause material differences in our actual results. Please refer to our recent SEC filings for a discussion of these risks.

All references to income statement results are non-GAAP, unless otherwise stated. As noted in our press release, we issued prepared remarks in advance of this call, which are available on our IR website. That material is intended to supplement our comments on the call today.

I would also like to note that there is a PowerPoint presentation also on our IR website that accompanies this call. Please take a moment to access it, if you have not already done so. It will remain on our site after today's call as well.

In terms of format, Mark will cover the quarter and year's highlights, then Dan will provide financial insights as well as our outlook for 2020. Following that, we'll open the call to Q&A.

And with that, I'd like to turn the call over to Mark.

Mark Benjamin -- Chief Executive Officer

Thanks, Tracy. And good afternoon and thanks for joining us. Q4 marked another quarter of solid execution by our global teams and I couldn't be prouder of what they have accomplished. We posted strong financial results, drove higher growth in our cloud-based ARR and continued to make significant progress toward the strategic initiatives we announced last November.

Today, we are a stronger, more agile and more unified company than ever before. But before I get ahead of myself, I want to take the opportunity to thank my team for their hard work and dedication. The level of commitment and determination they've exhibited over this past year has been amazing. We work together to execute on our fiscal 2019 goals and critical initiatives, which have sharpened our focus and positioned us well for fiscal 2020.

Turning to Slide 4. As you know, we took a number of significant strategic actions over the year to transform Nuance into a simpler, more growth-focused company. We exit 2019 as the undisputed leader in conversational AI for healthcare and enterprise with a strong market position in fast-growing verticals.

Transitioning our solutions to the cloud has been a top priority, and this enables us to shift our revenue mix to a more subscription-based higher value recurring model. During the year, we made significant progress migrating incremental Dragon Medical on-prem customers to the cloud with Dragon Medical One or DMO and saw success with the early launch of our new cloud solutions and created a go-to-market approach that align sales compensation to our cloud models. These efforts resulted in strong annual Dragon Medical ARR of $257 million, up 38% year-over-year and above our guided range. I'll talk more to this in a few minutes, but we expect this momentum to continue as the combination of these new products and improved sales focus drive significant ARR growth in 2020 and beyond.

Throughout this year of transformation, we also focused on simplifying the business. This included the sale of our Imaging business. The exit of our SRS business and most recently, the spin-off of our Auto business into its own separate entity called Cerence effective October 1.

Simplifying our organization and operations enables our R&D and go-to-market teams to be more focused, which we expect will also make them more effective. This has also allowed us to focus on the strategic investments we outlined one year ago. These involve expanding our go-to-market presence in underpenetrated and new markets, expanding internationally and accelerating our innovation activities, particularly in AI. One tangible outcome of this AI focus is the strategic partnership we recently announced with Microsoft.

As you probably saw a few weeks ago, Microsoft will be working exclusively with us to accelerate the development of our Ambient Clinical Intelligence or ACI technology and actively support our go-to-market activities. This will fast track our ability to make a difference in healthcare and has been well received by our customers. I couldn't be more excited about this, and I'm looking forward to doing great things together on this groundbreaking technology.

In addition, simplifying the business provided us with some cash flow in excess of our normal generation capabilities of the business. In line with our focus on disciplined capital allocation, we use some of this cash to pay down $300 million of debt and we repurchased $127 million of stock during the year. In total, since May of 2018, we've paid down $750 million of debt and repurchased 21.2 million shares or 7.2% of our outstanding shares. We continue to be active buyers and have purchased $50 million of stock thus far in Q1 2020.

Turning now to Slide 5. Q4 was an excellent quarter and one in which we delivered once again on what we said we would do. Let me touch on a few points. First, we executed against the strategic and financial objectives we laid out last November. We delivered revenue at the high end of our range and exceeded expectations for margins and EPS. We delivered strong cash flow, in line with expectations. And we are clearly gaining momentum, as this was our sixth consecutive quarter of solid financial performance either meeting or beating expectations. What's clear is that we have successfully navigated the early part of this on premise to cloud transition. As we've said, driving scalable operating margins are crucial to our future, and we are focused on capturing recurring revenue growth and maximizing the portion of our revenues that are SaaS.

Taking a closer look at the segments, starting with Healthcare on Slide 6, we have invested heavily in the areas that we expect will be growth drivers for years to come. We've established Nuance as a cloud platform in all of our solution areas with the launch this year of PowerScribeOne for our radiology base, CDE One for our clinical documentation improvement programs and of course, our Dragon Medical One or DMO.

Our growth is driven not only by offering these cloud-based solutions, but also by the addition of our AI-powered capabilities to each offering. We have also expanded our sales coverage in existing and new markets, including community hospitals, ambulatory clinics and surgery centers, and both federal and international markets. Looking at some of the specific accomplishments our Healthcare team made during Q4.

First, in our computer assisted physician documentation solution set or CAPD, we launched a new pediatric solution, plus also exceeded our own internal plan for our new Surgical CAPD by adding a significant number of new sites in Q4.

Second, we had continued momentum in our Dragon Medical cloud delivering year-over-year revenue growth of 42% in Q4 and 54% in the year. Additionally, we're seeing success with our early migration to the cloud and PowerScribeOne and CDE One, which are not reflected in our 2019 ARR number, but will be included going forward in 2020.

Third, within our AI marketplace, we signed 15 new agreements with industry-leading AI image developers. Our AI marketplace leverages our partnership with NVIDIA and the American College of Radiology bringing AI into the workflow for our customer base, which includes roughly 80% of US radiologists. It's worth noting that we were the first company to create an AI marketplace, as we look to build the one-stop app store for AI radiology algorithms.

And finally, our international markets continue to scale. We had Dragon Medical wins in Canada, the UK, France and Sweden. Importantly, our international expansion for Dragon Medical cloud is on track with our recent launch in Australia with additional countries that include France and Germany this fiscal year that will provide us additional EU country coverages for DMO as well. Key DMO wins include Cleveland Clinic London and NHS Harrogate in the UK. We have an exciting pipeline building overseas and are in the midst of growing our direct sales force by more than 20%.

Moving to Enterprise on Slide 7. Over the course of the year, we made excellent progress in expanding our omnichannel cloud offerings, including combining virtual and live engagement with Agent AI capabilities that increase first contact resolution rates and reduce agent handling time. We also enhanced our support for Apple Business Chat, SMS. More recently, we have deployed our solutions into Microsoft Azure, which will enable more rapid geographic expansion.

I'm proud of the achievements our Enterprise team has made as we have delivered consistent solid results ending 2019 with a record year and 5% organic growth, which is also our fourth consecutive year of growth for this business unit. Our Enterprise segment faced a difficult compare to Q4 2018, but still posted a very strong quarter with $126 million in revenue. There are three Q4 highlights I'd like to point out here. First, we expanded our omnichannel cloud platform enabling organizations of all sizes to easily integrate conversational AI through APIs and an open framework. This allows large organizations to better customize deployments and give smaller organizations access to our technology that's powered successful conversational AI deployments of much larger companies.

Second, we launched Nuance Gatekeeper, a cloud-native biometrics solution for authentication and fraud prevention and the newest addition to our omnichannel cloud solutions. Based on our new Nuance Lightning Engine, Gatekeeper uses neural net AI to authenticate individuals within seconds of speaking, truly an industry-leading capability. And early customer win is one of North America's largest transportation networks, which deployed our system to improve their back office process improving the safety and security of thousands of employees, while also reducing cost for the customer.

Gatekeeper also addresses market demand for cloud-native contact center solutions such as those provided by Amazon Connect. Through a cloud-to-cloud integration, Gatekeeper and Amazon Connect provide organizations the ability to deliver innovative and secure customer care experiences entirely in the cloud.

And lastly, we continue to receive third-party validations, including most recently being named the undisputed market leader in voice biometrics by Opus Research and awarded best AI application in financial services by Forbes at the recent AIconics event.

Turning to Slide 8, our Automotive division closed its tenure as part of Nuance with a record Q4 and full year that sets them up well as they begin fiscal 2020 as Cerence. Design wins in the quarter span China, Europe, the Americas, Japan and Korea and included our first India-based OEM and first intelligent car in Indonesia. Over these last 12 months, the Automotive team has stayed focused and executed flawlessly with impressive performance that has resulted in record sales growth for the business and a strong pipeline for the future. I know I speak for all of Nuance when I say that we wish the entire Cerence team all the best.

Moving to Slide 9. Before turning the line to Dan, I'll note we're really pleased with our Q4 and FY '19 performance. We delivered solid financial performance, while undergoing significant operational change, and we've transformed Nuance into a simpler, more growth-oriented company with emphasis on driving growth in recurring revenue by leveraging the power of our conversational AI capabilities. We've added more cloud products, are hyper-focused on ARR growth and are continuing to invest in breakthrough AI innovation to keep our solutions best in industry. We are leveraging this into a stronger go to market excluding expanding cloud into new geographies and bringing on new channel partners that can accelerate our market penetration into a wider base of customers. That momentum and the key initiatives we have planned for FY '20 will provide important levers for growth in FY '20 and beyond.

Dan will speak to our 2020 guide in more detail, but let me just say that in Healthcare, we expect the combination of new cloud offerings and continued migration to DMO and our expansion in new markets and geographies to yield ARR growth of approximately 30%. We're really excited about our ACI initiative, which we think affords us more opportunities for growth, especially with a partner like Microsoft.

Our Enterprise business has momentum coming off our fourth consecutive year of organic growth, and we forecast another year of solid growth in 2020, including segment margin improvements. Growth will come from leveraging the new Microsoft Azure partnership to deliver our cloud solutions more broadly in EMEA and APAC, and continued penetration of our customer base with omnichannel cloud solutions, including voice biometrics and virtual agent.

In fiscal 2020, we will continue to ramp our strategic investments that were started in 2019 and largely funded through cost reductions, while maintaining a clear focus on growth and ROI. Additionally, we will remain very focused on driving shareholder returns through continued disciplined capital allocation.

We've come a long way in a year, and we are taking the right steps as an organization. We see terrific opportunities ahead, and we're confident that we have a great deal of greenfield to capture and the right strategies and excellent team to achieve our strategic goals and deliver value for all of our stakeholders.

Over the course of the past year, I've spoken about our conscious approach to enhancing the Nuance culture and I believe our efforts have paid significant dividends. The team is more engaged in collaborative than ever. We can't wait to dive more deeply in all of these areas at our upcoming Investor Day in a few weeks.

And with that, I'll turn the call over to Dan.

Dan Tempesta -- Executive Vice President & Chief Financial Officer

Thanks, Mark and good afternoon everyone. Before we begin our discussion, there are a couple of financial presentation points I would like to make. First, as we walk through our Q4 and fiscal year 2019 results, I will do so on an ASC 605 basis, which includes the Automotive business since that spin-off transaction did not incur until after the close of our fiscal. I will then pivot the discussion to fiscal year 2020 guidance. I will provide some bridging data to help you understand how the adoption of ASC 606 and the removal of the Automotive segment affects our projections.

Beginning in Q1 2020, we will report our results only on a 606 basis. Additionally, when we report our Q1 2020 results in February, we will also adjust our historical results to be on a continuing operations basis, which means we will reclassify our historical Automotive business results into discontinued operations.

Turning to Slide 11. We are pleased with our results in Q4 and for fiscal year 2019 overall. As you can see, we performed within or above our fourth quarter and full-year guidance on every metric. We had excellent revenue results and earnings per share were well above our guidance.

In addition, I'm particularly pleased with how we did on Dragon Medical cloud ARR landing at $257 million above our guided range. As you know, this is a forward-looking metric that tracks the new sales made during the year and represents the estimated annual revenue under contract for our Dragon Medical cloud offerings.

We also had strong operating margins for the year, coming in at 28% as well as cash flow from operations, which totaled just over $400 million. That strong operating and cash flow performance provides us the flexibility to both reinvest in our business and make the right capital allocation decisions that drive shareholder value.

This next Slide 12 shows you our revenue performance for each of our businesses. If we focus on the fourth quarter, Healthcare and Automotive had excellent growth. our Enterprise segment faced a difficult compare in Q4 2018, but still posted a very strong quarter with $126 million in revenue. These strategic businesses collectively grew almost 6% when comparing Q4 2019 to Q4 2018 and almost 3% for the fiscal year. Please note that we will still have a small portion of Other segment revenue related to our legacy voice mail-to-text devices in SRS businesses, which declined in line with our plans.

As we go deeper on our Healthcare revenue results on Slide 13, I'd like to point out a couple of notable items. First, our Dragon Medical cloud results came in higher than our most recent guidance landing the year at $213 million in revenue and on the back of a strong fourth quarter of bookings and conversions. Second, consistent with our guidance, we enjoyed a particularly strong quarter in our Dragon Medical Product & Licensing line due to a large federal deal in the US, coupled with continued international license strength. This is one of the business lines that should decline as we transition our business to our cloud-based Dragon Medical Products. But as we have discussed, the international markets are slower to adopt our cloud solutions and as an interim step, are purchasing our Dragon Medical on-premise solution first. We expect these little markets to more rapidly adopt our cloud solutions beginning in 2020 as Mark mentioned.

Our license growth was offset by expected declines in our low-margin HIM transcription business and planned declines in our non-strategic low-margin EHR implementation services business, which is reported in the professional services line.

Turning now to Slide 14, 2019 was an excellent year for Nuance in the segment margin front. As you can see, we performed exceptionally well in each of our businesses. This outperformance was driven by two primary factors. First, the Healthcare revenue mix moved as planned toward higher gross margin products. The second factor is related to the benefits we enjoyed from our cost-savings programs, compared with the timing of our investment initiatives.

As we have pointed out on each of our quarterly calls during 2019, we were successful in taking out costs from the business at a faster pace than we anticipated. At the same time, our investments were more back-end loaded and will continue into 2020. As a result and in line with what we told you during the year, our 2019 operating margin performance reflects all of the benefits from our cost rationalization plan and only a partial burden of the investments we have planned. Therefore, the magnitude of our segment operating margin outperformance during 2019 will moderate in the very near term. I will say, however that once this timing-related impact works its way through, we are committed to returning to a steady cadence of increasing operating margins each year thereafter.

Slide 15, you'll see that we have laid out our revenue and segment margins for 2019 on an ASC 605 and 606 basis. I think of this slide more as a reference tool to help you build your forward-looking models. As you refer to this page, you can see that the impact of 606 is not significant for the company. However, at the division level, the effects are more pronounced in Healthcare due to two primary reasons. First, Healthcare has a number of historical term license offerings, particularly in Dragon, radiology and CDI. Under 606, the full amount of the term license revenue gets reported at the time of booking as opposed to ratably throughout the term thereby reclassifying revenue under 606 into periods prior to 2019. Since these term offerings are simultaneously undergoing a shift to cloud service offerings, which are recognized ratably. We are not experiencing an equal revenue offset for new term licenses in 2019. The second driver is due to a reallocation of fair value, which impacts both timing and classification of revenue categories under 606, particularly with the large bundled arrangements executed in the last few years.

With those explanations in mind, the most important point to make on this page is that the cash flow from operations are completely unaffected by the ASC 606 accounting, timing and reclassification changes. Fewer assistance and to help you update your models for 605 to 606, we have provided reference tables for segment revenue segment margin in the Healthcare revenue detailed tables located on our website.

Moving to Slide 16, let's talk about ARR. As you know, we have historically defined ARR to be exclusively related to the Dragon Medical cloud products. This metric allows us to track the cadence of our business while we execute our Dragon Medical on-premise to cloud transition. As you can see, our underlying recurring cloud subscription business continues to experience very high growth despite the slower overall revenue growth that results from this type of transition. In 2019, we experienced 38% ARR growth and in 2020, we see similar absolute dollar growth yielding a growth rate of approximately 25%.

Turning to Slide 17 as we enter 2020, we are expanding how we think about ARR. This is because we now have several products in addition to our traditional Dragon Medical line that are transitioning to the cloud. Products like PowerScribe One in radiology, CDE One for clinical documentation specialists and some of our smaller legacy cloud offerings are likely to show meaningful cloud growth in the coming quarters and years.

We, therefore, want to show the most complete measure of Healthcare cloud subscription growth as some of these transitions to cloud will come at the expense of on-premise license and maintenance revenue growth. The grey section of the bars represents these emerging cloud-based subscription products. When you combine all of our Healthcare cloud subscription business lines, our total ARR is expected to grow approximately 30% in 2020 as compared to 40% in 2019.

I will also point out that our current plan is to break out our Dragon Medical cloud ARR as well as emerging ARR for fiscal year 2020, but that in fiscal year '21 and beyond, we will collapse these categories and simply report one consolidated ARR figure. Although our thinking on this may change over time, I wanted to provide transparency as to our current plans.

On Slide 18 as we look forward to 2020 revenue guidance, we are expecting 0% to 3% revenue growth for our strategic businesses, which now is shown excluding Automotive.

Within Enterprise, we are guiding a fifth straight year of organic growth as we expand our footprint and market share across the Enterprise portfolio of products. Within Healthcare, we expect the trends we experienced in 2019 to repeat with very strong [Phonetic] growth in our Healthcare cloud offerings, offset by declines in both our on-premise license offerings and low-margin HIM transcription services. I will talk more about Healthcare on the next slide.

Finally, we continue to wind down our Other segment and will experience accelerated declines due to the sale of our SRS business in the second half of 2019. On a more granular level and in keeping with our practice from last year on Slide 19, we are providing our guidance for the Healthcare segment. We provide guidance ranges for each of our Healthcare lines of business on an annual basis and will only adjust them if needed throughout the course of the year.

You'll notice that if you were to total up all the low ends and all the high-ends of the ranges, the spread would amount to something greater than our total revenue guidance range. While there may be variability within each line item, collectively, we are confident in the total range provided for the entire division.

As you review the numbers, note that transitioning our Healthcare solutions to the cloud and shifting our revenue mix to higher value subscription models remains a top priority. We are focused on the long term to build a predictable recurring high-margin business. Our 2020 Healthcare revenue guidance reflects the continuation of this strategy. Within our clinical documentation capture business, we expect continued strong growth in Dragon Medical cloud. Due to this cloud migration, this growth will be offset in the near term by declines in the other three categories.

Maintenance and support will decline as we migrate our on-premise install base to the cloud. Product and licensing revenue should also decline at an accelerated rate as we have now enabled our channel to sell Dragon Medical cloud and launched multiple new Dragon Medical cloud offerings in certain international markets. We also had a large federal license deal in 2019. That does not repeat in 2020. Finally, our legacy transcription services business will continue the normal trajectory of about 15% annual decline.

For Radiology & Other, we expect continued growth, but it is slightly lower rate compared to previous years due to the two new cloud transitions I talked about earlier. The emergence of PowerScribe One and CDE One will both have a dampening effect on Radiology & Other revenues, but as we experience with Dragon Medical, that will be picked up as new ARR.

Now that we have level set you on the revenue side, let's turn our attention to Slide 20 in our gross and operating margins. This waterfall chart shows you the various puts and takes that bridge the gap from 2019's margins on a 605 basis to 2020 margins on a 606 basis. As we've discussed, the transition to 606 is purely an accounting change and has no impact on our cash flow. With that said and based upon our current estimates, the transition to ASC 606 creates a headwind to 2020 gross margin of approximately 90 basis points and operating margin of approximately 130 basis points.

Once we start with that adjusted baseline, I point out a few items. First is the revenue and business mix improvement. We continue to migrate our business mix toward higher-margin solutions and we expect approximately 190 basis points of improvement to our gross margin and a corresponding 130 basis point of improvement to our operating margin.

The second point relates to the ramping of our planned investments. This is what I discussed earlier and goes back to what we've been saying over the course of the year. We achieved a significant improvement on our operating margins in 2019 in part because our cost savings initiative outpaced the rampup of our investments. With our investments fully ramping in 2020, we expect these to have a 70 basis point impact to our gross margin and 280 basis point impact to our operating margin and thereafter, to level out and then reverse as these investments drive incremental revenue in the outyears.

Walking through the balance of this chart, you can see that the removal of Auto has a 250 basis point impact on our consolidated gross margin and a 120 basis point impact on our consolidated operating margins. There are, of course, stranded costs with the spin of Auto. However, we launched programs during 2019 to reduce those stranded costs and expect that we will be able to offset substantially all of the impact in 2020. Taking into account all of these dynamics, we are providing gross margin guidance of approximately 60% and operating margin guidance for 2020 with the midpoint of 24%.

We are also providing segment margin guidance on Slide 21. 2020 Healthcare margins are down year-over-year primarily due to the strategic investment dynamics I just mentioned, as well as the reduction in license revenue resulting from our cloud transition. Enterprise segment margins are up, despite the impact of the strategic investments with a favorable revenue mix shifting toward higher-margin solutions in 2020.

Similar to last year, we are providing cash flow expectations, which can be found on Slide 22. This year, modeling our business should be meaningfully simpler than it was last year. But just to help understand how all the pieces flow together, we are showing a pro forma cash balance after taking into account the impact of the Automotive spin.

You can see that while we ended 2019 with approximately $765 million in cash and marketable securities, we are starting 2020 with approximately $600 million mainly due to the redemption of our senior notes. We expect to end 2020 closer to $800 million, which provides us a significant amount of flexibility to make the right strategic moves, whether it's in the form of M&A, paying down debt or repurchasing stock. Mark and I are committed to making those choices that will drive significant shareholder value.

Before leaving cash flow, I would also like to point out that our CFFO in 2020 is burdened by approximately $30 million of payments, all related to our 2019 simplification initiatives. These payments will be pronounced in Q1 2020 and therefore, you should expect our Q1 CFFO to be less than our normal run rate.

Finally, Slide 23 provides a summary of our Q1 and full year 2020 guidance, which is also provided in our prepared remarks document as well as some additional guidance information.

With that, I'd like to turn the call back over to the operator to take your questions.

Questions and Answers:


(Operator Instructions) Your first question comes from Saket Kalia with Barclays. Your line is open.

Saket Kalia -- Barclays -- Analyat

Hey guys. Thanks for taking my questions here.

Mark Benjamin -- Chief Executive Officer

Hey, Saket.

Saket Kalia -- Barclays -- Analyat

Hey, Mark. A lot to get through here. So maybe just to start with you, nice guide on the ARR for next year on both Dragon Medical and Imaging. Can you just dig into what the team is going to be doing to really drive customers toward cloud solutions across Dragon Medical, radiology and CDI. For example in '20, are there anything that you expect to do on pricing or go-to-market or anything like that, that's going to support that healthy 30% kind of apples-to-apples growth?

Mark Benjamin -- Chief Executive Officer

Yeah. So we have Rob Dahdah here as well who you've met Saket, who runs our global sales for us. So I'll let him respond, but we share the excitement level for sure relative to ARR and I think the beat continues -- the beat of the drum continues relative to ARR growth in our existing DMO franchise, if you will. I think you see that strength continue albeit against larger numbers, but still nonetheless very exciting for us as we continue and we ramp the international markets on DMO, which will show themselves really contributing ARR in the second half of the year and probably into '20 a little more pronounced in the DMO ARR chart here.

And then you see we've created this emerging ARR with the new products, which is really the -- I think the genesis of your question. So Rob, you want to take some of that from Saket?

Robert Dahdah -- Executive Vice President & Chief Revenue Officer

Yeah, sure. So this is Rob Dahdah. So there are -- obviously as Mark just mentioned, we're really excited because we get to go out and tell a great story to the market and then we're doing that a couple of different ways. First off, we have really great existing relationships with a lot of our customers right now. So, we're leveraging our field teams and the way we're doing that as we built specialist teams to help drive home the messaging, this specific messaging around the CDE opportunity -- CDI opportunities. And so, that's the kind of the first thing we're doing.

We're also building for air cover specific multi-pronged marketing programs. So we can reach out and start to establish the dialog bond before our sales folks get there. And as you probably heard from Mark's comments -- prepared comments, the alignment continues with our comp plan. So we have really built into our incentive comp and recognition plans, the right opportunity for our sales folks to really want to sell to this. So we think we have really good coverage, and we're excited to continue delivering that in the market.

Mark Benjamin -- Chief Executive Officer

Yeah. And Saket, this is Mark. So having been through these transitions both Rob and I have, and you've certainly witnessed other companies getting that sales incentive right, which Rob touched on I mentioned in my remarks, is super critical. And I think having that set for '20 and beyond is really an important step for -- really all of Nuance, not just around these two solutions, but for the future of the business really growing where we wanted to grow and how we wanted to grow, so certainly an exciting time.

Saket Kalia -- Barclays -- Analyat

Absolutely and I agree with you there. Maybe for my follow-up for you Dan, I would love to zoom in on the stranded costs and particularly the comment in the prepared remarks about eliminating the margin impact of the Automotive spin by the end of 2021. I guess the question is, is that sort of implying the core business can really make up for that lost margin? I think it's about 120 basis points from Auto on the operating line. And the core business is really make up for that lost margin from Auto after the stranded costs are gone and any further detail on that comment will be very helpful.

Dan Tempesta -- Executive Vice President & Chief Financial Officer

Sure. Thanks, Saket. Good question. Yes, I think you have it right. I mean on the chart, we presented and in the call remarks, we mentioned it was a $35 million estimated stranded cost amount from Automotive. The chart shows you in the operating section that we lose 200 basis points for stranded costs, but we get them back through the savings initiatives.

Now, if you think about the savings initiatives, they're starting now. So we're ramping them up and they'll really sort of get going in the first half of 2020, but then they'll ramp up and they'll continue through the -- throughout the year and into 2021. So we think as they continue, we recover the full amount of the $35 million within 2020, but then we generate incremental savings in '21 as well, and the objective is to take care of that margin hit of course, with the Auto business leaving us.

Saket Kalia -- Barclays -- Analyat

Got it. That's very helpful. Sorry, if I could just squeeze in a last one -- a last modeling question if I may for you, Dan. Can you just talk a little bit about the free cash flow profile here? I mean, obviously, a lot of changes within the Company and with 606 kind of creating a little bit of moving part, I guess, anything you can note in the free cash flow profile in that midpoint of about $270 million for next year?

Dan Tempesta -- Executive Vice President & Chief Financial Officer

Sure. If you look at Page 22 of the slide deck, we did highlight that $270 million that you mentioned, and we also footnoted and I discussed in my remarks, there is about $30 million of what I'll call one-time simplification costs related to the carve-out activities and then the related restructuring costs. And those are directly related to the Auto aspects here. So if you back that out, our free cash flow midpoint would move from $270 million back to $300 million. That's pretty powerful, at the same time as you consider all the investments that we're making into the business. So we're really excited about the free cash flow that our business continues to throw off, but I do think it's artificially pressured right now because of those costs and they should come back in the future.

Mark Benjamin -- Chief Executive Officer

Yeah. And I would also add. I realize we're talking free cash flow versus expense, but the expense -- it's really just a timing of when the cash leaves the Company. So these were already contemplated costs, all within the ranges from the '19 work and I refer to it internally here as just the spillover effect of timing of cash out the door, which isn't always easy to control and unfortunately, I think it doesn't really blur the picture, but it doesn't really give that kind of to your question, Saket, I think the steady state of the existing business for '20 that would likely be incrementally $30 million higher on the free cash flow, which is I think what we would expect. So I think that's the point that Dan is driving here.

Saket Kalia -- Barclays -- Analyat

Got it. Makes sense. Thanks a lot guys.

Dan Tempesta -- Executive Vice President & Chief Financial Officer

All right. Thank you, Saket.


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

Dan Ives -- Wedbush Securities -- Analyst

Yeah, thanks. So maybe first for Mark and Rob. So Rob, maybe you could sort of hit on -- in Healthcare, specifically on the cloud side, maybe do you feel like you're starting to see some of the changes that you're making in terms on the sales force and strategically really starting to benefit you guys in terms of sales cycles? I mean, it seems like if I just wanted to get more granular from a sales execution and maybe strategy perspective going further up hospitals and cloud. Thanks.

Robert Dahdah -- Executive Vice President & Chief Revenue Officer

Yeah. So thanks for the question. I think we definitely feel really good about the positioning we have now. We're excited about the investment that the Company has made in not only increasing the amount of sales folks we have, but of course, increasing our geography, so deploying cloud overseas and really key market. So that starting -- that word is getting out not only internally into our teams who some of the traditional groups that grew up in the business, selling license now, are really grasping and understanding how to sell and working with the cloud and the market itself is receptive to it.

So I think we're feeling really good about that, where we have opportunities to really enhance the experience. We built specialist teams to work with our existing field teams. So we feel really good about that. We've expanded into the mid-market, and we're selling there where we didn't really very specifically call in that space before. We're fully staffed to our original plan and going after that. So the mid-market is new to us. So we feel -- I'll say a good about that.

So overall, yeah, we feel great about our cloud opportunity and the ability, from the Company side to invest in the sales organization in a way that makes it reachable for us. So, early on feeling really good about it.

Dan Ives -- Wedbush Securities -- Analyst

Great. And then in terms of -- I'm going to next sort of one to two years, how should I think about maybe there is some businesses obviously with more legacy on them; on the services side, specifically on Healthcare and in some of that business that maybe more strategic, how should we think about resources or even the focus on some of those businesses, Mark? And then maybe talk more about the Analyst Day, but I'm just trying to think about the next like year how to think about some of those non-strategic businesses specifically and services? Thanks.

Mark Benjamin -- Chief Executive Officer

Sure. Hey, Dan. So, good question. So I think a little bit consistent with what we started to talk about through the second half of '19 relative to some of the services aspects of the business. We've de-emphasized growing some of those segments that really don't fit the "strategic profile." Some of them actually do line up well to the strategy. We refer to as one of them that don't particularly line up as our EHR implementation services.

So we'll continue to de-emphasize those parts of the business. In this '20 guide, we essentially hold that business flat after a significant curtailing of the revenues in '19. So we didn't want to create any, I think, next year challenge or headwind. So we thought holding these business flat and in watching the investments and making sure we're investing for all of the right strategic growth businesses and not distracting ourselves really away from that and away from the cloud, there are services that support the cloud business. Our customers look for some elements of managed services that we think can carry a pretty good margin profile on them, but I think prioritization then continues to be like the key for us, and we'll continue to kind of step away from businesses that are less strategic for us over the even the near-term horizon.

I think you see that in the Healthcare schedule as well like where we're coming down in these categories as we transition Rob's entire sales force now internationally is cloud-focused and ARR and ACV focused, there's really no -- the benefits of simplifying this Company can really be felt across now our remaining two businesses. So, yeah, that's how I probably respond to kind of the non-strategic. We still have those businesses. We still have important customers of ours with those services. So we're not running away from anyone, but we are obviously prioritizing.

Dan Ives -- Wedbush Securities -- Analyst

Great job again everyone. Thanks.

Mark Benjamin -- Chief Executive Officer

Thanks, Dan.


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

Sanjit Singh -- Morgan Stanley -- Analyst

Hi, thank you for taking the questions and congrats the team for a real strong close to the year. And a special kudos to your team, Dan for clearing out of investor presentation that makes it easy to understand the 606 versus 605 impacts in growth on a like-for-like basis that was super helpful. So congrats on all of those fronts. My question, I guess sort of relates to guidance and what are the things that we've been talking about Nuance for quite some time is that the underlying growth in Healthcare is kind of better than what we're seeing on the sort of headline overall number.

So when I back out professional services residue from Healthcare the last two years, we see some pretty solid growth. I have it at 5% in fiscal year '18 and actually have been accelerating in terms of 7% this year in terms of Healthcare product revenue. But when we looked at the guide for next year implies a flat year-over-year growth on a 606 versus 606 basis.

And I guess my question for you, Dan and also Mark, if you want to chime in, is that just an impact of accelerating transition to costs? I would have expected more growth just given that Dragon Medical cloud is up, a larger portion of the overall mix. So if you sort of under -- help me understand the implied guidance for Healthcare on a product revenue basis, because I think we understand with professional services, we're going to keep that flat, but just on the product revenue side, can you just help me walk through some of those dynamics?

Dan Tempesta -- Executive Vice President & Chief Financial Officer

Sure, this is Dan. I'll start and Mark will jump in. By the way, thank you very much for the complement to the team on the deck they worked really hard. So we appreciate that. The Dragon Medical cloud is, it continues to have really good growth as we mentioned, it's in absolute dollars. It's growing similar to what it was last year and that's a positive. The Dragon Medical maintenance and support will accelerate its decline this year as we really hitting our strides now in the conversions. So we converted a lot in 2019 that causes a decline next year in M&S and that happens again as we had further strides with conversions in 2020. So it's not surprising that we're seeing that accelerated decline.

And then of course, in the product and licensing, it's a pretty meaningful decline as well because we had that one-time federal deal that I cited that was increasing 2019's revenue and it won't recur. So when you put all that together plus the 15% transcription decline, you do get to that flatter type of business, but it is yielding that really strong ARR growth that we're really focused on. So with that said to Radiology & Other, last year had more growth. It was a higher growth year than this 2% to 4% guide, but of course that's now coming down because we are launching those new cloud offerings and that is going to begin its journey and it's shifted to the cloud. So when you put all those factors together, it's a very rational sort of guide in our mind.

Mark Benjamin -- Chief Executive Officer

Yeah. Sanjit, listen I think you're asking the question that I probably spend the most time talking in myself and others about here internally around the growth rate relative to strategic growth drivers and legacy conditions. So -- and I do the back of the envelope math quite regularly on these businesses and certainly, we have continued headwinds created from the transition that Dan mentioned, not to mention the legacy transcription or HIM business. So we still see 600 basis points, 700 basis points of headwind to the overall Healthcare number. And now that we're a "more nimble company", that obviously drives a greater headwind to overall Nuance growth rate.

But as Dan mentioned, which is really I think the key focus, when you look at our Healthcare business, you want to understand the growth profile, you need to look at ARR and certainly now that we have the solutions largely in the cloud, it's no longer just a DMO story, it's no longer just the DMO North America story. So, I think certainly '20 shows like you mentioned a little bit of much of the same, but I think for those that follow the Company and understand the moving parts, I think the pay-off is quite apparent and you see in the numbers on the Healthcare schedule kind of that in the clinical capture category that those lines really cross this year in '20. So obviously, the headwind now abates to a higher growth ARR in Dragon Medical revenue line. So I think it's promising as we head out of '20 into the following years.

And Sanjit, although it's not part of your question, none of our 2020 guide has our ACI ambitions and the Microsoft partnership built into really any of it. It doesn't contribute to ARR. It doesn't contribute to revenues in '20. And as we've mentioned, we're launching that product in this first calendar quarter coming in the first five specialties. So I think we're being cautious. I think we're still working our way through the advancements of technology relative to ACI, but we continue to believe that to be the game changer within the industry and that I think will bode very well for us also in the coming, I'd say, back half into '21 and beyond as far as the potential for that solution.

Sanjit Singh -- Morgan Stanley -- Analyst

That's great color. I appreciate all the detail. And I guess -- and then takeaway -- I take from those comments from both you and Dan is that we're just -- we're continuing to lean into cloud, which is kind of what we want to all see the business go. And so, the follow-up question is when it comes to CAPD, when it comes to radiology and it comes to CDI One, is there anyway to frame out like that how to think through the unit economic profile of that in terms of the transition, in terms of its impact on the revenue and profit as we move those lines more to a cloud-based format, similar to how we talked about Dragon Medical cloud and its impact on revenue and profit over time? Is there anyway to frame that up?

Mark Benjamin -- Chief Executive Officer

Yeah. I'll keep it at a very high level, especially because it's very, very early days with those products rolling out, but I think big picture you should consider when you think about radiology and PowerScribe -- on-prem moving to PowerScribe One, the M&S stream will enjoy a similar uplift. We are now starting to get validation of that, that it will enjoy a similar two-plus times uplift in revenue, as did Dragon Medical One saw.

The second part is, of course, a fair amount of the PowerScribe product offerings are term based and they are moving to the cloud. So they were higher type revenue with high-margin businesses. So they will have a slight uplift getting to the cloud, but not to the same degree as maintenance and support. And then lastly, when you think about our CDI business in the past, it was really a combination of consulting services and software. So it was a real mix because that's how hospitals buy those types of services and what we're converting to in the future is a cloud-based software SaaS-based offering. And so, it's hard to predict where the revenue will land on that and if there's any multiple increase or not, but what we do know is that we should see improved margins in that business shift.

Sanjit Singh -- Morgan Stanley -- Analyst

Perfect. Thank you. Dan.

Dan Tempesta -- Executive Vice President & Chief Financial Officer

I think Sanjay, we will also go a little deeper at Investor Day on that transition at the BU level certainly relative to the cloud transitions in radiology and the other solutions and CDE.

Sanjit Singh -- Morgan Stanley -- Analyst

Great. That make sense.


Your next question comes from Jeff Van Rhee with Craig-Hallum. Your line is open.

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

Great. Thanks. Several for me guys. The -- maybe just -- you just touched on it briefly there, but I want to take you back to Mark on the two things. Microsoft relationship is a release out, but maybe put a little more meat on the bones there because it certainly sounds like you're very excited about it. And then on the ACI, also could you flush out a little more about the developments thus far in terms of what you've learned in the field, customer interests lead up to pipeline? Just a little more color on those two. That would be great.

Mark Benjamin -- Chief Executive Officer

Sure. Sure, Jeff. Thanks for the question. Our conversations with Microsoft have been, I think, taking place even well before my arrival here at Nuance on a couple of different fronts and not unusual. They are obviously a partner of ours in hosting and other places in the business, but really as our cloud transition and as ACI became a quite prominent and relevant investment for us to take, which we took obviously a little over a year ago in a significant fashion.

Our discussions with Microsoft, we have very similar philosophies and goals around healthcare and what we want to solve for, what our mission is relative to the physician and the patient and what the industry is suffering what today. So we had, I think, very similar goals, very similar philosophies and they have a healthcare business under really the moniker of PowerMD and we thought we could really kind of benefit from working with each other and accelerate the art of what's possible. And certainly, they weren't looking to get into the business. We were in and we're driving toward with ACI, but at the same time, leveraging their AI capabilities against our ACI capabilities that are really early stages really represented opportunity and it was really a strategic opportunity.

So, we ultimately got to a place with that -- with the most senior team there, and we saw the course together, and it's obviously very early, but we're super excited to have them. I mean, it ultimately gets the world's largest software company behind our ambition, having I think access to not just their team. But their technology and capabilities is really meaningful to us. So I think it's something that I think is super exciting for both companies. It doesn't change our course as far as our solutions being hours, our go-to-market, but it's certainly I think accelerates what's possible and certainly, we get the benefit of having their support behind us. And the reaction Jeff from the customer base, from the industry relative to Nuance partnering with Microsoft; in regards to ACI, has only been positive. And as you do and as you know that working with large horizontal software players can occasionally be a tricky course or something that isn't always naturally met with great excitement and I think working with Microsoft. It has been everything and more than what we could have hoped for. Relative to ACI -- go ahead Jeff.

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

No, no, go ahead.

Mark Benjamin -- Chief Executive Officer

I was going to try to answer the second part.

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


Mark Benjamin -- Chief Executive Officer

I think relative to ACI, we are at several of our client sites today in beta. We will go GA Q1 calendar 2020 with our first five specialties that we've talked about and in -- throughout the course of this fiscal year, we will add a large number of other call it ambulatory specialties to the tune of 15 or 18 more and obviously, that will contribute to to sales and growth and ultimately, ARR and revenues as we go.

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

Are you at a point now where you have at least some crude semblance of what you think the ARPU might be on those products?

Mark Benjamin -- Chief Executive Officer

We're being a bit cautious this early. We've been, I think, very focused on the value proposition and ultimately solving the problem and ultimately, what that will yield as far as cost benefit. And I think we still see this as a significant multiple -- multiplier if you will to our Dragon Medical One, a solution, which we've talked about publicly, is roughly 50 per month per doc, generally speaking, and we see a multiplier that's fairly significant on that number. We are cautious. Obviously, we're not speaking publicly about what some of the early adopters are accepting, but we're feeling very good about, I think, the value this will create and ultimately, the technology and the automation of the solution can really yield.

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

Got it. Great. I'll leave you there. Thank you.

Mark Benjamin -- Chief Executive Officer

Jeff, I think certainly, you'll hear more at Investor Day around ACI. You'll also hear from one of our early site, early customers using the solution, and I know you've been through the demonstration. But you'll go through it again, likely in all likelihood. And I think you'll get a little more clarity on 10th of December.

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

Got it. I appreciate it.


Your next question comes from Tom Roderick with Stifel. Your line is open.

Jeffrey Parker Lane -- Stifel, Nicolaus & Company -- Analyst

Hi, it's actually Parker Lane on for Tom. Thank you for taking my question. So you guys have talked about in the push to international markets there being some structural limitations around Dragon Medical One and customer adoption in those areas. As we think about the shift in radiology with PowerScribe One, could you talk about first what percentage of that business roughly is in international markets today? And then two, whether or not those structural challenges also persist in that business and will cause in an elongation of the transition there? Thanks.

Mark Benjamin -- Chief Executive Officer

Yeah. Hey Parker. This is Mark, maybe we -- all three of us may take a shot at some of your question. So I'll start with the easy parts because that's what I'm good at. 0% of our radiology business is international today and a 0% is cloud-based international of our radiology business. So ultimately, we view that as a complete greenfield. By the way, also on the license side so depending on the country and willingness to take a hosted solution versus a local solution or even a hybrid solution for that matter. So Rob, you want to add anything?

Robert Dahdah -- Executive Vice President & Chief Revenue Officer

Yeah, I mean as the -- just the deployment of the cloud, as you heard earlier, we're looking at opening up two new markets. We're in two right now. We've got a great traction in the ones that we are -- we've been in UK for a while now, Australia just recently. So overall, I mean we're -- as a percentage it's still small, just because of North America's size and the time that we've been in that market, but looking forward, we have great ambitions in terms of growth in those spaces and we're deploying teams on top of that to help support the growth there.

Dan Tempesta -- Executive Vice President & Chief Financial Officer

Yeah, I think Parker, the other thing is relative to the PowerScribe base here in the US, which is the business today, which is a on-prem business today, all license and maintenance and support, the early feedback and the early consumption of customers willing to upgrade because it is an upgrade to the cloud. They do benefit from greater functionality. Lower total cost of ownership has been I think quite exciting for us. And I think while still early you see some of the ARR growth in the emerging category in '20 coming off essentially a zero number relative to PowerScribe, I think is pretty encouraging.

Jeffrey Parker Lane -- Stifel, Nicolaus & Company -- Analyst

Got it. That's really helpful. Thank you.

Dan Tempesta -- Executive Vice President & Chief Financial Officer

All right, Parker.


Your next question comes from Shaul Eyal with Oppenheimer. Your line is open.

Yi Fu Lee -- Oppenheimer & Co. Inc. -- Analyst

Thank you for taking my question. Congrats on the quarter, as well as the successful Auto spin-off. This is Yi actually in for Shaul. In the interest of time, I just have one quick follow-up question for you, Mark or Dan. In terms of the capital allocation, you mentioned that it's going to go down to retain the 6% senior note as well as share repurchase. In terms of other investment, I guess priorities, what are you gentlemen thinking off like that on the next step to reinvest in with the excess cash flow?

Mark Benjamin -- Chief Executive Officer

Sure. Thanks, Yi for the question. I think we're going to discuss more of this in detail at the Investor Day. So I don't want to get ahead of ourselves with any "strategic points" relative to capital allocation. But I will say that we've had I think a good discipline here over these last 12 to 18 months. I think we've made great strides to get to a place where we want to be and in a position that we're very comfortable with. And we'll give a little more color to how we are thinking about deploying capital. I think you're seeing our confidence in the business with the share repurchases we've made literally in the first several weeks of this fiscal year. With $50 million of repurchases already made, we will remain active in the market and look for the right buying opportunities as we've always talked about. I think we -- from a debt standpoint, we're comfortable where we're sitting today. We've, I think, done a really, I think, responsible job to I think getting us to levels on a net basis where we feel good. So -- but we'll talk more about this Yi on the December 10th Investor Day in New York and -- but read this as steady as we go.

Yi Fu Lee -- Oppenheimer & Co. Inc. -- Analyst

Thank you, Mark again. And we look forward to the Investor Day.

Mark Benjamin -- Chief Executive Officer

Great. Thank you, Yi.


There are no further questions at this time. I will now turn the call back over to Mark Benjamin.

Mark Benjamin -- Chief Executive Officer

Okay. Well, I just want to thank everyone for joining us tonight. Obviously, I want to thank my team for a great year, and we look forward to seeing everyone live and in person on December 10th for an exciting half-day session. So thank you.


[Operator Closing Remarks]

Duration: 69 minutes

Call participants:

Tracy Krumme -- Senior Vice President, Investor Relations

Mark Benjamin -- Chief Executive Officer

Dan Tempesta -- Executive Vice President & Chief Financial Officer

Robert Dahdah -- Executive Vice President & Chief Revenue Officer

Saket Kalia -- Barclays -- Analyat

Dan Ives -- Wedbush Securities -- Analyst

Sanjit Singh -- Morgan Stanley -- Analyst

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

Jeffrey Parker Lane -- Stifel, Nicolaus & Company -- Analyst

Yi Fu Lee -- Oppenheimer & Co. Inc. -- Analyst

More NUAN analysis

All earnings call transcripts

AlphaStreet Logo

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Nuance Communications, Inc. Stock Quote
Nuance Communications, Inc.
$54.68 (-0.74%) $0.41

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/07/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.