Thursday night, voice-software specialist Nuance Communications (Nasdaq: NUAN ) reported its official second-quarter earnings. I say "official" because the company had already released its "preliminary" results a couple of weeks ago.
Nuance jumped the gun and gave investors a preview of what to expect, and the figures came out ahead of the company's own initial guidance, sending shares up by 14% in the process. With the uncertainty of a possible miss taken out of the equation, the official figures didn't leave a lot of room for surprises.
Non-GAAP revenue in the second quarter added up to $417.7 million, an increase of 26% over last year. Adjusted net income came out to $138.8 million, or $0.43 per share, also a healthy year-over-year gain. Those figures technically beat the consensus estimates of $412.6 million in sales and a $0.41-per-share profit, but we already knew they would.
CFO Tom Beaudoin said the company saw "unprecedented interest" in Nuance's voice and natural-language systems, and organic revenue growth came in at 15%. All operating segments put up strong growth, and health care remains the biggest revenue source.
Segment Non-GAAP Revenue
Total Growth (YOY)
Organic Growth (YOY)
|Mobile and consumer
Source: Supplemental financial information provided with earnings release.
Nuance also recently closed its acquisition of Transcend Services, adding to its arsenal of medical transcription and speech-editing services. However, the company is still waiting to close its acquisition of rival Vlingo.
The guidance game
Since the quarter's figures were essentially a lock, investors turned their attention to guidance. Third-quarter adjusted revenue is expected to be between $430 million and $447 million, leading to earnings per share of $0.38 to $0.41. Compare those ranges with the $433.5 million in sales and the $0.41-per-share profit the Street is looking for, and you'll see that Nuance may need to stretch a bit to beat the profit expectations.
Looking at the bigger picture, full-year 2012 sales should be in the range of $1.72 billion to $1.76 billion, with adjusted earnings per share between $1.61 and $1.67. Analysts would have settled for just $1.71 billion in revenue and think a profit of $1.63 per share is in order.
CEO Paul Ricci said guidance includes $50 million that Transcend should pitch in this year, although this is a conservative estimate to give room for the short-term effects of integration and acquisition-related accounting, particularly in the first two quarters of an acquisition "based on [Nuance's] experience." Nuance is a serial acquirer, so I trust it has the hang of this by now. Ricci also said he expects "significant revenue synergies" from Transcend, which should "become material in early fiscal 2013."
Mum's the word
Of course, the iElephant in the room is Apple (Nasdaq: AAPL ) , and of course, Nuance won't (or can't) give out specifics or even officially confirm the pair's secret affair. But looking at Nuance's mobile and consumer segment, Ricci similarly said the business "remains intense."
In its filings, Nuance said, "Also contributing to bookings growth was a material contract with a leading consumer-electronics OEM for voice-enabled personal assistant services across mobile devices and entertainment platforms." This is a pretty clear reference to Apple, and when asked to elaborate on this material contract in terms of whether it's a fixed-fee or per-unit price, Ricci said:
I can't share much more. I -- the language in the prepared remarks, I think, was meant to indicate that it was a broad spectrum of devices. But it is centered on the smartphone. It is centered around smartphones, but not exclusively smartphones. And as we've indicated even in the comments I made to earlier questions, these contracts involve numerous forms of revenue that include services, fixed payments, [and] royalties, and all of those are at work in this contract as well.
Source: conference call.
That's encouraging, because it gives investors more to chew on. Ricci's comments strongly hint that Siri will make its way across Apple's product line, and that Nuance will help serve it up, getting both fixed payments and royalties.
Google (Nasdaq: GOOG ) develops its own in-house voice offerings in Android, so Nuance needs to score design wins directly with OEMs to see more mobile upside. Nokia (NYSE: NOK ) and Samsung are listed as key design wins in the quarter, although obviously Nokia is part of the Microsoft Windows Phone camp.
Still the best
This was a solid quarter, and Nuance keeps charging forward on all fronts and its speech-recognition engine is still the best in breed. There's no one else that can help Siri expand its reach as effectively throughout the world with different languages. Meanwhile, health care, enterprise, and imaging aren't laggards, either.
Shares have pulled back significantly since last quarter's results -- this buy-in opportunity is still up for grabs.
Nuance is going to help Apple's international expansion with Siri. There are plenty of other American companies set to dominate the world, starting with these three. Every portfolio deserves some exposure to emerging-market growth, so you might as well start here by grabbing a free copy of this report.