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What Did Nuance Tell Us This Quarter?

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You might not know Nuance Communications (Nasdaq: NUAN  ) by name, but you've probably met her lovely daughter: The expert in communications between man and machine had a big hand in creating Apple's (Nasdaq: AAPL  ) voice-powered assistant, Siri.

The company reported third-quarter results this morning. Despite riding Apple's mighty coattails, Nuance shares have disappointed investors recently by falling 11% year to date. Fellow Fool Evan Niu calls this a buy-in opportunity, while the analysts at Mizuho Securities see a "hold," at best. Which vision did Nuance support this time?

The average analyst projected adjusted earnings of $0.40 per share on sales of about $440 million. That would be a 14% year-over-year profit jump on 27% higher revenue. Nuance reported non-GAAP sales of $448 million, adding back $16.5 million of revenue otherwise lost to accounting wizardry around recent acquisitions.

Non-GAAP earnings jumped 29% to $0.45 per share, largely keeping pace with adjusted sales. That's a sharp shift from Nuance's guidance for this quarter, which pointed to serious pressure on profit margins. Management explained the strong margins with efficient sales operations and reduced legal costs.

Nuance is pouring money into its research and development budget "in order to capture additional revenue growth in [fiscal year 2012] and beyond." The R&D budget jumped 33% year over year. There's a heavy focus on mobile applications and cloud services, as well as a big bet on voice control and clinical language understanding for the medical field.

Nuance is checking off all the hot keywords: mobile, cloud, medical, growth. The strategy makes sense to me, particularly for investors with a Fool-sized investment horizon of several years or more. Management is investing today's Siri-based dollars in future growth markets, including the endless smartphone and tablet revolution, alongside the baby boomer healthcare bonanza.

Nuance is known for growing by acquisition, but passed up the chance to buy clinical documentation expert M*Modal (Nasdaq: MODL  ) , as JPMorgan Chase (NYSE: JPM  ) stepped up to take that company private. But I wouldn't be surprised to see Nuance upping the ante with a late counteroffer. M*Modal is trading at prices around JPMorgan's buyout bid, and shareholders might not settle for the current deal. Keep an eye on this subtle drama, and look for clues, as Nuance discusses its evolving growth plans in more detail. This earnings report didn't provide much help on the healthcare front.

Long-term margin targets will also give us new insight into Nuance's intentions. If management is truly serious about their avowed long-term thinking, earnings and margins should stay low for the foreseeable future. The payoff would be several quarters away.

Whatever path Nuance walks from here, our senior technology analyst certainly thinks that Apple is still a buy. He spells out exactly why in our brand-new premium report on Apple, which comes packed with a full year of updates as key news develops. Make sure to claim your copy by clicking here.

Fool contributor Anders Bylund holds no position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool owns shares of JPMorgan Chase and Apple. Motley Fool newsletter services have recommended buying shares of Nuance Communications and Apple. Motley Fool newsletter services formerly recommended JPMorgan Chase. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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