Foolish Forecast: Nothing Subtle About Nuance

Speech recognition specialist and Motley Fool Hidden Gems recommendation Nuance Communications (Nasdaq: NUAN) will report its fiscal second-quarter results after the bell on Monday. Listen up, because here is what's on tap.

What analysts say:

• Buy, sell, or waffle? Sixteen analysts cover Nuance, with 12 issuing a buy rating, and the other four saying hold. In our Motley Fool CAPS community, 5,523 investors register an opinion on the company, collectively giving it the highest rating of five stars.
• Revenue. On average, analysts forecast revenue of $214.3 million, 59% higher than last year.
• Earnings. Net income is estimated to come in at $0.18 per share.

What management says:
Looking at Nuance's financials through GAAP lenses gives investors a pretty ugly picture, as the company continues to string losses together quarter after quarter. And not only is management purposely taking this tack of bottom-line losses, they are significantly diluting the share base to boot.

But management has a very grand plan in the works: building and buying the company to a leading position in speech applications across many markets. The acquisition spree is what is bleeding Nuance's bottom line; recent buys -- Tegic from Time Warner's (NYSE: TWX) AOL division, Viecore, and VoiceSignal -- are fueling revenue growth, but costing millions in integration efforts.

Nuance CEO Paul Ricci noted earlier this year, however, that the purchases are a net positive as "the successful integration and performance of recently acquired businesses contributed handsomely to our results and reinforced our ability to extend Nuance's leadership."

What management does:
Nuance's recent acquisitions did a little more damage than normal to the margin picture, as both operating margins and net margins reversed positive trends in the last quarter. And the firm's recently announced acquisition of eScription will be a drag as well.

One Fool says:
Few companies get away with the financial leverage and dilution that Nuance employs to grow. I believe the reason it is able to do so is twofold: It has solid products well positioned in growing industries, and management has a strong track record in successful business integration.

The acquisitions have given Nuance a deep customer list across a number of industries -- like health companies Aetna and UnitedHealth Group  (NYSE: UNH), wireless operators such as AT&T (NYSE: T) and China Mobile (NYSE: CHL), and automakers such as Ford and Daimler AG. But it will be years before these top-tier customers translate into strong bottom-line income.