Speech solutions company and Motley Fool Hidden Gems recommendation Nuance Communications (Nasdaq: NUAN) is living somewhat of a double life -- with a continuing string of acquisitions, Nuance reports financials in multiple ways. While this helps the company highlight positive operating trends, it also gives the market twice the opportunity to find flaws.
In its fiscal second-quarter release yesterday, things look just peachy on the top line at Nuance -- it's the bottom line that has furrowed the brow of analysts. Revenue on a GAAP basis grew an impressive 54% to $203.3 million, thanks largely to the contribution of recent acquisitions. Looking at sales as if Nuance owned recent acquisitions in the prior year, revenue increased about 14% organically.
But the bottom line showed a wide disparity between GAAP and non-GAAP financials. While Nuance reported a positive $41.6 million net income using non-GAAP methods, this was crushed to a net loss of $26.8 million on a GAAP schedule. The greater than $68 million difference is largely contained in stock option expenses, but is also inflated significantly by amortization expenses and purchase accounting adjustments.
Mobile speech solutions continue to be a hot spot for Nuance -- revenues in this segment soared to $46.7 million. On an organic basis, this is 28% higher than last quarter, as new design wins from the likes of Nokia (NYSE: NOK), Motorola (NYSE: MOT), Research In Motion (Nasdaq: RIMM), and Palm (Nasdaq: PALM) are putting more speech-enabled control in the hands of consumers.
The enterprise business did see some lackluster performance in the North American market. Like unified communications provider j2 Global (Nasdaq: JCOM), Nuance saw customers in the financial services sector curtail spending as they deal with the credit hangover of recent years. Fortunately, management believes other verticals in this segment -- such as telecommunications and hospitality -- will help bring back growth in this segment to the 15% range.
Despite the operating losses reported this quarter, management committed to tightening its belt to moderate losses in future quarters. Though the recent eScription acquisition should reduce cash flow by $5 million to $10 million this year, management expects sequential revenue growth next quarter, as well as reduced net losses.
It's encouraging that while Nuance is widening the gap between real financials and "performance financials," it is also widening the gap between it and the competition. As time goes on, though, investors should put more weight on organic growth and profitability.
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