Nuance's plunge after releasing fiscal first quarter earnings has brought with it fresh 52-week lows. Revenue of $462.3 million and non-GAAP earnings per share of $0.35 were both short of consensus estimates. The nature of Nuance's highly acquisitive strategy inevitably translates into high trading multiples, and as such the stock is very vulnerable to volatility.
Cash flow remains robust, with operating cash flow growing 37% to $122.9 million. Capital expenditures declined at the same time, leading to an increase in free cash flow to $107.8 million, up from $63.9 million. On the other hand, debt continues to climb and approach uncomfortable levels ($2.3 billion in long-term debt).
There were still three primary headwinds that led to the disappointing release. First is that on-demand transcription volumes are declining faster than expected due to the implementation of electronic medical records systems and installation of Nuance's Dragon Medical software. Second, EMEA results are suffering as Europe continues to face macroeconomic challenges that hamper demand, which is expected to continue in the foreseeable future. Lastly, Microsoft Windows-based sales are declining in part because of slow Windows 8 adoption, which has affected Nuance's consumer business.
On the mobile front, Nuance continues to grow its relationships with the two largest smartphone OEMs, Apple and Samsung. Nuance powers the voice recognition engines for both companies' respective voice services, Siri and S Voice. Samsung also recently announced new voice features in its new Galaxy S4 that inevitably tap into Nuance's engine, such as S Translator.
Interestingly, this has been the first time that Nuance has officially confirmed its relationship with Apple. Up until now, Nuance has been vague regarding its large customer contracts and refrained from naming Apple specifically as a key mobile customer, but the company is now acknowledging the relationship with the iPhone maker.
Overall, there have been some challenges in the business, but the long-term thesis remains intact. The weakness in Europe is not specific to Nuance, and the company still fared well with its handset and automobile businesses in EMEA. Fiscal 2013 non-GAAP revenue is expected in the range of $2.15 billion and $2.2 billion, with non-GAAP earnings per share of $1.76 to $1.87. Nuance's outlook left a little to be desired due to some of the headwinds that it's facing, but the plunge to new 52-week lows appears overdone.
Fool contributor Evan Niu, CFA, owns shares of Apple. The Motley Fool recommends Apple and Nuance Communications.
The Motley Fool owns shares of Apple, Microsoft, and Nuance Communications.