Image source: Nuance Communications.
Relative to expectations, Nuance Communications (NUAN +0.00%) released mixed second-quarter 2016 results Monday after the market closed. With shares down more than 10% Tuesday as of this writing, it's evident that investors aren't happy with what the computer software technology company had to say as it continues its transition to a recurring-revenue model.
But before we jump to conclusions, let's take a closer look at what Nuance accomplished over the past three months.
Nuance Communications results: The raw numbers
| Metric |
Fiscal Q3 2016 Actuals |
Fiscal Q3 2015 Actuals |
Growth (YOY) |
|---|---|---|---|
|
GAAP revenue |
$477.9 million |
$477.9 million |
0% |
|
GAAP net income (loss) |
($11.8 million) |
($39.4 million) |
N/A |
|
GAAP earnings (loss) per diluted share |
($0.04) |
($0.13) |
N/A |
Data source: Nuance Communications Inc.
What happened with Nuance Communications this quarter?
- On an adjusted (non-GAAP) basis, which includes $7 million of revenue excluded from GAAP revenue because of accounting treatment of acquisitions, quarterly revenue fell 0.8% year over year, to $484.9 million.
- Adjusted net income increased 6.6% year over year, to $107.8 million, and adjusted net income per share grew 18.8%, to $0.38.
- For perspective, investors were anticipating higher adjusted quarterly revenue of $490.1 million, and lower adjusted earnings per share of $0.37.
- Nuance didn't repurchase any common shares this quarter, leaving $292.5 million remaining under its existing repurchase authorization as of June 30, 2016.
- Delivered net new bookings of $362.9 million during the quarter, down from $484.4 million in the same year-ago period as last year's fiscal Q3 included a significant automotive booking that created an unusually difficult comp. The strongest performance this quarter came from Dragon Medical and Nuance's Imaging segment.
- Recurring revenue represented 71% of total revenue in fiscal Q3, up from 68% in the same year-ago period, driven largely by the acceleration of Dragon Medical to cloud- and term-based models.
- Revenue by product type included:
- A 6% decline in product and licensing sales, to $153 million.
- 3.4% growth in professional services and hosting revenue, to $242.3 million.
- 2% growth in maintenance and support revenue, to $82.5 million.
- Revenue broken by segment included:
- A 3.4% decline in healthcare segment revenue, to $241 million.
- A 0.4% decline in mobile revenue, to $91.8 million.
- 9.4% growth in enterprise revenue, to $95.2 million.
- 0.9% growth in imaging revenue, to $56.8 million.
- In June, Nuance completed an offering of $300 million aggregate principal amount of 6% senior notes due in 2024.
What management had to say
"Overall, we have delivered a solid performance in our third quarter and year-to-date 2016, particularly in our Enterprise segment and automotive business," added Nuance CFO Daniel Tempesta. "Balancing our continued initiatives to reduce costs and improve productivity with investments in our products and growth markets, we believe we are positioning the company for renewed growth and profitability."
Looking forward
For the current quarter, however, Nuance expects adjusted revenue between $498 million and $512 million, and adjusted earnings per share between $0.37 and $0.41. And though we don't pay much attention to Wall Street's quarterly demands, both ranges fell below analysts' consensus expectations for fiscal Q4 earnings of $0.42 per share on revenue of $518 million.
In addition, Nuance reduced its guidance for the full fiscal year 2016, calling for adjusted revenue between $1.965 billion and $1.979 billion (compared with its previous range of $1.975 billion to $2.005 billion), and adjusted earnings per share between $1.48 and $1.52 (compared with $1.48 to $1.56 previously).
To Nuance's credit, management did explain during the subsequent call that they entered the new quarter with a "robust pipeline," with particular strength in bookings for enterprise on-demand and multi-channel products, automotive connected services, and Dragon Medical cloud and bundled solutions. However, it's difficult to predict whether a number of large booking transactions (in the range of $10 million to $50 million) -- which typically require longer negotiations -- will close by the end of the fiscal year, so Nuance's new forecast for the remainder of the year excludes several of these transactions.
While this near-term uncertainty isn't ideal for appeasing impatient investors, Nuance Communications' long-term story appears to remain intact as the company continues to shift its business to more predictable recurring revenue sources. In the end, I think patient, long-term shareholders should applaud Nuance Communications for its prudence.
