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Nuance Keeps Seeing Demand Rise

By Dan Caplinger - May 9, 2017 at 11:15PM

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GAAP losses at the voice and language specialist hid the progress the company is making.

For years, Nuance Communications ( NUAN 0.27% ) has worked hard to make itself a leader in having technology work hand-in-hand with humans using their voices. Yet the company has had to struggle through setbacks and hasn't yet found the ideal way to live up to its full potential.

Coming into Tuesday's fiscal second-quarter financial report, Nuance investors wanted to see evidence that the company would continue to deliver at least modest growth in sales and earnings. Nuance's results reflected some changes in internal accounting, but for the most part, they pointed to a steady path forward for the voice communications specialist. Let's look more closely at Nuance Communications and what its results say about its future.

Software packages.

Image source: Nuance Communications.

Nuance makes more connections

Nuance's fiscal second-quarter results were gave investors most of what they were looking to see. Adjusted revenue was up 5% to $511.1 million, accelerating from a slower growth rate and topping the expected 2% increase on the top line. As we've seen previously, Nuance suffered a GAAP loss, but adjusted net income gains of 7% brought the number up to $92.8 million, and that resulted in adjusted earnings of $0.32 per share. The consensus forecast among investors had been $0.38 per share, but that was based on an old way of calculating adjusted earnings. Using the same old method, Nuance would have topped the consensus forecast by $0.05 per share.

Looking more closely at the report, Nuance's growth in net new bookings was again noteworthy. Growth of more than 30% was even faster than in the fiscal first quarter, and that brought the number up above the $410 million mark.

Among Nuance's key segments, performance varied. The healthcare segment took a 2% hit on sales, as growth in the Dragon Medical cloud product wasn't enough to offset declines to the healthcare information management business. Yet the enterprise segment was much stronger, with 26% growth coming from omni-channel cloud and on-premises solutions, especially on the security and biometric front. The mobile business put in a solid performance with 9% revenue gains, but the imaging business suffered a 7% hit, in large part because of the reorganization of the division's sales team.

From a bottom-line perspective, Nuance had more uniform performance. Adjusted segment profit rose in three of Nuance's four segments, with only the imaging division seeing a decline. Overall total profit margin rose two percentage points to 36%, with mobile leading the way with the highest margins of any of Nuance's businesses.

Work on making recurring revenue the key source of sales for Nuance keeps paying off. On an adjusted basis, recurring revenue reached the three-quarters mark in terms of total sales, and Nuance foresees further progress on this front going forward.

Can Nuance climb higher?

CFO Dan Tempesta was pleased with the results. "Nuance delivered strong performance in the second quarter," Tempesta said, "driven by demand for our enhanced solutions." The CFO noted that all of Nuance's key financial metrics held up well.

Those results are giving Nuance the confidence it needs to project strong growth forward. In Tempesta's view, Nuance should be able to "maintain our momentum while remaining focused on organic revenue growth and cost and expense discipline" going forward.

Nuance made some slight upward adjustments to its full-year guidance. The company now sees bookings growing by 6% to 10%, up from a lower 2% to 6% range. Adjusted revenue of $2.03 billion to $2.07 billion reflects a $10 million increase in the bottom end of the range, and adjusted earnings of $1.55 to $1.63 per share added $0.02 to the lower estimate. Similarly, fiscal third-quarter predictions included adjusted revenue of $503 million to $517 million, with adjusted earnings of $0.27 to $0.30 per share using Nuance's new method of adjustment.

Nuance investors seemed satisfied with the results, and the stock climbed almost 2% in after-hours trading following the announcement. Nuance has more work to do, but the latest results show that the company has the potential to drive long-term fundamental growth going forward.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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